The Times had a great piece in yesterday's paper which illustrated yet again how the relative inelasticity of demand in many health care markets leads directly to unfair pricing and erosion of consumer surplus.
Unlike other countries, where the government directly or indirectly sets an allowed national wholesale price for each drug, the United States leaves prices to market competition among pharmaceutical companies, including generic drug makers. But competition is often a mirage in today’s health care arena — a surprising number of lifesaving drugs are made by only one manufacturer — and businesses often successfully blunt market forces.
Exactly right. With only one manufacturer, the sole supplier can set his price way above the natural equilibrium of the market. That's why in cases like this the government needs to step in to improve market efficiency.
Of course, as Stiglitz points out many times in his book, the government doesn't actually do that and, instead, makes the problem worse.
Thanks in part to the $250 million last year spent on lobbying for pharmaceutical and health products — more than even the defense industry — the government allows such practices. Lawmakers in Washington have forbidden Medicare, the largest government purchaser of health care, to negotiate drug prices. Unlike its counterparts in other countries, the United States Patient-Centered Outcomes Research Institute, which evaluates treatments for coverage by federal programs, is not allowed to consider cost comparisons or cost-effectiveness in its recommendations. And importation of prescription medicines from abroad is illegal, even personal purchases from mail-order pharmacies.
“Our regulatory and approval system seems constructed to achieve high-priced outcomes,” said Dr. Peter Bach, the director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center. “We don’t give any reason for drug makers to charge less.”
And taxpayers and patients bear the consequences.
In trying to find common ground in this day and age of hyperpartisanship, we should look to the very simple solution of government actually doing its job as opposed to succumbing to special interests. This is where critics on the right always misread the left and it has to stop. As a Democrat, I don't want "bigger" government. I simply want better government and that means no more lobbying.
Let's just do that first and then we can worry about the size of government.
4 comments:
"Exactly right. With only one manufacturer, the sole supplier can set his price way above the natural equilibrium of the market. That's why in cases like this the government needs to step in to improve market efficiency."
It's even worse than that. It's not only patented drugs with sole suppliers that keep drug prices high. Some pharmaceutical companies pay generic drug manufacturers a bribe to not produce those high-profit drugs.
This "pay-for-delay" is obviously a violation of anti-trust law, and the Supreme Court recently agreed to let lawsuits against these companies go forward.
One critical point about medical care is that it does not follow normal market rules. Unlike a pricey iPhone that's simply "to die for," if you have a disease that will kill you, and there's a drug or treatment that will save your life, you will pay any price to get it.
It's often impossible to directly compare different types of drugs and treatments, as well as hospitals and doctors, because most of the time the information you need to make comparisons is simply not available, and even it if is, laymen can't make intelligent decisions about it: they must rely on the advice of the very people selling them the treatment.
That makes it nearly impossible for a regular person to decide to accept a cheaper drug or treatment instead of one that costs a lot more, because they have no real basis to make a decision. (This is complicated by the fact that your own genetics may determine the efficacy of one treatment compared to another: a drug that cured your friend's cancer may be completely worthless on yours.)
People will often take the more expensive option because they think it's better because it costs more. And when their wife or child is sick or dying, most people will do whatever it takes to make them well.
Finally, with a car or a TV, you can just return it if you get a lemon. If you take the wrong drug or an improper treatment, you may be sickened, crippled and even killed. Which means that you cannot pretend that health care can be treated like any other consumer product: it has to be played by completely different rules, with much greater oversight, regulation and licensing than window washers and checkout clerks.
you will pay any price to get it.
Something that is completely lost inside the bubble.
you will pay any price to get it.
Will you? Will you really? Bankrupt your family for a few months more? It's not as inelastic as you think.
With only one manufacturer, the sole supplier can set his price way above the natural equilibrium of the market. That's why in cases like this the government needs to step in to improve market efficiency.
I wonder what Stiglitz would say about the results of price controls. Probably what every other economist ever says - it creates supply shortages. In this case shortages of new drug development. That's what we are paying for - the cost to develop new drugs. Those other countries paying cheap for the same drug? Yeah, they aren't paying their fair share for the creating of the drug. But that's what happens when you socialize medicine - the government won't pay fair price, and the choice is sell it to them cheap or they pirate their own copies of the drug.
As a Democrat, I don't want "bigger" government. I simply want better government and that means no more lobbying.
If only that were even remotely true - what you want is govt that salves your conscience.
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