The innovator's bargain must not be broken carelessly

The National Review puts the question plainly: America can lower drug costs, but not by blindly importing European pricing approaches that would pose 'real risks to future innovation and patient access.' That is the right warning, and a mind attentive to manufactures should take it seriously.

I argued in the Report on Manufactures — and I will argue it again — that a nation does not become commercially independent by accident. It becomes so by fostering the productive arts, which includes the arts of medicine and chemistry as surely as those of iron and sail-cloth. When you destroy the expected return on a long investment, you destroy the investment. A pharmaceutical enterprise that spends a decade and a billion dollars on a molecule needs some confidence that success carries a reward. Eliminate that confidence and you eliminate the enterprise. The European pricing model, whatever its domestic justifications, is in significant part a free-rider arrangement: it lets American prices subsidize the research that European patients also benefit from. That is not a model to import; it is a condition to negotiate away.

And yet — I must be honest — the present American market is not a free market in any sense I would recognize as healthy. It is a thicket of exclusive licenses, regulatory barriers, and pricing opacity that concentrates private power in ways that escape any adequate check. Concentrated power in private hands warrants attention; I said as much of the great trading monopolies of my own era. When a manufacturer can charge ten times the production cost of a medicine that is the only alternative to death, we are not describing the free play of commerce. We are describing a private toll-booth on a public road.

The National Review is therefore half right, and half evasive. It is correct that price controls set below the cost of innovation will eventually produce a world with less innovation. It declines, as I infer from its lead, to grapple squarely with the countervailing failure: that the existing system prices many Americans out of medicines they need, which is itself a blow to the productive capacity of the nation. A sick workforce is not a vigorous workforce. A people rationing insulin is not a people at the height of its commercial powers.

What then is the recommendation of a mind disposed as mine is? First, the federal government must use its full commerce power — construed broadly, as the Constitution permits — to negotiate drug prices for public programs with the same energy a serious creditor brings to any large transaction. The Treasury does not pay list price; neither should Medicare. Second, the patent and regulatory system should be reformed to sharpen the line between genuine innovation and the trivial reformulations by which manufacturers extend monopoly without adding therapeutic value. Reward the discovery; do not reward the maneuver. Third, transparency: require that the actual cost of development, and the terms of any public subsidy or tax credit that supported it, be part of the public record. Public credit demands accountability; so does public subsidy of private research.

This is not European price control. It is energetic, bounded public action in the national interest — precisely the kind of vigorous engagement that a feeble government refuses and a capable one employs. The goal is to keep the goose alive, and to stop pretending that its present diet is above criticism.