Well, if you would care to debate your opinion in more detail, we have a discussion going on in this thread .
Economic principles always have to do with EVERY situation. We’re talking about prices and profits here.
Nobody who buys a drug pays for “Drug manufacturing.” Nobody who buys a drug pays for “drug development.” They pay for the drug. Nothing else.
NOBODY pays for the development of the drug except the company that develops the drug. The customer doesn’t pay for the development of the drug. That’s ridiculous to even suggest. The customer pays for the drug, full stop. When I pay $40 for a drug, I’m not allocating $13 to R&D and $27 to the pill itself. I’m paying $40 for the drug. Where the drug company choose to put that $40 isn’t my call or my concern.
I think you need to reexamine the concepts of “sunk costs,” and direct versus indirect costs, and how costs are different from prices.
That’s absurd. If it wasn’t up to consumers and insurers what to pay, all drugs would cost a billion dollars. You seem to have this impression that market forces don’t apply to monopolies, or don’t apply when government intervention is involved. Market forces ALWAYS apply.
Wrong again.
ANYONE who buys the drug pays for drug development. If the drug company makes money on the sale, then of course some of that money is being put into development. Where do you think those profits go? They don’t divvy them up and say “Okay, profits from Italy go to building maintenance, profits from Brazil go to eyewear benefits…”
What you’re describing is price discrimination. Any rational compnay (this is, again, the most basic economics) will, wherever possible, charge higher prices to customers who are willing to pay more. For structural reasons, Americans will pay more, so they charge them more. Canadians pay less, so they charge less. They make some profit either way, of course, and some of the profit from both markets will presumably go to research. Wat do you think they do with the profits they make in Canada? Hide it under a mattress?
Customers banding together to get lower prices is common in the marketplace; the insurance industry has a lot of that. Actually, Canada’s approach is in many ways the same as the way Wal-Mart deals with its suppliers. Because Wal-Mart represents an extremely large customer base, and negotiates as a single unit, it forces suppliers to lower their prices to sell to Wal-Mart. That doesn’t mean suppliers can’t come up with new products. It’s just part of the market.
It’s the job of the Brazilian government to see to the health of its people. They have made the fairly reasonable decision that saving Brazilians from fatal diseases today sometimes takes precedence over saving them from other conditions tomorrow (and that’s assuming such practices reduce innovation, which isn’t necessarily a proven fact.) I see nothing wrong with their stance. If Merck can’t make money on sales to Brazil, don’t sell the drug there. That’s capitalism. Part of running a business is dealing with the fact that people will try to get your product for the lowest possible price. They’ve been doing it for thousands of years and we still seem to have had lots of innovation.
First shall we start with the premise that a given part of the health care industry makes too much money?
What is too much? How do we define gouging or other such terms to determine if our health care practioners are truly lining their pockets with our health problems?
For fun and procrastination, I decided to grab the profit margin of some healthcare firms and compare it to some other well known operations:
Healthcare:
Allergan: 10.87% - Symbol Lookup from Yahoo Finance
Wellpoint: 5.41% - 1768673 (WLP) Stock Price, News, Quote & History - Yahoo Finance
Lifepoint Hospitals: 5.99% - LifePoint Health, Inc. (LPNT) Stock Price, News, Quote & History - Yahoo Finance
Cardinal Health: 1.54% - Cardinal Health, Inc. (CAH) Valuation Measures & Financial Statistics
Global Evil Symbols of American Capitalistic Hegemony:
Starbucks: 7.25% - Starbucks Corporation (SBUX) Valuation Measures & Financial Statistics
Exxon: 11.65% - Exxon Mobil Corporation (XOM) Valuation Measures & Financial Statistics
Wal Mart: 3.24% - Walmart Inc. (WMT) Valuation Measures & Financial Statistics
Yum Brands: 8.62% - Yum! Brands, Inc. (YUM) Valuation Measures & Financial Statistics
I am not seeing such massive profit taking on the part of the health care firms. Now, this is a very unscientific list - I went with the first stocks to come to mind, I admit. However, I am not seeing anything truly outrageous here.
If you guarantee everyone free or inexpensive health care you are, in effect, conscripting millions of doctors, nurses, etc. and telling them that they must work and they must do so at a low wage.
Doesn’t sound moral or efficient to me.
http://biotech.about.com/
This article points out drugs created in Iceland, China etal. In America, University Labs start most of the drug research. When it is proven viable the drug companies get to take it over.
I saw a survey recently that showed that on average employees in non-profit healthcare organizations earn more than those in for-profit organizations.
I’ve worked in academic research and in biomedical. University labs don’t “start most of the drug research” unless you’re willing to say that university labs start most of the research into television set design by better understanding how electrons work. If you put drug research in the hands of academic research you will have exactly zero new drugs developed in the next decade.
Don’t put university labs up on some pedestal because they’re not for profit. They are petty places where the rewards are having the brightest plumage when you walk into a room rather than profit.
(I had really, really bad academic lab experiences. But, nearly all of my graduate school compatriots did as well.)
While I hope to get a post up within a day or so with more points, here a short one: Yes, universities do a lot of work. But it’s far-off theoretical research. Useful in the long run, but you’re not going to see anything from it directly. It’s of the nature “XX seems to have some effects related to YY, which may mean ZZ.” It’s good for what it does, but you can’t say it’s going to deliver results any more than saying that we ought to scrap Boeing and just have the Engineering department build all our jet airplanes from now on.
Hrm? Not the normal consumer market forces. Health care spending per capita doesn’t drop at the same rate as other spending in recessions, nor does it increase in the good times at the same rate. People will put off buying that new car or even paying the electric bill, but they’ll still fork over cash for that life saving medication.
In addition, the consumers aren’t the users in the case of most health care expenses. So you have to include a model where expenses are spread about. Do you really think that the hospital is charging you $10 for an ibuprofin because of simple market forces and purely to pay for that capsule?
Finally, are great amount of university research that is used for new developments in healthcare is paid for…by grants from drug companies and private individuals. I’ve seen some nasty infighting to get that cash. Yowzers!
What I’ve learned seems to be that Universities are often the entities discovering or synthesizing a new drug molecule and perhaps doing some of the initial research into it’s pharmacology and potential therapeutic benefits. However, beyond that, the drug companies must buy the rights from the discoverer/university, pay the related FDA fees for an Investigational drug application, pay for all Phase I-III clinical trials (none of which guarantee that one can even market the drug yet), then pay for the costs associated with a NDA (which still doesn’t guarantee you can market the drug). Only after the NDA is approved (not a sure bet) is the Pharma company able to market and sell the drug. Meanwhile, drug patent laws start from the moment the drug itself is discovered and patented, not from when the NDA is approved, so the 17-20 years of patent protection may actually only result in 5-15 years of time where the drug can be exclusively sold under patent protection.
So yes, universities (and the NIH through grants to university research, etc) do “pay” for some of the drug development costs–but they do not pay for the BULK of drug development/marketing costs (including the expensive clinical trial component)–Pharma does that, at least as far as I’ve been taught.
Of course, right now, I don’t necessarily trust Pharma in regards to how much they say it costs to develop a drug (I suspect they’re liberally “cooking the books” as best as they can–largely due to the influence of my professors who feel the same way), but they are right as a whole in that their contribution to drug development is expensive in the neighborhood of low to mid hundreds of millions of dollars.
You’re describing inelastic demand. It’s a perfectly normal thing; some goods have highly elastic demand functions and some have inelastic demand functions. How is this is any way not a normal market force?
Nonsense. For one thing, there is no such thing as a free lunch (not even the ones that the drug reps bring to my office! 
). Under a national health plan, health care would not be “free”, it would just be paid for by taxes rather than insurance premiums. The costs would be more equitably distributed, and they would also be much lower due to the elimination of the insurance company bureaucracy which currently consumes about one-third of the money we spend on health care; so we could afford to cover the uninsured without having to reduce the salary of any productive health care workers.
For the other, would you say that guaranteeing everyone protection from crime regardless of their ability to pay is “conscripting” police officers? 
Are public school teachers being told that “they must work and they must do so at a low wage”? If any doctors or nurses do not feel that they are making enough money, they can always switch professions. Personally, I went into medicine because I wanted to help people, not because I wanted to maximize my income, and I am not sure that the loss of those with other priorities would be a great loss to the profession; but this is irrelevant, since there is no reason to think that universal health care would have a negative impact on healthcare worker salaries.
This is probably bordering on a hijack, since this thread now seems to be primarily about “Big Pharma: Phriend or Phoe?”. Anyone wanting to discuss universal health care further is invited to the previously linked thread.
Sorry, I should have used ‘typical’ not ‘normal’.
It must also be duly noted that sometimes Pharma gambles big and loses big.
As to the economics … Pharma will charge, for any particular product, what the market will bear so long as it covers their marginal costs. If the market will bear a windfall that covers many times over the research and several miffs at bat, they’ll take it. If only the marginal costs they’ll take. Given that demand is often quite inelastic the market will often bear quite alot. At least the US market will.
(bolding mine)
That is a crass statement, smiling bandit. I appreciate that this thread is not about drug discovery per se, and you not knowing anything about it should not undermine your views on nationalised health care, but it still should not be allowed to go unchallenged. To give you some brief reference points:
The most important drug discovered in the last ten years is probably Gleevec, which came out of Ciba Geigy’s tyrosine kinase inhibitor programme in Switzerland.
The drug which the whole pharma industry is watching with bated breath right now is acomplia, Sanofi-Aventis’ (France) anti-obesity treatment currently being weighed in the balance by the FDA.
The entire viagra programme was carried out at Pfizer’s Sandwich site in Kent, UK.
Taking a historic perspective, the modern era of drug discovery began with Sir James Black’s discovery of the beta blockers and cimetidine at Smithkline French (UK) in the early 70s- you can probably read his nobel laureate address on the nobel website if you’re interested.
Drug discovery takes place throughout Europe and the US, in a nutshell. Its also true that every major pharma company nowadays has a substantial US presence and US contribution to their research. That said, to state that almost all drug development takes place in the US is completely wrong.
But - and I don’t mean to harp, because I do have a point - what’s not typical about it, either? Some goods and services have elastic demands and some have inelastic demands. Every good or service has a relative level of elasticity.
There’s nothing particularly unusual about health care as an economic good. For that matter, the demand for it isn’t nearly as inelastic as some would have you believe. Your point that health care spending doesn’t drop “as fast as other spending” during recessions is true. It’s also true of food, but nobody here is claiming that food isn’t subject to typical market forces - indeed, food commodity prices are one of the basic economic indicators.
Doesn’t the PMPRB prevent drugs from entering the Canadian market if they agree on a price? That’s much different from a Free Market economy where a more natural market equilibrium price can be derived. From this Time article that I read around this time last year, it said that the American public is paying more for pharmaceutical drugs and ultimately development because other countries were so restrictive of what entered their market.
mazinger, it might help make your ideas clearer if you tried expressing them in the form of answers to the questions you quoted. And there is no need to capitalize “free market”; contrary to tragically widespread belief, the entity in question is not a deity.
Since price controls cut into drug company profits, the companies spend a great deal of money on propaganda asserting that price controls somehow harm consumers or impede drug development. These claims are nonsense for reasons that RickJay has explained very clearly multiple times in this thread. I don’t know that I can improve on his efforts, but maybe an analogy will help.
Suppose that you go to a hot dog stand where the sign says HOT DOGS $2, but the guy at the counter tells you that, sadly, he will have to charge you $3 to make up for the loss he took on the last customer, who was only willing to pay $1. What would you think? Would you be angry at the last guy for failing to pay his fair share and making you pay more? I"m guessing not; I imagine in this case you could easily see that the questions of what the last guy was willing to pay and of whether the vendor was or was not willing to meet his price are totally irrelevant to the question of what you are willing to pay in this completely separate transaction, and that his claim that the decision he made about the last sale has now somehow tied his hands and left him with no possible choice but to charge you extra is just self-serving bullshit. Indeed, you would probably think “Since he has demonstrated that he is willing to sell hot dogs for $1, why on Earth should I be willing to pay any more?” And if he piteously wailed that he needs the extra money to fund his research into hot dog recipes with fewer rat turds, you would say “Even if I had some reason to believe that is actually where the extra dollar would go, it is still not my problem – I came here because I wanted a hot dog, not because I wanted to contribute to scientific advancement”.
The economic principles involved are exactly the same.
I’m afraid, Thing Fish (that you’re superhero name? 
), that’s not quite right. It took me a while to articulate it, but I think I now understand what’s happening. Aside from which, we’ve already seen that governments are willing to use force to take medicines if the copanies want to bargain too aggressively.
Most analyses we’ve seen so far ignore two elements: profit and time. From the individual company’s viewpoint they must take a bad deal, which may be better than the nothing they get after the country steals their patents. It’s not entirely fair.
Second, drugs didn’t neccesasirly start out with costs this high. I doubt people would have paid bills this high some decades ago; price controls will tend to drive up the cost over time. If companies can’t get enough profit off of foreign markets, the one free market (in this case) gets hammered. The company would probably like to offer it at a lower price in the hopes of getting even more customers. They oculd easily clear more profit per unit and offer a lower price point. But since only one beast of burden is carrying the investment costs, that beast bears a higher weight overall.
Moreover, it’s a zero-sum game. It only works if at least one beast is hauling its full weight, plus the weight of everyone else not doing their jobs. If that beast stop pulling…
Price controls never do their job. There’s always a cost somewhere.
I don’t know how much more clearly this can be put: What you are saying is complete and total nonsense.
YOU CAN’T “HAMMER” A FREE MARKET.
Well, no, not necessarily. Holy Jesus. Really, it cannot be explained any more simply, but by God I’m going to try.
The ideal price in a free market is the price the drug company is going to charge. It does not make any difference what they charge in another market. If the ideal, PROFIT MAXIMIZING price for Newdrugbutin is $25 per pill, they will charge $25 per pill because that is what will MAXIMIZE PROFIT. Believe me, the drug companies are good at marketing, and they know what the profit maximizing price is, and that is where the price will be set. They will not drop prices to “get more customers” unless that will increase profits, and if it would increase profits then they would do it anyway no matter what people do in another country. In fact, they would have done it already. I don’t understand why you refuse to internalize this simple concept.
If the price goes down in Germany, why would that affect the profit maximizing price in the United States? It wouldn’t. It will remain $25. It doesn’t matter what anyone else pays. The free market will set the price, and that’s that. Any deviation from the market-determined price means you LOSE money.
No. I’m sorry, but that is impossible. A business cannot force a market to bear its investment costs. Investment costs are sunk costs, for God’s sake. They’re gone, history, a thing of the past. They have nothing to do with setting prices. Prices are determined by supply and demand.
And how can you keep on saying “only one beast of burden carries the investment costs?” Look, let me ask you a simple question and I want a straight damned answer: If the drug companies don’t make a profit outside the USA, why do they sell drugs outside the USA?
Look, Thing Fish’s example was really good and you just refused to read it, or something, so I’ll steal his example but try to make it closer to what we’re talking about.
The market price of a chocolate bar is about a dollar right now. That is the profit maximizing price. If you charge more than a dollar, your sales losses outstrip per unit profits. If you charge less, your per unit losses outstrip sales gains. It’s a buck a chocolate bar, let’s agree on that, okay? Now suppose that you run a chain of convenience stores and suddenly the State of New Jersey announces that you can only charge 70 cents for a chocolate bar because they’re insane or something.
What’s going to happen if you tell your customers in Texas, “We have to charge you $1.20 a chocolate bar to make up for New Jersey?”
I’ll tell you what’s going to happen: You’re going to lose money, because you’re a moron. The market warping effect of government intervention in New Jersey didn’t change the market price of a chocolate bar in Texas. The market clearing price is STILL going to be about a dollar. You can’t hammer the free market to make up for your bad luck. You’re fucked. Of course, you might not sell as many chocolate bars in New Jersey, because it’s not worth it to you. In fact, perhaps you will choose to sell no chocolate bars there at all if you find the cost of selling one is higher than the state-mandated price ceiling of 70 cents.
But the market price in Texas is a buck. You can’t change that just because you wish you could make that money back somehow.