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Market and state failure

by Hans Dembowski
Hospital pharmacy in Nigeria

Hospital pharmacy in Nigeria

In healthcare, the normal market forces of demand and supply do not work. They fail on the demand side because patients, who are desperate to save their lives, are willing to pay exorbitant prices. The supply side, moreover, is patently not transparent: lay people do not have an understanding of all relevant therapy options, nor can they tell whether a physician – or a traditional healer, for that matter – is actually competent. Very simply put, this is why costs of healthcare keep rising.

When markets fail, governments must act. So it is no surprise that healthcare issues are the topic of constant political controversy in rich nations. Matters are different in developing countries where many people lack purchasing power. Their needs do not translate into market demand. As a result, the professional market only caters to the wealthy elites. State-run services and charitable healthcare reach a share of the other people, and the rest simply has to fend for themselves. Masses, moreover, are exposed to health risks that are preventable. For these reasons, sections of the UN Millennium Development Goals read like a health-policy agenda with targets for maternal and child mortality as well as for HIV/AIDS, tuberculosis and malaria.

Drugs are an essential asset of scientific medical treatments. They do not solve everything, but without them, doctors are of only little help. Pharmaceuticals are of high symbolical relevance too. After all, many are brand-name products that are manufactured on behalf of corporate giants.

A decade ago, a ferocious debate shook the world. The issue was how to provide expensive medication, which was protected by patents, to HIV/AIDS patients in South Africa. The dispute ended in compromise. At their Doha summit in 2001, the WTO members agreed to allow all countries to breach patents under certain conditions. They can grant compulsory licences if doing so is necessary to safeguard public health with affordable imports or domestically produced drugs. The patent holders are nonetheless entitled to a share of the revenue, but they cannot dictate the price.

The WTO rules mean that the road to affordable pharmaceuticals is open. Nonetheless there are shortages in many places. Even drugs that are not patented tend to be in short supply in the developing world. The bulk of essential medicines is no longer covered by intellectual property rights. For the least developed countries, moreover, patents do not even matter yet. According to WTO rules, they will only have to comply with intellectual property rights after 2015.

The sad truth is that most developing countries do not have any generic-drug production capacities. That is what they need. Poor nations – just like ­government-run health insurances in Europe – do not have an alternative to relying on generics. And governments, in principle, can resort to compulsory licencing to produce generics of patented medicines. They would certainly do so more often if there was a production capacity in their country. That this is not so, is not a sign of market failure. It is proof of state failure.