Following up on my earlier post about drug price negotiation:
Supply curve of drug innovation slopes up
We are longtermists
So we overwhelmingly care about the post-patent supply of drugs, when almost all are nearly free
So barriers to drug invention are the key hurdle that matters for saving lives
Thus drug price controls are demonic
— Garett Jones (@GarettJones) July 13, 2024
"Price controls." This is an odd usage. What Medicare is planning to do is just the opposite: they want to negotiate the price of drugs, the way you do in a free market, instead of being forced by law to pay whatever drug providers tell them to. It's a cap on public subsidies, not a cap on prices.
And there's another common blind spot at work here. Medicare boosts prescription drug spending in the US by about half. This is all taxpayer funded, and it hugely expands the prescription drug market since much of it would be unaffordable if seniors were left on their own. So what's the idea here? That the government should massively subsidize drugs with no questions asked? That hardly seems tenable.
Price controls in a free market might be—well, not demonic, but maybe bad policy. But that's not what we have here. A true free market in elderly health care would involve seniors paying for all medical care, including prescription drugs, out of pocket. Short of that, you can't have it both ways. If you want public subsidies in order to spur pharma R&D, you have to accept some limits on how much taxpayers are asked to contribute. That's both democracy and the free market at work.
If you want public subsidies in order to spur pharma R&D, you have to accept some limits on how much taxpayers are asked to contribute.
Nonsense. All all pro-America free market movement conservative know, taxpayer subsidization of corporate profits cannot fail. It can only be failed.
How is it a free market if the buyer has no say in the price?
Their arguments are internally nonsensical.
America must not have many free markets then. There are very very very few retail establishments in America where the buyer gets to negotiate a price with the seller. Generally, American buyers have a single choice to make when it comes to the price of anything: take it or leave it. Cashiers in most American stores have zero discretion to negotiate prices on behalf of the seller. “Computer says it’s $99.99 so it’s $99.99, no it doesn’t matter if you’re buying 1 or 100, or if you can find a cheaper price elsewhere, or if you’ve come in here every day for a year and can see we’re not selling many of them, or we’re one day away from just throwing them out because of expiration dates, or whatever. The price is $99.99 until the HQ says it isn’t.”
I get what you’re trying to say here: the stores themselves are buying the stuff from the manufacturer, and the insurers (private or public) are actually paying most of the cost for the stuff the individual “buys”… and *those* entities should have the ability to negotiate prices on a macro level. But the idea that individual consumers in America have the right to negotiate prices went away sometime when national chains took over retailing and computers (allowing a central office somewhere to control sale prices) took over cashiering.
Sure retailers set a price, but they set that price in dynamic relationship to what their competitors are doing. In that sense, it's a free market if the consumer has options to find the same or comparable product elsewhere for cheaper. (And of course there are a lot of products and services out there now that have so much market domination that they're effectively monopolies or oligopolies, but that's beside the point here.) Drugs still under patent are effectively a monopoly -- only one company is selling them and if you want it, you have no other options. As it stands right now, the taxpayers are effectively subsidizing a private industry if the drug companies can just say "this costs $500 a pill, take it or leave it. Oh, wait, you can't 'leave it'! Har!"
Pharmaceutical CEOs squeal like stuck pigs every time they have to respond to the idea of negotiating drug prices, but like someone was saying in a thread yesterday, they're completely full of shit and every other country in the world with a single-payer health system (which Medicare is) does this.
What you're describing is not the market for pharmaceuticals. Almost no one buys drugs the way they buy clothing. The bill is paid mainly by Medicare or a private insurance company - not the consumer. Insurance companies regularly negotiate prices, but in the case of Medicare, they're required by law to pay whatever the drug company wants. This is not a free market in any sense.
Basically, it's central planning. In theory, the buyer can try shopping at another store, but the other store may be many miles away. There are only so many supermarket companies in the US, so price competition is limited. If you wander the supermarket aisles and look at products carefully, you'll see that there is only an illusion of variety since many products have only a single provider who markets under multiple names.
It might have been different 50 years ago when there were numerous supermarket chains as well as standalone grocery stores, that was then, and this is now.
Is it fair for Medicare to cover an anti-amyloid beta drug despite its minimal benefit (measured in months, not years) for Alzheimer's patients, at a cost of $20K+ a year per patient?
Sure. In the same way it's fair for an insurance company to pay the near-million-dollar replacement cost of your neighbor's house that burns down when you pay premiums every year and never get a dime from them. It's called risk-spreading, and everybody benefits from it.
The FDA has the scientific community on one side and the patient advocate community on another. When you or a loved one is dying, you'll do anything, anything to keep them alive longer. It doesn't matter if the drug is useless and does more harm than good.
People in the pharmaceutical community are not happy when the FDA approves drugs like this, but whenever the FDA says that the drug developer needs to do a multi-phase trial, the advocates are up in arms. They write to their representative and apply whatever pressure they can. You get them on the left and on the right. Trying to save a dying loved one is non-partisan.
If the government wants to subsidize drug R&D, then it should…get this…subsidize drug R&D. It can and does do so directly by several means.
Giving money to shareholders in the hope that some of their inflated profits will trickle down to the scientists and engineers is an absurdly stupid idea.
The US and other governments *do* heavily subsidize research on drugs, they just don't take it all the way through human trials. This is what Dean Baker is always on about. Drug companies collectively spend $244B/year (as of 2024) on R&D. Governments could easily take on those costs and have all drugs start as generics. In fact total Medicare part D spending was $216B in 2021 so we are pretty much already there. In an very real sense Medicare is paying for all drug R&D world wide anyway, just very inefficiently.
The first drugs for cystic fibrosis offer an interesting lesson in pricing. Cystic fibrosis prevents cilia from clearing fluids, so it makes breathing difficult and interferes with pancreatic function. The CF Foundation backed drug development using money contributed to it as a non-profit. Their first drug was an aerosol form of an already proven antibiotic to fight CF related lung infections. They sold the revenue stream from this drug to fund the development of a drug that restored cilia function in a subset of CF patients. Their participation cost several hundred million dollars. They then sold their revenue stream from that drug to fund the next round. CF is now a chronic disease like diabetes and life expectancy is close to that of people without CF. (It's actually a heartening story except that a lot of children die.)
So, does the CF Foundation want a high price for the drug or a low price. In theory, more affordable drugs are a good thing, but that would mean less money to develop the next drug. The foundation went with a higher price in each case since it gave them seed money to back the next drug.
This is not a general argument for higher drug prices, just an example of how one non-profit balanced drug prices against the high cost of development.
P.S. For a great book on this, check out Breath from Salt.
The argument in the quoted post is nonsensical on several levels. First, what supply curve doesn't slope up? Second, by "nearly free" he means "generic," ie without a patent premium in their pricing, and last I looked, generic drug companies -- even the ones that aren't subsidiaries of brand-name pharmacos -- seem to be doing just fine; generic drugs are merely much less expensive, not "free." And third, if ever we are truly in the blissful state that SO many now-unmet serious medical needs have been met that ... there just aren't many problems left to solve, and the existing pharmacopoeia is about the best imaginable, then indeed there will be a lot less need for firms that invent drugs and many existing firms will disappear; that's what happens in a free-market economy. But I doubt there will EVER come a time when NO research is being done into possible new drugs -- there will always be new approaches to old problems -- and even in the absence of a sustainable profit motive, ways will be found to fund it.
well, until the robots replace us all.
It’s weird but hear me out…
The government itself could also directly do all the drug R&D on the taxpayer’s dime, and then license drug manufacturers to mass produce and distribute the drugs at a fixed rate of return (profit). Bonus: There would be a lot less incentive for career government employees to rush a drug into retail sales by falsifying data.
There’s no reason why the manufacturers of any product also have to be the creators and designers of it. Except of course for the twin “needs” in our society to maximize profits for private entities and keep official government employment rolls down so as to not scare the capitalists into thinking we’re socialists.
Of course. No profit-taking but also greater opportunities for corruption and less incentive for innovation that improves efficiency. (See also all well-worn arguments for and against capitalist systems.) And the fact is, we have a hybrid: a lot of BASIC (ie unprofitable) research is done with government or venture funding (VC companies expect a very high failure rate, like 90%), and once a therapy is "de-risked" sufficiently, the big pharmacos step in and do the expensive clinical trials; that is, they are in some ways like little more than contract research organizations, providing a service that somebody (eg the government) would pay them to do in any case. So, meh, tomayto tomahto.
Where the system REALLY goes off the track is on the COMMERCIAL side, especially with advertising for new drugs in big markets (eg "lifestyle" drugs or drugs for widespread conditions like heart disease) with just a few competitors. That really should be regulated better.
I wouldn't call basic research non-profitable. It's just that the profits take longer to come and don't always flow to the party that funded the research.
Two things to consider are higher corporate taxes and stricter antitrust enforcement. That's how we got Bell Labs, Xerox PARC, IBM Watson and so on. High taxes mean shareholders can't keep big dividend or buyout returns so they are inclined to settle for future growth. R&D is one route to future growth. Strict antitrust means that the money doesn't go to mergers and enforces competition.
The drug companies don't fund nearly all the research that goes into drug development. The government funds massive amounts of basic research - the university and research institutes that do the "what the heck is this? and can it be useful?" type research. It's a huge public investment that benefits the drug companies. The law preventing the government from negotiating prices was a straight give away to the drug companies.
"We are longtermists
So we overwhelmingly care about the post-patent supply of drugs, when almost all are nearly free" - what appalling bullshit! Who are "we"?
And what does he mean exactly by "innovation"? Most innovation is to create a slightly different drug that you can patent. And why if drug companies are mainly about "innovation" do they spend more on marketing than on R&D. The whole thing is so full of bullshit it stinks.
It's simply Pharma mouthpieces and apologists spewing stuff in the hope that it registers with someone so that they can maintain and increase the profits of the companies. That's capitalism for you I guess...
several good comments.
The Twitter post is several layers of BS. Worth an eye roll.
In the end, pharmaceuticals are a manufactured product, and it is the ‘natural’ course of manufactured goods to become cheaper and cheaper as productivity improvements are developed and implemented. This is a good thing. From a global perspective, the greatest good for the greatest number is that widely needed medications should be widely accessible, i.e. cheap.
"Demonic price controls," "post-patent" when drugs are "nearly free." A real Frank Luntz disciple here almost does the master one better.
And inserts an implied or elided middle conclusion readers are supposed to fill in themselves, I guess-- on-patent profits must be as exorbitant as we can possibly make them so we can keep up the pipeline of "post-patent" no-cost drugs so we can go on "saving lives." Nobody here but us effective altruists!
Dude didn't get the memo-- SBF's in jail and EA has a bad smell now. Nobody, but nobody, is talking it up anymore.
Great points, but you can bet if there's any place where Pharma "innovation" is still a watchword, it's the economics department at George Mason.
This short post is probably the best, simplest explanation I've seen of the problem and what they plan to do about it. Congress and the White House should put you in charge of messaging for this issue!
"This is all taxpayer funded"
You wish! The premiums for part D are not unsubstantial. The geezers pay a fraction themselves--even those for whom the part D premium is a hardship (they are not differentiated by income level the way the part B premiums are).
Point taken, though Medicare is the payor so it stands between the premium payers and Pharma. On a small detail, part D premiums are actually surcharged like Part B for people who aren't facing the hardship you describe.
Of course there is no real free market in drugs which require a lot of research and mandated testing to bring to market. The idea of patents recognizes that inventors must be protected from cut-throat competition. But in drug development the real question is who makes the decisions as to allocation of capital. To get capitalists to supply the money for research and testing when there is a risk of failure for any drug project and in fact a lot of capital expenditure goes to failed projects, there is supposed to be a high payoff when a drug actually comes to market.
One alternative, favored by Dean Baker and others, is simply to have government do the research and testing. It already does a lot of it. This is essentially a socialist solution - allocation of capital is in the hands of politicians and bureaucrats rather than private entrepreneurs. But socialism has not worked well in general, except under emergency conditions such as war. There were many socialist governments in the 20th century and most did not do well economically. The Soviet Union, for example, did not have a good record of drug development; it preferred to spend money on providing basic universal care. And should a Trump administration be in charge of what drug research is supported?
But there is no reason that profits in the private system can't be limited, and negotiation by the government and insurance companies is one way to do this, since consumers themselves can't negotiate (they can't really in any aspect of healthcare). The Jones tweet is not very relevant.
The question of whether limiting drug company profits limits innovation is a valid one, but there must be at least some data on it, since most other countries do actually limit profits. How do their records on innovation compare with that of the US?
As usual, conservatives completely ignore the successes of other countries in healthcare. They try to argue a priori, based on poorly understood "free-market" economics.
How far is Medicare from being a monopsony?
google "medicare percent of medical spending"
Medicare plays a major role in the health care system, accounting for 21% of total national health spending in 2021, 26% of spending on both hospital care and physician and clinical services, and 32% of spending on retail prescription drug sales
Anybody using "demonic" like this should not only be politely ignored, they should be actively avoided.
If I see something like "We are longtermist" I know there's something stupid coming.
Wow, this clown is hilarious.
"In heaven drugs will be (almost) free."
I will hire Garrett to write propaganda, too! Eventually, I will reward him with uncountable riches. Someday.