Yves here. This post provides a tidy kneecapping of big Pharma whinging about being subjected to price restrictions. The even shorter version of what follows is that drug prices and health care generally are not market goods. People will pay any price if the medication or treatment is important to their survival. AOC made the point well in her better days:
"People's lives are not commodities…you cannot ask the question how much will you pay to live, because the answer is everything.
That is what makes the price of medicine different than the price of an iPhone." – @AOC pic.twitter.com/j4DTOR7VgI
— Social Security Works (@SSWorks) May 16, 2019
By William Lazonick, Professor of Economics, University of Massachusetts Lowell; President, The Academic-Industry Research Network; and Öner Tulum, Postdoctoral Research Associate, SOAS University of London; Senior Researcher, The Academic-Industry Research Network (theAIRnet). Originally published at the Institute for New Economic Thinking website
The ongoing negotiations under the Inflation Reduction Act over drug prices between Medicare and pharmaceutical companies confront the complex question of what constitutes a “maximum fair price” (MFP) for prescription medicine. The higher the price on a “MFP” drug under negotiation, the less affordable the drug is to the healthcare system. The negotiators agree, however, that the price of the MFP drug should be high enough to fund the pharmaceutical company’s next round of investment in drug innovation. The question is, with this tradeoff in mind, how high is “fair”?
The drug companies claim that any regulated drug price is “unfair” because the “market” should make that decision. But, as we show in our new INET working paper, “Setting Pharmaceutical Drug Prices: What the Medicare Negotiators Need to Know about Innovation and Financialization”, the market cannot set a price because of a combination of a cost curve that exhibits economies of scale and a revenue curve that reflects the price inelasticity of demand for essential drugs. In other words, prices fall as companies produce more but people also often must have the drugs at any price. Especially given the fact that we grant pharmaceutical companies at least 20 years of patent protection on prescription drugs, unregulated prices are monopolistic, likely with an element of price gouging.
What’s more, as we document in our INET paper, most of the pharmaceutical companies with which Medicare is negotiating the current round of MFP drugs do not use their profits from high prices on existing drugs to fund investment in drug innovation. For the decade 2013-2022, 14 pharmaceutical companies that are included in the S&P 500 Index distributed 105 percent of net income to shareholders, a larger proportion than the highly financialized 98 percent of all 478 companies in the dataset. At 51 percent, pharmaceutical stock buybacks were below the proportion of 57 percent of net income for the 478 companies, but, at 54 percent versus 40 percent, pharmaceutical dividends as a proportion of net income far exceeded that of all the companies in the dataset. The easily demonstrated bottom line is that pharmaceutical companies use high drug prices to fund distributions to shareholders. What’s fair about that?
The response of the drug companies is that, if they don’t “return” value to shareholders, then shareholders will not make risky investments in drug innovation. The problem with this argument is that contrary to conventional wisdom, established drug companies do not, as a rule, seek to raise funds on the stock market to finance investment in their productive capabilities. Their shareholders simply buy and sell outstanding shares on the stock market. How can a company “return” cash to shareholders who never gave them any?
Let’s look at a few companies with which Medicare is negotiating the current MFP drugs. Pfizer did its most recent common stock issue on the public stock market in 1951, Merck in 1952, and Bristol-Myers (now part of Bristol Myers Squibb) also in 1952. Are the shareholders who subscribed to those issues more than seven decades ago still clamoring for “returns” on their investments?
To bolster their untenable arguments, the pharmaceutical companies fall back on the now omnipresent, but deeply flawed, ideology emanating from business schools and economic departments that only shareholders make risky investments in drug innovation. In our INET paper, we debunk that position. Far more risk of investing in drug innovation is undertaken by U.S. households as pharmaceutical employees who engage in what we call “collective and cumulative learning” and as taxpayers who have since 1938 poured over $1.6 trillion in 2024 dollars into life-science research by the National Institutes of Health, including $48.8 billion in 2024.
In recent years, pharmaceutical companies have invoked “fairness” in drug pricing by arguing that the company that markets the drug should be the entity that captures all the “value to society” that the medicine creates by reducing the costs of treatment and increasing the benefits of health outcomes. In our INET paper, for the ten MFP drugs currently under negotiation, we summarize the histories of foundational research and translational research that are both antecedent and external to the drug companies selling these MFP drugs, enabling them to perform some (but not necessarily all) of the clinical research that made possible Food and Drug Administration approval of these drugs as safe and effective.
In reality, drug innovation is a collaborative process that involves a diverse range of contributors over very long periods of time. Academic institutions, government research labs, and non-profit organizations play crucial roles in foundational and translational research, providing the groundwork upon which pharmaceutical companies engage in clinical trials. Most of this collective and cumulative learning process is antecedent and external to the pharmaceutical companies that commercialize the drugs.
The countless number of people involved in these learning processes do not get paid their “value to society”, in part because when they do their work, the value to society cannot be known and in part because they, like the pharmaceutical companies themselves, are contributors to a vast historical process of collective and cumulative learning in foundational, translational, and clinical research that makes drug innovation possible. When they go to the bargaining table, Medicare negotiators need to have a deep understanding–both theoretical and empirical–of these learning processes to negotiate a price that is fair in terms of the affordability of the existing drug and funding investment in the next round of drug innovation. Our INET paper, “Setting Pharmaceutical Drug Prices”, is an introduction to that perspective.
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Use 1 generic medication for high blood pressure. Cost is minimal, unless you don’t pay attention by not doing a bit of price shopping. But there are some things that seem odd about this med in Mr Free Market Land. For example, when I transferred my script from Massachusetts to Tennessee, Sam’s Club tells me if I upgrade my membership card (minimal cost) I can get this medicine no charge as in free – forever, unless further notice. Granted this is small change (about $15 per 90 tablets in Massachusetts although about twice that in Tennessee) but got an uncomfortable feeling seeing medication being used as a perk or behavior motivator or whatever. If you’re on a tight budget, you can spend a lot of time price shopping and find differences. But IMO we shouldn’t have to do that at least not for generic meds. Another feature not a bug is many insurances tell you $20 minimum co-pay for any prescription, meaning is use your insurance you pay $20 but if you pay not using your insurance you pay $15 os less. That’s not a benefit is a punishment. Will add – hope this med isn’t made in China, because I see price increases in our future as Washington turns its attention away from Ukraine, towards heating things up in Asia.
What lesson should I take away from your comment? and how does your comment relate to this post?
[Disclaimer: I take two generic low cost medicines for blood pressure. Both my medicines have inflated prices were I to purchase them over-the-counter without the aid of my crumby drug insurance … but they were able to get me a substantial price discount when I use my insurance. Of course the company that manages the insurance also owns a subsidiary business that includes large portions of the retail drug outlets in my area.]
What lesson should you take from my post? See John Beech post immediately below.
The guy who came up with insulin declined to patent so it would be free. Look it up. So pharma executive gets salaries in the many millions per year selling insulin. Expensive enough some die rationing themselves. Seems to me, this is indicative something’s wrong. How much is a fair price? Hard to say, kind of like asking high high is up? But like Justice Stewart saying about obscenity, “I know it when I see it.” I suspect we all know when we, or someone’s being screwed. And what chaps me is the system is set up this way. University researchers, typically on my dime, along with the university itself get the patent, the royalties, and can build companies to obtain great wealth. And the system plays along with pharma companies ascribing absurd costs/prices, PMBs in the middle wetting their beaks, an entire chain devoted to shearing the guy who needs the drug to ducking live!
So while I don’t know the answer, I know this, SS negotiating is a small step forward. My only question is, what took so long?
Perhaps the drug companies need the extra profits to bribe politicians and regulators into continuing the current absurd system. Also there’s all that expensive TV marketing designed to create demand for their monopolistic products. Most other countries at least forbid the latter (and have lower drug costs).
The same statements apply to the Medical Industrial Complex in general of course. Or for that matter they apply to our foreign policy where we do bad things but for good reasons (we’re nice).
Of course doctors do care about their patients and maybe drug companies even care about their customers but money taints everything. However I’m not sure our State Department much cares about our overseas victims.
Call me old school, but many of the actions taken by pharma are technically criminal offenses, things like collusion on pricing or production of generics actually carry prison firms.
Start frog-marching executives out of their offices in handcuffs.
And frog march the corporation too. If a human would get life in prison the corp should forfit all assets to the Social Security trust fund.
Not for nothing but:
Could apply to most of the publicly held companies in America, but shareholder value is the excuse for every stupid greedy and even company killing decision made by over compensated boards and C Suite managers. It needs to be killed with fire, with stockholders treated the same as every average Joe who walks into a casino. They deserve an honest “game” and no more.
The thing that makes this particularly amusing for drug companies and their excuses is that even in a captive consumer business like theirs there wouldn’t be much in dividends for those stockholders without the government, charity and private organizations funding the research that doesn’t get done in their labs. If that research weren’t there they would find themselves competing with others who have found older less protected drugs can be produced by them.
It is particularly heinous in the healthcare industry, but corporate regulation has been needed across the board, and yes that includes treating the top management as legally responsible for decisions made for the corporation. Like bankers, we should have much of the Big Pharma leadership in prison or just leaving prison.
I’m finally taking pharmaceuticals as I descend into decrepitude. Monday afternoon I took my first pill. Twice a day. It is of a class called BTK inhibitors, and targets a specific mutant gene. The retail cost is $16,192/month. I’m paying nothing between Medicare and GEHA. GEHA is great. Designed for our sainted senators and representatives and their staffs. As an everyday Federal grinder carried it along into retirement when I left DC. My doc says that almost no one pays. The only point of the ruinous price tag seems to be to scam Medicare/Medicaid and the insurers. Anyway, as they say in Maine, “So fah, so good.”
I take one 20mg Xarelto (blood thinner) once day forever until I die. Amazon price with Prime is $535 per 28 days. CVS price is $590 per 28 days. I buy it overseas and the price is $55 including shipping per 28 days. When I buy it overseas it is shipped from a pharmacy in Singapore. That pharmacy is making money off of me. The pharmacy in Singapore buys it from the manufacturer in Turkey. The manufacturer in Turkey is making money off of the pharmacy in Singapore. Again, I pay $55 per 28 days worth. Everyone overseas is making a profit. That market has spoken loud and clear. The market in the USA is corrupt, broken, and rife with kick backs and greed. For those tsking tsking me for buy a non-FDA inspected drug and putting my life at risk, I have yet to read in any non-USA media that tens of thousands of non-Americans taking Xarelto produced in Turkey are falling dead every where due to “tainted” manufacturing. Just haven’t found any evidence of that. Imagine that. As to the vaulted FDA clamping down on “tainted” manufacturers, go google about baby formula and learn about the years they knew there was a problem and did not nothing but stick their fingers in their collective behinds.
thank you for posting this coherent analysis. Not only because it justifies fair prices. It is a step in the direction of Richard Wolff’s new capitalism, one which is no longer a 20 C. Model.
Monopoly Round-Up: Lina Khan, Pharma Middlemen and “Tasty Rebates by former NC writer Matt Stoller was released about 3 days ago and explains the role of Pharmacy Benefit Managers who are being sued by the FTC and the role they play in setting drug availability and prices is a relevant addition to this discussion.
The market cannot set a price because there is no market in the classical sense. The consumer, e.g. the person who ends up with a drug inside their body, has no effective means of price discovery. Price is obfuscated by health insurance and benefit management companies. A perfect setup for a middleman to rip the consumer off.