Fixing Our Broken Pharmaceutical System

Alex TabarrokAlex Tabarrok at Marginal Revolution wrote something interesting, Generic Drug Regulation and Pharmaceutical Price-Jacking. It’s about the recent price rise of Daraprim from $13.60 to $750. He noted that the drug is not under patent, so this, at least, is not an issue of our broken intellectual property system. It is just that the the company that makes it is the only company that makes it, and Martin Shkreli is using that fact to price gouge. It is an example of our broken pharmaceutical system generally.

Tabarrok is a libertarian, and he has a bit of an ax to grind — although not like his partner, Tyler Cowen. Regardless, he did note two things that are important. One is that FDA approval for getting a license to produce a generic drug is costly. The other is that we aren’t able to just import drugs from other countries. In an incredible comparison, this drug is available in India for 5¢ per pill. This is the drug that Shkreli has gone around telling people the company was losing money charging $13.60 — and which he now sells for $750.

The main point is that we should allow reciprocity in drug purchases, “All that we would be doing is allowing import of any generic approved as such in Europe to be sold in the United States.” I agree with that. In fact, I would go further, Tabarrok is a bit of a protectionist when it comes to this issue — claiming that allowing patented medicines to be imported might have a “effect on innovation.” I’m getting kind of tired of the “innovation” line when it comes to the pharmaceutical companies. They mostly seem to be providing us with more and more diverse drugs for erectile dysfunction.

I would like to see far more government involvement in the markets for healthcare needs. As it is, the US government already spends a huge amount of money on drug research, but then allows private companies to get all the rents on them. It’s madness. What’s more, I don’t see why the government doesn’t just go into the business of making generic drugs. Clearly, our market system is not working in the case of Daraprim. But personally, I don’t think we need various sources of generic Vicodin.

One thing is certain: this is not a situation where all we need is for the government to get out of the way. It’s true that Shkreli is abusing the existing system. But any system we have will be abused by the likes of him. And I find it interesting that we arrest people for price gouging during a hurricane — charging ten dollars for can of peaches. But when Shkreli does it on a massively larger and more damaging scale, all we get from people is a shrug: that’s just the way our economy works. Well that’s the problem! We need to stop thinking that the way things have been is the way they must be or or that they are the “natural” way.

Work by the Center for Economic and Policy Research has found that our drug patent system costs us many hundreds of billion of dollars per year. Given this, I think we have to ask if the current system is the best that we can do. As it is, pretty much all economists believe that patents are a really bad for the economy. They cause enormous distortions in the market. The only point to having them is if they provide great benefits. Clearly they do provide some benefits. But I think we could do much better for our money through collective action.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

8 thoughts on “Fixing Our Broken Pharmaceutical System

  1. I think we should cut out the middle man and just do price controls. Stephen Brill’s article on the price gouging that hospitals do shows that of all of the systems currently paying for the delivery of care the best run, most efficient and cheapest is Medicare that still allows for private entities to make reliable profit. Congress actually did a great job in creating the ideal system. (No one should tell them this since they will now screw it up.)

    But essentially it is beating a dead horse at this point since unless something very weird happens in the congressional elections next year, we are not going to see much change.

    • Sigh. I know.

      I like Brill’s work, but overall, I think it has been used to further the conservative narrative about our healthcare dysfunction. But Medicare is one of the big problems in terms of drug prices because Medicare Part D was first and foremost about big pharma profits and secondarily about providing drugs to people.

      • Oh yes. It will take a long time to fix that problem. What needs to happen is a huge scandal about drug prices breaks right before the congressional elections-right about the last week of August to give about six weeks to build up by the time that early ballots drop and people start voting.

        • And I’m afraid that kind of outrage-induced voting is more likely to help the conservatives. A good example of that was here in SF where that undocumented guy shot and killed a young woman. I’ve always thought it was an accident (there’s no motive). And it may turn out that way after it goes to trial. But had there been an election soon after, it would have poisoned things. As it is, the Republican presidential candidates are still talking about it as though (1) they know what actually happened; and (2) it meant something in a general sense.

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