Muh research budgets: Against a disingenuous defence of big pharma

Americans pay vastly more for many drugs than other countries. There are probably many causes of this, but one is the refusal of the federal government to collectively bargain about prices with pharmaceutical companies, unlike many other countries.

The right wing defends this state of affairs with the following argument- these higher prices allow drug companies to spend more on research.

Here’s the thing. If you want someone to provide your with something you should generally pay for it directly rather than giving them lots of money and hoping they’ll do it as a side effect.

Suppose there were a dude who kindly let people hang out in his garden. Suppose he spent 17% of his income on improving on his garden. If you were the city council and you wanted to provide money for parks, would you do so just by giving him extra money, no strings attached, and hoping he’d spend it on jazzing up and expanding his garden? No, of course not, this would be a deeply inefficient way to fund parks for the city. Either you’d directly fund the creation of a city park, or if you wanted him to provide it for some reason, you’d give him money directly tied to improving and expanding his garden. You wouldn’t just give him the money and hope it all works out. And believe me, this kindly hypothetical dude is way more sympathetic than big pharma.

There are many ways we could arrange for a high volume of pharmaceutical research:

1. The government could run the research itself.
2. Or, if you prefer a more market oriented solution, the government could give subsidies tied to research to companies.
3. If you’re a fan of compromise you could adopt a mixture of these positions.

And there are many other exotic options besides. It’s not my role here to say which solution I consider best. However, by far the least cost effective solution is to simply allow pharmaceutical companies to become rich and hope that, as a side effect they will spend money on research.

I don’t know the marginal propensity of pharmaceutical companies to spend money on research is, but I do know that, on average, pharmaceutical companies spend only 17% of their income on research (they spend twice as much on marketing!). It is true that this is high compared with other industries. However if we take this as roughly indicative of their marginal propensity to spend on research, for every dollar they gain through higher prices, only 17 cents is going into research.

Society would gain the same amount of pharmaceutical research for far fewer dollars if we cut the (obviously monopoly power-inflated) prices through collective bargaining and then funded the level of research we wanted either through private subsidies or public research. I don’t necessarily think massive research subsidies to private corporations would be a good idea, mind you. However even subsidies would be superior than paying vast sums of money to these rent-seeking monopolist parasites through inflated drug prices and hoping the research we want happens as a side effect.