I do not understand how you can write an entire post on the high prices of pharmaceuticals in the United States without mentioning the word “patent” once but Patrick Hedger manages the feat at RealClearMarkets. Here’s a snippet:
Drug prices in the U.S., which admittedly can be astronomical, are trying to tell us something. What that is exactly is certainly up for interpretation. Perhaps these prices are telling us that access to drugs is too restricted by regulation. There’s no debate that getting drugs approved by the FDA is a tedious, expensive, and usually unsuccessful endeavor. Further, drug access is significantly restricted through prescription requirements and companies thus can’t spread out their development costs over a high volume. Plenty of public policy issues abound on prescription drugs, but imposing price controls doesn’t solve any of them.
The “market-clearing price” is the price of a good or service at which quantity supplied is equal to quantity demanded. What is the market-clearing price for Humira? The answer is we have no idea. It was protected by patents until recently and its purchase continues to be subsidized by Medicaid and Medicare.
What is its high price telling us? Who knows? Remove the controls and subsidies and maybe we can find out. In the meantime let’s not appeal to market forces in talking about the high price of pharmaceuticals.
Also the high cost of getting a drug through the FDA approval process. I’ve read about a few existing drugs that look very promising applied to other areas, but no company wants to spend the money for FDA approval for a generic drug.
Here’s one example I came across:
https://slatestarcodex.com/2019/03/11/ketamine-now-by-prescription/
I’m not sure you gave him a fair shake. He failed to specifically mention patents, but the very thrust of his piece is the disruption of market price determination. And he correctly points out that government dictated prices, always an appealing nostrum, aren’t an answer.
I’ve had this conversation any number of times over the period of the last half century. The very same people who bitterly reject price controls just as ardently defend pharmaceutical subsidies despite the reality that they’re both interfering with the market. Here’s a modest proposal. Let any pharmaceutical do without subsidies and they can charge whatever they want. No patents, no Medicare or Medicaid reimbursement. Companies that accept the subsidies get price controls.
As to the approval process the US has reciprocity with many countries on patents. Why not reciprocity on approval too?
I fail to see why price controls are needed. All that would be needed is to force publication of prices on the Web along with requiring all medical providers to offer MFN pricing. That’s what keeps products on Amazon and eBay so competitive.
A lot to go over here, but just a few things, mostly on the Alexander piece which goes into more detail.
1) He really goes out of his way to avoid blaming the insurance companies. What he probably doesn’t know, is that insurance companies already pay for a lot of care that involves off-patent usage (meaning that the FDA did not approve it for the indication you are using it for). Many drugs never get tested for pediatric use because the drug companies dont want the bother and the risk. We wait for the pediatric hospitals to report that they used the drug and it was safe.
So, in this case, this is not the result of some government policy, but the insurance company just not wanting to pay for it. They selectively decide what they want to pay for. They dont like paying for mental health care in general.
2) After ranting about the government, and carefully avoiding saying anything bad about the insurers, he finally notes that the drug may not work. We dont need studies when we dont want to find out that stuff might not actually work.
3) We have done a few of these treatments. As I recall, Medicare paid for it, but the private insurers did not. Will try to confirm that.
4) The government doesn’t really dictate the price of drugs, except maybe in some unusual circumstances. The private insurers determine how much they will pay. Hospitals, usually through buying groups determine how much they will pay. The high prices, especially with what we are seeing with the generics which have been off patent for dozens of years are due to market economics and there is no government control involved. I live this on a daily basis with our injectables, having to keep track of which ones are in shortage and the pharmacy giving me the costs of the replacements. The price of new drugs is set by the pharmaceuticals. They charge the most that they think they can receive. Patents do protect them.
5) I have no big problem with reciprocity, but this will affect relatively few drugs in the drug approval process. Also, drugs in different countries are sometimes formulated differently (as we have had to find out the hard way sometimes) so I think they should have at least a brief clinical trial here first. All you f*cking experts who want to rant about the evil government dont have to resuscitate someone when things go bad. I do.
Where reciprocity will work best is with drugs that have been out on the market for a while. The high price of generics in the US is usually because competition has reduced us to one or two suppliers. If those suppliers have problems, say a hurricane in Puerto Rico (this really happened) then let us bring in the same product from overseas.
Steve
Interestingly, he uses the word “market”, once but the word “free” is never used.
The price of a product needs to include all costs, but by off-loading much of these costs onto the public, they are indirectly subsidized by the government.
McDonald’s could open stores in Venezuela, Somalia, and Yeman. They could pay low wages and have few regulations, but for some reason, they do not. The reason is because the total cost far exceeds the costs of doing business in the US.
Getting your product to the market means hiring security for every step – from the raw product to the finished product. McDonald’s would need to protect the cows, pastures, ranch-hands, roads to the food processing plants, the processing plants, processing plant workers, up to actually ensuring the public health of their customers.
Instead, McDonald’s opens stores in the US and off-loads those costs onto the public and the government.
We know that companies have no problem selling deadly products. I have no doubt that the Chipotle’s financial statement includes a section detailing how many customers they can kill or infect before it hurts profits.
We know that companies are not interested in maximising profit. I have no doubt that Facebook’s financial statement includes a section detailing how many customers they can lose and still be profitable.
We know that companies do not care about losing money. I have no doubt that Facebook’s financial statement includes a section detailing how much money they can lose before stock prices can drop.
Regarding regulations, I suspect that no Boeing executive is going to live next to an unregulated nuclear plant, but I could be wrong.
Just because the left is too stupid to be able to construct a logical argument supporting their case does not mean that they are totally wrong. (But, they are still stupid.)
If you don’t think that will improve the approval process, why not collaborate with countries with which we already have patent reciprocity in the approval of pharmaceuticals? One process rather than by jurisdiction as it is now.
David J – Looks like you are projecting other experiences onto this chap. And violating the two wrongs don’t make a right doctrine.
Is your point that 99% of those arguing against controlling drug prices give the others a bad name?
I don’t see that it has anything to do with wrongs and rights. I’m merely observing that you can’t unring a bell. Due to patents, regulations, and subsidies we do not know what the market clearing price of Humira is. You can’t appeal to a market to rectify that without removing the patents, regulations, and subsidies and even then the market clearing price would likely not be what it would have been in the absence of the previous intervention.
The moral of the story is that the only way to adjust to intervention is with countervailing intervention. Prudent government is necessarily a matter of constant adjustment.
Anybody remember Thalidomide?
“Thalidomide became an over-the-counter drug in West Germany on October 1, 1957. Shortly after the drug was sold in West Germany, between 5,000 and 7,000 infants were born with phocomelia (malformation of the limbs). Only 40% of these children survived.[4] Throughout the world, about 10,000 cases were reported of infants with phocomelia due to thalidomide; only 50% of the 10,000 survived.”
The FDA came down with a severe case of the precautionary principle. Subsequently the drug approval regime became much more expensive. About the same time the plaintiff bar discovered a gold mine in medical liability. In particular, John Edwards (sound familiar) was so successful in pursuit of birth mishaps that the number of Caesarean Sections tripled in the United States. I recall the case of an OBGYN in Florida who delivered 100 babies a year. Her liability insurance cost $200,000. That’s an additional $2,000 per birth.
The answer lies in recognizing that medicine is not an exact science. There are risks. It is life and life only. There are laws limiting liability in a number of areas. Firearms manufacturers are shielded from liability for misuse of their products. Liability is limited by the Warsaw agreement on international flights.
To wit: A law that requires a person who takes a prescription drug, after being informed of the known facts, to waive liability for adverse reactions.
Dave- Ok with me, but that kind of international plan won’t be politically acceptable I believe.
“To wit: A law that requires a person who takes a prescription drug, after being informed of the known facts, to waive liability for adverse reactions.”
In the case of drugs, the pharma companies have all of the information. The issue is rarely someone taking a medication appropriately, but rather were they well informed about the risks of the drug and does it work. Look at Perdue and how they lied about narcotics and withheld information and what a huge part that played in the narcotic epidemic.
If you want to change liability rules, then make senior management at drug companies liable. Dont let them hide behind corporate protections. I dont get to hide behind those. Hospitals dont get to hide. Let those executives join the group.
Steve
Steve,
Thanks for that. For context, Scott Alexander, if you don’t know, is a pseudonym for a practicing clinical psychologist in California.
I was mainly focused on his narrow point about funding the approval studies needed to allow the use of an existing drug for another purpose. And in the example here, instead of paying for that a company chose to create an analog they could patent. I think it’s fair to say that regulations incentivize doing that instead of just paying for the studies for ketamine. Maybe that’s the best or only alternative, but I tend to think there must be a better way, even if that way is for government to fund the studies if there is good evidence that a drug has efficacy for other conditions.
As far as generics and the high prices due to lack of suppliers – I’ve heard about that as well. What is your theory as to why that is? There must be some kind of barrier to entry if the market on a generic drug can be cornered by one or two firms.
Tasty,
Interesting comments on McDonalds. It reminds me of the first McDonalds in the USSR which opened in Moscow. It required all the things you cite to maintain the same “quality” and standard of product using Soviet sources. That McDonalds was, at least at that time, the biggest in the world. I got to go there when I was in the USSR in 1991 and it was interesting to see the Russians lined up ready to pay what was, to them, a huge amount of money for the privilege to eat our crappy fast food.
Here’s another approach for reforming the approval process. The FDA could do its own testing and charge the companies a fee for doing so. Just as a reminder it wasn’t all that long ago that arrangements of that sort were a commonplace here. The mania for stopping the federal government from actually producing anything is relatively recent.
Or, let the government do the research, development, and testing. The results would be Open Source, and drug companies could compete on the manufactured products.
There are a number of Open Source software licenses. With some Open Source licenses, any code derivatives are Open Source, also. With others, the code derivative can remain Closed Source.
To keep from triggering the libertarian and conservative snowflakes, it could be called the Mars Mission Medical Program.
Underwriters Laboratories could be another model.
“What is your theory as to why that is?”
Our specialty had a committee look into that is this affects our specialty more than almost anyone else. What they found was that the generics are generally low cost drugs with very low margins. (These often go for less that a dollar per vial.) The competition on these drugs drives things down to just a couple of manufacturers. If one has trouble, the other company cant gear up fast enough to make up the difference. (They generally run production on these older drugs just a couple of months a year, then change to another drug.)
What could help is being able to bring in the drug from other countries where they are also produced. Our society has been just a bit apprehensive about this as we have had some issues with dosing with drugs from other countries. I think the answer to that is have a long term collaboration so when this happens we will already know if there are issues we should know about, but I also doubt that this is politically feasible right now.
About the esketamine, if someone pays for the tests for ketamine, everyone else gets to use the results and free ride. Not so with esketamine. However, all of the safety tests are already done for ketamine. (They actually use pretty low doses for the depression treatments and it is a pretty safe drug.) The insurance companies just need to pay. There is already more than enough evidence.
Steve