The Role of Free Riding in Global Health Policies: Hubris and Power Dynamics

The Council of Economic Advisers to the President of the United States in its 2018 report sought to confront two challenges facing policy makers in reforming biopharmaceutical pricing at home and abroad. The first challenge is how to constrain artificially high prices in drugs and inspire competitive behavior in the pharmaceutical markets. The second challenge is how to address the relationship between the incentive to innovate or invent and high global pharmaceutical profits. The CEA argues that pharmaceutical innovation is sensitive to higher global pharmaceutical profits. The CEA further argues that the U.S. government and consumers account for a substantial portion of global pharmaceutical profits which drive new drug discoveries and biopharmaceutical inventions. Other OECD developed countries, particularly those in Europe contribute about 4 times less than the U.S. but benefit from new drugs and biopharmaceutical inventions spurred by higher profits from the U.S. Through the use of a single payer system European countries are able to negotiate with pharmaceutical companies to pay a price higher the marginal cost of the companies and thereby contribute less to the overall global profits of pharmaceutical companies. To the extent that this is the case, the CEA argues that European countries are free riding. This paper challenges the validity of the free riding argument as not founded on sound theory and in large measure spurious. The free riding argument is not based on patent infringements or other intellectual property violations. It is simply based on the fact that European countries are able to negotiate lower prices with powerful pharmaceutical companies that voluntarily engage in the process. The paper argues that proposed solutions of the CEA that involve getting European countries to pay prices higher than marginal cost negotiated with companies is ill-founded and exports the inefficiencies of the U.S. markets to the European countries. It is also argued that the proposed use of trade policy measures for the spurious claim of free riding is likely inconsistent with the obligations of signatory countries to the WTO and TRIPS system of agreements. Finally, the type of free riding claimed also applies to developing countries. Thus, if the U.S. is able to extort high prices from developed countries, next in line will be middle income developing countries followed later by other developing countries. If developed countries of Europe yield to the trade levers and measures of the U.S. it is most unlikely economically and politically weak developing countries will be able to resist U. S. trade pressures similar to those used in the negotiations leading up the adoption of TRIPS. What appears to be in play is simple geopolitical power politics employed by the most powerful country against the rest, particularly the weak members of the global community. It appears the trade solution is based on the simple fact that the U.S. can implement it.