A few extra taxes here, discounts for low-income seniors there -- there's plenty for drug and medical-device makers to not like about health-care reform, which, after a couple of about-faces, passed over the weekend.

But in reality, the health-care industry got off pretty easy. That's good for now, but what happens when everyone realizes that the changes didn't go far enough toward lowering costs? It's the next phase of health reform that should have health-care companies running scared: price freezes.

Don't think it can happen? German officials recently said they're mulling compulsory discounts and a price freeze. Canada already limits the amount that drug prices can increase through its Patented Medicine Prices Review Board (PMPRB). The British health-care system refuses to pay full price for many drugs, including GlaxoSmithKline's (NYSE: GSK) Tyverb and Bayer and Onyx Pharmaceuticals' Nexavar because it doesn't believe the benefits justify the cost.

Those aren't developing countries like Brazil or the Philippines trying to save their low-income citizens some money. They're high-GDP countries that got fed up with the high cost of health care. If costs in the U.S. continue to increase, eventually there will be pressure to put price freezes on drugs and medical devices in the U.S. as well.

There's just one problem
Patients may think they're getting a good deal by freezing the cost of drugs and medical devices, but in the long term it's not a good move for society. Revenue from current drugs pays for the development of future ones.


Percent of Revenue Spent on R&D

Eli Lilly (NYSE: LLY)


Johnson & Johnson (NYSE: JNJ)


Bristol-Myers Squibb (NYSE: BMY)


Boston Scientific (NYSE: BSX)


Medtronic (NYSE: MDT)


Source: Capital IQ, a division of Standard & Poor's.

Development-stage drugmakers without any revenue coming in are sustained by the potential of blockbuster sales. Lower the potential reward, and many drugs won't get developed. Even if companies wanted to develop drugs because it's the right thing to do, money from venture capital and investors in public offerings funds drug development. Take away the big reward, and investors will move on to the next potential moneymaker.

You're indirectly supporting other countries' health-care systems
Like it or not, if you live in a country with unregulated medical-care costs, you're supplementing the medical costs for the citizens of countries that do regulate costs. Drug and medical-device companies need to make a certain amount to survive and keep their shareholders happy. Any decreased revenue in a regulated country has to be made up for elsewhere.

As I see it, we have three options: Continue to grin and bear it, convince other countries to pay more (good luck with that), or join the club. It's that last option that investors and patients alike should be afraid of.

It's already starting
Sen. Herb Kohl, D-Wis., head of the Special Committee on Aging, has already started the process by questioning six drugmakers, including megapharma Pfizer (NYSE: PFE), about the discrepancy in costs between the U.S. and other countries. For instance, Pfizer's megahit Lipitor costs $2.82 per dose here in the good ol' U.S. of A. according to the senator's letter, citing IMSHealth.com. Here's what it costs elsewhere:


Cost per dose







Netherlands & United Kingdom




New Zealand


Source: Letter from Senator Kohl to Anthony Principi of Pfizer, dated 3/16/10.

Letters to the other companies showed similar patterns for one of their own drugs.

It seems to me that Kohl already knows the answer to this: because the U.S. is willing to pay the higher prices, and because free markets come at a cost. Is the U.S. willing to abandon its free-market system? Probably not just yet -- the industry's lobby is mighty powerful.

It might be politically easier to just use other countries' negotiating systems and establish massive importation from those countries, but even that won't work in the long run. Pharmaceutical companies aren't likely to ship extra drugs to countries that get lower prices, just to see them shipped on to the U.S. or elsewhere where the drugs are more expensive. That can result in shortages if a large amount of drugs are exported -- something that's already happening in the U.K. because of a fall in the British pound.

What's the solution for patients and investors? Right now, grin and bear it, and hope doctors and politicians can find other areas in medicine to cut costs. What happens if price freezes and compulsory discounts finally make it to the U.S.? The stocks of drug and medical-device companies are likely to take a major hit.

On the upside, you won't need as much for retirement, because you likely won't live as long.

Have a solution to end the spiraling cost of health care? Let us know in the comments box below.

Pfizer is a Motley Fool Inside Value selection. Johnson & Johnson is an Income Investor selection, and Motley Fool Options has recommended buying calls on the stock. The Fool owns shares of Medtronic and Glaxo and has written puts on Medtronic. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy is the same price it was when it was published years ago.