Monday, July 14, 2014

What free market?

A significant number of the elderly suffer from macular degeneration, a gradual destruction of the retina of the eye ending in blindness. As persons age, more blood vessels develop in the retina and disturb the eyes' visual functioning.
In some cancers, similarly, new blood vessels develop to enhance the growing cancer. Pharmaceutical researchers have developed some medications that stop this development of blood flow to the growing cancer. Virtually the same drug in much smaller doses, has proved useful to retard the progress of macular degeneration. It inhibits the progressive loss of visual acuity in the patient.
All of this is an encouraging story of the contribution of pharmaceuticals to maintaining the quality of life in the elderly.
This story is also interesting from an economic point of view. It turns out that one of the big Pharma firm, Genentech, sells the drug that is to be injected into the eye at 100 times the price of what they charge for the same drug to be used, in much larger doses, on cancers. Yes, you read that right: for virtually the same medication, this company charges 100 times the price for an application to the eye from what it charges when the drug is used in combating cancer. The anti-blindness injection may cost as much as $2000.
As a consequence, Medicare is said to spend between one and $2 billion a year for this treatment, "roughly 10% of Medicare part B drug expenditures." (JAMA, Journal of the American Medical Association, July 2, 2014).
How can they get away with that?
Here is the story economists tell us about free markets: in a free market everybody competes with everyone else to get a high return on the capital they have invested in their business. If someone has an exorbitantly high rate of profit, someone else will enter this same line of business and so will more entrepreneurs until the profits in this particular business are at just the same level as anywhere else in the economy. Extraordinary profits are temporary phenomena, soon to be cut down to prevailing profit rates through competition.
But pharmaceuticals are not sold in a free market. To begin with you cannot sell medications without government approval. In other words entry into a particular market is restricted by government protections for consumers. You may be the only firm able to sell this drug because no one else has the FDA permit. In that case you can do what Genentech does and charge absolutely outrageous prices.
In addition, medications are protected by patents. Competitors who would like to ride the same gravy train as Genentech, will have to develop a drug that does not violate Genentech's patents. It must be essentially the same drug but enough different to avoid patent problems. In the pharmaceuticals trade that's known as a “me-too” medication.
Both FDA supervision and patent protection are eminently sensible. But they create a situation where medications are not sold in a free market.
None of this has to be a terribly difficult problem. The bulk if not all of the macular degeneration medicines are paid for by Medicare. Medicare is therefore in a very strong position to negotiate a more sensible price for these medicines. After all if Medicare said: these macular degeneration drugs are much too expensive. We we can no longer afford to pay for them, Genentech would lose most if not all of its business. It is very much in their interest to come to an accommodation with Medicare.
Other countries such as Canada or some of the European health services regularly negotiate favorable prices for the medicines they buy in very large quantities.
The problem with that approach is that Congress, in its infinite wisdom, and ignorance of the most basic features of our economy, explicitly forbade Medicare to negotiate drug prices. That, they thought would harm the free market.
That's how much Congress knows, or how much of our representatives were paid to allow the pharmaceutical companies to continue to make sky high profits.
As long as our representatives are, in fact, for sale, large companies, such as drug companies, will be able to rob the taxpayers blind for the sake of their own stockholders.
That's robbery, not the free market.