Saw that piece of his this morning and I was incensed. There's also just the fact that his proposals aren't going to happen but price controls are actually happening. Thanks for writing this.
Is it plausible that during the 12 year period the pharma company does actually get paid more per dose (in the US) than that dose is worth in order to partially compensate them for the profits they miss out on after the patent expires? This only seems possible given that they have a monopoly and that drugs aren’t really priced in response to market demand, but correct me if I’m wrong here. I ask because that could help explain why people are SO angry at pharma companies (beyond regular anti capitalist sentiments)
I'm a bit confused by what you're saying. If the suggestion is that they'd get more monopolistic profits than their drugs are worth that can't be because people only will pay some amount for a new drug if they value the drug at more than the cost of the drug is.
Yes in any normal market that’s true. But I’m asking if that’s necessarily the case here given that individuals rarely weigh the costs or benefits of drugs that they take (at least as far as I know). Drugs either are or aren’t covered by their insurance and that seems like it could disrupt the normal price setting process to make this possible.
Yeah I suppose that's theoretically possible but it doesn't seem that likely. There are still pretty significant out of pocket costs often and the surplus value of life-saving drugs is so enormous that it seems quite likely that they're underprofiting. My sense is that this is the opinion of most economists who have looked at this--I remember Kremer in his paper said something similar.
The pharmaceutical industry seems like a very interesting outlier to me, an industry that suffers heavily from externalized profits, because if you look at the economy as a whole, the question of the "profitability" of meds is mostly ridiculous.
A more efficient but analogous way to fund drug development would be to charge a sales tax on medicine for the same time period as the existing patent period, but allow anyone to manufacture the medicine. This would be more efficient because pharmaceutical companies wouldn't have the incentive to spend a significant portion of their patent monopoly markup on marketing and the government could direct that the tax be spent on drug development. Such a program could be structured so the profit motives are better aligned with developing drugs that improve public health than how the system is structured today.
However, there are a lot of more efficient ways to raise revenue than a sales tax on medicine. If you tax something, people use less of it and people being able to afford their medicine has positive public health externalities. More efficient funding sources include income taxes, property or land value taxes, or sales taxes on things that don't have positive externalities (or better yet sales taxes on things with negative externalities).
The problem with all these approaches is that they are potentially more difficult to politically implement and more vulnerable to cuts than the present method of funding. And the returns of drug development are so high that even an inefficient funding method is better than no funding at all.
With the present system, the drug prices are obscured from many consumers by insurance. The cost of insurance is obscured by the fact that it is employer or government funded for most people. This makes it politically feasible to fund drug development at higher levels than a more efficient funding method that has a more transparent cost burden distribution.
It is similar to how fuel efficiency standards for cars are more politically viable than gasoline taxes even though it's a less efficient method of reducing pollution because the distribution of economic costs is more opaque.
Scott Alexander's argument for price controls being worse than Mao seems a little strange. I mean, where is this 0.7 or even 2 year reduction coming from? If it's at the end of life, elderly people dying a bit earlier is not some great tragedy, they're definitely at an age where everyone involved should have made peace with death. And if it isn't, clearly it must be a very small number of younger people having their lives cut short.
But regardless, if price controls result in such a reduction, then they make no sense, since surely the idea is that they would result in greater cumulative lifespan + quality of life? If they don't, there is no point.
EDIT: Ah, I was mistaken, as Bentham's Bulldog points out further down, we could get this 0.7 if 1 in 40 people were to lose 40 years of their life, which would of course, be a catastrophe (and a largely invisible one). I stand corrected, this policy could potentially be worse than Mao!
It's a 0.7 reduction, it cannot be a lot of people losing a big chunk of life, like during Mao, but rather a bigger number of people losing a pretty tiny slice of life (with some unspecified amount losing bigger slices and even chunks). At least without actually crunching the numbers, this appears to be the case. Notice Scott didn't provide a number for the average age of death reduction during Mao (I'm guessing it was way bigger than 0.7), he went for the total, which is probably the only way to make pharmaceutical price controls seem worse than Mao.
This reminds me of that whole dust specks versus torture thing.
This is pretty far from my area of expertise (if I even have one of those), but it seems as though the current Medicare drug price negotiations aren't expected to have much impact on innovation (due largely to the specific drugs involved): https://www.nature.com/articles/s41587-023-02096-w
Of course, the situation could change if the negotiation were expanded to cover other drugs.
So I'm a little confused about this- and I must confess I'm in a screaming hurry at the moment so maybe I've missed something- but I would of thought that the clear point here in any debate price caps would be *are the drugs currently in patent*. From the standpoint of economic theory, this makes all the difference in the world. Both you and Yglesias understand this point I'm sure but I think you should both lead with this.
The standard economic theory says the price cap monopolies, and if we feel that there are benefits not captured by this arrangement, to have the government subsidse research directly, rather than extracting monopoly profits from patients as a method of subsidising research- this is because of the deadweight loss that monopolies impose. This could be seen as like subsidising a positive externalities, although perhaps here what we are really concerned about is not externalities per se, but benefits to patients that we feel the market undervalues because of limitations in ability to pay.
On drugs outside monopolies, standard economic theory would advise not price capping generics unless there is some special reason they have monopoly power- and if there is a special reason they have monopoly power, either price capping them, or if feasible, removing the reason.
I really like the proposal you mention in your other post- similar to Stiglitz's prizes not patents. I think this is the best solution, but don't see what's wrong with a cap plus subsidy at the level judged socially optimal.
FWIW: a nice paper on theoretical incentive design for patents is Hopenhayn, Llobet, and Mitchell (2006) "Rewarding Sequential Innovators: Prizes, Patents, and Buyouts".
I completely agree. What we should do is deregulate pharmaceutical industries significantly and ensure that regulations which do exist target mostly non-innovative business practices. The benefits of better drugs are indeed astronomical.
Saw that piece of his this morning and I was incensed. There's also just the fact that his proposals aren't going to happen but price controls are actually happening. Thanks for writing this.
Always good to see another person opposed to pharmaceutical price controls.
Is it plausible that during the 12 year period the pharma company does actually get paid more per dose (in the US) than that dose is worth in order to partially compensate them for the profits they miss out on after the patent expires? This only seems possible given that they have a monopoly and that drugs aren’t really priced in response to market demand, but correct me if I’m wrong here. I ask because that could help explain why people are SO angry at pharma companies (beyond regular anti capitalist sentiments)
I'm a bit confused by what you're saying. If the suggestion is that they'd get more monopolistic profits than their drugs are worth that can't be because people only will pay some amount for a new drug if they value the drug at more than the cost of the drug is.
Yes in any normal market that’s true. But I’m asking if that’s necessarily the case here given that individuals rarely weigh the costs or benefits of drugs that they take (at least as far as I know). Drugs either are or aren’t covered by their insurance and that seems like it could disrupt the normal price setting process to make this possible.
Yeah I suppose that's theoretically possible but it doesn't seem that likely. There are still pretty significant out of pocket costs often and the surplus value of life-saving drugs is so enormous that it seems quite likely that they're underprofiting. My sense is that this is the opinion of most economists who have looked at this--I remember Kremer in his paper said something similar.
The pharmaceutical industry seems like a very interesting outlier to me, an industry that suffers heavily from externalized profits, because if you look at the economy as a whole, the question of the "profitability" of meds is mostly ridiculous.
Hopefully the industry can profit without continuing to medically abuse animals.
A more efficient but analogous way to fund drug development would be to charge a sales tax on medicine for the same time period as the existing patent period, but allow anyone to manufacture the medicine. This would be more efficient because pharmaceutical companies wouldn't have the incentive to spend a significant portion of their patent monopoly markup on marketing and the government could direct that the tax be spent on drug development. Such a program could be structured so the profit motives are better aligned with developing drugs that improve public health than how the system is structured today.
However, there are a lot of more efficient ways to raise revenue than a sales tax on medicine. If you tax something, people use less of it and people being able to afford their medicine has positive public health externalities. More efficient funding sources include income taxes, property or land value taxes, or sales taxes on things that don't have positive externalities (or better yet sales taxes on things with negative externalities).
The problem with all these approaches is that they are potentially more difficult to politically implement and more vulnerable to cuts than the present method of funding. And the returns of drug development are so high that even an inefficient funding method is better than no funding at all.
With the present system, the drug prices are obscured from many consumers by insurance. The cost of insurance is obscured by the fact that it is employer or government funded for most people. This makes it politically feasible to fund drug development at higher levels than a more efficient funding method that has a more transparent cost burden distribution.
It is similar to how fuel efficiency standards for cars are more politically viable than gasoline taxes even though it's a less efficient method of reducing pollution because the distribution of economic costs is more opaque.
I agree with your general point here, but at the same time, what are we supposed to make and do about cases such as this one?
https://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html
It's all about mean vs. variance again.
Scott Alexander's argument for price controls being worse than Mao seems a little strange. I mean, where is this 0.7 or even 2 year reduction coming from? If it's at the end of life, elderly people dying a bit earlier is not some great tragedy, they're definitely at an age where everyone involved should have made peace with death. And if it isn't, clearly it must be a very small number of younger people having their lives cut short.
But regardless, if price controls result in such a reduction, then they make no sense, since surely the idea is that they would result in greater cumulative lifespan + quality of life? If they don't, there is no point.
EDIT: Ah, I was mistaken, as Bentham's Bulldog points out further down, we could get this 0.7 if 1 in 40 people were to lose 40 years of their life, which would of course, be a catastrophe (and a largely invisible one). I stand corrected, this policy could potentially be worse than Mao!
No, it's an average of .7 fewer life years. Many will lose like 40 years, others just a few months.
'Many' is doing a lot of work here. I'm guessing it's 'overwhelming majority lose a few months', but I don't know.
Why do you think that?
It's a 0.7 reduction, it cannot be a lot of people losing a big chunk of life, like during Mao, but rather a bigger number of people losing a pretty tiny slice of life (with some unspecified amount losing bigger slices and even chunks). At least without actually crunching the numbers, this appears to be the case. Notice Scott didn't provide a number for the average age of death reduction during Mao (I'm guessing it was way bigger than 0.7), he went for the total, which is probably the only way to make pharmaceutical price controls seem worse than Mao.
This reminds me of that whole dust specks versus torture thing.
If 1 in 40 people lose 40 years of life, that's around a .7 reduction and that's a lot of people losing a big chunk of life.
Oops, that's what I get for shooting from the hip and not crunching the numbers. Yeah, that would indeed be worse than Mao.
This is pretty far from my area of expertise (if I even have one of those), but it seems as though the current Medicare drug price negotiations aren't expected to have much impact on innovation (due largely to the specific drugs involved): https://www.nature.com/articles/s41587-023-02096-w
Of course, the situation could change if the negotiation were expanded to cover other drugs.
So I'm a little confused about this- and I must confess I'm in a screaming hurry at the moment so maybe I've missed something- but I would of thought that the clear point here in any debate price caps would be *are the drugs currently in patent*. From the standpoint of economic theory, this makes all the difference in the world. Both you and Yglesias understand this point I'm sure but I think you should both lead with this.
The standard economic theory says the price cap monopolies, and if we feel that there are benefits not captured by this arrangement, to have the government subsidse research directly, rather than extracting monopoly profits from patients as a method of subsidising research- this is because of the deadweight loss that monopolies impose. This could be seen as like subsidising a positive externalities, although perhaps here what we are really concerned about is not externalities per se, but benefits to patients that we feel the market undervalues because of limitations in ability to pay.
On drugs outside monopolies, standard economic theory would advise not price capping generics unless there is some special reason they have monopoly power- and if there is a special reason they have monopoly power, either price capping them, or if feasible, removing the reason.
I really like the proposal you mention in your other post- similar to Stiglitz's prizes not patents. I think this is the best solution, but don't see what's wrong with a cap plus subsidy at the level judged socially optimal.
Your linked reference doesn’t, as I understand it, say 78% of new drugs come from the US, but that they were approved in the US first.
FWIW: a nice paper on theoretical incentive design for patents is Hopenhayn, Llobet, and Mitchell (2006) "Rewarding Sequential Innovators: Prizes, Patents, and Buyouts".
I completely agree. What we should do is deregulate pharmaceutical industries significantly and ensure that regulations which do exist target mostly non-innovative business practices. The benefits of better drugs are indeed astronomical.