Drug Prices are Too Damn High: Or Why Government Really is the Problem

TL;DR: Just tell me what to think already

Libertarians often claim that government isn’t the solution, that government is the problem. What’s this mean? Often, good hearted liberal folks are annoyed – they believe there are many solutions to social woes that the government can play a role in. Surely we shouldn’t paint the idea of government and civic service with such a negative light?

The issue isn’t that libertarians see the government as necessarily evil, or even bureaucratic. The issue is that libertarians believe the government to be entirely amoral. In other words, the Gub’ment is capable of this:

 

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The Apollo Program which got Humanity to the Moon

As well as this:

 

nuclear-bomb-explosion
Don’t Mind Me.

The government is a tool – a social organization capable of great power. It’s not necessarily good or evil. Thus libertarians are often skeptical of granting the government additional power because they fear what someone might do with it.

One of the largest worries we have in a capitalistic democratic society such as our own is when the power of government gets corrupted by corporate greed.

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Government Power and Corporate Interests?

We call this regulatory capture. More on this later.

What’s this have to do with Drug Prices?

Drug prices have been in the news a lot lately, with life-saving interventions such as the EpiPen and lifelong treatments such as insulin having been exposed as having gratuitously increased prices in the past twenty years.

This is important for everyone since we all usually pay for health care using insurance, which means as drug prices go up for anyone, we all end up paying for it.

 

Wait a second, though – both of these drugs have generic alternatives? Why are they so expensive? Why can’t we rely on competition to keep drug prices down?

Market Failures

If drug prices are high and there are cheaper alternatives, why don’t consumers simply choose the cheaper alternative and drive down prices?

Because this is ‘medicine’ which is somehow ‘different’ from ‘every other market’, don’t you see? Trust me, I’m a doctor.

In choosing drugs, doctors make choices and patients – usually through their insurance companies – pay. You don’t get a prescription for insulin, you get a prescription for one brand of insulin, the one the doctor chooses. In some states, you can ask the pharmacist to substitute a generic brand, but not in all. In many cases, you have to ask your doctor directly.

But I was enjoying that free steak dinner

Well, then why doesn’t my doctor give me more generics right off the bat? Becuase many of them make a nice bit of side cash by giving you the name brand drugs.

I actually had a friend who was visiting a psychiatrist for depression. He was prescribed name brand Wellbutrin, an anti-depressant. It was prohibitively expensive. When  he asked to switch to a generic, the psychiatrist refused, and said that the generic version wasn’t as good as the name brand version.

Unfortunately, you know, we like to have a whole government institution called the FDA that makes sure generics are as good as name brands, so the psychiatrist was talking out of her ass. Still, it was my friend who had to pay the difference. His insurance didn’t cover the non-generic: why should it, its just a more expensive version of a perfectly effective drug? So he was left having to shell out for his shrink’s golfing trips with the Wellbutrin sales guy.

There is no generic alternative to my wonder drug!

There actually often is – though it may be a combination of generic alternatives.

The government (there’s that word again) grants 20 year patent protection to drug companies, offering a temporary monopoly to help spur innovation. Only patents don’t really work that way but that’s tangential here.

Other companies can offer generic alternatives at the end of the patent protection. Only patents can be extended by playing all kinds of games with patents and the FDA to continue their monopoly on a drug.

This hit me personally. I have chronic ear infections and have to rely on an ear drop called Ciprodex to treat them. Ciprodex, in the past five years or so, has become prohibitively expensive for me since the owner of the drug has upped its cost and my insurance company as rightfully(to keep premiums down) decided to cover less and less.

Ciprodex has no generic alternative, however, all it is is a combination of two generic drugs, Ciprofloxacin (an antibiotic) which was introduced in the 1980s and dexamethasone (a steroid) which was introduced in the 1950’s.

Apparently putting these two molecules together, each of which you can get generically for very little money, means I have to shell out more than $200 bucks for a bottle.

Ciprodex is a pretty unique case, too, in that it illustrates other methods pharmaceutical companies are undertaking to extend their monopolies. In the case of ciprodex, they intervened in a malpractice court case and convinced a judge that no other middle ear drop was shown not to cause hearing damage.

Did you get that? The FDA – again, the institution we set up to regulate this stuff – allowed other drops to be used for ear infections, but now I have to take only ciprodex because the company convinced a lot of doctors they’d get sued otherwise.

It’s not all steak dinners. To capture doctor’s prescription pads, many pharma companies will use both carrots and sticks.

 

Drug costs are high because there’s money to be made in keeping them high

Why are EpiPen and insulin specifically so expensive? Because even though there are alternatives, there’s lots of maneuvering to be done and lots of money to be made by getting people to continue to use name brand stuff. That money gets spread around, to your doctor as well as the pharmaceutical company.

That’s Bullshit. Medicine is expensive because it’s really hard to make! Science is expensive! Doctors are heroes!

Okay, so what about name brand medications that have no generic alternative and haven’t had their patents played with? What about, say, a new blockbuster drug that was just released?

We’re often told these drugs cost so much – and additionally, other drugs cost a lot too – so that the pharmaceutical company can ‘make up the cost’ of insane amounts of research and development. This is entirely true – the cost of getting through FDA regulation for a new drug can be upwards of one billion dollars.

The great majority of those costs are in the final “Phase 3” trials, which also happen to be the largest. And the great majority of running those trials is staffing.

However, this was not always the case – FDA approved clinical trials used to be cheap as recently as the 1980s. At that time, most of the trials drug companies used were run by either government or university labs. Nowadays, they’re run by the private sector.

So, in other words – we used to have cheap research, now we have expensive research, and that’s lead to a huge increase in the amount of money it takes to get a drug through trials. Why do we have expensive research – is it necessarily better? Well, er, no. I mean, despite these huge increases in cost we haven’t really seen safer drugs or a better process. In fact, even with these new expensive trials, there are still a lot of wide open regulatory holes and conflicts of interest.

And why are these private sector trials so expensive anyway? Cause why not?

As a principal investigator in a clinical trial, you stand to make upwards of $300k a year, despite not having to do anything. Well, I mean, you have to have an MD to do it, but other than that.

Now I may not be a big city lawyer such as yourself…

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Now, I am an amateur when it comes to government policy, and I’m not a health care economist (did you know that the healthcare industry thinks it’s so special that they need their own economists? Cause “healthcare is different and doctors are heroes!”)

But I have had some training in corporate strategy. And I know Porter’s 5 Forces when I see it.

Trials are expensive because large pharmaceutical companies want them to be expensive. It is an incredibly effective way to reduce the threat of new entrants, otherwise known as startups. If people have to have upwards of a billion in cash to play the game, then the small guys can’t play. You see this often in drugs – some new spin off lab coming out of a university ultimately has to be acquired by a large pharmaceutical company to even get its drug off the ground.

New entrants and start-ups are one of the best and most effective ways that truly free markets keep costs down. And they’re more or less disallowed in drugs. This is commonly called a Corporate Moat, and in corporate strategy, its the thing you’re supposed to be building.

Why would the FDA do that? Doesn’t the FDA want cheaper drugs?

Remember – the government is amoral. It doesn’t want this or that, it’s just a tool for people who want this or that. And in this case, the FDA has been captured by large pharmaceutical companies.

This is odd, as capture usually means that the captured organization is more likely to turn a blind eye to declining corporate compliance. In this case, though, it’s happily working with large pharmaceutical companies in increasing the cost of drug development because it thinks it needs to, to protect us. The DoD acts similarly, which we’ll get into later.

And these corporate interests are happy to shell out the billion or so dollars on a drug since they recoup it anyway. Remember, they’re paying doctors this money to test their drug – who will later prescribe the same damn drug. Let’s say you pay a doctor $300k for a drug you later charge $1K a month for – a somewhat common scheme. You only need to get 300 patient months out of that doctor before he paid for himself.

Let’s sum this up – pharmaceutical companies lobby for increased regulation to keep out new entrants. They can now charge higher prices for their drug which covers the cost of increased regulation – for them – many times over. And as a side gig, they use all this increased regulatory cash to capture doctors into pushing their product when its released.

It’s nice work if you can get it.

All this is just proof we need a Single Payer

A Single Payer healthcare system is one in which the government purchases all healthcare services for its citizens. Usually people refer to Canada or the UK’s single payer model.

However, these insane drug prices aren’t actually all that good of a reason to even enter the single payer argument. Drug prices only account for 6% of the difference of healthcare costs between the US and other countries.

Still, its an incredibly interesting microchosm – so maybe if we follow this lead we’ll get somewhere about healthcare costs in general. First, let’s talk about why single payer won’t work here since it points to the macrocosm at the heart of this whole issue.

We don’t exactly have a good track record here

If you look at single payer systems, you often look at Canada or the UK. And sure, there are problems with the system but overall costs are dramatically lower and healthcare provided is comparable if not better.

But that’s just not the “American Way”. Instead, let’s look at our own history of having single purchasers and see if that’s kept cost down.

Defense

There’s only one buyer of defense equipment in the country. Yet the army has somehow misplaced trillions of dollars.

The DoD has repeatedly set up rules that favor large single contractors as being ‘easier to deal with’ – this limits competition and drastically reduces the marketing power than they have as a single buyer.

The DoD is also insanely risk averse, and layers mountains and mountains of work on top of its contractors that prevents small players from getting in. One reason the DoD is so risk averse is because its suppliers – like Lockheed Martin – have lobbied to make it that way. Take, for example, their interaction with SpaceX – they’ve repeatedly put out literature questioning the quality of the startup, advocating that government can’t go with someone so new and that if anything, Lockheed ought to be in charge of SpaceX as a subcontractor.

No doubt there’s been quite a number of backroom conversations between defense industry lobbyists and congress on what kinds of regulations need to be in place to prevent such “reckless” actors from killing our astronauts.

Medicare

Medicare is the single largest purchaser of healthcare services in the country. You’d expect them to have costs under control, but their costs are as unsustainable as the rest of the healthcare system. Why would expanding a program like this keep a cap on costs?

Corporate strategy should come into play here – creating a single payer should reduce costs as it creates a monopsony, or a single buyer in the market (monopoly is the term for a single seller). But we should see those prices drop due to negotiating power at the medicare level, and while medicare often is more cost effective than private insurers due to its market power, it’s not cost effective enough to stay solvent. Its costs are still climbing unsustainably.

There’s something more at play here.

The Common Thread

Let’s pull some things together.

Your drugs are expensive because of a few reasons – the pharmaceutical company managed to pay off your doctor to prescribe you something, it played games with patents, or it increased regulation and again, paid off doctors, to perform research to sell its drugs.

Government plays a role here, but usually just as a tool used by pharmaceutical companies playing lobbying games. What else is in play?

It’s the Doctors, Stupid

Remember how like, only your doctor can write a prescription? Or how, for the pharmaceutical research to be legitimate, they literally have to pay off someone with an MD to manage nurses and administrators to actually do the work?

That’s all legal licensing – another form of government regulation – and it’s very often used to reduce competition.

Why are drug costs so high? Why are healthcare and procedure costs so high? Why does an office consultation with a surgeon cost me $300 bucks out of pocket for fifteen minutes of someone’s time?

Because of monopolies, patents and licensure. And why are all those things around? Because of massive amounts of lobbying on behalf of doctors and hospitals. Why won’t single payer work? Because we haven’t solved the problem – if we allow organizations like the AMA to write our single payer legislation, we’ll continue to have the most expensive healthcare system in the world!

The AMA spends more on lobbying than the NRA and AARP combined. They have single handily kept Medicare from the cost savings you’d expect of such a large buyer. While not a regulator per se, the amount of influence the AMA has over congress is astounding and nearly all healthcare costs and debates can only move forward with that in mind.

The AMA is nothing more than a labor union, albeit an exclusionary one rather than inclusionary union. And it’s one of the oldest politically active institutions in America.

But Doctors are Heroes!

No, they aren’t. They’re a profession like any other. They have a history of anti-competitive practices going back all the way to their founding – see the MD vs DO debate of the early 20th century or the co-opting of a competing profession, nursing, into merely a source of cheap labor. They’re an organization like any other.

They don’t require their own economics, and their trade isn’t so different from any other that we need to figure out how to make sure doctors can still make $300k a year and keep healthcare costs down. Doctor’s save lives? So do farmers. So does the city, by providing us clean water. So do police and firefighters, who make pennies compared to doctors.

Many if not all of government interventions that have reduced cost have all been related to reducing the power of the medical doctor.

Don’t get me wrong – I like doctors. I think a lot of doctors are called to their profession by a sense of wanting to help people. But I think a lot of our blinders on the issue of medical cost are due to this overwhelming sense of medical exceptionalism – that doctors are heroes.

If you ask why doctors don’t often consider costs when they prescribe to patients, they’ll say they don’t think they should. That it is somehow below their profession. However, when you ask a sanitary engineer about the costs of keeping our water clean or a police chief about the costs of a bullet proof vest, you won’t get so much smug dismissal.

There’s a lot of money to be made in medicine, and there’s a lot of blame to go around. But we must recognize the role that medical lobbying has played in the system we have today – from what drugs require a prescription to get, why it costs so much to do research, to why anti-competitive practices are deemed okay in medical economics. We even have to understand the role that all of this lobbying throughout our history has on our own view of doctors. While many of them are good people, is our odd obsession with doctors as heroes and wonder workers more marketing than fact? Is the prestige of the profession less about how wonderful everyone is and more about how exclusive it is?

The first step in fixing a problem is recognizing you have one. We’re so quick to judge thousand dollar charges for life-saving drugs, and increased premiums on our insurance while getting reduced coverage. We see it all as profiteering. But when we ask – why did that doctor prescribe such an expensive medicine when there was a generic alternative, the conversation is shut down with “Doctor Patient Privilege!” and when we ask why the doctor was charging more than the insurance company agreed to pay in the first place, we get similar admonitions. Doctors are too important to worry about this money stuff, but apparently not too busy to raise their own prices year after year.

Back to Gub’ment

So yes, it’s the government’s fault. But only because we have a government that’s relatively easy to capture by lobbyists. There are some things we can do there, but one of the first things we have to do is realize that we can’t fix this problem with more government. The AMA is not going to let anything through that challenges them. We need to look for ways to make the entire marketplace more competitive and fair, as that’s the only way to really challenge entrenched interests that, themselves, have captured the government.

 

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