Sunday, October 01, 2006

Making money from the desparate

Medical insurance in the US now costs businesses $8,500US per family. But nearly 50 million have no insurance and US health status indicates health sector underperformance.

One medico-entrepreneneur has devised a way of charging women $4,200 a dose for a new version of an old anti-breast cancer drug. It has helped make Dr. Patrick Soon-Shiong a billionaire but, in so doing, women with breast cancer are left with some difficult choices.

If a cancer sufferer is desparate enough a drug vendor can offer salvation by bankrupting them. The demand to live is about as price-inelastic as any - a fact recognised by entrepreneurs who understand the pricing implications of someone desparately seeking to survive.

My impulses as an economist are to support free markets but - sometimes - we need to devise ways of organising production that depart from adherence to the profit motive. In relation to health the following quote from one of the greatest modern economists is potent:

'The very word, 'profit,' is a signal that denies the trust relationship'. (K. J. Arrow).

9 comments:

conrad said...

If you can tell everyone a way to get drugs developed better and more cheaply than the way big pharma does, I think everyone would be impressed Harry.

The problem is that drugs cost hundreds of millions to develop, and most of them are helpful in some way or other, thus everyone wants them for free, even in countries that could pay for them (cf. Aids drugs, Hepatitis drugs, etc.). Australia and the US are rich countries with rich citizens -- if they want anti-cancer drugs for all, I don't see why they shouldn't pay for them.

The problems is that if people can't profit from making things like anti-cancer drugs then I tend to think it means we will end up in a drug free world (like now with antibiotics), or at least a world with only drugs that people can't try and claim for free, which are of course not the ones you want when you have cancer.

hc said...

Conrad, This drug has already been developed and offers only marginal (though positive) additional benefits. Those insured pay for it via their insurance those without insurance go without.

Its not about wanting them free. Several suggestions occur.

(i) Public drug research which provides pharma knowledge as a public good. I do not believe that only the profit motive can direct valuable phama research.
(ii) Buying out anticipated monopoly surpluses from drug patents and then pricing supplies at marginal cost (The Economist's suggestion for anti-AIDs drugs).

conrad said...

Harry,

I don't think either of the two solutions work in anything more than the exeptional case becase:

1) In case governments really do want to buy out drug patents I see nothing wrong this. The problem is, which government is going to fork out the billions that some of the drugs are worth? and what criterion do we use to buy out one drug over another? (I'm sure, for instance, modern hyptension drugs that are not available to many would save more lives than some of the anti-cancer drugs -- they just are not spectacular).

2) Most of these drugs are costing more than any public body is willing to pay to develop, and I believe most of the cost is not going into just lead discovery (where public funds/grants are now used), but the whole trials process. Do you want to give me a 500 million grant? If not, then I am sorry to say that some mega company is going to have to fund the development.

In addition, it isn't clear whether public research into drug discovery could be done any more cheaply or efficiently than the drug companies that already have the infrastructure. Are our universities etc. coming up with better drugs than Glaxo? and would they ever have the money if they did (I'm sure Glaxo is worth more than many countries).

There was a good discussion of this at www.corante.com some years ago (I seem to remember) which might be worth digging up if you are really interested.

BSF said...

The NYT article does quite a nice job of discussing the role of insurance in determining the price of drugs in the US. Essentially, drugs are being priced according to the insurers' willingness to pay, not the insured's.

hc said...

bsf, And your view coincides with the general thesis (discussed elsewhere on this blog) that US health costs are escalating rapidly as a consequence of insurance - rather than because of medical advances.

FXH said...

I've mentioned it before elswhere. The biggest single reason for bankruptcy in USA is health debts /fees.

civitas said...

If public drug research and funding was such a great idea France would still have a world class pharmaceutical industry.

As new drugs come on and new treatments, of course the cost of medical care is going to go up. But who wants to spend less than necessary on their medical care?

hc said...

Civitas, Nice to hear from you.

I thing no-one does and there is nothing wrong with this provided that individuals bear the costs not insurance companies.

I think the profit motivate can be an enervating force but in situations of asymmetyric information where demands can be very inelastic it doesn't work well.

A fully public research system might not work but I think a publicly-funded research program that is moderately reward-based can.

So too can buying out patents for the value of surplus anticipated and then selling at marginal cost.

civitas said...

Nice to talk to you Harry. The US basically has a hybrid system with both public and private funding of research, which seems to work well. Systems without some private funding do not appear to be as successful. Now if we could just get people to stop wanting all the things that research is discovering......