Price Fixing Doesn't Work - Drugs Edition
Obviously, making coke cheap would be great but otherwise....
The Americans - OK, American Progressives, a distinctly lesser breed - are getting terribly excited by the idea that Medicare should, will, be able to negotiate drug prices.
Eight pharmaceutical companies that manufacture the ten medications on the Biden administration’s list for Medicare price negotiations have spent lavishly on a variety of expenses, including millions in executive compensation and billions in advertising and shareholder handouts, with most spending far less on research and development. Several of these companies argue that the negotiations will negatively affect their research and development operations and are currently suing the Biden administration to stop the plan.
The companies - Johnson & Johnson, Amgen, AstraZeneca, Bristol Myers Squibb, Eli Lilly, Merck, Novartis and Novo Nordisk - pulled in a combined $367 billion in sales in 2023, according to their financial filings. Collectively, these companies spent a total of $95.9 billion on research and development expenses, compared to $162 billion on stock buybacks, dividends, and marketing and administrative costs and nearly $500 million on compensation for their boards and executives. Additionally, these companies spent at least $83.2 million on trade association dues, $10.6 million on political contributions and $57.8 million on lobbying, all in 2023 alone.
Near $70 million on political lobbying is easily explained - the politicians want to come steal our money, we’ll spend a bit to try and stop them. If there were no legislation about drugs there’d be no lobbying by drug firms.
But such obviousness aside, onto another obviousness. The Biden Admin is not suggesting that drugs prices should be higher so as to secure supply, oh no. Clearly, the “negotiation” is to use the power of the law to force charges lower. Which runs into this piece of obviousness:
If the price declines - especially if it is forced down below that market clearing price - then the supply of drugs will be lower than the demand for them at this new lower price. Because that’s just what happens. It’s a feature of our universe.
So, the American elderly can look forward to a shortage of drugs then. Aren’t they the lucky ones?
But, comes the rejoinder, companies won’t give up the some profit they could make, will they? Hah! Gotcha there. To which the answer is yes, some of them will. Again, this is a feature of our universe. Drop prices below market clearing and supply will fail to meet demand. That’s simply what market clearing price means.
We can even prove this. Note that the drugs we’re talking about are not recent ones still in patent. These are the things made - or at least very close cognates are - by several companies. Generics abound - we already have market forces working here. We can prove this by checking somewhere else that already does this. Like our own dear National Health Service:
Drug shortages in England are now at such critical levels that patients are at risk of immediate harm and even death, pharmacists have warned.
The situation is so serious that pharmacists increasingly have to issue “owings” to patients – telling someone that only part of their prescription can be dispensed and asking them to come back for the rest of it later, once the pharmacist has sourced the remainder.
Hundreds of different drugs have become hard or impossible to obtain, according to Community Pharmacy England (CPE), which published the report. Widespread and often long-lasting shortages posed “immediate risks to patient health and wellbeing” and caused distress, it said.
That the NHS does “negotiate” drug prices is well known. It’s well known enough that Americans actually use that fact as a part of the rhetoric in allowing Medicare to do the same.
The effect is as Econ 101 would predict. As that same Econ 101 told us about the doner kebab market. Price fixing doesn’t work. This is the advantage of basic logical structures - once you grasp those basics you can then apply them to many different examples - that’s why they’re basics, because they can be applied to many different examples.
Other than for Giffen Goods force the price down by law and you’ll create a shortage of supply. Which is why so many middle aged women can’t get their HRT these recent years. Shrug, jus’ what’s gonna happen.
But still, American Progressives, so stupid they use the NHS as an example of something to emulate. Perhaps we can hope that the menopausal women of America work this out and turn on them? There is a reason that the Septics call women of a certain age “cougars” after all.
I might have to re-read the chapter in "How the brain lost its mind?" on the discovery of penicillin as a treatment for syphilis.
From memory there were massive shortages of penicillin, partly because of war, its usefulness in treating other conditions, and it was really hard technically to manufacture at scale. It wasn't until the late 1940s that it started to make significant difference to syphilis patients.
But on reflection, a discovery in 1928, taking say 21 years under a pre-NHS system to be properly useful wasn't bad going, and at least it did actually get discovered and developed.
Nothing wrong with “negotiation” of prices between willing seller and willing buyer. Happens all the time especially when the buyer is a bulk buyer in prodigious quantities. Result: mutually satisfactory price reached.
Or do I suspect that when Biden and his cronies use the word “negotiation” they are being a tad disingenuous? Surely not…..