Transcript Chapter 22 - McGraw Hill Higher Education

Chapter 20
The Economics of Prescription
Drugs
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Chapter Outline
• PROFITEERS OR BENEVOLENT
SCIENTISTS
• MONOPOLY POWER AS IT
APPLIES TO DRUGS
• IMPORTANT QUESTIONS
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Profiteers or Benevolent
Scientists?
• Spending on drugs accounts for 10% of the
more than $1.4 trillion health care industry
• The question of advertising
– Ads for particular drugs
• These are not unexpected as new cures and remedies
are invented.
– Feel-good political ads
• These ads are seen as a means to forestall price controls
or regulations.
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Patents
• A patent is a right granted by
government to an inventor to be the
exclusive seller on an invention for a
limited period of time.
• Patents motivate innovation with the
promise of monopoly profit for a period
of time.
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Orphan Drugs
• An Orphan Drug is one that treats
someone with a disease that afflicts few
people.
• The concern is that there is insufficient
potential demand to motivate
innovation.
• For orphan drugs the patent life is
extended by several years.
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The Concern over High Prices
• Are prescription drug prices too high?
• The answer to many depends on the impact
of the disease.
– For “life or death” drugs price has been an ethical
concern.
• The AIDS “cocktail” (a mix of drugs, used to fight the
disease) originally cost $14,000 per patient per year.
– For “quality of life” drugs it has been less of a
concern.
• Pepcid and Zantac (heartburn medications), Seldane
and then Claritan (seasonal allergy medications) cost a
great deal but have not raised as much ethical concern.
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The Impact of Monopoly Power
P
MC
P*
MR
Q*
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D
Q/t
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Monopoly vs Perfect Competition
P
MC=Supply
A
•Under PC
B
Pmonop
•CS=PPCAC
•PS=FPPCC
C
•Under Monopoly
PPC
•CS=PmonopAB
E
•PS=FPmonopBE
MR
•DWL=EBC
F
D
Qmonop QPC
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Q/t
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Deadweight Loss
• Deadweight Loss (DWL) is the loss
in social welfare associated with
production being too little or too
great.
• In the case of monopoly, production
is too little and prices are too high.
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Important Questions
• Are prescription drugs expensive necessities
or relatively inexpensive godsends?
– Expensive Necessities?
• Prescription drug prices rose twice as fast as overall
prices.
• The prices are often more than ten times their marginal
production costs.
– Inexpensive godsends
• Drug treatments are typically much less than their
surgical alternatives. (Drugs that deal with blocked
arteries are less than a tenth the cost of bypass surgery.)
• New quality of life drugs treat ailments for which there
are no surgical alternatives.
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Why We Should Expect
Costs to be High
• Innovation costs
– Highly trained and highly paid personnel are required to work
on the therapies.
– Expensive equipment is necessary to aid the invention
process.
• Uncertainty about success
– Most new therapies that make it out of the lab do not make it
through clinical testing.
• Time delay and opportunity cost
– Even when therapies are approved the revenue stream
begins more than a decade after the invention costs have
been incurred.
– The opportunity cost in terms of lost interest must be
counted as a cost as well.
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The Cost Debate
• Consumer advocacy groups contend
that ad spending now exceeds research
spending.
• Drug firms contend that this ignores
important “opportunity costs.”
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Are Price Controls an Answer?
• Price or profit controls in other countries
make it such that drug prices are much higher
in the U.S. than they are in other countries.
• If the U.S. controlled prices or profits it would
eliminate the sole high profit market for drugs
thereby reducing their motivation to innovate
• Economists are generally against price or
profit limits for prescription drugs in the U.S.
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Buying from Canada
• It is against the law for anyone to resell
drugs purchased oversees.
• Canadian and Mexican drug prices are
controlled by their governments
• It is much cheaper to buy drugs in
Canada or Mexico that it is in the U.S.
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FDA Approval
• The Process
– Laboratory trials test the effectiveness of
drugs “in the test-tube” and on animals.
– Small scale human testing is done to
determine safety.
– Large scale human testing is done to
determine effectiveness. This also catches
some safety issues.
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Too Lax or Too Stringent
• Too Lax
– If drugs are approved that are later determined to
be unsafe (such as the weight loss drug FenPhen) the concern is that screening is too lax.
• Too Stringent
– If drugs that would have saved lives (or otherwise
helped people) are delayed in their approval this is
a loss as well.
• Economists evaluate the marginal cost of
increasing stringency against its marginal
benefits.
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Over-the-Counter
• When a drug has been deemed to be safe
and effective and does not have an adverse
interaction with other drugs it can go overthe-counter (sold without a prescription.)
• It is not always in the consumer’s best
interest for a drug to go over-the-counter
– OTC drugs are not covered by insurance
– The out of pocket expense to consumers with
insurance can often be higher when a drug goes
OTC.
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