Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price.
Pointer from Mark Thoma.
His point, with which I agree, is that we should try to find other ways to subsidize drug research, so that drug prices will be closer to manufacturing cost, which is low.
Otherwise, I disagree with a fair amount of his post. I do not think that the wage rate of American doctors is notably high relative to their foreign counterparts. Keep in mind that American wages in general are higher, so that opportunity costs are higher. Keep in mind that American doctors tend to work longer hours. Finally, keep in mind that the mix of American doctors is much more skewed toward specialists than the mix in other countries.
In Crisis of Abundance, I looked at various possible explanations for the high rate of health care spending in the U.S., and I decided that the relative price of medical services is not such a big factor. The main factor is that we utilize many more services that have high costs and low benefits. A government-run health care system, which Baker advocates, ultimately would have to address this issue through refusing to pay for services as readily as we do now. A more market-oriented system would force people to decide for themselves when a procedure has expected benefits that are low relative to costs and hence not worth undergoing.
That is exactly like saying that “economists seem content to ignore the copyright monopolies granted to the publishing industry, which allow it to charge prices that are often ten or even a hundred times the free market price.”
If the government paid the cost of developing new drugs and getting them approved, then the choices of which compounds to spend taxpayer money on and how much to spend would be political choices. Are there any real-world examples indicating that the government would do a better job than the drug companies? If you want to reduce the cost of new drugs, you should do things like reducing the barriers to entry for “look-alike” drugs, and expediting patent litigation.
More like force them to pay up when they have no alternative which is how our system works. This is why catastrophic care and cancer drugs are so expensive. When you are desperate, incapacitated, and your life is on the line, there is no calculation that can be undertaken, you can only be deprived of the option by not being able to afford it or be deterred by treatments so awful they are worse.
Hmmm, the highly regulated drug and banking have high profit margins. That indicates what we need is more dramatic government intervention and not something like, say, tweaking the patent system marginally until we find a balance.
The cost to develop a new drug is (relatively) invariant. Most of the cost is in the failures along the way.
So patient population becomes a key determinant of price. If you’re selling a drug to millions to take it chronically for years, you can charge $4/day and recoup the investment (cholesterol, hypertension, depression). If you’re selling it to thousands for a limited course of therapy (cancer), you’re going to have to price much higher to recoup that relatively fixed R&D investment.
You can also be deprived of the option by the fact that the needed drug doesn’t exist. And if a company cannot recoup its R&D costs, for the drug you want and all the other drugs that never made it to market, then the drug won’t exist.
What % of “health care costs” goes to drugs? hmm, to ask …
https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/downloads/highlights.pdf
This 2014 report says $3.0 trillion spent, retail drugs $298 bil., so less than 10% of total.
I’d favor high “tax credit” rewards for drug research, including doing and publishing studies on drugs that fail. IBM Watson Art. Intel. is now learning about failed drug treatments for cancer, and it might be that future trials are indicated for some drugs for some people.
It’s not clear how much total income is received by doctors. But I strongly suspect that, since WW II, there have been far higher increases in the number of law students than in the number of medical students — opening more med schools and accepting more med students is one of the best ways to reduce health costs as well as leading to more innovation/ experimentation, as more doctors try more different things.
More med schools – lower cost doctors yet more of them.
We might should separate innovation from clearing government hurdles like the FDA, which may not even be legit. Innovation may be cheaper.
One problem with Patent is that even a completely independent discovery of the same thing is not allowed. Perhaps if we modified the laws in some way to allow that we would better off on net.