Why is medicine so expensive?

Over on FaceBook an image posted a Senator’s facebook page asked the question “why are prescription drugs so expensive in the US? It also claimed to answer it: “We are the only major country without a national healthcare program and the pharmaceutical industry can charge whatever it wants.”

Well, let’s leave aside that latter part which ignores things like competition and supply/demand curves. (What?  You’ve never price shopped among different treatments?  Asked if there was a lower cost alternative to some expensive medication?  Whyever not?  I have.)  Instead, let’s look at what effect a “national healthcare program” really has.

The production of new medicines and passing the extensive testing required to get them approved is extremely expensive. That cost, and the cost of those medicines that do not get final approval has to be recouped somewhere. Now, all these places with “national healthcare” are a monopsony (that’s “single buyer” in the same way that “monopoly” is “single seller”) and, thus, can dictate the price they will pay. This means the cost of development cannot be recouped there. But it has to be recouped somewhere.
And that means that we’re subsidizing medical research for the rest of the world. Even if something is developed overseas–One of the medicines I used to take (a beta blocker–not allowed while I’m on allergy shots) was developed in Great Britain and only just “aged out” to having generics available–guess who pays to recoup the development costs? Yep. We do.

We not only subsidize our own research into new medicines and treatments, we subsidize the research of the entire rest of the world.

The problem is, if we stopped doing that–by whatever means, national health care, some “fair price” law, whatever–then research into new medicines would also stop. We could “enjoy” the same level of medical progress as, say, Yugoslavia.

Don’t think so?  Get a copy of an insurance formulary (many of them are available).  These list the various approved medicines at various copay price points.  Go through and list the ones that were developed in the Soviet Union, Communist China, Cuba, or similar highly “socialist” society where it’s all “good of the State” rather than profit motive.

Did you even have to turn the paper over to continue the list on the reverse side?  I didn’t think so.

So, take away “recouping costs” and “making money” from the equation and go instead to  top-down government funded and dictated research and medical progress essentially goes away.  You may reduce the costs of what you have now, but what you have now is all you will ever have.

So why, you may ask, do the pharmaceutical manufacturers sell to these other countries if they can’t recoup their development costs?  The answer lies in a concept called “marginal cost.”  Marginal cost is the added cost of producing one more of something.  If you’re making 10,000 pills, the marginal cost is how much more you have to spend to produce 10,001 instead.  Now, so long as you have some way, some how, to make back the fixed costs you can make money selling more so long as the price is higher than the marginal cost.  Sell 100,000 pills in the US priced to recoup costs and make a profit.  Sell 100,000 pills in the US at the same price and also sell 10,000 in France just a bit more than the marginal cost and make a somewhat bigger profit.  But without that 100,000 selling in the US at a price that recoups cost, the 10,000 to France won’t exist.

As I said, we’re subsidizing the world.

The bright side is that once that cost is recouped, prices do come down. Half the medicines I take every day are “$4 generics” (that’s not a co-pay. That’s what the pharmacy charges). And the ones that aren’t are mostly in the $10-20 range. But all of them were expensive during that limited window the developer had to recoup costs.

The Senator in question, of course, knows all this. At the very least, someone on his staff could explain it to him if he asked. But it’s much more useful for him to use the cost as a means to grab even more government power.

And that’s what this is really about–a power grab. The more dependent you are on government, the more they own you.

We’re subsidizing the world.  But if that’s the price for continued development of new prescription drugs and other treatments, I can live with it.  End that, however, and you end medical progress, which means my daughter, when she gets older, won’t have anything better than I have today.

And that I will never forgive.

Advertisements

2 thoughts on “Why is medicine so expensive?”

  1. Simple math. Cost to be recouped vs. number of doses over which to recoup it. Increase the number of doses over which to recoup (by, as you suggest, having a longer period over which to do it) and the cost per dose goes down.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s