Drug Prices
Martin Shkreli became the villain of drug pricing when he increased the price of a $13.50 pill to $750. While the practice of buying up smaller drug companies and increasing the prices of their products is a standard profit-making venture, the scale of the increase and Shkreli’s attitude drew attention to this incident. Unfortunately, while the Shkreli episode is the best known case, drug pricing is a sweeping problem. The August 2016 issue of Consumer Reports features an article on high drug prices in the United States and provides an excellent analysis of the matter—I am using it as the basis for the numbers I mention.
From the standpoint of consumers, the main problem is that drugs are priced extremely high—sometimes to a level that literally bankrupts patients. Faced with social pushback, drug companies do provide some attempts to justify the high prices. One standard reason is that the high prices are needed to pay the R&D costs of the drugs. While a company does have the right to pass on the cost of drug development, consideration of the facts tells another story about the pricing of drugs.
First, about 38% of the basic research science is actually funded by taxpayer money—so the public is paying twice: once in taxes and once again for the drugs resulting from the research. This, of course, leaves a significant legitimate area of expenses for companies, but hardly enough to warrant absurdly high prices.
Second, most large drug companies spend almost twice as much on promotion and marketing as they do on R&D. While these are legitimate business expenses, this fact does undercut using R&D expenses to justify excessive drug prices. Obviously, telling the public that pills are pricy because of the cost of marketing pills so people will buy them would not be an effective strategy. There is also the issue of the ethics of advertising drugs, which is another matter entirely.
Third, many “new” drugs are actually slightly tweaked old drugs. Common examples including combining two older drugs to create a “new” drug, changing the delivery method (from an injectable to a pill, for example) or altering the release time. In many cases, the government will grant a new patent for these minor tweaks and this will grant the company up to a 20-year monopoly on the product, preventing competition. This practice, though obviously legal, is certainly sketchy. To use an analogy, imagine a company held the patent on a wheel and an axle. Then, when those patents expired, they patented wheel + axle as a “new” invention. That would obviously be absurd.
Companies also try other approaches to justify the high cost, such as arguing that the drugs treat serious conditions or can save money by avoiding a more expensive treatment. While these arguments do have some appeal, it seems morally problematic to argue that the price of a drug can be legitimately based on the seriousness of the condition it treats. This smells of a protection scheme or coercion: “pay what we want…or you die.” The money saving argument is less odious, but is still problematic. By this logic, car companies should be able to charge vast sums for safety features since they protect people from very expensive injuries. It is, of course, reasonable to make a profit on products that provide significant benefits—but there need to be moral limits to the profits.
The obvious counter to my approach is to argue that drug prices should be set by the free-market: if people are willing to pay large sums for drugs, then the drug companies should be free to charge those prices. After all, companies like Apple and Porsche sell expensive products without (generally) being demonized for making profits.
The easy response is that luxury cars and iWatches are optional luxuries that a person can easily do without and there are many cheaper (and better) alternatives. However, drug companies sell drugs that are necessary for a person’s health and even survival—they are generally not optional products. There is also the fact that drug companies enjoy patent protection that precludes effective competition. While Apple does hold patents on its devices, there are many competitors. For example, since I would rather not shell out $350 for an iWatch, I use a Pebble Watch. I could also have opted to go with a $10 watch. But, if I had hepatitis C and wanted to be cured, I would be stuck with only one drug option.
While defenders of drug prices laud the free market and decry “government interference”, their ability to charge high prices depends on the interference of the state. As noted above, the United States and other governments issue patents to drug companies that grant them exclusive ownership. Without this protection, a company that wanted to charge $750 for a $13.50 pill would find competitors rushing to sell the pill for far less. After all, it would be easy enough for competing drug company to analyze a drug and produce it. By accepting the patent system, the drug companies accept that the state has a right to engage in legal regulation in the drug industry—that is, to replace the invisible hand with a very visible hand of the state. Once this is accepted, the door is opened to allowing additional regulation on the grounds that the state will provide protection for the company’s property using taxpayer money in return for the company agreeing not to engage in harmful pricing of drugs. Roughly put, if the drug companies expect people to obey the social contract with the state, they also need to operate within the social contract, Companies could, of course, push for a truly free market: they would be free to charge whatever they want for drugs without state interference, but there would be no state interference into the free market activities of their competitors when they duplicate the high price drugs and start undercutting the prices.
In closing, if the drug companies want to keep the patent protection they need for high drug prices, they must be willing to operate within the social contract. After all, citizens should not be imposed upon to fund the protection of the people who are, some might claim, robbing them.
A Philosopher's Blog 
The state of price gouging with monopolized medicine is analogous to the old company towns and their grocery stores. The company that owned the grocery store could charge whatever they want due to the inability of the town residents to travel to another store with reasonable prices. I doubt if society would tolerate the return of company towns and their company stores. So, I have to wonder why society tolerates monopoly medicine with all of its associated price gouging?
Society tolerates monopoly medicine because there is no connection to price/benefit by the average consumer. When was the last time you really had a good idea of what ANY of your medical treatment cost, aside from your deductible or co-pay? When was the last time you ever had a good hard look at a medical bill and tried to understand all the charges?
I got to this page because I joined the “Quadriceps Tendon Repair” blog. I was transported to the hospital via ambulance, I had surgery and three days in the hospital – including all the ER, surgical, nursing, PT, drug, durable goods and medications. I have had home nursing care, home PT, outpatient PT and followup visits. I have no idea what any of it cost – not a clue – because it has been taken care of by insurance and workman’s comp.
The public is complacent because we are generally clueless. The only time this comes up is when there is a story in the news like that of Martin Shkreli or some indigent cancer patient who cannot afford treatment. On the other side of that, what does not get any coverage at all is the efforts by drug companies to make medications accessible by uninsured and indigent people. A quick Google search reveals many, many programs like this.
Drug companies charge what the market will bear, but the market is a manipulated one on the consumer side. It has gotten worse since the Affordable Care Act, because now the private insurance companies have less incentive to protest paying high prices for medical care and drugs.
I’m going a little off topic, but I think the reasons you describe for societal complacency about medical costs are some of the same sorts of reasons for societal complacency about credit card transaction fees. Consumers are usually not bothered by the fees because those fees are payed for by the vendor. But if more consumers knew about such fees I think more would be bothered by them since most people making a purchase want the primary beneficiary of their consideration to be the provider of the goods or services being purchased — not some huge credit card corporation that does little more than sit back and collect enormous dollars for doing so seemingly little work.
I cautiously agree with you – but I stop short at your characterization of a “huge corporation that does little more than sit back and collect enormous dollars …” There is always another side to the story. My credit card was recently compromised and the company stepped up and forgave several thousand dollars in expenditures that they either had to absorb themselves or carry insurance to cover. The amount of accounting and actuarial work that goes into maintaining a credit card system is non-trivial.
Ultimately the consumer is the one paying the fees anyway – they are figured into pricing. Many small stores have minimums for credit card purchases; many gas stations offer different price structures for cash vs credit. Nor are we, as consumers, forced to use them. That’s one of the reasons I favor free markets – because I am always the one who has a choice as to whether or not to use a credit card, or subscribe to cable TV, or shop at WalMart.
It sounds as though you may be a small business owner who is saddled with paying these fees – and I respect your opinion and understand your point of view.
I would take your off-topic but highly relevant comment and apply it to taxation. If we, the complacent, had to sit at our dining room tables every month with a full paycheck and write checks to the federal government, to Social Security, to our state and local agencies and every other government demand for our money, there would likely be a tax revolt. Every month we would have to ask ourselves, “What is this for, again? How is this money being spent? Is this something I support?”
You are also forgetting several significant things in addition to the fraud protection and that is the bad debt that never gets paid when consumers declare various forms of bankruptcy, die owing money with no estate to speak of or collect from, along with the costs of running such a system.
Also, regarding the general point about transaction fees, some of that does go back to the consumer via the cash-back bonuses, frequent flyer miles, etc. that some cards offer consumers, generally those with good credit.
It sounds as though you may be a small business owner who is saddled with paying these fees
Nope. He has previously self-identified with some descendant of CPUSA or such. Can’t recall the name right now but you may have heard of it. Not all that obscure…as such things go.
True, I am not business owner and I do have some forms of communist leanings, but communism with a small ‘c’. However, insofar as we do have market economy I have sympathies more so with small businesses than giant corporations and the corporatocracy that we are living in.
Also if you have read some of my works, you would know that I don’t necessarily see communism and market commerce as being mutually exclusive, but instead, if anything, private businesses depend on forms of communism for the conduits and the rules under which they trade and work together.
But under our corporatocracy, artificial scarcity and a limitation of the ability to compete is created through protectionistic legislation that favors large businesses at the expense of smaller entrepreneurs. I believe that one such piece of legislation are laws or a law that prevents business owners from charging less for cash transactions than credit card transactions. Some businesses used to engage in that practice but I have not seen it since the law was passed. I think it might be a federal law.
Also, I think credit card companies can very often avoid any losses in cases of fraud or disputes by doing charge backs.
Much of this could be avoided if there was a public digital currency system where the US treasury would issue computerized transaction devices to vendors that would only charge a transaction fee consistent with the cost for the treasury to operate such a system. Small businesses would save billions of dollars a year from such a system resulting in a tremendous knock on benefit to the overall economy.
communism with a small ‘c’.
Is that anything like Venezuela with a small ‘v’? Or course not. They’re just a victim of circumstance. It’s the fault of the oil markets. Just a run of bad luck, really. Brother can you spare a dime?
private businesses depend on forms of communism for the conduits and the rules under which they trade and work together.
I know this is hopeless, but let me explain it to you anyway. Businesses can opt out, well short of the creeping socialism going on, of any arrangement they want. They stop doing business with other businesses that fail to live up to their commitments, they fire employees who don’t perform. They do this to survive. Sometimes they stop doing business with other businesses that are living up to commitments but are perceived to be being unreasonable. Sometimes they fire valuable employees. And sometimes they fail. But either way they are responsible for their own decisions and profit or fail according to their ability to meet/understand what the market (consumer) wants.
But under our corporatocracy, artificial scarcity and a limitation of the ability to compete is created through protectionistic legislation that favors large businesses at the expense of smaller entrepreneurs.\
While I’m inclined to agree, it is a central control economic system that leads to this marriage of government and business. See my comment on Sowell in response to TJ. You say you oppose “big business”, yet you endorse government planning which constitutes the biggest business of them all.
a law that prevents business owners from charging less for cash transactions than credit card transactions. Some businesses used to engage in that practice but I have not seen it since the law was passed. I think it might be a federal law.
Agree. This is government meddling in the marketplace. However if this is truly the case, it’s certainly not happening in GA or FL. I see plenty of gas stations and such that charge 5 cents/galllon less for cash. Some businesses don’t take American Express or Discover because of the higher transaction fees, but do take other cards. Perhaps such a law is in force in the socialist leaning state in which you live, but I doubt it’s a federal law. If it is it’s not very effective. Either way, as you are someone whom I’m fairly certain has never run a small business, you don’t understand the costs of cash, the risks, etc. The fee is justifiable for the numerous reasons I stated earlier. If it wasn’t, a free market would drop it.
Also, I think credit card companies can very often avoid any losses in cases of fraud or disputes by doing charge backs.
Chargebacks may or may not be eaten by the credit card company. If the merchant has shown that they done their due diligence in not accepting a fraudulent charge, the credit card company eats the cost. Or it goes to arbitration. Either way, the process costs time and money to pursue. In the past, many businesses took customer checks, a form of credit. As the economy grew and fewer and fewer customers were familiar to businesses, this became more costly. Thus the rise of credit card transactions. The consumer pays a little more, the merchant makes up for what he kicks in due to greater volume of business, the system works. If you TRULY are concerned about the costs of credit, people like you and Mike might want to look into being tougher on crime and encouraging people to be more responsible about debt. Like that would ever happen.
Much of this could be avoided if there was a public digital currency system where the US treasury would issue computerized transaction devices to vendors that would only charge a transaction fee consistent with the cost for the treasury to operate such a system. Small businesses would save billions of dollars a year from such a system resulting in a tremendous knock on benefit to the overall economy.
You are dreaming. The government is far more wasteful than private enterprise. This has been proven time and time again. You view the government as some sort of all-seeing, benevolent God made up of little angel bureaucrats who would never, ever use their positions of trust and authority to defraud the citizens. More on this in reply to your other post.
As far as having to write a check every month for taxes, I think instead people would say “I realize all the bounty of benefits we receive from the government has to payed for somehow, but why can’t some of those billionaires living lives of opulence foot the bill instead of us middle class citizens struggling to make ends meet?”
You might think that, but I don’t. I do not wallow in envy – I work hard to feed my family and I am critical of those who take money from me for no reason, not those who are more successful than I. I would like to stop the thieves, and I aspire (somewhat) to the success of others.
I see millionaires in congress who have manipulated laws to steer money into their own pockets, public servants who entered government only to see their net worth increase tenfold by deals made with donors and lobbyists. I see political correctness gone awry and funding, funding, funding with no real goal of success. I see limousines and lavish vacations paid for on the public dime. I see the corrupt and illegal wielding of the IRS as a weapon against political enemies. I see agencies like the Secret Service and the DOJ taking our taxpayer money and hiring prostitutes for their “Team Building” junkets. The Department of Education has crippled our schools and pandered to union bosses. The “War on Poverty” has sucked trillions out of our economy, yet poverty still exists at very high levels in this country. Government funding of the solar industry has been a complete failure; the cap on carbon emission has created a secondary market in carbon trading that has made men like Al Gore into millionaires a hundred times over.
The bounty of the government is a myth. Open your eyes. Pull back the curtain. See the real wizards at the controls.
“I realize all the bounty of benefits we receive from the government…”
My God, this reads like a prayer.
Government is great, government is good. Let us thank it for our food. Amen.
[…] Drug Prices are too high and unfair. […]
I would rather have expensive drugs than no drugs at all.
Let’s hope the “cure” (government control) is not worse than the “disease” (high prices).
Thomas Sowell:
It bothers me a little when conservatives call Barack Obama a “socialist.” He certainly is an enemy of the free market, and wants politicians and bureaucrats to make the fundamental decisions about the economy. But that does not mean that he wants government ownership of the means of production, which has long been a standard definition of socialism.
What President Obama has been pushing for, and moving toward, is more insidious: government control of the economy, while leaving ownership in private hands. That way, politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.
Politically, it is heads-I-win when things go right, and tails-you-lose when things go wrong. This is far preferable, from Obama’s point of view, since it gives him a variety of scapegoats for all his failed policies, without having to use President Bush as a scapegoat all the time.
Government ownership of the means of production means that politicians also own the consequences of their policies, and have to face responsibility when those consequences are disastrous — something that Barack Obama avoids like the plague.
Thus the Obama administration can arbitrarily force insurance companies to cover the children of their customers until the children are 26 years old. Obviously, this creates favorable publicity for President Obama. But if this and other government edicts cause insurance premiums to rise, then that is something that can be blamed on the “greed” of the insurance companies.
The same principle, or lack of principle, applies to many other privately owned businesses. It is a very successful political ploy that can be adapted to all sorts of situations.
One of the reasons why both pro-Obama and anti-Obama observers may be reluctant to see him as fascist is that both tend to accept the prevailing notion that fascism is on the political right, while it is obvious that Obama is on the political left.
Back in the 1920s, however, when fascism was a new political development, it was widely — and correctly — regarded as being on the political left.
https://www.creators.com/read/thomas-sowell/06/12/socialist-or-fascist
That Sowell piece was quoted a while back on David Thompson’s blog (http://davidthompson.typepad.com/davidthompson/2016/07/elsewhere-206.html) to which I had replied:
It is no coincidence that capitalists are frequently referred to as ‘sharks’ — a shark is the ultimate archetypal predator. Contrast that with charities that make heartfelt pleas for donations to raise funds to try to find new drugs to cure some horrible disease like cancer. All the while keep in mind that the only way some new drug will get to a regular patient is if some capitalist Big Pharma Drug company decides it is in their best financial interest to manufacture and distribute the drug.
And yet we still keep hearing about making a ‘moon shot’ effort to cure cancer as though the cancer charities were in charge of the operation from drug discovery to manufacture and distribution. What we need to remember is that the original, actual ‘moon shot’ where Apollo 11 first landed on the moon was a public operation from start to finish. It is clear that if we expect success in curing cancer and other diseases, we need to wrest control from the obstructionist, greedy, predatory drug companies and put the operation entirely in the charge of a publicly owned and operated entity comparable to NASA such as the NIH. But of course, cancer is not the only horrible disease, so no doubt we should put finding not only cures, but the best treatments for all diseases, into the hands of the people and out of the mouths of sharks.
In a free market, the best way for a company to profit is by offering an excellent product at a fair price to a public who wants or needs that product. It is an amoral system. When the government and business are in collusion, the markets are interrupted and bad things happen.
While the government IS capable of a major effort like the moonshot (which was almost 50 years ago) or the Panama Canal (over 100), the risk of putting major efforts like the cure for cancer in government hands is that the government is fraught with corruption, inefficiency, political correctness, bureaucracy and the same kind of greed you attribute to the sharks you so despise.
The way that politicians get themselves re-elected is by manipulating the beliefs of the public, and satisfying the lobbyists who steer funding in their direction. “Success” is only a minor part of the equation. That’s why when you look at the list of accomplishments of bureaucrats and politicians, you see so much funding – “Approved additional funding for the Department of Education”. “Increased Funding for Cancer Research”. “Increased Funding for Stem Cell Research”. In the mind of the public, “Funding” means “Success”.
There is a reason that the word “Motivation” is part of the phrase “Profit Motivation”. A company can only profit if they are successful. Unlike government, they do not have an endless stream of taxpayer money to fund their operations and justify their existence. They actually have to make something, something that fills a need or solves a problem. If they do not, they are out of business. Compare the public-good accomplishments of the federal government over the last five decades to those of the pharmaceutical industry and you’ll see what I am talking about.
However, just as it’s possible for the government to achieve success in a project like the moon shot, it is possible that a company will take advantage of their ability to gouge the public – but neither case is the norm.
In an earlier post I listed the sequence of events, durable goods, care and medications involved in my quad tendon repair. I received world-class care on all levels – and at every level the driving force was the free market. I believe very strongly that the success of my surgery was based on the amount of prior research given to that procedure – research that in no small measure was driven by the fact that it is a common basketball injury and there are millions of dollars at stake when a star player tears his quad. The drugs I was given were developed by private pharmaceutical companies who profited by my pain. I’m glad they were motivated enough by that pain to realize there was money for them in relieving it – otherwise I would have been dependent on the altruism of some Senator or Representative who might see more votes in building a bridge in his district, or in cutting a compromise deal with a committee in exchange for some future favor.
It is no coincidence that capitalists are frequently referred to as ‘sharks
I will say it again, and again, and again…It is no coincidence that communism has failed time and time again in Venezuela, USSR, East Germany, Hungary, Poland, Red China, North Korea, North Vietnam, Libya, Czechoslovakia, etc. etc. etc. Need I go on? Hell, even Mike admits communism is a failure. But then he turns around and endorses all forms of socialism whilst pretending it’s not socialism. But that’s a whole other clown show.
we need to wrest control from the obstructionist, greedy, predatory drug companies and put the operation entirely in the charge of a publicly owned and operated entity comparable to NASA
As someone who has actually worked for NASA, this would be a disaster. NASA, like damn near every government program, is a wasteful, bureaucratic nightmare.
I will grant that, due to the dedication and hard work of engineers, and the organizational skills of a certain engineer/former Nazi, the moon shots were accomplished. However unlike curing cancer or most other diseases, there was zero financial incentive to go to the moon. Which is why the later ones were cancelled. I wasn’t on that program so I don’t know how efficient it was. But I did work for considerable time on the Space Shuttle program and the waste I found there was absolutely stunning. From what I understand from working with older Apollo era workers, Apollo was more engineer focused. The Challenger disaster was a management (government) f-up from the beginning. I have also worked int he defense industry. Ditto. Sure, throw enough money at something and it will get done somehow at some time. But you damn better have a market economy thriving that you can parasite. Otherwise, you’re just the USSR-in-waiting.
Crony capitalism, our present system, is only marginally better than socialism.
If we truly had a free market economy then politicians would not be getting rich.
Why, exactly, would Goldman Sachs pay HRC a half million dollars for a 30 minute speech? Remember, this is a person the FBI cleared because she was too incompetent to know she was mishandling classified information.