Drug Companies Push For Price Controls—Again

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.