Drug Companies Push For Price Controls—Again

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I should know better than to run into this particular briar patch, but it needs saying. Last week, the New York Times reported that the price for a decades-old cancer drug, Mustargen, has jumped from $77.50 to $548.01 per two-week dose. The price for another old chemotherapy agent, Cosmegen, is going up even more according to the Times. Merck has spun off the sales of these drugs to Ovation Pharmaceuticals which has boosted the price of Mustargen 7-fold. Ovation claims that it needs to ask more for the drug in order to pay for new manufacturing facilities for it and to help pay for research on new drugs on rare diseases.

The economically ignorant Times notes, "[P]eople who analyze drug pricing say they see the Mustargen situation as emblematic of an industry trend of basing drug prices on something other than the underlying costs."

Ahem. Prices are not based on costs; they are based on what people are willing to pay for something. Think of it this way.Your parents probably paid less than $25,000 for their first house. Fortunately, let's say they bought in Chevy Chase, Maryland and stayed there all their lives. Now the average home price is $600,000. If one only took inflation from 1960 into account, the house would only be worth $160,000. Unfortunately, your parents were run over by a Presidential motorcade. As their heir, would you be willing to sell their house for the equivalent of what they paid for it? Would that be fair to you?

Of course, the response by many well-meaing people is something like "Drugs are different. Sick people need drugs; how dare someone profit off their misery!" However, there will be few new drugs if you take the profit out of discovering and producing them. Then sick people will simply suffer and die as they always have, but at least no one will have made a dime off of their misery. And while I'm thinking about it; how dare those grocers and homebuilders profit off of people's hunger and need for shelter!

In any case, the problem of third party payments in our health care system has royally screwed up rational pricing of all medical care including drugs. The normal incentives that hold down prices in other markets operate only feebly in health care. Thus even efforts to subsidize those who cannot afford drugs often end up unnecessarily boosting the profit margins of drug companies or, in the case of underpayment, forcing them to boost prices to people not receiving government funded health care.

That being said–we now live in a political market, not a free market, with respect to drugs. Price hikes like the ones Ovation just took make it much more likely that the public will clamor for and that the Federal government will impose drug price controls. Then we can all get cheap primitive drugs forever.

Disclosure: I own small amounts of several biomedical company stocks, but not any Merck or Ovation Pharmaceuticals stocks.

NEXT: Ivy League Madrassah

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  1. joe: Ron Bailey is a corporate shill!
    Ron: No I’m not!
    Dave W.: He is too. He’s not disclosing if his mother owns Merck!
    Ron: I’m not and my mother is dead.
    joe: Ron’s never worked for a drug company, so what does he know?
    Ron: That’s right, I’ve never worked for drug company. I’m a reporter.
    Dave W.: What about patents? Patents are bad!
    Ron: What’s the use? Sigh.

  2. You left out a string of corn syrup jokes and some bantering about the difference between copyright and patent.

  3. I’m not a fan of price controls, but any pharmaceutical seller who increases prices over 700% in a single mark-up is just too stupid not to be the recipient of a price-gouging investigation.

  4. And a line about decoder rings.

  5. Seeing as how Ron, Timothy, and Number 6 preemptively summed up the thread nicely, I thought I’d just make a token comment. You know, a cameo.

  6. And something about Phil’s mom having sex with farm animals.

  7. Yeah, the real unfortunate part is that the last part you describe is really just part of the cycle of government intervention. When/if price controls are enacted, the pharma companies are going to scream for longer patent periods, which will create a demand for more price controls, which will probably be generously leavened with increased subsidies to this “vital industry,” and so on ….

  8. “That being said–we now live in a political market, not a free market, with respect to drugs.”

    Best summation I’ve seen.

  9. we now live in a political market, not a free market

    Markets have competition. I don’t see any competition on the supply side in the Mustargen sales transactions. If the government opened up Mustargen to competition, then, and only then, could we debate whether the market was “free” or “political.” Maybe there are good reasons that there is not currently a market in Mustargen. I am open to that idea. However, because there is no competition in Mustargen it is stupid to call it a market, or to act like price controls here would diminish the market-ness of this situation in any way. You can’t diminish something that doesn’t exist.

  10. Nothing: Good point–I suspect that the profit margin was so small for Merck that no other company thought it was worth it to build a facility to make it. My personal hope is that Ovation has overreached and that some other company will come in and start competing with them.

  11. I must say, though, that my sympathy for the drug companies is tempered by the tone-deafness of some of their actions.

  12. I read this article Sunday, and was puzzled by the arithmetic.

    The two drugs are used by fewer than 5,000 patients a year and had combined sales of about $1 million in 2004.

    Now Ovation has raised the wholesale price of Mustargen roughly tenfold and that of Cosmegen even more, according to several pharmacists and patients.

    So the new average is $2000 per person per year.

    Either most people don’t use it for long, in which case its price is not a big deal. Or the reporter succeeded in finding two people who are being reemed and failed to talk to the 4,998 others whose average is apparently even less than $2000 per year.

  13. By the way, thanks for running this piece. I would not have caught that correction on the misrepresentation of Avastin!

  14. Nothing: Good point–I suspect that the profit margin was so small for Merck that no other company thought it was worth it to build a facility to make it. My personal hope is that Ovation has overreached and that some other company will come in and start competing with them.

    To be frank, I suspect that Merck was running a loss, but they went ahead and stomached it to avoid exactly this sort of article. Making the stuff was probably not too expensive, but dispensing it nationwide for a measly $1M gross? That is expensive.

    Note that Merck says explicitly in the article that it doesn’t mind making it. It is entirely consistent with what I’ve seen to think that Merck simply wants the lesser lightning rod Ovation doing the selling.

  15. Why is the Times “economically ignorant” for mentioning the issue of price vs. the marginal cost of production? Also, your whole “Ahem, prices are based on what people are willing to pay” thing sounds like some kind of cornball defense of rent-seeking, which is fine, but I don’t think it makes you any more economically savvy than the Times.

  16. Ahem. Prices are not based on costs; they are based on what people are willing to pay for something.

    This seems pretty tone deaf. In Econ 101, one of the big selling points of a free-market system is that everything winds up at a “fair” price, basically connected to its cost. This is not a trivial side point that can be tossed away casually.

    Of course drugs are well known for being a tricky case — you need to invest in expensive research to find them, but once you have them they’re cheap to make. So if we’re going to have good research, we’re going to need *gasp* government intervention to protect investment… and of that makes total sense to a libertarian. It’s only when the government gets concerned about what the companies are charging that alarms start going off.

  17. So let me get this straight, Ovation buys the right to market/manufacture the drug (whatever that means since the patent is long since expired) from Merck

    Merck continues to supply Ovation with the drug, who can’t/won’t make it themselves

    Ovation raises the price 7 fold.

    Why wouldn’t Merck just raise the price itself and cut out the middleman? Oh of course, how silly me not to see, it’s horrible PR.

    Conspriracy alert! Ovation is “privately held?” Who holds it, Merck?

  18. Ahem. Prices are not based on costs; they are based on what people are willing to pay for something.

    This seems pretty tone deaf. In Econ 101, one of the big selling points of a free-market system is that everything winds up at a “fair” price, basically connected to its cost. This is not a trivial side point that can be tossed away casually.

    Of course drugs are well known for being a tricky case — you need to invest in expensive research to find them, but once you have them they’re cheap to make. So if we’re going to have good research, we’re going to need *gasp* government intervention to protect investment… and of that makes total sense to a libertarian. It’s only when the government gets concerned about what the companies are charging that alarms start going off.

  19. If Mustargen is “decades old” shouldn’t any patent protection it might have enjoyed long-since passed? What’s to stop someone else from manufacturing a Mustargen clone?

  20. Barbar: You’re correct that competition drives marginal prices down to marginal costs. Thanks for pointing that out. Of course sellers try to mark up their prices as much as possible above their costs and they can only get away with that if they do not have competition. As I said in an earlier post above:

    My personal hope is that Ovation has overreached and that some other company will come in and start competing with them.

  21. The nice thing about wearing a libertarian lapel pin is that — h-hey! — you can argue that price gouging regulation and price caps on monopoly producers are unnecessary and morally wrong because government interference qua government interference distorts the market and that prices should be and are set through the market alone.

    On the other hand, wer’re told that broad, long-term patents are a critical stimulus for innovation.

    Put the two together and there’s no principled philisophical stance there, just a stance that uses government to boost specific companies and hold a boot on the necks of customers and would-be new entrants.

  22. Further to previous: my patent database only goes back to 1976, which is why the patent I linked to is so recent.

  23. “On the other hand, wer’re told that broad, long-term patents are a critical stimulus for innovation.”

    Not by me, you’re not.

  24. the response by many well-meaing people is something like “Drugs are different. Sick people need drugs; how dare someone profit off their misery!”

    Very good there, Ron, but you missed your own irony, I think. Because, what, PEOPLE DON’T NEED HOUSING EVERY BIT AS THEY NEED DRUGS? Oh, well that doesn’t matter, not if it’s MY housing sale I wouldn’t be able to cash in on if there were government controlled prices!!

  25. “Put the two together and there’s no principled philisophical stance there, just a stance that uses government to boost specific companies and hold a boot on the necks of customers and would-be new entrants.”

    Not all libertarians are intellectual property-friendly.

  26. “On the other hand, wer’re told that broad, long-term patents are a critical stimulus for innovation.”

    Not by me, you’re not.

    BLASPHEMY!

  27. Patent Clerk – that patent expired 10 years ago. Better bone up on your MPEP

  28. “Put the two together and there’s no principled philisophical stance there, just a stance that uses government to boost specific companies and hold a boot on the necks of customers and would-be new entrants.”

    Not all libertarians are intellectual property-friendly.

    And even some intellectual property friendly people think that drug patents are: (1) too long; and/or (2) too easy to get.

    Not that any of us seems to know whether Mustargen is still patent protected in 2006.

  29. The writer here is clueless as to how drugs are developed and come to market.

    Drug companies do not take chances jumping on every possible miracle cure out there. Before they go investing in a drug, they take advantage of the real primary r&d WHICH IS DONE IN THE PUBLIC SECTOR. Taxpayors, philanthropists, tuition payors, and yes, corporate granters, pay the universities to perform the primary research and development of drugs and other medical therapeutics. So, to say that drug companies would lose incentive to develope new drugs if the prices were restrained is STUPID, or worse, lying. Besides, any capitalist should well know, if there’s money to be made, people will make it, regardless of the margins.

    Mr. Baily neither understands pharmaceuticals, nor markets – political or commercial.

    JMJ

  30. S.M.: I can tell that you’re not wearing your “libertarian pin” today.

    As I’ve tried to point out numerous times, patents are a compromise solution to the problem of living in a world of trade secrets. Patents are a disclosure mechanism that has been kluged together that entices inventors to tell us how they did what they did, so that other inventors can use their insights to create improved products. So that I and other H&R posters don’t have to constantly read your tedious incorrect assertions that I am “unprincipled,” could I trouble you to read my previous column excoriating the drug companies for misusing patents? Pretty please.

  31. Patent Clerk – that patent expired 10 years ago.

    Nor does it claim the drug Mustargen. It does show that Mustargen was known as a cancer treatment at least 37 years ago, which was the point of the link.

  32. the compound itself is not patent protected. you may view all patents with mechlorethamine (mustargan) in the claims here?:

    http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2Fsearch-bool.html&r=0&f=S&l=50&TERM1=mechlorethamine&FIELD1=ACLM&co1=AND&TERM2=&FIELD2=&d=ptxt

    from the titles, there do not seem to be any patents that cover formulations of mustargan, although there do seem to be some that cover mustargan + another chemotheraputic agent

    the lack of competition between manufactures is not due to intellectual property rights, but because the intrinsic cost of producing a pharmaceutical – building the facilities, the training of the technicians to run the facilities, ect…is greater than the potential sales of the product, due to the small number of patients who require the drug

    merck, on the other hand, already has invested in the overhead, the actual cost to make the drug for them is quite low.

  33. Ron,

    I hate to say it, but it sounds like you’re back on the Mustargen. The folks at Ovation can kick up the price of the good stuff by 1000% because they have a government-granted monopoly. Someone in need of housing who can’t score a $600,000 mortgage doesn’t end up in the street. They find a cheaper place to live. Your counter-example is, dare I say it, even more one-sided than the Times.

    Ovation says they need the money to create manufacturing facilities and to do research on new drugs. And maybe to hire cheerleaders to sell their drugs? And maybe to pay for a new fleet of Beemers for the executive staff? (How else are you going to attract good people?) What if Ovation doesn’t make good on its promise of future virtuous conduct? Are you going to go down to the plant and kick some ass?

    I dunno about you, Ron. I used to trust you implicitly, but now I think you’re slipping. Better take it up a notch and not be in such a hurry to bust the Times. It seems to me that they had at least half the story, and you had a quarter.

  34. “the lack of competition between manufactures is not due to intellectual property rights, but because the intrinsic cost of producing a pharmaceutical – building the facilities, the training of the technicians to run the facilities, ect…is greater than the potential sales of the product, due to the small number of patients who require the drug”

    Tell you what. I’ll pay to produce the drug. You pay for FDA approval. I get 5% of sales. You get 45%. Which of us do you think will make money?

  35. As I’ve tried to point out numerous times, patents are a compromise solution to the problem of living in a world of trade secrets.

    I too view patents as a heuristic, not a principle.

    However, with pharmaceuticals in particular, can anyone suggest how the FDA could possibly do its job without patent protection for drugs?

    I know how it could work in an anarchy. The private drug approval agency would require, in essence, a patent write-up. In exchange for approving the drug, they would guarantee that they would not approve a similar drug for some number of years. Eventual patent disclosure would be a further part of the contract to avoid the legal risk of having to keep a trade secret forever.

    The patent process just seems, like most things, to be a compromise that a society with a self-regulated monopoly government has to live with.

  36. Jeffiek

    I am no expert in the economics of pharmaceutical development, so maybe you can enlighten me. as I understand it, a producer of mustargan does not need to go through a rigorous approval process for since mustargen has already been approved. the potential producers files an abreviated new drug application which (i think) consists of showing how the drug will be made and that it will be “the same” as the previously approved product.

  37. Alan V: I will try to take it up a notch. First, I don’t have your aversion to patents, see earlier post for details. Secondly, I assumed–and this is perhaps where could “take it up a notch”–that there was no patent on a decades old chemotherapy agent. Perhaps I am wrong, in which case it makes perfect economic (and incredibly stupid political) sense for Ovation to boost the price of the drug untilthe patent expires.

    But if there wers a valid patent, surely Merck would already have been charging a higher price for the drug.

    As for my housing example–the point is simply to illustrate that costs do not set prices for items.

  38. As for my housing example–the point is simply to illustrate that costs do not set prices for items.

    A better example than housing is salary.

    Anyone who complains about “gouging” had better not be making more money than that required for a rice and beans diet in a boarding house.

  39. This thing keeps eating my posts. Quick point: Cliapee your database only goes back to 1976 and you were using a too-modern search term. Ron: it looks like government research invented mustargen. Now I turn it over to the Wiki:

    The era of chemotherapy began in the 1940s with the first uses of nitrogen mustards and folic acid antagonist drugs. Cancer drug development since then has exploded into a multi-billion dollar industry.
    . . .
    The first efforts (1940?1950)
    The beginnings of the modern era of chemotherapy can be traced directly to the discovery of nitrogen mustard, a chemical warfare agent, as an effective treatment for cancer. Two pharmacists, Louis Goodman and Alfred Gilman were recruited by the United States Department of Defense to investigate potential therapeutic applications of chemical warfare agents. Autopsy observations of people exposed to mustard gas had revealed profound lymphoid and myeloid suppression. Goodman and Gilman reasoned that this agent could be used to treat lymphoma, since lymphoma is a tumor of lymphoid cells. They first set up an animal model – they established lymphomas in mice and demonstrated they could treat them with mustard agents. Next, in collaboration with a thoracic surgeon, Gustav Linskog, they injected a related agent, mustine (the prototype nitrogen mustard anticancer chemotherapeutic), into a patient with non-Hodgkin’s lymphoma. They observed a dramatic reduction in the patient’s tumour masses. Although this effect lasted only a few weeks, this was the first step to the realization that cancer could be treated by pharmacological agents (Goodman et al 1946).

  40. Prices are not based on costs; they are based on what people are willing to pay for something.

    Except in this case, the prices are being based on what Ovation thinks they need in order to R&D some hypothetical drug in the future. It has nothing to do with what their customers are “willing to pay”. Clearly, some of them aren’t willing to pay 10 times what they were: they’re using it less or not at all anymore. Too bad for them, I guess.

    And yes, drugs ARE different. Anyone who can’t see the difference between drugs (“I need this specific drug or I die”) and a house (“I want this fancy house but a cheaper one will do”) can only a heartless libertarian.

  41. calliope:

    I’m not an expert either. It was a “make you think” reponse to your post. The drug itself may not need much approval. But it doesn’t stop there. You have to get the facilities and the production process approved. What? You expected something with the FDA to be easy?

  42. the potential producers files an abreviated new drug application which (i think) consists of showing how the drug will be made and that it will be “the same” as the previously approved product.

    The seller of a drug copy does not need to get the drug appoved. That’s a big deal, but it’s pretty much the only savings — other than, of course, free-riding on the original drug’s marketing.

    The copy’s manufacturer needs to get FDA approval for the facility and for the process. Furthermore the product of the process needs to pass equivalency tests against the original, which may have broad or narrow bands for various metrics.

    And this does not even touch the issue of bioequivalence — meaning pharmacists can use the two drugs interchangably unless the presciption says not to — which I believe requires going back through clinical trials.

    Let’s just say that between salaries, fees, and time, doing this for two drugs that gross $1M is not going to happen. Two drugs that gross $10M, as the new Ovation prices seem to indicate? Maybe.

    Of course, the next company to come along with a copy will not only get less than the whole market share, they will be bidding down the total revenues. They are back to making the decision to enter the market based on a $1-3M gross to themselves.

  43. “Wonder Drug Inspires Deep, Unwavering Love Of Pharmaceutical Companies”
    http://www.theonion.com/content/node/46032

  44. Why is the Times “economically ignorant” for mentioning the issue of price vs. the marginal cost of production?

    Not directly on-topic and not a direct answer to the question, but —

    Last Sunday a Times op-ed piece had a single mango tree producing something like 130,000 pounds of mangos per year for over 100 years.

    It takes a kind of mathematical tone-deafness (or innumeracy) to allow something like that into print.

    Don’t these people own envelopes with backs on them?

  45. Dave W: your long URL widened my page, making this thread hard to read. Stop it!

  46. Rhywun,

    If you don’t have some kind of clothing or shelter you can die a lot faster from exposure than from cancer.

    By your reasoning, clothes and shelter are more important than drugs.

    We are therefore all heartless for not demanding that the clothing and shelter markets be regulated to ensure that everyone gets proper clothing and shelter.

  47. We are therefore all heartless for not demanding that the clothing and shelter markets be regulated to ensure that everyone gets proper clothing and shelter.

    At least clothing and shelter are actual markets, with something affordable to almost everyone. Try substituting some cough medicine for your heart medication and see how far that gets you.

  48. Tell you what. I’ll pay to produce the drug. You pay for FDA approval. I get 5% of sales. You get 45%. Which of us do you think will make money?

    Whoever gets to keep the other 50%?

  49. “Whoever gets to keep the other 50%?”

    Reason server squirrels. Who else besides calliope and me would work for peanuts?

  50. I’m back, Ron! I agree with you that patents are essential, but I’d point out that they are gifts of the state, given pragmatically under the assumption that special privileges for a few will benefit society as a whole. If those with privileges find ways to exploit them in ways that disadvantage society, there’s no reason why the state can’t unilaterally renegotiate.*

    The comparison to a fairly open market like housing wasn’t very illuminating. If the market for drugs were just like the housing market, why did Ovation feel the need to defend its price increase by saying its profits would be spent on good things? Why didn’t they just say “It’s our property and we’ll charge what we damn please! Besides, we could all use some new Beemers! And some new wives!”

    *If only! Usually, of course, it’s the drug companies who are writing the laws. As Sam Pepys put it “The King can never do his business as cheaply as another man.”

  51. Given the small number of consumers buying Mustargen, and assuming for the sake of argument that the pool of customers won’t grow or shrink substantially for the next ten years, at what unit price would it make sense for another producer to enter the market and capture half of it at full competition? Given QA testing, the incremental added worker hours, shelf space at the warehouse, adding a SKU to the company catalog and so on, is that price substantially below the old Mustargen price of $77 biweekly per consumer?

    If it isn’t, then it doesn’t matter what Ovation’s current pricing for the drug is, because Ovation could drop its price to its previous biweekly $77, which we already know was profitable enough to justify its continued manufactire under the Merck banner, and drive the competitor out. If this is the case, then no competing producer will be forthcoming. Ovation’s current sale price for the drug has nothing to do with a would-be competitor’s decision.

    Thanks for your clarification, though, and I stand corrected on your patent stance, but the fact that you think patent terms should be shorter and more restrictive than they are doesn’t change my point. In the article you sent me to, your stance is that drug patents have their place, and thus you’re for some government regulation of the pharma market. The point is that when you’re coming from that position, rejecting limits on profit margins on medications produced by de facto monopolies because regulation is bad doesn’t fly.

    The American healthcare system — if you can call it one — is indeed organized in a way that places drugmakers at a strong advantage over customers, but of course the most-cited rational solutions — ones that would put consumers on roughly equal footing with producers in the drug market — are the single-payer/socialized-medicine models, where as with pretty much every other country in the developed world, a monopoly purchaser negotiates with the monopoly producers and the producers still miraculously emerge with a profit on the transaction significant enough to bring them back for business the next year.

    But we don’t have that, Pharma certainly doesn’t want it, and Nick Gillespie doesn’t want it either. So the question is, since you’re okay with government protecting producers from their fellow producers, what’s inherently wrong with government protecting consumers from producers in a manner that doesn’t drive that old drug off the shelf?

    All right, so you’re not a shill. You might just be someone who sometimes likes to root for drug makers like other people root for a baseball team, or you may simply subscribe to a political and economic philiosophy that says regulation’s bad unless it isn’t. What I can say, though, is that considering drug patents self-evidently good and drug price controls self-evidently bad is a combination of positions congruent with those of a shill. 😉

  52. The question is how much would patients be willing to pay if no one made the drug?

    Obviously, the company that was originally producing the drug doesn’t want to produce it anymore. They sold the rights to market the Brand Name to someone else. Obviously, the drug is out of patent protection. Also as obvious there are no generic versions of the drug. Maybe this price boost would inspire a generic version of the drug.

  53. Another question to keep in mind as we line up to whack Evil Pharma for making a profit is that, increasingly, drugs are not the only treatment for whatever your condition is.

    When you buy the drug, you may not be doing so because the alternative is an agonizing death; the alternative may well be a course of treatment that is more unpleasant than the pill you just bought.

    So, if you pay a premium for a drug, you are doing so because you prefer it to your treatment alternatives.

    And, the drug, even an expensive patented one, may be cheaper than the treatment alternatives.

    As always, meaning, especially ethical meaning, cannot be divorced from context.

  54. s.m. –

    There is a difference between , on the one hand, telling people that they have property (as evidenced by title documents or a patent on a drug) and providing the mechanisms for protecting that property and, on the other hand, telling people what they can do with their property (which is what most libertarians mean by “regulation”).

    What you characterize as “protecting producers against their fellow producers” falls into the category of defining and protecting property rights, while ordering to producers to produce a given drug and sell it for a given cost falls into the latter category.

    the single-payer/socialized-medicine models, where as with pretty much every other country in the developed world, a monopoly purchaser negotiates with the monopoly producers and the producers still miraculously emerge with a profit on the transaction significant enough to bring them back for business the next year

    But not enough of a profit to fund the kind of research we would all, presumably, like to see.

  55. What I can say, though, is that considering drug patents self-evidently good and drug price controls self-evidently bad is a combination of positions congruent with those of a shill.

    And considering drug patents self-evidently bad and government-controlled medicine self-evidently good is a combination of positions congruent with those of an elitist authoritarian.;)

  56. Dave W: your long URL widened my page, making this thread hard to read. Stop it!

    Agreed. Please learn how to make proper links.

  57. Agreed. Please learn how to make proper links.

    Yes. http://tinyurl.com is your friend, as is the anchor tag in HTML.

  58. And yes, drugs ARE different. Anyone who can’t see the difference between drugs (“I need this specific drug or I die”) and a house (“I want this fancy house but a cheaper one will do”) can only a heartless libertarian.

    Well, the problem is that I don’t think that you can have a right to drugs to keep you alive. Think about it. Drug companies produce, what, hundreds of drugs every year, which many of us could not live without. These drugs increase our quality of life immensely, but our response is increasingly to call them greedy for asking for reimbursement for their services. Yes, many of them make obscene profits. And well they should, since the products they make have increased our quality of life so much. Remember, money is nothing; it is what money represents, resources, that is important. Should we not spend a great deal of resources on things that will increase our standard of life so much?

    I understand that it seems heartless to deny treatment to those who cannot pay. Indeed, it is heartless, which is why drug companies often have programs to help people pay for the drugs they are using. But for those who can pay, drug prices are often a bargain. Instead, we’ll kill the goose that lays the golden eggs, and condemn future generations to have a lower quality of life than they would have otherwise, and condemn millions to die who otherwise would have lived. In the name of compassion.

  59. R.C.:

    You assume I think drug patents are bad. I don’t, and actually probably feel roughly the same way about them as Mr. Bailey does, i.e. that the terms should be shorter and narrower than they are at present. Which is about how I feel about the state of U.S. copyright too.

    For the record, I also don’t think price controls are the best approach to upwardly-spiralling drug costs, instead preferring the widely-tested, proven, more equal bargaining positions between buyer and seller attendant with, um, socialized medicine. Since that’s not in the offing anytime soon, though, I don’t see anything terribly wrong with regulating monopoly producers through price caps for now.

    You call the difference between patents and price controls one between protection of property rights and a taking of property rights. Me, I say to-mah’-to, that both are simply government-imposed distortions on a market. If the market can be distorted by government in ways that favor certain producers with results you find beneficial, it seems only like so much posturing to cry foul on laissez-faire grounds when it comes to government-imposed market distortions with a roughly countervaling effect.

    Cheers, &c.

  60. Ahem. Price may be based on what people are willing to pay for something. But if what people are willing to pay is above the cost of production, and market entry is free, then the supply will increase until what the last buyer is willing to pay equals production cost.

    In other words, the equilibrium price of goods in elastic supply IS based on cost.

    The price of the house in your example illustrates the differential rent of land, caused by the fact that the supply of land IS NOT elastic.

    When you’re able to charge a price many times more than production cost, over the long term, because of state-imposed market entry barriers (patents), you’re a thief. It’s that simple.

    Bailey is simply parroting second-hand cliches from the work of Austrian economists, as “authorities.” That’s exactly what Bohm-Bawerk said about labor-theory advocates, by the way: that they appealed to the authority of Smith and Ricardo, like a medieval scholastic appealing to Aristotle. Now the shoe is on the other foot.

  61. R.C. Dean,

    A patent IS a regulation that tells me what I can do with my property. It tells me I can’t buy a particular assortment of chemicals with my own money, combine them in a certain way on my own premises, and then sell the final product to a willing buyer. That’s why a patent isn’t real property–it’s what Hodgskin called an “artificial right of property,” and Nock called “political property.” It confers on one person the right to engage in a particular form of production, and prohibits others from engaging in the same form of production ON THEIR OWN PROPERTY.

    Intellectual property is theft.

  62. Ron Bailey-

    Totally off topic, but I’m curious if you’ve been attending the American Physical Society March Meeting in Baltimore this week, seeing as how you’re the science correspondent and I seem to recall reading that you live in northern Virginia. I assume that the APS meeting is like a giant magnet for science correspondents. You might enjoy the talks on biophysics, alternative energy, nuclear terrorism, and other topics that Reason has given coverage to.

    There’s even a handful of crackpot talks, which are kind of amusing even though I rarely get to them. The philosophy is that it’s better to give the crackpots a room to talk in and then ignore them, than to try to root them out and banish them. Somebody was talking yesterday about the medicinal benefits of colloidal silver (the same stuff that an LP candidate used to dye his skin blue), but I missed it because it was in the morning and I got a flat tire on the way to Baltimore.

    Anyway, hope to see you there, if you’re around.

  63. I see it pretty much the same way as grylliade. If a drug saves your life, shouldn’t it be worth more to you than a TV, car, or swimming pool?

    A few years ago, my dust mite allergies (both kinds) where destroying my life. It was like I had a 36-hour flu three times a week. The only drugs that finally brought my allergies under control were Allegra and Flonase. Both were under patent and cost me well over $100 per month. Without them I would have lost my job because my allergies were destroying my productivity. The drug companies that created these drugs gave me my life back for only a fraction of my monthly income–an income that would have ceased without them!

    The same assholes that are crying about high drug prices are the people that are buying Hi-Def TVs, gas-guzzling SUVS and other cars, granite countertops, and any number of items that DO NOT SAVE THEIR LIVES OR INCOMES. To all of them I say FUCK YOU!

    Don’t fuck with a good thing.

  64. The drug companies that created these drugs

    The drug under discussion on this thread mustargen (commonly called nitogen mustard) was created by the DoD (that is, the government), not a drug company. In other words the tax dollars of the general public at large was what funded the creation of the drug now being subject to the price gouging here.

    I leave it others to decide whether this example suggests that a greater portion of new drug creation should be socialized.

  65. I defended the drug companies, but I will not defend the practice of taxpayers funding most of the development of some drugs that are turned over to drug companies to finish, patent, and sell. You can thank congress for that.

  66. Maybe if the costs of development of a drug are socialized, then the benefits should be socialized too?

    That doesn’t seem to be what Mr. Bailey wants in this case tho, AFAICT.

  67. Profiteering from the heathcare sector is a drag on progress in society. Period. Healthcare is a constitutional right in virtually all of our competitor states throughout the world. The only reason it is not one here is because our constitution is very, very old, relatively speaking. We should nationalize healthcare and negotiate prices from the best possible pool – everyone. Same goes for insurance actuation and assessments. This will not happen until Americans learn to stop leaching off their own economy and put their long-term mutual interests ahead of thier investments in pharmies and insurance companies.

    JMJ

  68. instead preferring the widely-tested, proven, more equal bargaining positions between buyer and seller attendant with, um, socialized medicine.

    Koppelman,

    Why do you think a monopoly supplier and a monopoly buyer will remain adversarial? Such a construct is riddled with opportunities for fraud. If you don’t like the terms the your monopoly purchasing representative negotiates, you have no alternative unless you are willing to cheat and pay even more.

    People who want socialized medicine deserve to get it good and hard.

  69. Maybe if the costs of development of a drug are socialized, then the benefits should be socialized too?

    I’d agree, but I think that the costs of development should not be socialized.

  70. JMJ,

    Fuck you asshole! I’m happy with my insurance plan. If you want to help poor people without insurance, find a poor person or family and buy them insurance, you dickheaded control freak.

  71. Bill, take it easy there pal! Your co-pays will rise! 🙂

    Bill, you are paying for poor people now – through your taxes. And you’re paying far more than you should because these people are not receiving the proper preventative regaular care and so are visiting emergency rooms rather than doctors offices. Emergency care costs far more than regular preventative care.

    Think bigger, man.

    JMJ

  72. I’d agree, but I think that the costs of development should not be socialized.

    Did you come to this bold conclusion before or after you learned that “the beginnings of the modern era of chemotherapy can be traced directly to the discovery of nitrogen mustard” by socialized medical research? (quote from the wiki)

    More Wiki fun:

    Unlike some scientists who sought wealth or fame accompanying their innovations, [the discoverer of the 1st polio vaccine Jonas Salk] stated “Who owns my polio vaccine? The people! Could you patent the sun?”

  73. Maybe if the costs of development of a drug are socialized, then the benefits should be socialized too?

    The benefits are socialized. The drug exists and is available to society. Presumably the only reason this gets brought up is that the drug would not exist were it not for the government research. Certainly that is the argument put forward by the proponents of this particular brand of corporate welfare.

    You want more formal socialization of the benefits? You should read some California newspapers and watch the sausage being made before your eyes as dozens of different interests try to make sure that their particular slice of Californians get their rightful return on whatever stem cell research comes out of that $3 billion corporate welfare boondoggle!

  74. the only reason this gets brought up

    Another reason this gets brought up is that some people think that the profit motive is the only way that great new drugs like Flonase get discovered. Nitrogen mustard and the polio vaccine are two counterexamples to this faulty mindset.

    And, yes, I still believe that actions against the price gouging on nitrogen mustard is a way of making its benefits more socialized than they are right now, which increased socialization would better reflect how it got discovered in the 1st place.

  75. Ghost,

    Did you read the article? Did you read this thread?

    This drug is 60 year old. The only reason it’s not being made by several companies is that the market at the “pre-gouge” price could not support more than one producer. (In fact, I speculated that even that one was selling at a loss.)

    Furthermore, the only reason it’s not paid for by insurance is that the use talked about in the article is not FDA approved. Again, the market is too small for anyone to pay for that approval.

    What possible socialization of benefits is due here? What possible socialization of benefits is possible?

    Ovation is going to spend many millions of dollars getting their own production built and approved. The only way the price of this drug wouldn’t go up at least somewhat is if someone forced Merck to continue running the already built and approved manufacturing.

    Is that socialization of benefits? Compulsion is involved, so I guess it is starting to look like socialization.

  76. What further socialization of benefits is possible?

    http://en.wikipedia.org/wiki/Orphan_drug

  77. I was going to bring up orphan drugs. But I would have cited the FDA site. Ironic, huh.

    What do orphan drugs have to do with 60 year old publicly funded research? Or do you just get your socialization where you can find it.

    I don’t know much about orphan drug law. In particular, I don’t know who is authorized to declare a drug orphaned. But if Merck’s transfer of these drugs to Ovation was designed to dodge an orphan designation because it’s more profitable to keep it private, that would be an interesting story. And the Times story that was actually written would be even less interesting and insightful than it already appears to be.

  78. The only reason it’s not being made by several companies is that the market at the “pre-gouge” price could not support more than one producer. (In fact, I speculated that even that one was selling at a loss.) . . . [T]he market is too small for anyone to pay for that [FDA] approval. What possible socialization of benefits is due here?

    I read that and I thought, gee, that sounds a lot like the orphan drug problem. I wonder what how orphan drugs are handled. I honestly didn’t know how they are handled. SO I checked the Wiki. It turns out that they are handled by various forms of socialization (most more drastic than price controls). Therefore, the Wiki link seemed like a fair answer to the question you asked about whether it was possible to socialize drugs. It is possible and this exact approach is what has been taken in the past when a drug market is deemed too small for the typical FDA/pharma logrolling.

  79. Ghost, I finally read that Wiki article. It was not only thin. It was founded on economic ineptitude.

    This need for government intervention is often called a market failure in free market economic systems.

    The “need” for orphan designation is not a market failure. The production of the drug is simply not worth what its potential consumers are willing to pay for it. That is not failure. That is a properly functioning market.

    As an extreme example, if one person has a disease that can be cured only by mincing the thalamuses of a million children, that person is going to die. That is not a market failure.

    If the government wants to enforce a social contract to offer to subsidize the development and production of drugs that a free market would not produce, the government has that power. But it is not government intervention thwarting a market failure.

  80. And by the way, looking at how to apply for orphan drug designation, I see that anyone can sponsor it. In particular, it does not need to be the current manufacturer of the drug.

    So I take back my earlier comment that the handover might be a cynical ploy to avoid orphan designation. The two drugs passed from Merck to Ovation appear to be perfect candidates for anyone to sponsor for orphan status.

    I see nothing that suggests that any further “socialization of benefits” is required.

  81. Until this afternoon I had no idea that there was an orphan drug law (I assumed it was part of the failed attempt to socialize US medicine back when Hillary was prez). I certainly didn’t come on this thread to advocate it.

    I did come on this thread to say that something that is basically an orphan drug (especially one discovered by the government) should not be used as a cash cow for speculative private research, which is how this price increase is being pitched at the top of the thread by Mr. Bailey. If the research Bailey wants to fund needs a cash cow then I nominate RealBill’s Flonase since that one was actually discovered by the private sector without aid of gov’t subsidy (presumably).

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