I had to laugh when I read this article at Fortune about the prices charged by hospitals for pharmaceuticals:
A new study shows something many healthcare patients know all too well: hospitals are charging significant premiums on some of the most-used prescription drugs.
In a new study of 34 hospital systems, Wall Street firm AllianceBernstein found that the average drug prices in a hospital are three to seven times higher than what Medicare charges for the same medication, according to Axios, which obtained a copy of the study. Academic hospitals, which provide care and also train new doctors, had the highest markups on medications. AllianceBernstein also found that generic drug prices at all the hospital systems tended to be higher than brand-name medications.
Here’s the punchline:
Within the AllianceBernstein study, an unnamed CEO at a pharmaceutical company said that prices on oncology drugs, in particular, need to remain high. If they didn’t, the person said, “every hospital in the country will go broke.â€
or, in other words, the prices charged by hospitals for pharmaceuticals have no relation to costs. They’re to pay the hospital’s “burden”—the wages of hospital administrators, physicians, nurses, techicians, maintenance staff, and so on.
What amused me about this was that I learned that the way real companies, particularly big companies, set prices is not what you learned in economics class. I’d be interested in a description of what kind of micromanaging government policy would remedy this situation without addressing the underlying problem. The problem is, as succinctly stated by the CEO of the Mayo Clinic some years ago, too many people making too much money.
Well, a couple years ago, my wife was in ICU and I was speaking casually with a nurse who confided that fully half of patients in ICU have no ins coverage at all. Not medicare, not medicaid, nothing. They have to recoup costs somehow.
BTW, our bill was not itemized and was EXACTLY $25,000 dollars on the nose. How weird is that?
Need to see the details. Some of our cheaper generics cost less than a dollar per vial through our buying agency. It doesnt seem unreasonable to me that it would really cost 4 or 5 dollars to account for the costs of keeping the drug stocked around the clock and to account for preparation and administration costs.
Steve
Just to flesh this out a bit, take a drug like Ancef, the most commonly used antibiotic in the OR. (Used a lot elsewhere also.) It takes a full time pharmacy tech to keep the OR locations at our hospital fully stocked. It has to be stocked and accounted for in the main pharmacy. Sometimes a pharmacist needs to prepare it, other times a nurse. That takes time and time is money. Comparing the list price of a drug compared to what it costs to acquire and administer the drug is inadequate without knowing the other costs involved. Mind you I am not saying there i snow abuse, it’s just that people who dont use these drugs or know health care very well dont think about this kind of stuff.
Steve
“the prices charged by hospitals for pharmaceuticals have no relation to costs.”
That makes sense. In a free market, the price depends on supply and demand and not the cost of the goods. If you are the owner of a valuable product like a generator or gasoline in a time of earthquake or flood, you have every right to charge a freely negotiated price or simply set your price and sell to any willing buyer.
Gold is normally priced higher than water, ounce for ounce, for example, not because of gold’s greater value. In time of famine, the positions might well change because of the effects of supply and demand pricing.
Furthermore, “the average drug prices in a hospital are three to seven times higher than what Medicare charges for the same medication” is bad science, since it is totally ambiguous. Would someone charged “three to seven times higher” for a drug for which Medicare pays $1 end up paying $4 to $8–or $3 to $7, which is three to seven times as much? Such confusion leads one to doubt the science and math behind the claims.
It might make sense if health care were a free market but it is not. The supply of care is capped while wages are allowed to rise. That results in what has been observed here in the United States: wages in health care rise at a multiple of wages outside health care and health care increases as a percent of GDP. That’s a serious concern since 60-75% of health care spending is from the public purse.
In the United States this is called “the free market”. Elsewhere it’s called “socialized medicine”.