When Is the Price of a Drug “Fair”?

By April 26, 2019 Commentary

Drug manufacturers have been taking heat from everyone about their pricing tactics, with the possible exception of shareholders.  There are a variety of ways to try to analyze the appropriateness of drug pricing and a new article in Health Affairs proposes one standard.   (HA Article)   The author of the article is one of the architects of the federal health care reform law, so that tells you everything you need to know about how logical and reasonable his views will be and if that doesn’t help, the title “When is the Price of a Drug Unjust?” makes it obvious that this is another absurd dissertation on such amorphous concepts as “justice” (or even better “social justice”) and “fair”.   Just read a few of the first paragraphs of the article to get the usual completely convoluted and tortuous reasoning usually associated with such malarkey.  As far as I can tell, his premise is that health care is a basic necessity or right, that it should be paid for collectively or by society (not sure why that would be true) and so prices have to be fair, whatever that is.  He does acknowledge that normally determination of a fair price would be done by the market, but our patent and drug regulation system precludes this.

So he proposes four principles to establish a fair price which would reflect justice.  I just want to barf when I see people use those words fair and justice, which have become cover for nothing but authoritarian approaches to dictating how people live.  His principles are that benefits and costs should be considered over a whole life because that is the unit of analysis for justice.  Really, who decreed that?  Second, there are limited resources, so we need to be sure they are distributed fairly. Okay, now we are getting close to the heart of this–idiots like this guy think that it is okay for some humans, i.e. himself, to determine what should happen to other humans.  Enlightened and smart people, like him of course, can best tell all the rest of us what we can do, what we get, what we have to give.  No thanks.   His third principle is a “value” one, the price should bear some relationship to benefits.  That one makes some sense.  And the last principle is something called comprehensiveness, which seems to have something to do with the extensiveness of the potential benefits of a drug.  The author then discusses and compares cost-effectiveness analysis to his approach, finding it inadequate to determine the fairness of a price.

What he proposes is that we take average lifetime earnings and take some portion of that as acceptable for spending on drugs, in a lifetime.  That number apparently currently works out to around $70,000.  Drugs with a price over a lifetime in excess of that are unfairly priced.  Okay, let’s give the guy some credit for trying to come up with some standard.  But let’s also acknowledge that he totally ignores economics.  Here is what happens in a true free market.  Various people come up with an idea for a product.  They make the product.  They try to sell the product to consumers.  Consumers buy from one or another seller based on price and other attributes.   It costs the seller something to make and market the product.  If the price doesn’t cover those costs, they are out of business unless for some reason they like losing money and have an unlimited supply of capital.  (See Amazon)

The market for health care goods and services is distorted in a variety of ways, not the least of which is that the price is often paid by a third-party plan.  But for health care products it is further distorted by patent and regulatory exclusivities.  So the logical approach to fixing drug prices would be to try to return things to a close to free-market conditions as possible.  Even with third-party payment, it would be possible to do this by removing all exclusivities, which would obviously create multiple sellers, who can decide what price and profit they are willing to accept.  The supposed justification for the patent system is to ensure innovation and in the context of health care, that should mean encouragement of development of products which enhance health.  I wonder if people really wouldn’t still develop better products in the absence of patents.  In any event, as I have pointed out multiple times, since this is a government granted right, the government should feel free to arbitrarily condition patents on whatever pricing criteria it wants to use.  And certainly once there is an initial price set, patent life should automatically decline every time the price is raised.

The second way to think about drug prices is what is a reasonable return to earn on the cost of developing, manufacturing and marketing a drug.  That cost can be determined and the margin set.  This approach does run the risk of encouraging higher costs, to justify more margin on a percent basis, but you can put boundaries on the reasonableness of costs.  I am hesitant to have yet another bureaucracy second-guessing pricing decisions, but again, in the context of the patent system, we probably have to do something.  So if it were me, I would look at the cost of developing and manufacturing a drug, largely ignore marketing and sales costs (because drug companies ought to do a lot less of that) and then set an arbitrary margin.  Anybody who wants to charge more than that loses their patent and other exclusivities.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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