“Increase legal flexibility… [to enable] expedited regulatory reviews of new drugs and vaccines that shorten the time between drug discovery and commercial availability. Shorter approval processes reduce development costs and encourage greater investment.”
You would be forgiven if you assume this recommendation came from the pharmaceutical lobby or a “loony-libertarian” website. You will be surprised to find out, however, that this recommendation comes from none other than the high temple of so-called liberal progressivism: the Brookings Institution (“Five ways to improve private investment in global health R&D“).
What in the world?!
Liberal progressive thinkers have always advocated for more government regulation and greater government involvement in healthcare as well as almost every other aspect of people’s economic life. That’s what makes this so surprising.
This is symptomatic of the logical and ideological inconsistencies in American left-leaning intellectuals’ thought processes. American leftists want the benefits of free markets, but they want the government (politicians and bureaucrats) to control the free market. They don’t seem to realize that that when you control something, it is not free anymore.
‘Controlled free market’ is an oxymoron.
The Brookings Institution’s recommendations are meant to increase private investments for drug development in “low and middle-income countries (LMICs).” Apparently, the Brookings scholars recently discovered that “less than four percent of private investment in health R&D targets the developing world.”
Here are the five recommendations from the article: 1) lower barriers to investment, 2) increase legal flexibility, 3) more systematic and transparent data, 4) lower cost structures, and 5) accelerate scientific discovery.
In plain English: reduce government regulations and allow the free market to flourish.
The $2.6 billion question is: why are these recommendations only meant for developing countries, and not applicable to all countries, including developed ones? It’s $2.6 billion because that is the average cost of bringing a new drug to the market, according to a 2014 estimate by the Tufts Center for Study of Drug Development.
The biggest barrier to overcome is the hundreds of millions of dollars’ worth of upfront investment needed to comply with expensive FDA regulations. Eliminating the onerous regulations, that is “increas[ing] legal flexibility” (recommendation 2), will automatically “lower barriers to investment” (recommendation 1) and result in “lower cost structures” (recommendation 4).
Recommendation 3, “more systematic and transparent data”, is aimed at making “drug development costs and investment returns” data freely available so that “private investors could easily assess risks and determine the possible benefit to investment”. This is absolutely unnecessary. Private investors know how to acquire relevant data to conduct risk analysis. The reason private investment in healthcare is so low in developing countries is because investors have already concluded that there is very little “benefit to investment”.
Finally, let’s consider recommendation 5, “accelerate scientific discovery”. A simple question to ask is what sectors of the economy are witness to the greatest human innovations? The sectors where returns on investments are high and which are not shackled by burdensome regulations.
Since the late 1980s, the technology sector has produced huge returns on investment and has been blessed with a minimal regulatory burden. As a result, the greatest innovations of the past generation have been produced in this sector by private players without any need for government intervention.
The financial sector has witnessed many innovations in spite of being heavily regulated. The reason being that the returns on investment are high even after taking the regulatory burden into account. However, in this sector the innovations have been produced mainly by big financial institutions that can overcome the huge regulatory cost barriers. As a result, the financial sector has progressively consolidated, resulting in the elimination of smaller players.
The state of the pharmaceutical sector is similar to the financial sector. A heavy regulatory burden has led to high level of consolidation. However, in the pharma sector, the situation is dire. High regulatory costs stifle innovation, resulting in fewer start-up companies and fewer innovations. Most companies do not invest in rare diseases (diseases that afflict less than 200,000 people) because the cost of drug development is higher than the returns. Big pharma companies invest only in blockbuster drugs for highly-prevalent diseases such as cardiovascular diseases, cancer, and depression.
In low and middle-income countries, the situation is slightly different. Due to low income levels, people cannot afford high-priced drugs. Therefore, even if the volume of patients is high, the profit margin per patient is very low. This is the reason for low investment.
The easiest way to “accelerate scientific discovery” is to eliminate regulations and unleash the ingenuity of entrepreneurs. In India, private enterprises managed to put mobile phones in the hands of a billion people at costs as low as two cents per handset and operating costs of less than four dollars per month. Surely, they can figure out how to put cheap and effective medicines within the reach of billions of people.
Brookings Institution scholars are trying to put forth recommendations to weasel their way around regulations using words like “legal flexibility”. This is how governments function. First, they enact cumbersome and non-productive regulations that stifle free markets, then they flex the rules (by creating loopholes) to enable free markets to function. But you don’t need five recommendations to achieve this. You need just one: Get rid of regulations.
If people apply logical consistency in their arguments, they would realize that if the five recommendations reduce the cost of drug development and spur higher private investments in developing nations, then the recommendations should also apply to drug development for diseases prevalent in developed markets.
A corollary to the Brookings Institution’s recommendations is that higher barriers to investment and legal inflexibility in developed markets are causing the drug prices to skyrocket, making healthcare more expensive for ordinary Americans. Yet, you will find hundreds of articles from Brookings and other left-leaning think tanks that suggest that the solution to controlling skyrocketing drug prices is increased regulation on drug development and price controls via Medicare (today) and single-payer healthcare system (in future).
This is what I would call a classic case of cognitive dissonance that is so pervasive in the American left’s ideological thinking.
Dear Brookings scholars and all liberal progressives: the laws of economics don’t distinguish between developed and developing countries.
What’s good for the goose is also good for the gander!
* Satish Bapanapalli is a freelance writer and ardent admirer of the great economist and Nobel laureate Milton Friedman. Satish’s ideas closely resonate with libertarian or classical liberal thinking.
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