On Vox Sarah Kliff digs into the recent Epipen controversy, and I found some parts … unsatisfying – because they are not thought through:
In Europe, Canada, and Australia, governments view the market for cures as essentially uncompetitive and set the price as part of a bureaucratic process, similar to how electricity or water are priced in regulated US utility markets.
Other countries do this for drugs and medical care — but not other products, like phones or cars — because of something fundamentally unique about medication: If consumers can’t afford the product, they could have worse odds of living. In some cases, they face quite certain odds of dying. So most governments have decided that keeping these products affordable is a good reason to introduce more government regulation.
So if I can find an example of an unregulated product without which life is worse – even endangered – and yet the very thought of regulating the product will cause gales of laughter, then Sarah’s argument is in trouble.
Here’s one.
Parkas in Minnesota. (Sure, we could go with heavy coats or even clothing, but parka is more fun.)
Regulating the price of parkas seems, on the face of it, to be silly – but take it from me, being in Minnesota, in January, without a parka is just begging to make you either housebound or cold enough to hurt. Even die.
This is one of the kinds of arguments which will erupt – and rightfully – from the free markets crowd. Why would we regulate the price of parkas? Understanding and stating why we don’t is important.
Details matter.
Get the details wrong and you may end up with a solution that solves nothing and engenders scorn from the other side of the aisle. And while some will scorn you regardless – these are the dead-ender ideologues – there will be those who listen, who think, and if you can convince them, you may find you have a bi-partisan effort. But you have to have the details right, and understand that these sorts of arguments are often non-linear – that is, a detail may skew a solution way out of its apparent importance.
Understanding the differentiating factors between life saving drugs and life saving parkas may lead to a better understanding of how to solve what appears to be a problem – and to understand what might be a temporary problem. Let’s abstract a bit – why do we forbid monopolies and price-setting conspiracies? Because this is how prices get too high. The latter case is clearly a violation of the ideals of free markets, where competition is cherished; in the real world, we only cherish it when we’re not on top, but once we’re king of the hill then, for most folks, competition is a bane on one’s existence. It’s much easier to influence lawmakers to suppress that up-and-comer than to come up with the topper to the competition’s new product. Company’s must be forced to compete.
In the former case, that of monopolies, this time we’re protecting consumers from an instability in the free market system. Free marketers will claim that a competitor will spring up to depose the king; I’m not certain about market histories to comment on the claim.
Back to Sarah’s article:
When drug companies set their American prices, they don’t focus on the price of making the pills. Instead, they look at what their competitors already charge for similar products and try to land their price somewhere in the same range, regardless of production costs or how good the drug actually is. Since most drugs are already expensive, new drugs keep matching those prices.
This does not match the traditional narrative of a market in which competitors step the prices of the products down as costs slide over production runs and competitors slide their prices down in hopes of securing market share. Because it doesn’t, I think it’s important Sarah state why she believes this narrative doesn’t apply in general.
More detailed, “they don’t focus on the price of making the pills” is no doubt accurate, but the follow-on is misleading – because most pharmaceuticals have to cover the costs of not only the research to validate the efficacy and safety of this particular pill, but also the costs of those products which failed somewhere along the development path. There’s more to this process than just manufacturing.
Her description is actually reminiscent of a monopoly situation in which there’s a conspiracy to raise prices – which is illegal and can lead to serious fines and jail time. I don’t think this is happening in general. But perhaps that assertion, or a related assertion, could be fruitfully applied to the Epipen situation. But evidence should be supplied.
Sarah goes on to reference how prices are set in other countries – an interesting process – but doesn’t address the free market concern of how regulated pricing would affect the decisions of the pharmas in deciding which biomed problems to pursue next. How much are pharmaceuticals developed for the American market vs regulated markets? If we went regulated, how would that change?
I’ve talked about the problem of the intrusion of the practices of one sector into another in this thread, but I have no ready solutions of my own. While many researchers are motivated by personal losses or a sense of contributing to society, or even just ravenous curiosity and drive to achieve, the investors who fund the efforts, whose funds by the critical supplies and pays the salaries, often, though not always, are driven by a quest for profits – often large profits. How do you replace them? How do you replace those researchers who are driven by money? How do you handle the lost investments, of those efforts which failed?
Tough questions. Unfortunately, I’m not convinced by Sarah’s narrative. And if you can’t get reasonable free marketers and conservatives on board, any solution appears dubious.
And if the Epipen is suddenly faced with a competitor priced at a tenth of the Epipen’s, much like happened to Daraprim? Sarah mentions Daraprim – but not the competition aspect which arose a few months later, and what happened to Shkreli, the CEO that raised the price of Daraprim. How will this impact her argument, if it happens?
I have my doubts about how the medical sector is impinged upon by the private sector (see here) – and I wish Sarah had perhaps asked whether the free market, as defined by Adam Smith, is appropriate for the medical area. The arguments made here are uneven, and in several cases, unconvincing.
