Why is the health care industry allowed to be for-profit?

Great Debates
21

Yes, nationalizing the pharmaceutical company would go down one of two ways. One way, it gets funded about like you’d expect from government, meaning the resources researchers have to research new drugs is tightly squeezed. Drugs designed to combat a wide range of illnesses will probably not be researched at all because limited taxpayer money would force research to be restricted to medications with “life or death” implications.

In general it would mean less new medications, and even in the treatment of things the government viewed as essential I would not be surprised to see a drop off in performance.

The other way it could go down is, government becomes committed to fully funding holistic pharmaceutical research, tax rates go up by about 20%. That’s the only realistic way government could make it happen.

smiling bandit is on the money, and nothing pisses me off more than when some third world country declares the patent on a drug dead. That drug only exists because a corporation spent hundreds of millions to research it, if they don’t recoup the costs, where is the next drug going to come from? Or the one after that? Well, I’ll tell you where it’s going to come from, it’ll come from the pockets of Americans straight into the bodies of the rest of the world, because we respect patent rights and because other countries do not we unfortunately have to pay their share too. In the United States we pay so much for pharmaceuticals because if we didn’t, the only way the drug companies could recoup their expenses and still have enough to invest in high-risk research would be for massive infusions of money to start coming from Washington; which just isn’t going to happen.

Canada has a system where they will still respect patent rights but strictly regulate how much the patent holder can charge for the medication. That’s well and good; and I’ve heard Canadians argue we should try the same system–we can’t, the only reason Canadians can is because the pharmaceutical companies know the government here in America will allow them to raise prices for us to subsidize Canada’s lower prices.

22

So having established that to some degree “Greed is good” … and I believe it, I believe that the profit motive allows for creative product design and funds the research that gets done, in addition to the big payouts for company execs … is there any justification to placing some caps on the profits reaped? If so how much? Is it true that the world needs America’s consumers to pay more so Canada can price fix? Can the world realistically “demand” that Pharma makes less of a profit when the public good is great enough? How much profit is needed to encourage new research? How does research that is less likely to produce a blockbuster lifestyle drug, but a drug that is still desperately needed, get motivated? What do countries do when a Pharma has a medication that can save millions of lives, but will only price it at a point that would cripple the countries’ economies? (Even though they could still make a reasonable profit priced more affordably.)

And to clarify the discussion away from the hyperbolic extremes, we already do place some restrictions. There is a defined period in which there is patent protection, for example.

23

Those are tough questions, DSeid, under the current system for things like Canada’s program to work, yes, Americans do have to pay more. Pharmaceutical execs would otherwise possibly say, “well, the profit margins on this new ALS medication is way too small, so we’ll have to roll more money into IBS meds.”

If we engaged in a price-fixing regime like the Canadians do (the specifics of which I’m not entirely aware, maybe a Canadian poster could expand on it), it certainly would not bankrupt the pharmaceutical companies. I think it would lead them to quit producing new medications for conditions whose meds are already operating at lower profit margins, it’d create a squeeze effect. The Canadian (and other countries also) price-fixing regimes squeeze the balloon, causing it to get fatter for us Americans meaning we shoulder more of the burden; if the pharm companies couldn’t use us that way I suspect some of the “air” would get squeezed out of the balloon to compensate, meaning less research on lower profit margin drug-lines.

There’s already problems with the system. ALS is one of the most debilitating diseases around. It hits, and pretty much kills you and there’s not a damn thing medical science can do about it. To my knowledge the only ALS drugs on the market are estimated to give you around 2 extra months of life with the disease, but without any improvement in quality of life. I’m involved in ALS related charity-work so the issue is more near and dear to me. But I understand why pharmaceutical companies don’t make ALS a top priority, it’s relatively rare and it’s a tough nut to crack. Stuff like multiple sclerosis is much more common and more treatable. But the diseases like ALS get the short end of the stick in a strictly profit-based model, so the current system isn’t by any means perfect, I think more money is needed from governments and the populace in the form of charitable contributions to advance work on the less “flashy” diseases that are often times extremely debilitating (ALS often kills very quickly compared to many other terminal illnesses like HIV/AIDS for example.)

24

[QUOTE=smiling bandit]
Bing Bing Bing! Flickster gets it.

There’re huge risks in drug development; overall, their profits are not excessive given the sheer risk they take every year. One reason drug costs in the US are so high is that other countries refuse to pay for the actual cost of developing the drug.
[/QUOTE]

What countries “refuse to pay for the actual cost” of developing a drug? Why would any “Country” wants to pay a private company to develop a drug? If Merck wants to develop a drug, since when were we expecting any “countries” to pay them for it? Shouldn’t the patient, or his drug plan, pay for the drug?

People arguing for “universal healthcare” usually aren’t talking about drug research and manufacture, you realize. Universal health care generally refers to the delivery of health services, not drug research. You’re confusing two different things.

[QUOTE=Martin Hyde]
Canada has a system where they will still respect patent rights but strictly regulate how much the patent holder can charge for the medication. That’s well and good; and I’ve heard Canadians argue we should try the same system–we can’t, the only reason Canadians can is because the pharmaceutical companies know the government here in America will allow them to raise prices for us to subsidize Canada’s lower prices
[/QUOTE]

Again with this bullshit. How many times do we have to go over this? Aside from the fact that the Canadian “medicare” system and the way drug prices are determined aren’t the same things - they’re two different systems - what you’re saying is nonsense.

You cannot charge American customers more to “subsidize” Canadian (or French, or German) prices. It doesn’t make any sense that you would try to do so, and it wouldn’t work to do so. It defies common sense, it defies fundamental economics. Honestly, it’s complete ignorance. It’s Econ 101 stuff.

If Merck invents a new drug, Newdrugozan, and markets it in the United States, they will market it at whatever the ideal price is. If the ideal price for Newdrugozan in the U.S. market is $15 a pill, given the marginal cost (the cost of making, marketing and delivering the pills) and the demand for the drug, then it will be sold for $15 a pill. It does not matter what Canadians pay. It doesn’t matter if they pay $5, or $15, or $150; the U.S. customer will be charged whatever the ideal U.S. price is that will maximize Merck’s return. You cannot raise the U.S. price beyond the ideal price to “subsidize” the lower price in Canada, because you’d lose money. Or else it should have been $17 all along.

Copying my own previous post on the subject, changing the numbers to match my existing example:

"Research and development is an indirect cost. If the equilibrium price of Newdrugozan is $15, it is $15, and that is the end of the story. That price is determined solely by the demand for the drug and the supply of the drug, as well as, again, marginal (e.g. DIRECT) costs, which in the case of a drug means the physical process of mixing the chemicals and forming the pills and trucking them to a logistics company to be sent to drug stores.

It does not matter if Newdrugozan cost 100 trillion skillion dollars to invent, or if it was accidentally discovered in a scientist’s egg salad sandwich (Viagra was discovered sort by accident, while they were working on a drug to do something else.) If the market-clearing price is $15, that’s what it is. You cannot, just because you spent a lot of money inventing the drug, pretend that reality is not what it is and that the ideal price is REALLY $250. If the market says it is $15, it is $15; any deviation from that price loses you money."

Canadian drug prices are not subsidized by U.S. drug prices. The drug companies make money off their Canadian sales. As it happens they make a bit less because it’s a different market; the Canadian government acts as a monopsonistic party, increasing its bargaining power, so the market price there is different. This is actually kind of like Wal-Mart, but that’s a different story. They still make money, though. If they didn’t, THEY WOULD NOT SELL THE DRUGS IN CANADA. They make a profit, or else why would they bother to market and sell them there?

There is no “subsidy.” It’s pure, one hundred percent fantasy. If the Canadian government abandoned its drug policies and allowed the market to operate the same way, American drug prices would be completely unaffected. Why in the name of Christ would Merck lower U.S. drug prices because Canadians decided to pay more? Are you actually suggesting they’d drop their prices to BELOW the market-clearing price? That would be insane. Why would they do that?

25

RickJay, you seem to be operating under the assumption that demand is incredibly elastic, it isn’t in this case. That failure completely undermines what ever “economics” point you were trying to prove.

You’re also making the assumption that we’re looking at a free market, we aren’t. There isn’t a market price for drugs, that’s precisely my point. If there was a market price, that’s what pharmaceutical companies would have to sell them at to maximize profit, when producers get to set the price, it means they have more or less monopolistic power, which is the actual situation.

The claim that “drug companies make a profit in Canada, so of course the Patented Medicines Price Review Board’s price controls have no effect on the market for pharmaceuticals outside Canada” is ludicrous. It’s not about “making profit” it’s about what profit margin in aggregate the company wants to make for a given drug for it to have been considered worthwhile. If you make a drug that gives you a $1 profit, that doesn’t mean you’re happy. Sure, you haven’t lost anything, but the goal of people who run corporations (in theory) is to maximize wealth/profit, which means you go after the highest possible returns, you don’t focus on just making a profit in general. An exec at Merck sees it pretty clearly, the PMPRB controls prices in Canada, so sure, we’ll still sell our drugs there at the controlled price because it is a paltry profit and because if not we lose the patent in Canada (this is one of the big reasons drug companies play along with the PMPRB, generic versions of their drug flowing back into the U.S. market is competition for them long before their U.S. patent expires.)

The simple truth of the matter is, the U.S. and Canada by-and-large are buying from the same companies, the U.S. is paying more per pill because of Canadian price controls.

26

[QUOTE=Martin Hyde]

The claim that “drug companies make a profit in Canada, so of course the Patented Medicines Price Review Board’s price controls have no effect on the market for pharmaceuticals outside Canada” is ludicrous.
[/QUOTE]

Watch your use of quotation marks; I didn’t write that.

But the FACT is that drug companies do make a profit in Canada or else they wouldn’t sell there drugs here, and the fact is that it doesn’t affect American prices. I’m sorry if you don’t like the facts, but those are the facts.

That has nothing to do with how drug prices are determined. I am sure Merck would like to make a trillion dollars for every drug they produce. They can’t, because life just doesn’t work that way. You do not get to determine “we’ll make exactly Y dollars for this drug, and so if we get less in Canada, why, we’ll just raise prices in the USA.” Drug prices are set according to what they can get from the market, and that’s that. Sometimes they make as much as they were hoping, and sometimes they make less, and sometimes they make more. It may not be a particularly elastic demand function, but so what? They’re going to initially set U.S. prices at whatever level will draw the most bucks. Why would they do otherwise?

In the U.S., this mostly means whatever the market will bear. In Canada, it’s what they can negotiate with the review board (and there’s still market elements to it; believe me, drugs can be very pricey here. If I didn’t have a drug plan with my employer I’d be out a lot of bux.) They’re not connected; if negotiations with the Canadian government go worse this week than expected, the market price in the U.S. doesn’t change. Merck can’t simply decide to raise drug prices anytime they feel like it or else they’d have done it by now.

Jesus, I don’t know how much more simply it can be explained. What you are saying doesn’t make any sense.

Why would Merck give American customers an unnecessary break if Canadians paid more?

Why would Merck raise prices BEYOND the ideal market price because people in a different market paid less? How would that not cause Merck to lose money?

27

[QUOTE=RickJay]
It does not matter if Newdrugozan cost 100 trillion skillion dollars to invent, or if it was accidentally discovered in a scientist’s egg salad sandwich (Viagra was discovered sort by accident, while they were working on a drug to do something else.) If the market-clearing price is $15, that’s what it is. You cannot, just because you spent a lot of money inventing the drug, pretend that reality is not what it is and that the ideal price is REALLY $250. If the market says it is $15, it is $15; any deviation from that price loses you money."
[/QUOTE]

If true, why on earth would any pharmaceutical company make such sizable investments to develop, license and market a new drug? That’s why the drug company has patent rights for a set amount of time which allows them to recapture some of their investment $$. To pretend that you can’t charge more for a newly developed drug that has required a huge investment to produce is ludicrous.

As for the US vs Canadian pricing, I don’t have a cite but it sounds perfectly logical to me that a company would set a US rate based on the Global market. In other words, if they have to live with a set price in Canada in order to have marketing rights in that country then they may adjust the price in the US to still allow them the investment return required.

28

[QUOTE=threemae]
I work in a medical clinic. God bless every one of my coworkers, but I don’t suspect that they’d last until Friday if they were told that all of their work would be on a volunteer basis from now on this Monday.
[/QUOTE]
Non-profit doesn’t necessarily mean that people don’t get paid wages.

Hospitals use their profit mainly to maintain their facilities, buy new equipment and the like.

The money to keep medical services up to date has to come from somewhere.

29

To expand on others statements, non-profit does not mean that an organization cannot earn a return on its investments, but that such a return is not paid out to shareholders since it has none. The money will stay in house. Nor does non-profit mean everyone is a volunteer. Employees still make salaries, even competitive salaries, though granted they tend to be at the lower end of the range.

I think the heart of the dispute against for-profit health-care, hospitals, pharmaceuticals, or whatnot, is not that firms charge high prices to recoup their R&D or operating expenses, or build up a capital budget to research the next drug or to buy the latest and greatest MRI, but the additional premium these firms have to earn to please their shareholders. Its not the return on investments or return on assets, but the return on equity that bother people, especially when that ROE appears extravagant and benefits only the few, as suggested by the OP.

And paying dividends or buying back stock is a considerable expenditure. Johnson and Johnson paid $4B and Merck paid $5B in dividends last year, and spent even more buying back stock. That is money not being spent to develop the next generation of drugs or medical tech, but primarily enriches Wall Street. How much less would those firms be able to charge if they did not have to respond to those pressures? (That’s only a semi-rhetorical question. I’m trying to find a study that has addressed this point, but to no avail yet.)

These corporations have also reached such a size that I think a strong case can be made that they do not need equity shareholders. They have sufficient assets that they could probably manage themselves fairly well through either self-financing or issuing debt, which non-profits are allowed to do as well, though fairly uncommon. I am open to hear arguments why a for-profit venture would be better than a non-profit corporation or foundation, but I cannot see any myself.
Healthcare seems a better fit to me under the service motives on non-profits, instead of the profit motives of business.

[QUOTE=RTFirefly]

Which reminds me of a question I’ve been meaning to ask for awhile.

When I was growing up, back in the 1960s, hospitals were almost all owned and run by governments or nonprofits; they’d have names like Fairfax County Hospital, or Baptist General Hospital. Now it’s largely reversed itself: hospitals are mostly corporately owned, and have names like Inova Fairfax Hospital. Yet I don’t believe I’ve ever seen a newspaper or magazine article on this transition. How and why did this happen, and what have the consequences (positive and negative) been?
[/QUOTE]
I’ve noted the same trend, and I’ve been unable to find an answer either, but the cynic in me notes that not only do non-profits pay out to shareholders, they dont pay out to the government either. I could see why policy would encourage the switch, especially considering how large a portion of our economy is now based on healthcare, both goods and services.

30

[QUOTE=Agnostic Pagan]
T
Its not the return on investments or return on assets, but the return on equity that bother people, especially when that ROE appears extravagant and benefits only the few, as suggested by the OP.

[/QUOTE]

I’m not just a drug developer, but a shareholder in a number of small companies. Even though I understand the science better than 99% of investors, the industry is still nearly impossible to predict. I’m taking huge financial risks being a shareholder in these companies that are more than likely to fail. I do it because if they succeed, the reward will be considerable. If the shareholders don’t have that possibility, why would they invest in such a risky field? Without the shareholders initial equity, the smaller companies have no chance, and without the return on the investment, there are no shareholders.

What bothers me is people sitting on the sidelines, risking nothing, but wanting to be rewarded from the exceedingly few blockbusters that actually succeed. (not talking about you, just in general!)

31

**Rickjay’s ** trying to apply the economic principles which have nothing to do with the situation. It ain’t a free economy - most countries can and do put the squeeze (formally or informally) on drug suppliers. They’ll pay just enough for a profit - but only on the drug manufacturing. Never on the drug development. And that’s just stupid, because they don’t want to leave enough cash on the table for the next drug; bureaucrats aren’t thinking abut that because it’s not their job. Their job is just to squeeze, not to ensure for the future.

If everyone paid for drug development, it wouldn’t add much to anyone’s drug costs. But everyone wants to free ride… except the U. S. of A. I agree that it should be up to consumers and insurance as to how much gets paid, but it ain’t. Consumers and insurance have ample reasons to try and cover drug development - more drugs mean you can charge more, offer better terms, attract more customers or on the consumer side live longer and have better quality of life. But it ain’t so in most of the world.

Hence the drug companies bust up their pricing into several categories. They often provide cheaper drugs (even at or below cost) to extremely poor countries. Developed but nationalized countries like Britain and France get different prices. The United States gets another. The US is also the only one paying for new drug development, and without us it simply wouldn’t be happening. On a related note, almost all drug development in the world happens here; virtually no new medical techniques emerge from other nations.

The reason this thing with Brazil (and it’s not the first time Brazil has done this, either) keeps popping up is that, if I understand correctly (and I may not, but I’m trying to comprehend the dispute), the drug companies are basically saying, “Look, you’ve got the money. If you want our product, pay for it like a deecnt country.” And Brazil is trying to “stand up to the heartless corporation”. And incidentally save itself a lot of money. Hey, what do they care if the next generation isn’t so well off?

32

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neccessities but of their advantages.”

Adam Smith

There doesn’t have to be ANY drug companies at all. They only exist to develop drugs because it is profitable for them to do so.

33

But correct me if I’m wrong don’t most drug breakthroughs come from research funded by government anyway? I don’t know about in America but here in the UK the government puts a great deal of Public money into independent research via universitys, and that often results in research and papers used for the benefit of the pharmecutical industry.

So if the research is publicly funded doesn’t the public play a role in saying what price should be set?

Here’s a piece of information picked up from the /. thread -

And I think most of you are misunderstanding RickJay’s point, think of it like this, if the Company has to raise it’s prices in America due to Canadian prices then the drug must have been selling below its optimum price point in the US- why the hell would any organisation do that? Look at my above example, it doesn’t matter what a drug cost to research as the companies will charge whatever makes them the most profit

(I’m sure there’s some graph demonstrating a standard price vs demand correlation)

34

[QUOTE=Sri Theo]
But correct me if I’m wrong don’t most drug breakthroughs come from research funded by government anyway?
[/quote]

Not the case in the US

That’s what the Canadians require in order to allow their product to be marketed in their country. As for the US pricing, there’s multiple considerations.
If the drug is new, in demand and the firm has patent protection - they are allowed to price as they see fit as there is no market competition. This is the time period that the firm tries to recoup the majority of their investment $$ and provide funding for additional research.

After the patent protection expires then the price is more regulated by competitive pressure (generic).

35

Money for drug development is a confusing issue, and it’s not made any clearer because a number of dishonest “facts” which get tossed about. It’s true governments do put a lot of money into “drug development.” However, first off, government dollars (or pounds or what-have-you) don’t do a lot of direct good, and governments rarely put in money to actually get drugs to market. That’s assuming the money gets any real use anyway.

Second, I think most of it goes to relatively theoretical studies. Essentially, people are looking at huge education and university outlays, some of which goes to pharmaceutical research. They do important work, but it rarely results in direct benefits for you and me. That’s not to denigrate it, but it betrays wishful thinking for goverment intervention.

36

[QUOTE=Kneepants Erasmus, the Humanist]
Do you really think all humans are so selfish?
[/QUOTE]
All? No, not all.

But enough.

Hence the Adam Smith quote above.

37

[QUOTE=Kneepants Erasmus, the Humanist]
I think that this is a very cynical viewpoint. Do you really think all humans are so selfish?
[/QUOTE]

Is it selfish to pay the rent and buy groceries? People don’t generally work for free because…well..nothing is free. Everything you see comes at the expense of someone elses labor.

38

In fact, demand for most new drugs is pretty elastic; almost all new drugs don’t do anything radically new, they just do it (theoretically) with slightly greater efficacy or slightly fewer side effect. If the price is set too high, doctors and patients will just make do with one of the many similar drugs already on the market. So RickJay is substantially correct in saying that the market price in one country bears little direct relation to the price in another country.

I would argue that the frantic profit-driven efforts of drug companies to develop new drugs actually does much less good for humanity than they would like you to believe, and that we would be much better off if a substantial part of the resources they devote to these efforts were instead devoted to getting the drugs we already have into the hands of patients who need but can’t afford them. It amuses me that many of the people who cite the allegedly selfish and greedy character of “human nature” as a rationale for free-market policies seem to get so morally incensed at the failure of, for example, the Brazilian government to tell its people that they must continue suffering from curable diseases in order to give unborn generations in other countries a possible shot at being cured from other diseases!

The question of whether we should have universal health care (to which the answer is YES) is only tangentially related to the issue of funding medical research; but it is worth noting that a great deal of such research is already government-funded through the National Institutes for Health, with Sri Theo 's AZT example being one of the biggest success stories. smiling bandit appears to feel that this research “doesn’t count”, for some reason which I am not clear on; perhaps it could be explained in more detail, with maybe some cites?

WRT to the assertion that “virtually no new medical techniques emerge from other nations”, well, let’s see: Canada came up with laparoscopic surgery and pancreatic islet cell transplants, and the UK invented the CT scan. I think these count as significant scientific advances made in countries with non-profit-based medical systems.

39

[QUOTE=Thing Fish]
The question of whether we should have universal health care (to which the answer is YES)
[/QUOTE]

I’ll agree that an affordable national health insurance should be available but, IMHO, universal health care is not the answer.

40

[QUOTE=Fiveyearlurker]
I’m not just a drug developer, but a shareholder in a number of small companies. Even though I understand the science better than 99% of investors, the industry is still nearly impossible to predict. I’m taking huge financial risks being a shareholder in these companies that are more than likely to fail. I do it because if they succeed, the reward will be considerable. If the shareholders don’t have that possibility, why would they invest in such a risky field? Without the shareholders initial equity, the smaller companies have no chance, and without the return on the investment, there are no shareholders.

[/QUOTE]
To stick with medical research, since that seems to be primary focus, by going to a non-profit model, shareholders would not be able to invest in hopes of striking oil, or Viagra. Those dollars would find other investments. I understand your point that venture financing is necessary to enable small firms to do initial research and operations, but private equity is not the only method and I dont think that it is the best method.

Two alternatives are carrying debt, but banks would probably only lend to ramp up production once the product is actually developed and a reliable cash flow can be predicted, or government or foundation-sponsored grants or funds for the initial research. Several universities have small-business incubators affiliated with them to bridge the gap between breakthrough and production.

The thought may be anathema to several free-marketers on the board, but I dont think that medical research should be left to the control of market forces. Science, not profit, should drive the research, and social and patient needs should drive the services. I trust the NIH more than Goldman Sachs on which new drug or treatment will be the most effective and/or efficient. I’ll always trust the doctor over the HMO.

Yet because advances in health care ultimately benefit everyone, directly or indirectly (healthier workforce equals greater productivity, blah, blah…) I think it is one of those areas that government, as the voice and hand of society, has a proper place in directing/encouraging what those advances might be, and using taxpayers money helps ensure that [most] everyone helps pay for those benefits.

[QUOTE=smiling bandit]
Money for drug development is a confusing issue, and it’s not made any clearer because a number of dishonest “facts” which get tossed about. It’s true governments do put a lot of money into “drug development.” However, first off, government dollars (or pounds or what-have-you) don’t do a lot of direct good, and governments rarely put in money to actually get drugs to market. That’s assuming the money gets any real use anyway.
Second, I think most of it goes to relatively theoretical studies. Essentially, people are looking at huge education and university outlays, some of which goes to pharmaceutical research. They do important work, but it rarely results in direct benefits for you and me. That’s not to denigrate it, but it betrays wishful thinking for goverment intervention.
[/QUOTE]

Do you have any cites about how much money is spent by whom? And it seems that almost all government or university research will aways be primarily theoretical since as soon as anything practical is discovered from that research it leaves the lab along with its discovers who then form a company to further develop and exploit their findings. Government focuses on the R, not so much the D. I would be amazed to see any market-ready product come straight out of a laboratory, public or private.
Slight hijack - “It is not from the benevolence of the butcher, the brewer, or the baker,…”

Its a nice bit of rhetoric, but I’ve always thought that he contradicted himself by publishing the Wealth of Nations. What reason did he have to do so, but benevolence? And why did one decide to be a butcher rather than a brewer or baker?

Market forces will push all profits toward the same equilibrium point. So why insist that money be the primary consideration?