There’s a reason that pharmaceutical costs are complained about so bitterly by Americans. It’s not fairness. It’s because drug prices are what seniors are most exposed to out-of-pocket and seniors complain. I find it extremely discouraging that I should need to point out basic economic facts to Megan McArdle but there you have it. In her latest Washington Post column she defends high drug prices:
You could cut the budget and maybe still eke out a living. But when you’re making a new investment, the question isn’t “How can I make my income match my expenses?†but “Is this the best use of my time and money?â€
Most of us want to do more than eke out a living. If government squeezes the profit out of a business, we’re not going to go into that business; we’ll do something else.
That’s how pharmaceutical firms think about research and development: not as something they must do, which they will support by economizing elsewhere, but as something they would like to do if the investment pays better than doing something else, such as executing stock buybacks. It’s also how people buying biotech stocks, or lending money to pharmaceutical firms, think about their activities. And so, if the returns on those investments are squeezed, fewer investments will be made.
That, like every other assertion in her column, is unsupported by the facts. Research at pharmaceutical companies does not increase with revenues or profits. It rises with inflation. That is evident from reading the companies’ annual reports. That means it is treated like overhead, “something they must do”.
There is also no demonstrable relationship between the rate of spending on research and the rate at which new drugs or treatments are developed. Maybe there was a century ago but it is simply no longer the case.
Finally, overspending on drugs is exactly the same as throwing a rock through a bakery window. You may see the new drugs that are developed due to the excess spending but there are thousands of things that might have happened that did not and will not happen and you do not see. Children that will not be educated. Bridges that will not be repaired. Research in energy or materials or any of a million other things that might have saved millions of lives or made them better that will never happen. You see what did happen but you don’t see what didn’t.
That was observed nearly 150 years ago by Frédéric Bastiat and recapped later in Economics in One Lesson. Ms. McArdle might try reading it.
I think you are mostly correct, but in the specific case of the older generics that have been off patent for many years that someone buys then jacks up the price sky high, I think there is a sense of fairness involved.
Steve
Here’s one possible explanation – or maybe just part of the picture – for high-priced generics:
https://slatestarcodex.com/2019/04/30/buspirone-shortage-in-healthcaristan-ssr/
I saw that. As one critic at Cowen’s blog said, it reads like someone Googled the issue and became an expert in 2 hours. The issue of drug shortages has been around for a long time and is most prevalent with generic injectables. My society has had a subcommittee looking at this problem for many years. Alexander read long enough to blame the government, he admits that is his bias, and to be fair there is some blame to place on the govt, but there is lots more.
Just on time stocking- Like most of the world we now do just in time stocking so we dont keep large depots of drugs. Disruptions of supplies that we would shrug off 20 years ago now make shortages.
Global supply chains- To cut prices, supply chains are global. As an example, we face a global heparin shortage soon because we use pig intestines to make it and most pigs come from China and they may lose 1/3 of their pigs to the African flu. (No one has used cows since mad cow disease to the best of my knowledge, at least not in the US.)
Drug production- The profit margins on these drugs is small. They tend to use a production line to make a year’s supply, then tune that line to make the next drug. It costs money to redo the lines and drug companies arent willing to do that unless they are sure the shortages are real.
Competition- Has driven prices and profits so low that usually end up with just a few companies making the drug. If one of them has production issues, the other companies have trouble making up the difference.
As much as Alexander hates the govt, it is odd that he failed to note that one govt related problem is that we can’t bring in drugs from other countries. That is not risk free as IIRC there were issues with some imports from China in the past, but we see the same drugs having shortages so this shouldn’t be that hard to figure out.
Steve
I don’t think Alexander hates the government – he’s a self-admitted California liberal.