One of the very first posts I wrote here at The Glittering Eye was an explanation of the business that large pharmaceutical companies are in, something that remains widely misunderstood more than ten years later. They are not in the business of developing new drugs. They’re in the business of selling drugs and retaining the rights to an exclusive market for their products. As evidence I produced the figures from the companies’ very own annual reports over the period of a decade showing that research and development increased with inflation while sales, marketing, and lobbying expenses increased with revenues which by itself is enough to prove the point. To increase revenues a farmer plants more land. To increase revenues pharmaceutical companies do more promotion and lobby harder. R&D is basically an overhead expense for them, like the phones.
I also have a vague recollection that the post sparked the first email exchange I had over one of my posts (I think it was with Megan McArdle). My correspondent said I just didn’t understand the length of time that it takes a pharmaceutical company to bring a product to market (an irrelevancy). Since by that point in my career I’d had big pharmaceutical companies and medical equipment manufactures as clients for decades and not only did I know how their businesses worked I knew how their managers thought, I was confident of my ground.
At any rate you might want to take a look at this article in Quartz on drug prices. The graph above is from that article and I beamed when I saw it. Familiar territory.
However, I laughed out loud when I read the final sentence of this passage:
Americans pay far more than any other country for prescription drugs. In fact, Americans overpay for every aspect of healthcare: procedures and services are the most expensive in the world, because efficiency plays no role in rewarding the healthcare providers. As Dr. Stephen Ondra—who works as chief medical officer for customer-owned health insurance company Health Care Service Corporation—told Quartz, “right now inefficiency is rewarded, the more you do to get an outcome, the more you make.â€
There is a common denominator behind all of this: the free, unregulated market.
Talk about not understanding the industry you’re writing about! I fully endorse the second sentence of the first paragraphy above. I’m told that’s changing under the PPACA but I’ll believe it when I see it. However, healthcare in general and the pharmaceutical industry in particular are among the most heavily regulated sectors in the economy. There is no “free, unregulated market” in pharmaceuticals. If there were Martin Shkreli’s decision to increase the price of Daraprim from $13.50 per tablet to $750 per tablet over which they are rightly outraged would have presented no problem because there would have been a legion of companies (many of them in India) that would have been eager to produce the drug themselves and undercut the $750. I don’t know the manufacturing processes required for Daraprim but I suspect it would come in at a price substantially below $13.50 per tablet. No, the reason it presented a problem is because of patents and trademarks, neither of which have anything to do with a free market.
Like most other heavily regulated industries, e.g. banking, pharmaceutical companies are doing very well, indeed. Whatever problems free markets create, high pharmaceutical prices aren’t among them. The real problem in this case is that a 62 year old drug is being extended patent protection at all. Heck, I’m skeptical about extending trademark protection for that long let alone patent protection. We don’t pay Xerox a royalty when xeroxing a document or Kleenex a royalty when blowing our noses. I don’t think that Daraprim should be any different.
Daraprim is a generic. It is off patent. Its ownership has changed twice in the last 6 years. Under the first ownership it was selling (from memory) about $1 a pill. The company was bought and the price increased to $13.50. it was bought again and raised to $750.
From personal experience I would note that drugs from overseas don’t always behave they way you expect. Knowing people who have had a lot of experience with third world drugs, ti seems pretty clear there is a lot of counterfeiting, and often very poor quality control. Not sure that would be tolerated here. However, we know that it can be made profitably here in the US for a very low price so the cost of inspecting and verifying quality should not be very high.
Just slightly OT, but you do realize that CMS is changing the way they pay for hospital care. Hospitals will get a flat fee to cover expenses for 30 days prior to admission and 60 days after discharge. You used to able to load up on unnecessary consults and tests ahead of time since they got paid for whether or not they were needed. That is going away. You used to be able to hustle people out the door as quickly as possible to save money, then just get paid for the readmission if they came back. That is going away. You used to just get paid for complications. Now you won’t so you have to figure out ways to prevent them.
So let me tell you about just one thing we have done. Old people who are already suffering from cognitive dysfunction before major surgery have significant rates of post-op delirium. This can last for days or weeks, is associated with a high mortality rate and is quite expensive to manage. We (others are starting to do this also) have started a program that screens to find people with dysfunction. People often don’t realize that granny is having issues and how bad they are. Once identified they get entered into a program that starts them on needed meds, improves their diet, involves exercise classes, cognitive exercises and pairs them with a nurse who will follow them before, during and after admission. In our most recent reporting period we had a zero incidence of delirium. Saved lots of money and patients got better care.
Steve
Thanks, Steve. The information is much appreciated. I appreciate all contributions especially including corrections.
Nonetheless my point remains. It’s hard for me to imagine an increased price not attracting competition if it were possible for a competitor to enter the market. In other words the problem is not the operations of a market but the lack of a market.
If it is generic, why is it so expensive?
I am with the VA, and all my meds are generic. The VA negotiates for the best prices, and they will change without any warning. I have to be careful because I never know what color, size, or shape a pill might be.
Although I will purchase generics because of the costs, I am not a big fan of them. I had looked into it about 10 years ago, and the FDA does not consider a generic drug the same way a normal human being would.
My psych drugs are the only ones I really care about, and they are the ones that concern me the most. I just tell myself that they are working to at least get the placebo effect.
How does the consumer advertising affect the overall numbers? It seems like TV ads for prescription drugs is a new development.
Many of the experts just spout the conventional wisdom. It is wisdom because it is the opinion of the experts, and it is conventional because they all have the same opinion. They all have the same opinion because they reference each other’s expertise, and because it is convoluted, it is difficult to discern the circular logic.
The experts never cite primary sources and rarely cite authoritative sources. I doubt most of them understand the concepts, and if they do, I doubt they know how to determine a primary source from a 7th order derivative, and Wikipedia, no matter how many footnotes, is not an authoritative source.
If you understand what you are using and how to use it, it is possible to use a 5th order derivative source, but you need to be careful.
(1) Russian novel
(2) German translation
(3) German critique
(4) English translation (German critique)
(5.1) English critique
(5.2) English translation (Russian novel)
This does not account for the quality of the translations. They are not all the same. Depending upon the work or type of work, a word or phrase can change the entire meaning.
The other problem is that many people are unaware that the world has changed since they were knowledgeable about a specific subject matter.
After a little bit of digging, I think I understand the issue better. The problem is a combination of sole source manufacturing in the United States, resulting in a closed distribution system which makes it hard for generic manufacturers to get what they’d need to produce comparison samples for FDA bioequivalence testing, coupled with the FDA’s approval process.
There are already low cost manufacturers in many places in the world. They just aren’t being allowed to export their products into the U. S.
None of those things have anything to do with a free market. Look, I realize that free markets don’t result in perfect outcomes. But put the blame where it belongs and it’s not on free markets. Not in this case.
In 1997 regulations changed to allow radio and TV advertisement of prescription drugs. Prior to that drug companies had been required to include “brief summaries” of the mechanism of operation, side effects, and risks of their products in advertisements. You know those pages of fine print you get with your prescriptions? Those are the “brief summaries”. For print advertising it’s not that much of a problem. However, for TV and radio ads it was a major barrier.
In 1997 that was relaxed which led the way to TV and radio advertisements.
TB- They can charge that much because markets had worked to force down prices and leave one low cost manufacturer. Realizing that, the investors came in and bought the company, then raised prices. There is no answer market based answer of this problem. Dave’s proposed solution, letting in foreign manufacturers has issues, and is a temporary solution. As I noted above, not all drugs are created equal. I guess we can take the libertarian, anarcho-capitaist approach and just keep importing drugs until we find the one from India that actually works, and not worry about those who die or suffer disabilities in the process. We can always just sue them, the market solution. Of course, since they are based in India, I doubt that ends well. Meanwhile, you should again see competition driven out as the low cost company wins. Of course, this could take a while and maybe we will have a new drug by then.
Steve
And here I thought we had a government anti-trust function to avoid monopoly. Easier to blame the failure on markets I guess.
@Dave Schuler
If I understand correctly, it is another example of free-market capitalism. You rig the market in your favor and get your useful idiots to scream bloody murder whenever anybody notices.
@steve
If this were an actual free-market, everybody would try to get in on the action. Making a pill for less than $1 and selling it for $750 is any investor’s wet dream. The idea that Walmart will put everybody out of business and raise prices is a fantasy. Without any unnatural intervention, it never works.
(It might actually be a short sell play. By bringing government scrutiny on big pharma price hiking, it will drive down their stock prices, and it just so happens that the owner was/is a hedge fund guy.)
If you want to try to belittle with silliness, why not go all the way? We could just shoot the patients, or we could torture any doctors who prescribe the medicine. Even better, we could torture all doctors just in case any of them thought about prescribing the medicine. (By torture, I mean batteries and testicles, gang rapes, broken bones, etc.)
I am not a big fan of the post-HIV drug testing rules FDA, but I am even less enamored of foreign manufactured drugs. If foreign manufactures were under laws and regulations as or more stringent than those of US, I would not be as concerned. The EU and Canada might be OK, but most places would not pass the test.
I would allow companies or countries that would submit to the FDA’s regulations and US laws regarding drug manufacturing, and this would include the criminal and civil legal system of the US.
What libertarians, anarcho-capitalists, progressives, and liberals like to forget is that humans are simply a more evolved animal, and given the opportunity, humans will act like animals. Everybody wants to take today’s conditions as the natural starting point, but if you move the dial back 1500 years, things are not quite as simple.
How many libertarians would like to live under their system during the Dark Ages? How long would the anarcho-capitalists last explaining to the Huns that they would be required to engage in value for value transactions rather than simply pillaging? We know how the progressives and liberals fared after the revolutions they helped enact.