What good are whizzy new drugs if the world can't afford them?
economist.comThe reality is that high drug prices are what incentivize companies to go through the process of creating/designing/trialing them. They will get cheaper with time as the techniques become commodities.
The US should probably negotiate 'most favored nation' status so they get the lowest price offered among the OECD (maybe adjusted by national income per capita) such that there is less global free ridership - but even that probably won't do that much to shift the cost burden.
We should also invest in lowering the costs of drug design & trialing so we can lower the risk premium and startup cost.
Not according to the literature.
Lee Mendoza, R. (2019). Incentives and disincentives to drug innovation: evidence from recent literature. Journal of medical economics, 22(8), 713-721.
> While high and continuously rising drug prices are typically claimed as the price of scientific innovation, the reviewed literature finds that this link only partially accounts for the problem. High risk aversion owing to information asymmetries and vastly intractable uncertainties is prevalent among innovating firms. Predatory business models abound. Reverse predatory strategies also exist to maintain product exclusivity without much added clinical benefits, and to constrain generic competition. CEO compensation practices contribute to rising drug prices.
Feldman, R. (2020). Perverse incentives: why everyone prefers high drug prices-except for those who pay the bills. Harv. J. on Legis., 57, 303.
> Quite simply, incentives percolating throughout the prescription drug market push players toward higher prices. At the center lies the highly secretive and concentrated Pharmacy Benefit Manager (PBM) industry middle players who negotiate between drug companies and health insurers by arranging for rebates and establishing coverage levels for patients.
> Thus, one should not be surprised to see competitive distortions and sub-optimal outcomes.
> presents a full picture of incentive structures in which higher-priced drugs receive favorable treatment, and patients are channeled towards more expensive medicines.
> In exchange for financial incentives structured in different ways to appeal to hospitals, insurers, doctors, and even patient advocacy groups, drug companies ensure that lower-priced substitutes cannot gain a foothold.
The literature is divided. I will point out most of the people you are sharing are not econometricists by trade. And these articles are mostly just saying that a lot of the cost is due to middlemen.
Here is an extremely recent study by one of the most famous econometricists out there:
I have heard this argument before but it's interesting to see where the money for R&D is actually spent.
It's not on these kind of diseases, this kind of work is usually done with public money, grants.
Money in big pharma is usually spent in researching weight loss and alternative drugs for common diseases. After all, the return of investment on these types of drugs is much higher.
For a big company to make a drug that costs 1 million dollars but only 1000 people in the world have it, and from those only perhaps 100 live in countries that can afford the drug might be a business opportunity but it's honestly not a huge profit which is why they will turn to public funding to research these.
Imo, if you use public money then the products should be free of intellectual property. Public money, public goods.
> and alternative drugs for common diseases. After all, the return of investment on these types of drugs is much higher.
This isn't just some greedy behavior. Treating common diseases is how you reduce discomfort/misery the most, in aggregate. Aspirin for 100 million people who are 1.5 on the pain scale is more effective than some $50,000/pill analgesic for that one guy who happens to be at 11.
Aspirin already exists and improvements to it are marginal.
This kind of extreme utilitarian approach seems flawed when you view healthcare as a human right. Reducing pain from 1.5 to 1.4 to millions of people is not really as valuable as saving one person's life. That's my opinion at least.
Of course, developing a drug that could save thousands of lives or one life is a real problem that governments and pharmaceutical companies need to face. And I would agree that in this case a utilitarian view is helpful.
But on the other hand, companies are not making these decisions based on ethical frameworks. They're making them on a basis of shareholder profit maximization. When you talk about "reducing the pain" do you actually care about reducing pain or is that simply a positive externality to the profits you'll make.
> When you talk about "reducing the pain" do you actually care about reducing pain or is that simply a positive externality to the profits you'll make.
people will pay a lot of money to save their life. to the extent that people cannot afford to save their life, government should subsidize.
> This kind of extreme utilitarian approach seems flawed when you view healthcare as a human right.
Of course it seems flawed when you're delusional and view absurdities as human rights. Do you have a right to rollercoaster rides? Do you have a right to jazz music? What about a right to gold jewelry? If you have these rights, then all sorts of other sensible principles seem flawed.
> But on the other hand, companies are not making these decisions based on ethical frameworks.
Why would that be necessary? Why do you think that whatever outcome you want actually requires making decisions in that way? And how could you ever guarantee that the decisions were made "based on ethical frameworks" even if law mandated it?
>Imo, if you use public money then the products should be free of intellectual property. Public money, public goods.
How much % of research today is publicly funded but privately patented? The principle of "public money, public goods" sounds good, until you you start mixing public and private funding. If you make a drug that's based on public research (that costs say, $1B), and then spend another $1B bringing that to market, should anyone be able piggy back off your work and compete against you? Why would anyone want to be the first company to do that? This is basically the exact problem that intellectual property laws are trying to solve.
Your example makes the public money side sound far too good because I promise you the government is not spending even close to $1b on making a single drug. that's like 1/4 of what we spent on all covid research and that was unprecedented.
I don't think that's true. Even a cursory search turns up, as the first response, this:
NIH has received almost $4.9 billion to date to fund important COVID-19 research on diagnostic tests, vaccines, and treatments. More than $940 million came from the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, with supplemental funding coming from the U.S. Congress .
Edit: I guess that you could argue that it wasn't all for a single drug
You're right - 1/5 more so than 1/4. And yes, it wasn't all for a single drug at all.
I misread your post as meaning there was not more than approximately 250 million spent. Sorry, my mistake.
Covid was different because of the urgency. A nation which gets vaccine first could easily recoup much more than $5B when the rest of the world is closed.
That is bullshit, public spending is really massive here, and this study just looks at investments made by NIH not accounting other governments:
> In this cross-sectional study of 356 drugs approved by the US Food and Drug Administration from 2010 to 2019, the NIH spent $1.44 billion per approval on basic or applied research for products with novel targets or $599 million per approval considering applications of basic research to multiple products. Spending from the NIH was not less than industry spending, with full costs of these investments calculated with comparable accounting.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10148199/
The industry might spend more overall, but if you look at typical drugs they are typically publicly funded.
Edit: I think the main point people miss is all the research done by universities that is government funded. MRNA vaccines were made possible by decades of university research based on public funding, the private corporations just came in and did the easy part at the end. Novel medicines are mostly based on such research and hence mostly publicly funded, we would continue to make such progress regardless of private investments.
Interesting, I agree that study seems at first glance to contradict what I am saying. Will look into it further.
This includes amortized spending for failed drugs I think, but so does pharma spending so seems like a fair comparison.
I agree on the first part, hard disagree on the second part.
Publicly funded research part is on the characterization of the disease and the mechanisms, not the actual design of the drugs themselves. A lot more intellectual effort goes into the actual development of the compound that can safely treat the patients.
> It's not on these kind of diseases,
I think we should publicly fund more drug development, but it is simply false that most drug development money is from government. I'm not sure which 'these kind' of diseases you are referring to.
> They will get cheaper with time as the techniques become commodities.
Absolutely not. Take mebendazole, for instance. It's generic, it's on the WHO's list of most-essential medicines, but in the US there is only a single manufacturer (Janssen/Johnson & Johnson) who uses their monopoly to charge an outrageous $350 per tablet. In every other nation, the price per tablet ranges from $0.10 to $10.00.
which is why we should have most favored nation status. for most drugs, it would probably raise prices globally rather than significantly lower them in the US.
given tropical diseases are so rare in the US though, there might not be enough liquidity to encourage good pricing
High drug prices also incentivize companies who don’t do R&D themselves to corner the market on existing drugs and raise prices.
As for “free ridership”, the US only has so much military and economic power to compel the rest of the world to give them money because THEY own certain molecules and not anybody else. It is actually totally absurd to think the US can unilaterally set prices because of a self-inflicted victim complex. If the US wants less free riding it should spend less on research which is fundamentally impossible to profit from without mass scale coercion, or maybe should kick off some cooperative research funding agreements.
The TPP shakedown meant to force the global poor to pay tribute to US pharma in the guise of a trade agreement went down in flames and it went well below actually expecting poorer countries than the US to pay more for drugs - which is a bad pricing strategy anyways driven by envy since you will not achieve optimal profits if you price people out.
> High drug prices also incentivize companies who don’t do R&D themselves to corner the market on existing drugs and raise prices.
High drug prices do not encourage cornering the market on drugs, for obvious reasons?
> As for “free ridership”, the US only has so much military and economic power to compel the rest of the world to give them money because THEY own certain molecules and not anybody else. It is actually totally absurd to think the US can unilaterally set prices because of a self-inflicted victim complex.
Most developed countries have sufficient rule of law that they won't sell a drug if the creator refuses to sell it in the country. If that can't be enforced, that's too bad - as it will leave us all worse off in the long-run.
How does high drug price incentize to increase the price further, at least any more than low drug price would do.
And US doesn't compel rest of the world to give money in fact it's the opposite. Almost all pharmaceutical company in the world would die if US refuses to increase their price like the rest of the world.
> They will get cheaper with time as the techniques become commodities.
Except the cost of many drugs continues to go up, even as they're commercially available and R&D has been recouped (I also realize that R&D may be a bucket across multiple drugs, not just a 1:1 correlation, but nonetheless).
> We should also invest in lowering the costs of drug design & trialing so we can lower the risk premium and startup cost.
We already lower the costs of a lot of drug design by doing (some of) it at public universities.
> Except the cost of many drugs continues to go up, even as they're commercially available and R&D has been recouped
Yes, it is a bucket. I would like your examples though.
> We already lower the costs of a lot of drug design by doing (some of) it at public universities.
Yes, we should do this more. Public funding is very rarely sufficient to go through the whole development -> market process.
>Except the cost of many drugs continues to go up, even as they're commercially available and R&D has been recouped
A successful drug doesn't have to recoup its own R&D costs, it also has to recoup the costs of all the drugs that failed to make it to approval. It's not any different than VC investing. Just because one company in a portfolio returned 10x ROI, doesn't mean you can be like "alright guys, you made back all your money, now turn yourself into a non-profit".
There is a perverse incentive by the drug companies to encourage more expensive regulation, both to keep competitors out but also to justify their higher prices. Efficient markets drives prices down to the point the participants end up only making average returns on investments, regulation is one of those tricks that can help reliably maintain above average returns. Like the children's fable; 'please don't throw me into the briar patch'.
As I’ve said elsewhere, the majority of the cost of developing a drug is from clinical trials, to make sure that the drug is safe and effective for human consumption. Unless we commoditize the medical services in US, this cost isn’t coming down. In fact, it’s going up.
Asking for lower price is simply asking for fewer whizzy new drugs. If our medical system price goes down, so will drug price.
We could just have nationalized pharma and direct research and production rationally at lower prices. The scientists and research directions are managed for the most part by the state and organic energy already, pharma just does marketing and purchasing trials. Anyone with money (i.e. the state) could do that, probably for less.
You would kill, at minimum, hundreds of thousands of people with your hubris.
I encourage you to read some econmetrics papers on governmental success rates as 'picking winners.' They are terrible allocators and would be more likely to try to build a pharma R&D center in Michigan and Wisconsin for general election concerns.
Are you kidding me? The way the private sector "picks winners" more consistently is by tweaking existing molecules or creating two-in-one pills for patent protection purposes. In other words, by avoiding real work.
If it's really easy that "anyone" can do it, wouldn't you expect investors to flood in and drive the cost of capital to near-zero?
Not really, it's an expensive and risky undertaking so only very wealthy investors or the state can afford this. That doesn't mean that the investors are a value add other than providing money. Furthermore, many publicly useful innovations will not be able to capture a positive return despite being beneficial for society as a whole, so private money is actually poison.
Innovation and tech progress drive prices down over time.
Nathan Rothschild, richest man in the world, died from an ailment that could be cured basically for free today using penicillin. But when penicillin came out, it was an expensive and "whizzy" new drug.
Why has insulin prices gone up then?
greed. the patent was donated to the public domain back when synthisis was discoverd but since the manufacturers have taken up tweaking it patenting that tweak then charging more and more. other countries dont have this problem with insulin. thats why you hear about people going to Canada and Mexico to get meds cheap.
If the old insulin works just as well, and is basically free, why is everyone paying through the nose for the newly patented stuff?
"old insulin" pre-~1980 was made from grinding up animal (cow, pig) pancreas and extracting a tiny amount of pure insulin through a chemical extraction process. Wikipedia posts a ratio of 2 tons of animal matter to 8 oz of insulin. It was "easy" but didn't scale up very well.
because they dont make it anymore
They do, you can still buy it for cheap. It's not the same though, the new stuff works much faster.
> because they don’t make it anymore
They do, you can buy it at Walmart cheaply.
Nobody has used that type of insulin for decades.
Insulin is not the same insulin that was first created - they have modified it with improvements to make the metabolic process much smoother.
That's cool. So you can still buy the cheaper original formulation?
yes, i believe it is like $25 at walmart. even the older synthetics are similarly priced if you don't have a prescription
Yes, you can buy a months supply for 30$ at Walmart
Because it's not just plain insulin. Insulin, for the miracle drug that it is, doesn't work for everyone equally. Depending on personal dietary habits, unique pharmacokinetic responses, how far diabetes has progressed... sometimes it lowers blood glucose too quickly or for too long or too short a time. So they've developed a hundred different formulations, and doctors basically just keep trying new ones until the patient gets the results they're both after. These new formulations cost more than plain insulin. They're almost all patentable and no generics are available. Wouldn't be shocked if old-style plain insulin hasn't (more or less) just followed inflation.
I think that’s a function of consumers switching to newer variants and injectors. Basic insulin in a vial retails for like 2 Cents a unit.
Has it? Keep in mind that there's always been constant inflation, and that people keep earning more money per hour worked even after inflation, and that products tend to get better - even insulin is now better than before.
Why smartphone prices have gone up? Or GPU prices...
With insulin it is not same, but new better or changed product. Similar insulin to past is not that highly priced.
Cos market consolidation and collusion is a more powerful force than technological progress.
Which insulin?
The ones descended from Banting, Best, and MacLeod's original invention
You can get human insulin from Walmart for 25 a vial without a prescription.
Insulin analogs are most prescribed and subject to pricing issues. Particularly important to those with insulin resistance.
Nobody has used those for years. New engineered insulins like Novolog have been going down in price for years. They can make tons of it now.
It hasn't.
Oh, the depth of the riches and wisdom and knowledge of the Market! How unsearchable are His judgments and decisions and how unfathomable and untraceable are His ways!
Greed. Late-stage capitalism. Private Equity.
Pick one - heck, pick any of the three - or all of them at the same time.
It didn't in the most of the world. It did only in the USA cause america can't into free market
I don’t have a problem when drugs for some obscure rare disease have an astronomical price tag associated with it. The problem starts when the cost of developing a cure for them is used as an excuse to charge $200 for a bag of saline. We have the best care in the world, but for when things go terribly wrong. And most people can barely afford it. Meanwhile, the primary care and basic affordable care is lacking.
I just paid $5.3k in the US for four 350mg doses of Albendazole (antiparasitic). This medication is something like $2 or less anywhere else in the world. This is not simply a problem with new drugs, but lack of pricing regulations from the federal government enabling pharma companies to fleece patients and insurance providers.
The U.S. subsidizes the rest of the world.
and pharmaceutical company shareholders look at the operating margins of these companies
Or just allow imports.
"Never have the limitations of existing insurance and payment models been more evident. "
Is the limitation really the payment model?
They're having trouble keeping up with demand, even at the current high prices.
It appears that the innovation has to occur at scaling the manufacturing.
Maybe pharmaceutical companies should dial back their return expectations.
More people need to be aware of how the drug development costs are distributed. It’s the clinical trials, not R&D, which contributes to astronomical cost, and that price is emphatically NOT set by the pharmaceutical companies that the public loves to point their fingers at.
You can be emphatic all you want but I refuse to believe that pharma has no say in pricing. Ludicrous.
It’s a simple math of risk vs reward. Let me explain before dismissing my argument.
Do you know why there are so many “Big Pharma”? It has to be big, because most of the smaller ones simply can’t survive for long. Developing drug is a difficult process. Whopping 90% of compounds fail during the three phase clinical trial period, $40k per patient in the trial, hundreds of millions of dollars per trial.
Every failed trial is a signal for career change for people who develops drugs. You think people will invest in such risky business without expecting a big reward? Asking for low drug price without lowering the clinical trial cost is assuming drugmakers can print money. Unfortunately biology doesn’t work like that.
A lot of us who develop drug are doing it because we believe this is a meaningful thing we can do in the world. They are just hidden behind investors like Shkrelli, who isn’t even anywhere near the actual people who make the drug. But we do need the money to develop the drug. A lot of it. I hope you understand.
The real solution is to lower the cost of the trial. And I maintain that the drug company isn’t in control of this.
the simple math is these companies spend less than 20% of their revenue on drug development and have operating margins over 40% so prices don't need to be as high as they are
The math you bring out is oversimplified.
You need to take into account of the fact that patent clock starts ticking as soon as you file it, whether the drug gets approved by the FDA or not. The drug development process itself eats away that exclusivity at about 12 years on average, so that 40% needs to account for the time when you don’t get another drug approved (remember the 90% failure rate).
Drug business is EXTREMELY hard, and investors aren’t running a charity. There needs to be high profit margin to motivate people who fund the discovery and development process for new drugs to come out.
As I keep saying, once we bring down the cost of clinical trial (which is totally artificial, and not under the influence of pharma), you will bring down the risk and cost of drug.
Again, you are pointing the finger at the effect of high medical cost rather than the cause. Ask yourself: why are doctors in US paid 3x the amount compared to UK? Do they raise price because of the drugs? No.
In public capital markets, this is equivalent to saying 'maybe we should devote less money to life-saving R&D'
What about the Martin Shkreli incident? How does that get explained by your general broad thesis statement - 'maybe we should devote less money to life-saving R&D'?
Economics describes human behavior in the aggregate.
If the expectations for returns on pharma become substantially lower, less money will be invested in pharma and they will have less money to invest in R&D.
I don't think Martin Shkreli is a challenge to that thesis.
The Martin Shkreli challenge is that its actually not R&D that money is being deployed its that many people (MS being one example) have found ways to capture consumer surplus in a quasi monopoly environment and then extract maximum prices to a group that has an inelastic demand.
Nothing to do with deploying more R&D in this case.
In terms of expectations on returns of your statement - I would be curious to see the case that increased expectations on returns correlates with positive outcomes. Sure more money in, but that does not equate to better meaningful and better results out.
The Martin Shkreli example is perfect for you because it shows someone raising drugs but we don't have the timeframe to see someone quickly ramping up cheaper generic production because of how quickly he was jailed. His company went bankrupt due to generic competition.
> Sure more money in, but that does not equate to better meaningful and better results out.
I believe that spending more on R&D will cause more drugs to be developed. If you disagree, we can agree to disagree - I'm not sure it would be a productive conversation.
You miss a fundamental difference.
"I believe that spending more on R&D will cause more drugs to be developed."
More != better.
...partially due to the fact that nobody else can be bothered to fund it. Which is the problem with public capital markets; unless someone forces them to research, say, seatbelts and airbags, those things become an ignored liability.
> partially due to the fact that nobody else can be bothered to fund it
I'm not even sure who the 'somebody else' even is. Public capital markets are how we direct money towards promising things that people want.
Public capital markets are also how we avoid improving things to increase margins. Especially in a modern market with shareholders and administration involved, there's little incentive to improve things or even make them human-safe without regulation. It's why stuff like the FDA exists.
Markets have inefficiencies and reflect collective human irrationality (such as underestimating the likelihood you will be in a fatal car crash). But it is trending better - not especially in a modern market. The stuff the FDA prevented when it was first created is much worse than what it has to deal with today because of better information dissemination and a broadly educated population.
I'm not sure who else would be funding pharma research if not people who are giving their money willingly.
> I'm not sure who else would be funding pharma research if not people who are giving their money willingly.
Hmm... yeah. Shame, there's just... no other way.
Say, how often do you travel abroad?
I travel abroad frequently and am an EU citizen. Most pharma research is not funded by the government, in Europe or the US. The EU free rides off of American drug R&D, this is well-studied.
No need to be snarky and sarcastic just because you are having trouble explaining your point.
Then scale back your ROI expectations on your 401K.
Also maybe give up some of your income expectations. After all if companies have to pay less for their workforce they can charge less...
You know what's in my portfolio?
They are owned by and have return expectation set by shareholders
Couldn't you write this about almost any technological innovation?
Traditionally, avant garde tech is very expensive and available in limited quantities, then prices come down and things become more broadly affordable.
Every drug was a whizzy new drug at some point. Most of them are now common and affordable. The people who the drug will help cheaply in 20 years will benefit greatly.
Works where archive.ph is blocked:
https://beta.economist.com/by-invitation/2024/06/14/what-goo...
Is there an example of a drug that hasn't gotten cheaper over time?
"The world" !== USA
As long as theres a bilionaire who can, who gives a shit about the world
“financial innovation” is a nice way to say “be less greedy”