Asymmetrical Information

"Alone among commenters, I am unsure which regime will collapse: the US patent regime that keeps prices high,..."

Eh? Perhaps this argument needs some links. I'm pretty sure the "US patent regime" makes drugs *possible*.

So it does . . . by keeping prices high.

You can argue that the US system makes development of new drugs possible. You might well be right.
However, that development of new drugs is pursued at all or at the current level is not a selfevident fact.

If you haven't already seen it, check out Malcom Gladwell's piece in the New Yorker -- the best thing I've seen written on the subject:

http://www.newyorker.com/critics/atlarge/?041025crat_atlarge

"The transaction costs are still too high to get a black market going via thousands of individual Canadians."

Don't be so sure. I'll bet there are plenty of fixed-income Canadians who can (1) get prescriptions they don't really need, and (2) would be glad enough of an extra $30/month to put up with the hassle of listing the drugs on Ebay. And with a fixed supply, it won't take much to cause a shortage.

My expectation is that the Canadian government (and people) will find a way to make export controls work. They get a big enough benefit to make the whole enterprise worthwhile. I think a bigger obstacle than the transaction costs would be a concerted effort (by the Canadian government and the pharmaceutical industry) to build social norms against exporting drugs to America, which I think they will start attempting. At the end of the day, especially if it gets to the point where individual people have to list drugs on eBay or the like (since norms are less effective against for-profit businesses like pharmacies) I think the private benefit (the extra $30/month or whatever) is small enough that people won't be excited about doing it... especially if there is a well-done and concerted PR campaign and the like telling them that this could cost Canada their low-priced drugs entirely (which, of course, it could).

"So it does...by keeping prices high."

Nonsense. You'd be on firmer ground blaming capitalism.

Gladwell's article is pretty good but it fails horrendously in one point. He refuses to assign any blame at all to the major drug companies' advertising campaigns when it comes to the overconsumption of more expensive drugs. He makes one brief mention of how people come in asking for a drug they've seen advertised. Isn't this what the drug companies he is largely apologizing for are encouraging? Aren't they therefore still responsible in part for the increase in drug spending in a negative fashion? How much do they spend on these advertising campaigns compared to their R&D budgets? The patent system is an absolute necessity if we are to let new drugs be developed and properly profited from but we also need to make certain that it doesn't become corrupted as the copyright system has become.

My expectation is that the Canadian government (and people) will find a way to make export controls work.

I agree, though I hope I'm wrong. How hard can it be for the Canadian government to jail or fine people who violate the law, including those who sell on Ebay?

He makes one brief mention of how people come in asking for a drug they've seen advertised. Isn't this what the drug companies he is largely apologizing for are encouraging? Aren't they therefore still responsible in part for the increase in drug spending in a negative fashion? How much do they spend on these advertising campaigns compared to their R&D budgets?

I read the Gladwell article a few weeks ago and really thought it was quite excellent, and also even-handed. He's not given to pharma-bashing, but he certainly provided examples of what I thought were some pretty unsavory practices on the part of the industry. There's the example of the minor molecular change in heartburn medications, for instance (that allow a new patent, for instance, but have no effect on efficacy); he also describes, as I recall, how some of the anti-inflammatories on the market are statistically no more effective than ibuprofin (sp?), yet are widely (and expensively) prescribed. So, I definitely thought he gave an objective account of both the stengths and weaknesses of the whole sector.

Thing is, though, TV advertising is one area where I don't see legitimate cause for complain. As a society, we obviously accept the role of the profit motive as a means of advancing medicine, thereby benefiting all of us (for the record I think patent law is something we might consider modifying; I think a case can be made for weakening, without abandoning, the profit-protecting properties of our patent laws vis a vis medicine). So, why shouldn't drug companies be prohibited from getting the word out about new products meant to help people and improve health?

There was, by the way, another development reported on in the Gladwell article. Can't think of the name, or acronym for them, but there are firms, or practices, or consultancies, that now specialize soley in monitoring the value and efficacy of drugs, and advising healthcare providers on what's worth prescribing and what's not. I view this as a very healthy development. As long as patients, physicians, and, perhaps most importantly, insurance companies, are properly informed, drug companies shouldn't be able to pull the wool over our collective eyes when it comes to selling us products to make us feel better.

Unlike you and many of the commenters here, I am no economics expert, but does this situation amount to:

High prices paid for prescription drugs by the people of the United States (the haves) subsidize the development of and the price paid for prescription drugs by Canadians and the peoples of other nations (the have nots)?

If the people of the US are allowed to import these lower priced drugs, the likely (nearly certain) outcome is for the average price paid and total revenue collected to fall.

The question then becomes: will this result in fewer drugs being developed, less of the existing drugs being available, and and overall decline in the number of companies involved in the drug making business?

The pharmaceutical market, like the education market, suffers from a plethora of insufficiently knowledgeable consumers. I would venture that the average consumer who spends 3600 dollars a year on car payments has more insight as to his automotive options, and their trade-offs, than the average consumer who spends 3600 dollars a year on pharmaceuticals, as some medicare patients do. Toss in the pharmaceutical consumer who perceives his drugs' as being "free", because his health insurer is paying for it, and there are a lot of ignorant drug consumers. Ignorant consumers are much more easy to fleece, and there really isn't a solution to this ( all advocates of central planning to the contrary), other than to make sure that consumers know that they bear the price of ignorant decision-making, in hope that they will take measures to improve their knowledge.

too many steves: Yes, the effect is that Americans subsidize the whole world by paying most of the cost of drug research. However, the effect of Americans buying drugs from other countries doesn't have to be lower revenues for the drugmakers. It should instead encourage them to resist pressure to lower their prices elsewhere, and to be far more willing to say, "at that price, you won't get our products because they'll be coming back to America", until things settle out with a somewhat lower world-wide price and about the same revenues.

There are three related issues.

1) What about 3rd world countries? Canada, Japan, and western Europe can afford to pay American prices, but what about countries that genuinely can't?

2) Will the US government continue to attempt to protect this subsidy for other countries by trying to stop private importation of drugs? (Yes, both Bush and Clinton have done this.) And how far are they willing to go? I'm just waiting to see some 80 year old greatgrandmother go to Leavenworth for smuggling blood pressure medicine.

3) Will the US government be willing and able to make foreign countries respect our drug patents and not make the drugs for themselves? Once again, it's mainly an issue of how far they're willing to go - Clinton already demonstrated how we can take out a drug factory in a foreign land (the aspirin factory).

So, why shouldn't drug companies be prohibited from getting the word out about new products meant to help people and improve health?

When I wrote that above (3:25am) I didn't mean to write "prohibited" but rather "allowed". I was arguing that drug companies ought not to be prevented from advertising on TV. I might want to consider refraining from post-1am blog commenting from here on in...

P.B., my problem with their advertising is when they claim that the reason they must be allowed to charge these higher prices is to maintain their R&D budgets but they spend more on advertising than they do on R&D.

As far as the benefits management companies go, they can suck off and die and go to hell. Why do I say this? I found out today from my wife that the new insurance that my employers had to switch to because of yet another obscene rate increase use one that decided that the medicine she's been on for two years won't be covered by them because there is no generic version of it. There is also no exact drug in the same class. No Celebrex vs. Vioxx deal here. So they expect her to switch to something and go through the transistion process in the blind hope that what they want her to take will work as well as the current medication that we know does work.

So my suggestion is more along the lines of taking the pharma company execs out in front of their buildings, hanging them by the neck until dead and leaving the bodies swaying in the breeze as a reminder to their replacements. Repeat the same at Capitol Hill for every politician who takes their payoffs with the addition of a sign that says "PharmaWhore" nailed to their forehead. Can you tell anything about my bitterness about how screwed up this system is becoming?

Perhaps Jim, you should reconsider your biased view of marketing expenditures.

One of the biggest obstacles to rational discussion of this issue and other health care issues are the introduction of these bizarre notions that pharmaceuticals or other health care is some sort of holy business that should be unsullied by economic reality.

R&D produces product. Marketing sells it in sufficient quantities to recover investment. The final result is a complete business. Viewing one expenditure as moral and another as immoral is irrational.

P.B., my problem with their advertising is when they claim that the reason they must be allowed to charge these higher prices is to maintain their R&D budgets but they spend more on advertising than they do on R&D...

Jim S: If you have a problem with the industry, then don't buy their products. Seriously -- the US is generally not a country where firms must be "allowed" to charge what the market will bear. We assume they will.

I personally think we might want to revisit patent lengths (though I think we should be mighty careful here). And, despite your negative experiences, I think benefits management is a concept with a lot to be said for it. Perhaps the type of incident that visited your family could be dealt with via legislation; it sure seems wrong for them to deny a necessary medication when another drug is not available; though, one side note -- I think you'll find that other governments are heavily into the practice of benefits management with respect to medicines, so, we are not alone.

And I'm all for letting the price controls of other countries give us a cross-subsidy (and I'm likewise all for the increased prices our Canadian cousins may have to pay as a result). Heck, while we're at it, we should make sure our own government drives the hardest bargains it possibly can to the extent that it pays for drugs.

But in the end, there's no free lunch. My leanings are probably a lot more socialistic when it comes to healthcare than in other areas (I mean, what the hay, government already pays for half the country's medical bills -- maybe more if you count the value of forgone revenues from tax treatment of insurance benefits -- perhaps we should just go full throttle single payer, or at least an Australian-style hybrid).

But when it comes to big pharma, well, those folks come up with some freakin' miracles. I say proceed with caution. It certainly wouldn't be unusual that, as we grow wealthier as a society, we spend more of our incomes on the elixirs that improve our lives and health.

Also, what Robin Roberts said.

P.B., many of those miracles come from government subsidized university labs and actual government agencies.

I hope that a global drug market evolves and the whole costs of drug production/development end up spread out around the world.

When looking at what drug companies spend, remember that Marketing != Advertising. Marketing also includes research into what drugs are needed or will sell and getting the word to doctors and hospitals.

Having said that, doctors are people, too, and can't possibly keep up with all advances in medicine infallibly. If I have a condition, I have a strong incentive to keep current on the state of treatment for that condition. Ads are one way for me to get information about new treatments. If my doctor just gives me whatever I ask for, he is a fool. If he takes my requests into consideration and listens to my concerns and is open to that fact that I might possibly find some information he wasn't aware of, then he'll be a better doctor.

Bolie IV

Jim S. - Do the university and government labs then put their research through Phase I, II, and III testing, clinical trials? Do they actually produce FDA-approved drugs and put them to market?

A good analogy is NASA - it does research into aeronautics that some aerospace companies may then apply to their planes. NASA itself doesn't manufacture _actual_ commercially available planes. Shoot, the government researches everything from agronomy to zoology. Companies worldwide use their research to develop products.

Actually they shouldn't be as close to the testing as they are. Fox. Henhouse.

The old "fox/henhouse" metaphor has always been silly. Humanity has always used conscripted foxes to guard henhouses. We called them dogs.

The reason is that chickens do a poor job of security work.

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