In today?s world, most countries, sooner or later, end up following the US model in many areas. Sometimes, the US model is pushed by international agencies and ?experts?. So, it is perhaps important to understand some of the problems faced by the United States of America ? in healthcare for example ? as they may contain significant lessons for countries like India. There are other reasons as well. The patents on most new generation drugs are held by multinational companies based in the US and other developed nations, and their prices will increase in countries like India after the introduction of product patenting under World Trade Organization rules. The drug-pricing policies of such MNCs are thus a matter of concern for India.

At the moment, the cost of prescription drugs and medical care in the US is skyrocketing. Why? And what are the policy options available?

The standard argument for high prices of new drugs is that they cost a lot to invent but are cheap to manufacture. So, the innovating company needs to have a patented monopoly over the new invention for a specific time period. During this time (it is 20 years under the current WTO patent regime), the drug company will charge a price much above the cost of production. The monopoly pro-fits enable it to recoup the huge cost of research and development of new drugs.

But do the prices of drugs need to be that high? All economists do not agree. While they recognize the need for continuing R&D, they feel that options other than the current patent system must be explored. According to the US Food and Drug Administration, only about 10 per cent of the drugs developed over the last 10 years are real breakthroughs. In most cases, drug companies make only marginal improvements in existing drugs (like shifting from tablets to capsules), get new patents on them, and spend on advertisement to make them appear as big qualitative jumps. The practice keeps the prices of many branded drugs high.

Take a recent example from the US. Vioxx and Celebrex, two branded drugs massively advertised to manage the pain associated with arthritis, are now found to be nothing better than the older painkillers. In fact, both drugs have now been shown to cause heart attacks in some cases. Vioxx has been withdrawn from the market and Celebrex may have to follow. The US FDA has been alleged to have ignored early warning signs from medical stu-dies. Now these drug companies will have to fight damage suits worth billions of dollars. Yet, this is not new. Similar episodes happen almost in regular cycles in the US.

The medical insurance system also contributes significantly to the problem. Since insurance companies, rather than the insured patient, pay the cost of treatment, including for diagnostic tests and prescription medicines, doctors prescribe branded expensive drugs even when cheaper substitutes are available. Doctors get incentives from companies to push the drugs. The same is true in India. The fear of medical malpractice cases also encourages doctors to prescribe all kinds of diagnostic tests even when they are fairly certain that the tests will not reveal anything abnormal. All these keep the cost of treatment (and medical insurance) beyond the reach of poor families. That leaves a lot of families without medical care in the US.

Are there any alternatives? One option is to have the government directly finance research and then make the fruits of research freely available. This would allow drugs to be sold at their low manufacturing cost. Some, however, are sceptical about how effective government laboratories would be for innovation. Some others feel that given prevailing fiscal problems in all countries, government funds for research would be inadequate, specially when in many cases nothing useful may come out after spending a huge amount.

How about the government compensating private firms for their research when the output is beneficial to society? One variant of this proposal is that the government will buy the new drug at a price which will cover the cost of R&D and then sell the drug at affordable prices. Since the major impact of diseases like AIDS or malaria is in poor developing countries, drug companies do not find it profitable to research for such drugs. Given the enormous social benefits, government subsidy for research would be justified in these cases. Moreover, the government will buy only if the research is fruitful, thereby avoiding wasteful public expenditure.

The major problem here would be to decide when and how much money the government should pay for such private research. One suggestion is that the government could selectively buy patents at a premium over the price that the highest private bidder is willing to pay and then put them for free use by others. This would make it less profitable for drug companies to exploit patented monopoly. In a free market, nobody would be willing to pay a high price for buying the patent for such improved drugs. This would get more therapeutic value for each dollar spent and also increase access to the drugs.

Naturally, the big and powerful drug companies would not like these ideas and would argue for continuing private patenting in the interest of innovation and for increasing the coverage of medical insurance to widen access to drugs. Some are also sceptical whether the decision to buy patents selectively by the government would be influenced by vested, rather than public, interests.

As the debate continues, many Americans wistfully look beyond the US-Canada border. In Canada, the same prescription drugs are available at much lower prices owing to price control by the government and freer imports of drugs from other countries. The American administration continues to ban imports from Canada on the grounds that unsafe drugs manufactured in third world countries would find their way into the US. However, no Canadian has reported sick because of imported drugs, so far.

The Indian administration should learn a lesson from Canada. It must fight hard to preserve its right to impose price controls and liberally allow ?compulsory licensing? (that is, giving other companies the licence to produce patented drugs) whenever the big companies try to extract monopoly profits. This drug lobby may include not just MNCs, but their Indian collaborators too.