Skip to main content

Business and Markets

Read These Before You Write That Op-Ed

I’m conferencing today in Manchester, with less time to blog than usual. But I wanted to strongly recommend a couple of other posts this morning: first off, Bruce Booth’s on innovation and its flip side, exploitation, in the drug business. A good complementary post is this one at SlateStarCodex, which goes into detail, with great brio, on our regulatory environment. I wish that everyone who would like to write an op-ed on drug pricing would read it as an introduction and then read Bruce’s post, which goes into some policy recommendations as well. Not going to happen, but a guy can hope!

33 comments on “Read These Before You Write That Op-Ed”

  1. watcher says:

    Personally, I think there needs to be and eventually will have to be some controls on drug prices. This will be forced by public demand. Actions by insurance companies in the role of approving the use of specific treatments will be a large driver when they begin to deny high priced options for lower cost ones, and the government’s need to control spending overall. Drug companies have gotten greedy, but are able to get away with it due to the patent laws and the implication on human health. Those priorities are still important, but new drug approvals may have to come with agreements for limits of pricing as part of the working relationship between FDA and the companies.

    1. Vader says:


      You appear not to have read the articles recommended by Derek.

      1. watcher says:

        Yes, I read all three (including Derek’s). I did not say anywhere that I agreed or disagreed with what was written. As I said, this was my personal opinion. This has come after having trying to defend prices as they went higher and higher under the “reasoning” that they were “life saving or altering.” But they have gotten out of line with the economics of personal an national health care, what individuals can afford and what insurance will pay. Companies need to adjust accordingly, or they will ultimately be told to.

        1. Hap says:

          1) If the regulation is the problem (as with generics), then more of it won’t help – it won’t necessarily have the effects you want, because the way it is being performed is either flawed in theory or is designed for ends you don’t want.

          2) Insurers, patients, and the government can complain to nature, but she isn’t required to listen. Much of the problem with new drugs is that you can’t develop them cheaply enough to price them where people want – finding them is hard and risky and expensive, so they’re priced high, so that people invest in their discovery. If you can make the process cheaper, you could decrease the prices (in the absence of an oligopoly or badly-intentioned regulation), but no one’s figured out how to do that yet. If you force drugs to be cheaper by fiat, people investing in drugs will invest somewhere else (where they can make money), so people won’t be looking for new drugs and won’t be finding them.

          1. RM says:

            To be fair, you can’t treat “regulation” as a uniform entity. The type of regulation matters. A completely unregulated pharmaceutical industry would have no drug approval process, no patent protection, no market exclusivity …. This is probably not what you want, even if drug prices would be reduced.

            The trick is to be judicious about carrots and sticks, and what and how you’re regulating. For example, if you give one manufacturer exclusivity on a drug, it might come along with regulations on how they can price it, to counter that exclusivity. Basically, plug the loopholes that the one regulation creates by putting in a new one. At some point it’s epicycles, but not all orbits on orbits are epicycles (e.g. satellites orbiting the moon).

            Would it be as “seamless” as a fully free market approach? Probably not, but it’s an absurd proposition that the pharmaceutical market will ever be as “free” as, e.g., the chair market, unless you ditch the FDA’s safety and efficacy role completely.

          2. CH says:

            “Much of the problem with new drugs is that you can’t develop them cheaply enough to price them where people want – finding them is hard and risky and expensive, so they’re priced high, so that people invest in their discovery.”

            This is a tired argument. Yes, finding drugs is hard and expensive. But, some drugs are priced high (too high sometimes) and that has nothing to do with how “hard” or “expensive” it was to find them. They are priced high because that is what the company believes the market will bear, plain and simple – not based on what they have in the drug.

  2. late night says:

    in case you missed it, Late Night’s take on exploitation vs. innovation:

  3. A. Nonymaus says:

    Of course, this division between exploiters and innovators exists within the industry all the way to its core. Innovators work at their desks, benches, and terminals while exploiters control their access to capital through cozy relationships with government. You labor for a wage instead of a stake. They get patents assigned instead of licensed for the duration of one’s employment. You don’t look forward to a merger meaning that you’ll get enough of a payoff to live on indefinitely. They get states to enable no-compete clauses.
    The snakes at Mylan are different only in that they decided to rip off the public instead of their employees.

    1. ECON 101 says:

      Rent-seeking behavior at its finest!

  4. Anon says:

    The system won’t change because those that control it don’t want it to change. Until it implodes.

  5. MoMo says:

    Make sure you emphasize that the US leads the UK in drug discovery NCEs by an order of magnitude and to get back to work!

    Meanwhile the drugs they buy from the US are cheaper than my grandmothers’ in Poughkeepsie.

  6. Oblarg says:

    I’d like to see “amount of regulation” phased out of these discussions, because it’s absolutely meaningless. The space of possible regulations is incomprehensibly vast and amorphous and it’s not even clear that there’s a coherent metric of “how much regulation” there is.

    Either a regulation is good, or it is bad. We cannot speak meaningfully in terms of heuristic “amounts,” we have to look at the substance of the regulations. Everything else is a vacuous non-sequitur.

  7. Malkin says:

    The issue here is the same as the T*&%#g issue, not the general price of pharmaceuticals. The 2 shouldn’t be conflated:

    1) It’s too difficult, expensive and slow to produce generics and too easy to exploit using non-patent law.
    2) Prices for new medicines are too high.

    On the first (and present) issue, the whole premise of the patent system relies on the period of monopoly (that promotes necessary innovation) being followed by a period of competitors being allowed in and the market regulating itself (preventing companies from taking advantage of the monopoly to set arbitrarily high prices).

    If bureaucracy (i.e. regulation) stands in the way of outside generics however, then the system isn’t functioning properly. In this case, the FDA’s process of approving generics has to be streamlined and the laws need to prevent the anti-competitive tactics that have come to light recently. Anything that stands in the way of people getting proven, safe medications for a price that reflects the cost to produce them can’t be allowed. That stands to reason.

    The price of new medicines being too high is an entirely different and more complex issue.

  8. steve says:

    There’s little justification for the price hikes that have happened over the past few years, not only with Epipen but with all . To cite market forces and nature is erroneous; the simple etiology is greed. Is there really any justification for drugs to cost $300,000 a year like Kalydeco or Acthar? A recent JAMA paper showed that prices for commonly used brand-name drugs in the US surged 164 percent between 2008 and 2015 while the consumer price index only rose 12 percent. Even insulin, a drug discovered over 60 years ago went up by an average of 300 percent, between 2002 and 2013. We hear that this is due to the high cost of drug development but these are bogus explanations as well. First it used to be 100 million dollars to get a drug through development then within a few years it was $1 billion. How do they get these numbers? Well, half the number is opportunity cost. (e.g., if you took $100M and, instead of putting it into drug development you put it into something else, how much would you make?). Put opportunity cost is not a real development cost so it’s fallacious to include it in the cost of drug development. There are other similar accounting tricks that inflate the price. One only has to look north to Canada and compare what they pay for drugs to what the US pays to know there is a lot of market manipulation going on.

    1. Hugo says:

      Someone else can comment on the first part, but your remark about opportunity costs is just wrong. Of course it’s not a real cost in development, but if investors expect to make slightly more money doing something else than drug discovery, they (companies, funds, shareholders) wouldn’t invest in new drugs anymore, and they just wouldn’t be made.

      The comparison between the USA and Canada is also misguided, as in the USA you’d pay way more for everything related to healthcare, not just drugs. There’s a bigger problem there that wouldn’t go away if drug prices were lower (perscription drugs are just 10% of the total health expenditures).

      1. steve says:

        No, it’s not wrong. Opportunity costs are simply not part of what it costs to take a drug to market. And if you want to include them in the equation, then what about all the cost savings afforded to pharma such as R&D tax credits, NIH funding and all the funding that goes into academic research that pharma draws on, orphan drug incentives, patent exclusivity, etc.? Funny how those weren’t included.

        Bottom line, there’s no justification for the huge increases in the prices pharma companies have been made recently for existing drugs already on the market. The Tufts study numbers are clearly bogus; they are based on a relative few number of drugs, selected by industry and they won’t reveal which ones so that people can check to see if the claims are valid. How did the cost move from $800M in 2003 to $2.6B in 2015? Do you know any other industry where costs skyrocketed like that? It doesn’t pass the smell test.

        1. Hugo says:

          The whole point of this thread is that there’s a difference between drugs already on the market, that are price-hiked by crooks, and new drugs that are expensive because drug discovery is hard and nowhere close to 100% successful.

        2. Anon says:

          “How did the cost move from $800M in 2003 to $2.6B in 2015? Do you know any other industry where costs skyrocketed like that? It doesn’t pass the smell test.”

          Simple, it’s because clinical success rates have fallen with increasing competition and standards of care. Basically, each new drug raises the bar for the next and decreases the scope for improvement.

          I’d be astonished if the R&D costs weren’t increasing so rapidly!

          1. James says:

            I’m surprised no one has mentioned (or I’ve at least missed) the savings that truly innovative drugs provide to healthcare services. Keeping patients out of hospital saves vasts amounts of money. Getting patients back to a state of health where they can work again hugely benefits economies. I lack truly accurate statistics on these cost savings – (I’m sure most do!) but this must form part of the discussion.

            Secondly I fear many people are lumping the true innovators in with the price-hikers, which is potentially very damaging for the industry.

            Thirdly, cost of failure – further explanation on this topic I feel is unnecessary due to its obvious nature.

    2. loupgarous says:

      You had me with you until you told us about how old insulin is. I was working at Eli Lilly and Company’s headquarters as a consulting analyst when Lilly sold their old-style, get the insulin out of livestock pancreas plant to the Russian health ministry. According to the US Food and Drug Administration beef insulin stopped being made in the US in 1998, and pork insulin stopped being made here in 2006.

      All insulin made and sold within the USA is made by various strains of E. coli bacteria modified to make insulin. The first recombinant insulins were direct copies of human insulin. When I was there, Lilly and its main competitor Novo Nordisk were heavily engaged in insulins which had been modified in various ways in hopes of reducing insulin resistance (many diabetics actually have allergic reactions to insulin).

      The amount of Phase III study time needed to convince the FDA of the safety and efficacy of these products was extensive. I’ve heard estimates that (at the time I worked at Lilly) a safety and efficacy study in patients cost roughly US$300,000/day. Some safety and efficacy studies in patients took eighteen months or longer. Running those numbers through “R and I” (as my EE prof called the calculator), I get a figure over $160 million dollars, not counting animal and healthy volunteer safety studies that happen before safety and efficacy studies in patients.

      I’m an insulin-resistant diabetic myself. I’ve had to find other ways to control my diabetes because the copayments for the insulins I was prescribed were huge (around a hundred US dollars/month), and I exist on a small pension with huge outlays for supplemental health insurance for cancer. So I see both sides of this issue.

      The companies which make insulin have a massive investment to recoup. But with unprecedentedly high numbers of diabetics in this country, it’s odd that a decade after the last animal insulin was sold here, they haven’t done that. This is about the time you’d expect the insulin manufacturers’ investment in fermentation vats and other new tooling for insulin to have been amortized, That leaves new study costs every time they develop a new nucleotide sequence for a new synthetic insulin. I’m beginning to be cynical about everyone’s motives here – the insurers and drug chains aren’t passing, say, the monster discounts on the high price of insulin on top their patients at all. Insulins are damn expensive for patients.

      But overpricing of insulins is actually a relatively new thing, when you consider the companies actually had to reinvent the way insulin is made starting in the 1980s, and that reformulation of insulins now can involve resequencing a bacterium first found in human stools to produce insulin with new properties – which have to be evaluated in animals, healthy volunteers and patients each time, to the FDA’s satisfaction. The insurers and pharmacy chains may actually be getting fatter off of insulin prices than the drug companies are.

  9. Kelvin Stott says:

    Pharma is forced to increase branded drug prices because their prescription volumes are falling with diminishing incremental benefits vs generics as their development costs are rising. This means that patients, payers and providers will continue to pay more and more for less and less, until they can’t or won’t. We are reaching that tipping point now.

    Pharma’s business model is broken because it has ran out of steam with diminishing returns, and so a radical new model is required to discover better new drugs at a much lower cost. Adapt or die.

    However, you can’t develop radical new models by building on the status quo with incremental innovation. You have to be prepared to throw the status quo out of the window, and start from scratch with a great vision and a blank sheet of paper.

    Similarly, the automobile was not invented by adding more horses to the cart, or feeding the horses with more hay. The whole concept of using horses had to be thrown out of the window. But when the alternative is terminal decline, that doesn’t seem very risky at all.

    1. Design Monkey says:

      Sure, everybody would be happy to have new, radically different, no cost way of flying around just by waving hands instead of using planes. Somehow it doesn’t happen.

  10. Hap says:


    Except if they cost more to make, the price goes up, whether or not they believe (or know) that the market can bear more. Prices would go up in the absence of such behavior, or supply down. Some of the price increases (which Booth was careful to note, I think) are because companies can, and some are because of financial engineering (Gilead HepC drug had to make back the money Gilead spent buying the company that made it before others could enter, and that high price set those of others), but some are because you have to make back the money it cost to find your drug, and that has increased (both the cost of getting there and the costs of the failed shots). It may be tired but that doesn’t make it not so.

    1. CH says:

      It’s tired because it’s the only excuse Pharma can give. Did Gilead need to make back the money it spent – sure, but it also priced it based on what the market can bear. Could they have made their money back with a lower price? Of course. Trying to say they priced it based on what they spent, whether that be R&D expenses or buying a company, is tired – and nobody is buying it anymore, yet Pharma can’t help themselves by repeating it. They priced it at the maximum they could based on the market. A glaring example of this is Biogen and their industrial chemical MS drug – dimethyl fumarate. 50K for that is not recouping costs.

      1. Hap says:

        If you can make them cheaper (particularly the trials which swamp most of the cost of goods) then there’s plenty of money to be made. Otherwise, most of this seems like “well, they should be cheaper, and you don’t have to make as much money”, but no one seems to want that logic applied to them. Most of the ideas that anyone has to make drugs cheaper (including, alas, drug companies) seem to involve someone else working for nothing or for cheap and giving them to you, which seems…unlikely.

        1. Hap says:

          I guess I concur with the previous person that the market is rapidly getting to the point where the costs can’t be sustained – people aren’t going to buy drugs at what they cost (and probably can’t – taking 25% of a person’s future income for a cancer drug would be hard to swallow, even if you had a way to do it) and insurance companies don’t want to pay either. I suspect that situation isn’t just for drugs, but I don’t think “Take less money for them” is probably going to happen, at least not without other bad consequences or a whole lot of system reordering.

  11. loupgarous says:

    What the press keeps missing is the Mylan EpiPen saga is a tale of over-regulation. FDA created the issue by denying other companies the right to sell their versions of EpiPen.

    I’d like to say this was a new bad thing, but Sen. Dick Lugar and his buddies tried to roll enough logs to get the patent on Prozac extended long past its statutory limit, and DID get a new indication and patent through FDA – “Pre-menstrual dysphoric disorder”.

    A Lilly company employee (I was a contract consultant there at the time) explained it to me thusly: “Lilly was very opposed to generic fluoxetine entering the market, because you can just about make it in a bathtub, compared to other prescription drugs.” I don’t know enough about the synthesis of fluoxetine to confirm or deny that, but Lugar brought the patented bacon back home to Indianapolis – only to lose all the patent extension strategies for fluoxetine but the PMDD indication patent.

  12. Read the wind says:

    All this talk of regulation tells me that no, the market will not bear any more. In essence, regulation is the expression of the lowest common denominator of consumers’ needs, so I take all this talk of legislating as a pretty clear indication that people can’t take much more.

  13. Chrispy says:

    Matt Herper had an interesting piece on this. It boils down to crazy pricing and rebate models that have flourished in the opaque prescription drug market. Mylan, for example, will get less than half of the price of an EpiPen sold through a pharmacy benefit manager due to competition and rebates. The people who really get screwed are patients, particularly the uninsured or high-deductible insured.

  14. anonao says:

    One has to pay for the TV adverts

  15. Tim H. says:

    High development costs should not be used as a defense for price gouging on drugs developed in prior decades, and would this discussion even be happening if corporate entities could get a handle on administrative expenses?

  16. tangent says:

    Scott Alexander: “If a doctor writes a prescription for “EpiPen”, the pharmacist must give an EpiPen-brand EpiPen, not an Adrenaclick-brand EpiPen. This is apparently so that children who have learned how to use an EpiPen don’t have to relearn how to use an entirely different device (hint: jam the pointy end into your body). ”

    Wow, that’s a bad argument. Does he know a lot of actual humans? Because the ones I know, if the pharmacist surprises them with a different autoinjector, they will mostly /not/ read the package insert as soon as they get home. Assuming it includes a dummy for practice, they will /not/ get around to practicing with it, because humans don’t like stabbing themselves. (I’ve seen doctors prescribing EpiPens have the patient practice it there in the office; I hope this is common.) And they will /not/ have as high a success rate with that blithe “jam the pointy end”, in a panic situation where they’re dizzy, shocky, and wheezing.

    Look, I wish for a way to get real competition into this sclerotic market too, but generic substitution for consumer medical devices used in emergencies is not the way.

Comments are closed.