Thursday, October 1, 2015

The Scandal of Pharmaceutical Prices

I just spent a frustrating hour listening to a discussion of pharmaceutical prices on the Diane Rhem Show on public radio. The panelists uniformly took a perspective informed mostly by Austrian-style economics. Prices and profits need to be high to spur innovation. High prices are justified by the “value” of the products to their users. U.S. consumers subsidize research and development that benefits consumers in countries that regulate drug prices. Drug advertising benefits consumers by drawing attention to new drugs.

Now, a neoclassical economist of the Cambridge, Massachusetts variety, or even of the “Good Old Chicago School” (as McCloskey has called it) would raise some protest. Economic efficiency requires that prices should be related to costs. Efficient use of pharmaceuticals would come about if the price were set at the marginal production cost of the pill, with R&D covered by government or charity. R&D on “me-too” drugs is wasteful. You could make a case that if government or insurance is covering the cost, some charge for the capital invested in the research is appropriate. I’m not (that) neoclassical, but it seems to me that cost should enter into this discussion. The disjunction of prices from costs is what fuels the public concern about “greedy drug companies” that the panelists were so willing to dismiss.

But I’m an institutionalist. Health care is one of the “helping professions”. That means that you are dealing with people in distress, for whom this expenditure is not some kind of lifestyle option. It means that the industry has a moral obligation to assist people regardless of their financial circumstances. It means that people go into this business expecting that their compensation will be less than they might make in a more commercial line of work, because helping others is its own reward. (It’s akin to the choice I made to go into Christian higher education instead of, say, finance.) We don’t expect drug companies to be greedy. We expect that much the research will be financed by the NIH and by the big disease charities that have telethons and door-to-door campaigns and memorial requests. The TV commercials and the “lifestyle drugs” we don’t need.

These new prescription drug scandals are of a piece with business scandals going back to Enron and the S&Ls. Business has lost sight of its public responsibilities and moral purposes. It has bought into bad economics of the Austrian School, and bad ideology of libertarianism and “free markets”.  This is not the way that American business operated in the “golden age” of the 1950s and 1960s. We need leadership from the business, political, and civil society sector to point to a different way.