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.

1 comment:

Susan Fitzwater said...

Working out the costing is actually a little more complicated than you might think. For most relatively new drugs, setting prices at the marginal cost - which, as I understand it, is the cost of producing one more dose of an already-developed, already-tested, already-scaled-up dose - would result in massive real losses for drug companies. True new drug development would be scaled way back, perhaps to the vanishing point. [Think that couldn't happen? I could tell you stories ...]

Also, the idea that pharmaceutical company workers will happily accept lower compensation because they are working in a "helping" profession - no no no. While this might be somewhat true for some of the "worker bees" (ie the grunts who do the work of R&D and manufacturing which actually produces pharmaceuticals), it sure isn't true for the marketing, financial, and management folks who take home most of the money. Those guys are in pharmaceuticals BECAUSE it offers high compensation for them. [Of course, you could argue that all of those highly compensated management types don't provide value commensurate with their compensation. I would not disagree.]

As far as advertisements to the general public go, get rid of them. Really. I remember all of those commercials urging me to ask my doctor for "Nexium, the little purple pill" without ever telling me WHY I should do so. Seriously, it took me quite awhile to even figure out what ailment Nexium was supposed to treat. But I was told to ask my doctor for it anyway. This idea that somehow seeing a commercial makes a consumer better able to diagnose and treat his / her ailments than an MD - ridiculous.

Some of the background research that results in new pharmaceuticals is done by public institutions like the national labs and universities, but in general tracing a route from public sector research to a new drug is very difficult - public sector research doesn't translate directly into new drugs, drug companies put in a lot of extra work (==> $$) to convert that research into safe effective drugs.

Also I believe that if you break down the costs of developing a new drug, most of it comes not in compound development but in the clinical trials.

So what can we do? A couple of ideas:

1) Longer patent protection - because drugs are patented as soon as the compound shows efficacy, but clinical trials can take years, the effective patent protection time can be fairly short. Ten years (out of a 17-year patent span) is not unusual, I think.
2) Build an FDA with some teeth. Right now, all the FDA is built to do is to "evaluate" data that is provided by the drug companies themselves. Basically they get to check in every now and then on the fox who is guarding the henhouse. I would love to see a beefed-up, transformed FDA running the clinical trials, instead of the drug companies. I think you'd get much better decisions about which drugs were developed. Drug companies would be less likely to develop the 15th "me-too" compound if they knew they would then have to talk the FDA into running the clinical trials on it. Also all of the data would be publicly available. Finally, real drug development costs - the major rationale for high pharmaceutical prices - would drop.