« Government Demand for Drugs and Drug Prices-Becker | Main | The Revolution in Women’s Employment in the Market—Posner »

12/27/2009

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Brian Davis, Austin, TX

It makes more sense to me than the financing contrivances the current healthcare bills are foisting on Medicare. We wouldn't have the "donut hole" today in Part D if Congress had bitten this bullet in '03, I don't think. It's fundamentally what the VA has been doing for eligible vets since the early '80's. We have drug price rebate schemes with Medicaid and Medicare Part B Rx drugs but we throw too much transaction cost into litigating over the industry's pricing constructs. Straight up-front negotiation of drug prices would save taxpayers and patients more $$$ than litigation brings back years after the fact, IMHO.

none

brian,

congress is not powerful enough for your solution. it would take executive action to battle vested interests in a profitable industry. unfortunately liberal presidents are like giant interest aggregators, and we voted in a most liberal president.

another solution is to limit firm size in an attempt to make the market competitive enough for social costs to coincide with what the pharmaceutical industry is producing. but this is also politically impossible in our democracy.

to solve for this problem you must calculate transaction costs correctly. As a hint or baseline you can use a drug that is produced in a perfectly competitive setting, yet is itself outside the economy and thus not subject to the transaction costs facing pharmaceutical companies. This commodity is your control group. If i were writing the paper id probably use marijuana. Marijuana prices in the 1990s (the earliest i bought pot) are identical to that of today. if suddenly the middle east ceased to exist and the resultant cost push inflation drove our economy into collapse via hyperinflation i would wager that pot prices would stay the same.

Mxa

Couldn't agree more with none( earlier poster ), good article.

MC

Long story short: you are O.K. with retarding new drug and device development?

blake

Does the government really need to use monopsony power to counter the effects of monopoly rights it grants? That seems only marginally less silly than manufacturing drugs in this country, exporting them to Canada, then reimporting them to make them cheaper. Drug companies need subsidies to develop new drugs, but are state enforced monopolies the best way to subsidize them? Monopoly rights are a tax on consumers, which in this case seems to be one of the most regressive taxes possible, literally killing the less advantaged. Why devise a system that forces people to take inferior, even slightly inferior,drugs with the same marginal cost to produce and act like society sees some sort of savings?

Jim

Maybe I am stupid or ignorant or both but it seems simple to me; no profit, no drugs. Smaller profits, fewer drugs. More subsidy, higher taxes. We want it all don't we. unlimited healthcare done quickly at no cost. Now let's see, the last time I looked it doesn't work that way very well. The real problem is in the medical-patient-tort culture. The patient wants the magic bullet (test or drug). The physician grants the wish. The physician knows that if he/she only dispenses advice, the patient will go elsewhere until he/she gets the test/drug. The lawyers are happy with this system because they know that they can sue if the drug/test is not granted and something goes wrong and they can sue if the drug/test is granted and there is a complication. Wow, talk about demand-push inflation. The underlying system is IRRATIONAL and the government cannot make it more rational by trying to force drug prices down with purchasing power or subsidies without introducing market dislocations. After all, who was it that allowed the drug companies to advertise directly to the public on television? I can only imagine the unforseen consequences of the next brilliant, well-intentioned attempt to control drug prices; "Hey buddy, how much for two Viagra?"

rogerc

An excellent article, concise and to the point.Perhaps Gary and/or Richard would care to comment on the drug purchasing system in Canada where a partial monopsony is in place.

On a different point - could it be that monopsony increases efficiency? "More" is not necessarily "better", and I'm cynical enough to believe that, given the level of remuneration in this industry, there are significant - perhaps enormous - inefficiencies in drug research, development and distribution.I doubt that these inefficiencies net out.Maybe constraining price would prompt searches for more efficient drug development processes.

Jack

Jim, I posted the following on Becker's side.

Few questions too:

Seems monopsony power in the US or for Medicare/VA alone is not monopsony power for the world. If drug companies here were, in a more competitive future not gleaning enough from to today's trapped consumers to cover advertising (their largest single cost) or reasearch, they could opt to charge more for patented US developed drugs in other advanced nations.

And IF we trust the global market to provide profits, R&D to Intel, MSFT, Apple, Qualcolmm etc, why do we fear that model in prescription drugs?

As RogerC asks, "how much is enough?" ie should the amount of advertising and RD paid for by the US consumer in a rigged deal more "efficient" than, say Intel making a free market decision as to when to develop and bring their new product? (Kind of an interesting case as Intel's newest goodie kills off their existing product while new drug development is usually accretive to the developer.

The case our proffs make for just paying the rack rate for prescription drugs and extending them government protection from virtually any competition has me reflecting on the time when we had only the Big Three auto companies and at great cost Ma Bell supplied us with clunky black dial telephones and would not even allow us to connect other products to "their" lines.

Had we not broken ATT's choke hold on telecomm where would we be today in terms of either tech improvements or the cost of communicating?

Do we even know what is going on in the economics of drug sales? If, say Canada employs its "monopsony" power in buying drugs from a US company for one third the cost to the US provider, I'd assume that the negotiated price covers at least the marginal cost of providing product to Canada, while as Brian points out we overpay.

The question comes up as to whether we lose our "trust in both capitalism and what appears to be a highly selective "globalism". For example from a technical standpoint the computer chip and software biz seems much like that of the drug industry. Both spend billions before making a dime on a new product and the profits are made in serving the widest possible consumer base before something better comes along.

Becker seems to depict a scarcity model in refs to the "very sick.... being willing to pay" etc. Interesting. In the computer biz model the "need" and profitability of a computer might be great for Google or another big business, but the price paid is much the same as it is for a teen for whom it may be nothing more than a toy.

(I understand some drugs may be costly even when produced in the millions but most do fall in cost as we see once the generic comes out.)

Currently the VA is "allowed" to price shop (I believe only within the US for most drugs) and pays less than half what the price-fixed deal for Medicare costs. So what would happen were Medicare allowed a similar freedom? Surely they'd pay somewhat less and squeeze the mfg somewhat. But, assuming that the monopsony power of other nations was not absolute wouldn't the drug company offset their lower margins on Medicare with a somewhat higher (than today) price in Canada and other nations much as would Microsoft or Intel?

Any discussion of "markets" are completely confused in the US by "insurance" companies and Medicare/VA etc paying most of the bills. But the matter of US citizens paying a LOT more than those in other nations is not trivial. Increasingly out medical care dollar goes to prescription drugs and as our overall H/C costs are half again higher than Germany and nearly double that of some other nations the costs have become a problem affecting our ability to compete in a global system we designed and promote.

Domestically perhaps it's even worse. Becker and Posner both wrote on "job creation" of further pounding down wages (at the lowest rungs of course) so the employer could "afford" to hire more workers. Leaving out for now the silliness of $7 jobs that pay less than half of a basic std of living for one person, the ability of the low income worker to pay inflated costs of drugs becomes impossible by any scheme other than yet another direct subsidy.

Mark Twain

Not bad for not having a single equation to back it up. Now, why should I believe you?

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of course the drug price should be more affordable.

Obadiah Shoher

Sir,

You're indeed correct that price bargaining would reduce R&D funding. That might not, however, lead to reduction in R&D output. Rather, the companies will merge and thus eliminate duplicated R&D expenses. With the existing patent laws, most of R&D investment is wasted: several companies conduct similar research, the winner takes all, and the losers lose. Thus, there is a tremendous potential for price bargaining which would not result in less research.

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I understand some drugs may be costly even when produced in the millions but most do fall in cost as we see once the generic comes out.

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I think yes because drug price is too high.

sesli sohbet

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

sesli chat

An excellent article, concise and to the point.Perhaps Gary and/or Richard would care to comment on the drug purchasing system in Canada where a partial monopsony is in place.

On a different point - could it be that monopsony increases efficiency? "More" is not necessarily "better", and I'm cynical enough to believe that, given the level of remuneration in this industry, there are significant - perhaps enormous - inefficiencies in drug research, development and distribution.I doubt that these inefficiencies net out.Maybe constraining price would prompt searches for more efficient drug development processes

sesli chat

An excellent article, concise and to the point.Perhaps Gary and/or Richard would care to comment on the drug purchasing system in Canada where a partial monopsony is in place.

On a different point - could it be that monopsony increases efficiency? "More" is not necessarily "better", and I'm cynical enough to believe that, given the level of remuneration in this industry, there are significant - perhaps enormous - inefficiencies in drug research, development and distribution.I doubt that these inefficiencies net out.Maybe constraining price would prompt searches for more efficient drug development processes

Round and Brown

significant - perhaps enormous - inefficiencies in drug research, development and distribution.I doubt that these inefficiencies net out.Maybe constraining price would prompt searches

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