Compulsory Social Responsibility

The Washington Times (Washington, DC), September 27, 2005 | Go to article overview
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Compulsory Social Responsibility


In August, health ministers of 11 South American countries met in Buenos Aires with 24 drug and diagnostic companies. Their aim: to negotiate purchase prices for anti-retroviral (ARV) drugs to combat HIV/AIDS. This week, the ministers meet again, under auspices of the Pan American Health Organization in Washington, and the issue of drug prices is again on the agenda. Yet, our historical experience with price controls suggests, if the ministers prevail, the effect on access to medicines will be negative, not positive.

It's time our governments stopped these dubious practices and looked for more positive ways to improve access.

In the background documents for this week's meeting, PAHO asserts it is working "to develop and review national health pharmaceutical and IP [intellectual property] policies and regulatory measures that promote access to medicines."

While access to medicines remains urgent, the tools PAHO and the Latin American governments propose to achieve it seem blunt and inappropriate. Rather than enable market delivery of the medicines, they seek use of the state's coercive power, including threat of granting "compulsory licenses" to local companies to produce the ARVs, in order to reduce prices. It is especially ironic our governments seek such price caps, considering our previous experience with them.

In the 1930s to the 1990s, Latin American governments thought inflation could be stopped by imposing "ceiling prices." Latin Americans quickly learned the results. When the ceiling price, or cap, was below the market price, the supply of price-capped goods vanished from stores. At the official price, nobody was willing to supply legally because they would suffer a loss. Only old or substandard stock would be sold in the stores. Products often could be found in black markets but at higher prices than those that initially triggered the policy.

Meanwhile, the price caps had little or no effect on inflation. Indeed, they probably worsened it by reducing output and hence tax receipts. So governments kept printing money to pay for their large budget deficits - thereby fueling the inflation the price controls were supposed to stop.

Now our governments want to do the same thing with ARVs. Brazil's government, egged on by various activists and anti-globalization campaigners, has decided the price is too high of one such drug owned by the U.S. firm Abbott. So it has demanded ever lower prices from the company, backed by the threat of compulsory licensing.

At the moment, pharmaceutical companies use "differential pricing," meaning prices are lowest in the poorest African counties, such as Malawi, higher in Brazil and Argentina, and highest in the U.S. That the companies can make a little profit on ARVs in middle-income markets means they can sell them at marginal cost or even give them away in the poorest countries.

But price caps and threats of compulsory licenses already have a predictable effect on new medicines' supplies. Why would a company risk millions developing a new medicine if it is unable to recover its costs?

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