There are some wrong ideas that just can’t be stamped out. In his recent post at RealClearHealth physician Steve Miller assumes the truth of one of the most persistent of those ideas—the notion that there’s a true or inherent price for goods and services. Here are his prescriptions for the pharmaceutical business:
- Pharmaceutical companies have to demonstrate more rational drug pricing. They deserve to be rewarded for innovation, but at prices the marketplace can afford, not what it will bear.
- More competition means lower costs for American patients. Washington should act on policies that streamline the process for generics, including biosimilars, to come quickly and safely to market. Introducing competing versions of complex drugs into the market would save patients billions of dollars and have an impact similar to that felt by the introduction of generics decades ago.
- Payers must closely manage the benefits they provide, ensuring fairness and access while offering protections to their beneficiaries enrolled in high-deductible plans.
And lastly, it is incumbent upon the pharmacy benefits managers to more forcefully illustrate the critical role we play in making medicine more affordable and accessible. For example, we partnered with a drug maker who was willing to lower the price of its hepatitis C drug. In doing so, we were able to provide 50,000 patients affordable access to this medication.
What mechanism will bring those happy outcomes into being? Public spirit? Good will? Sages and prophets from Confucius to Jesus of Nazareth have preached the Golden Rule for thousands of years and somehow pharmaceutical prices are still high.
Let me tell an alternative story.
- There is no such thing as true or inherent price. All prices, whether those for pharmaceuticals or those for physicians’ services, are determined based on willingness to pay.
- When third parties pay for goods and services it removes price discipline.
- When price discipline is removed, prices will always rise to what the market will bear.
- In our system of health care most payment is done by third parties.
- No cap has been placed on what will be spent.
- Consequently, prices rise without limit.
- Pharmaceutical companies are the recipients of exclusive franchises, enforced by the federal government, on their products.
- Those franchises are supposed to be of limited duration but in practice they can be perpetual.
Somewhere in that list a solution is lurking. All that remains is for us to be perceptive enough to ferret it out.
Just to take on two of his errors, more competition does not guarantee lower prices. Once you leave the big cities most place will have one or two dominant health care providers. More competition in the form of more insurance companies means that the one or two providers will have significant market power. Prices go up, not down when you have too many buyers chasing a limited supply.
Second, offering “me too” drugs has not lowered prices in the past. Why would it start working now? What really happens is that someone introduces the breakthrough drug. Then others copy it. By the time the second drugs come around the patent is wearing off on the older drug.
Also, OK this is 3 and I lied, he ignores the fact that the 1000% price increases we are seeing in some generics is actually a market driven phenomenon. Now, I am not saying that there isn’t some way to use markets to bring down these costs, but I am saying that no one knows how to do it.
Steve