Pharma companies get the benefit of near-perfect inelasticity in demand, i.e., if you don't get your meds means you die or have extreme pain, you will likely be willing to pay inordinate prices.
Drugs typically have a pretty in elastic demand. Whether it costs $16000 or $0.05 for a pill, the end user - whether a doctor or a patient - will simply figure out a way to pay for it to alleviate the pain, symptoms, and perhaps to avoid dying.
Seems like 340B (I hadn’t heard of this before, thanks!) may have been created with recognition of this inelasticity.
If we can limit prices this way, all it would take are a few more laws to put more price limits in place.
I work in pharma. Pricing in pharma for drugs like that is complicated. Usually these drugs do actually require rather expensive manufacturing processes, that have to run in extremely large facilities with extensive QA, but in fairly small batches.
More importantly, every major pharma has a compassionate use program that helps people who can't afford the drugs get them, through offsets and credits. I understand the desire to make pharma look like pure-evil profit mongers, but the reality is that this is not an easy business to be in.
Pharma is a bit different from typical pricing, though. Note that pricing is done per-country, based on mean ability to pay- so there will always be some number of people below a percentile who can't (that's why pharma has compassionate care programs).
There are plenty of example of drugs costing 10-100x what they normally would, which pharma companies get all the heat for, are drugs that would otherwise have plenty of competition but dont due to to backlogs at the FDA.
Could you provide a source? It sounds interesting, if true.
Such a result has interesting implications. Since we know the demand for medicine is not perfectly inelastic (various experiments with copays prove this), it would suggest that some external force (insurance companies?) is keeping prices down and the constraining factor is supply.
Everybody wants to maximize the value of their investment, or product.
To the consumers affected so much by the high price, this comes around as greedy. While to the business themselves, they see this as good business incentive.
Of course, there are other factors:
+ economics of how much people are willing to pay for, the scarcity of the product (and resources used to build it)
+ the derived (and perceived) value of the people taking the medication
+ politics and lobbying cost
In the end, it all comes down to the business' bottom line and the consumer's capacity to pay. It is very probable that the pharmaceutical companies have done a lot of calculations to ensure that their price point would be at the stage where they have balanced everything to lean on profit for their side.
Medication for chronic disease is a highly inelastic market. The other such market is oil. Prices react to spikes and sudden drops in demand, otherwise they are stable. No one is going to bring a new plant onstream unless there are certain takers for the output.
There are a few markets where people's demand are very inelastic: food, housing, health care.
Food has gotten cheaper because competition is trivial.
Housing is becoming more and more expensive since it's a positional good and we have been doing our best to make sure supply doesn't increase.
And healthcare costs are being held high due to monopoly rights in the form of patents and drug companies' general unwillingness to compete with each other.
In light of all this saying that pricing is a question for the marketplace seems naive at best.
The part about companies not being willing to invest is true, but maybe that means we should stop relying on them for this; the Drugs for Neglected Diseases initiative (DNDi) has been doing a lot of good by focusing on drugs that drug companies are not interested in since there is not a large enough profit motive. Maybe that should be a model for taking publicly funded research and bringing it to market.
Pharma has the additional problem of inelastic demand. Deciding to purchase a candy bar or not is qualitatively different from deciding to purchase cancer treatment or not. Personally, I extend your idealism to any good that has highly inelastic demand. Using markets to price goods efficiently is not a goal I have in mind when I'm considering the distribution of these type of goods.
We're talking market forces here. Yes, the drug companies will try to squeeze as many dollars out of the market as they can; the counterbalancing force is that if they get too greedy, someone else will enter the market and undercut them.
The fact that entering the market is so bloody expensive is why drug companies can set their prices so high without provoking a new competitor into existence.
That's probably the only good reason to allow exorbitant prices for this specific kind of medicine. To keep it in reserve while keeping pharma companies incentivised.
I'm the last to defend the drug companies, but at a basic level, they get the right to sell at high prices because of the cost to bring to market which is absolutely enormous.
Once it goes to market the cost of producing the drug is often very low compared to the price but it's in order to encourage companies to invest in future drugs.
This is a separate issue from large emergency medical bills. You can get a drug prescribed for a chronic condition just about anywhere, but if it's produced by a monopolist then you're forced to pay whatever absurd price the manufacturer demands. Adequate competition without IP restrictions can drive drug prices very, very low. This can be seen in the Indian pharma industry.
I don't know what the answer is, but excess capital always demands more. When starved, the markets will feed wherever they can.
I will add my two cents, though. I think this is enabled by ACA and the drug companies are playing a dangerous game if they don't want to end up with Medicare-negotiated rates. Currently if you're uninsured or on a high-deductible plan you pay full price for drugs. If you've got a more traditional plan the insurance company and manufacturer play their typical monopoly money game. If you want more amo for the fire look into the price increases for EpiPen over the last few years.
There is much more elasticity than you think. Most medicine is not about “not dying”. Here is an example: I get heartburns pretty often. I take a heartburn medicine omeprazole daily. It’s an over the counter drug, costing something like $0.3/dose. If they bumped the price to $16,000 I would just stop taking it, and started getting regular heartburns again. These suck, but I lived with them before finding this drug, and wouldn’t pay tens of thousands of dollar annually to get rid of them.
reply