Compulsory social responsibility

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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? Threats of the kind coming from Brazil's government make the whole AIDS medicine business far less appealing. Perhaps unsurprisingly, the number of AIDS drugs in development has been decreasing steadily in recent years.

Price caps on medicines would in fact provide a subsidy to Latin American governments from the research-based pharmaceutical companies and their shareholders, a subsidy those governments say is their due. Those governments are encouraged by nongovernmental organizations (NGOs) and even many businesses, who promote such notions under the guise of "Corporate Social Responsibility." But this sort of arm-twisting really amounts to Compulsory Social Responsibility and is both antisocial and irresponsible.

Of course, these companies are easy targets for any politician: They are big, they have large budgets and they do not vote in elections. They are consistently portrayed as enemies of the poor, even though they produced most of the drugs that alleviate the diseases of the poor, as well as everyone else.

Nearly all useful pharmaceutical innovations in fact have come from free enterprise, underpinned by property rights and the rule of law. Such innovation has allowed millions of HIV sufferers to live longer and their babies to be born free of infection. PAHO's agenda for price caps would weaken the incentives that drive such innovation, even while HIV mutates and spreads and kills.

Moreover, if the profitability of developing and manufacturing ARVs is eroded, patients in the world's poorest countries, such as Liberia, Burundi and Malawi -- whose gross domestic product per capita is a fraction of that of Argentina, Brazil and even Bolivia -- will suffer because the research-based pharmaceutical firms would no longer be able to afford to offer their ARVs at cost (or to give them away), let alone supply valuable know-how to health-care workers in such countries, as at present.

Here's an idea: Instead of promoting price controls when discussing access to medicines, perhaps PAHO should discuss a more realistic means of enabling companies to price differentiate. After all, it seems unreasonable that Haiti (GDP per capita of $400) or Bolivia (GDP per capita of $1,000) should pay the same as Brazil (GDP per capita of $3,500) or Mexico (GDP per capita of $5,600).

Price differentiation can only be effective if those who buy at low prices do not resell at a higher price. The best way to achieve this is to include a restriction in the sales contract.

But companies will only be willing to enter such agreements when they are sure they can uphold them -- which would not be the case at present in many Latin American countries.

So, as the health ministers meet, let them make a commitment to improving the rule of law in their countries -- rather than undermining it with threats of compulsory licenses.

Martin Krause is dean of ESEADE Business School in Buenos Aires, Argentina, and professor of economics at the University of Buenos Aires.