European price controls hurting U.S.

By JAMES K. GLASSMAN
SCRIPPS HOWARD NEWS SERVICE
Even at the lofty levels of recent years, gasoline prices are a minor worry compared with health care costs. An Organization for Economic Cooperation and Development study, released earlier this month, says U.S. spending on health care per capita in 2003 was $5,635, far ahead of all other developed nations, which averaged $2,307.
Some 71 percent of Americans say they are "very or somewhat dissatisfied" with the affordability of health care, according to a Market Strategies study. That's the single biggest dissatisfaction with the state of the nation, in a tie with poverty and homelessness and followed by federal taxes, the quality of public education, the environment, crime, and energy policies.
But, while they hate what they pay, they like what they get: 82 percent of Americans are satisfied with the quality of health care they receive.
The United States has the best health care in the world. As three scholars -- John Cogan, Glenn Hubbard and Daniel Kessler -- write in an excellent new book published by the Hoover Institution at Stanford, "Eight of the ten most important medical innovations of the past thirty years originated in the United States." Americans have won more Nobel Prizes in medicine than the rest of the world combined.
Look at cardiovascular disease. Mortality dropped by two-thirds between 1960 and 1995. Part of the reason was a drop in smoking, but more important was better medical care, including new drugs for high cholesterol and blood pressure and procedures like angioplasty. Another example of progress is depression, where new drugs return more than $6 in societal benefits for every $1 spent on treatment.
But is there a way to deliver great care and still reduce costs overall? The three authors (Hubbard, my colleague at the American Enterprise Institute, is a former chairman of the President's Council of Economic Advisors) lay out a plan I find attractive -- a combination of tax and malpractice reform, better information and enhanced competition.
Alas, the administration is probably too distracted to accomplish this agenda, but there is one step that can be taken now through negotiation and moral suasion.
Anti-competitive devices
The United States can demand that other developed countries put an end to their practice of free riding on American innovation. No wonder France, Germany and Japan can keep health care costs so low. They let U.S.-based companies spend the vast sums required to get a drug approved for the market (an average of $1.3 billion in 2003) and then use price controls and other anti-competitive devices to avoid paying the cost.
A study of 11 OECD countries (France, Germany, Canada, Japan, etc.) by the Commerce Department has found that all rely on pharmaceutical price controls, which prevent drug companies from charging a market-based price for their products. The low price is achieved through what economists call "monopsony power" -- the power that a single buyer (in this case a nationalized health care system) has over multiple sellers. Prices for patented drugs that are 18 percent to 67 percent less than U.S. prices, depending on country.
These policies may look good in the short term, but they have reduced health care quality for these countries and have forced the export of their R & amp;D operations to the United States. Eight of the world's 10 top-selling drugs are produced by companies headquartered here.
Research has shown clearly that price control policies in hurt Europeans themselves. The annual economic loss in Germany is $3 billion annually, says a 2004 study by Bain & amp; Co.
But Europe's policies also hurt Americans, not to mention Ugandans and Bolivians.
The Commerce report notes that if current European policies were reversed, global R & amp;D would be increased to a level that "could lead to three or four new molecular entities (drugs) annually."
It's U.S. consumers who are getting the shaft. We pay while they get a free ride. The benefit to American purchasers "if there were no price controls (in Europe) is in the range of $5 billion to $7 billion per year," says the study.
The drug policies in Europe, Japan and Canada are quite simply a trade issue. It's not time to go to the World Trade Organization just yet, but the office of the U.S. trade representative should be exerting pressure immediately in bilateral talks with countries like Germany. Counterproductive price controls must end. The health of the world is at stake.
X James K. Glassman is a fellow at the American Enterprise Institute and host of the Web site TechCentralStation.com.