stay healthy

What I’d like to find out are the candidates’ plans to lower the prices of medicines in the United States. In the Philippines, there was a bill which had passed through the bicameral conference committee but which was not ratified in either chamber before the adjournment of the 13th Congress in June. So much effort wasted; advocates have to virtually start anew.

In brief, this is how the proposed mechanism works. Everyone knows that the drug companies exercise monopoly power over the production, marketing, and pricing of their products for the life of their exclusive patent (17 years, after which generic producers can compete in all phases). The patent is supposed to reward the pharmaceutical company for the innovation and enable it to recoup costs for reasearch and development although many researches have shown that many companies spend much more on marketing (or hyping their products) than on useful innovation. Also, it is standard practice for them that when the patents expire, they introduce marginal or useless modifications and apply for a new patent, thus thwarting generic production and competition.

The drug companies do not charge uniform prices across their segmented markets worldwide and thus calculate different monopoly prices to maximize profits in each of these segmented markets; each price depending on the demand curve and thus income levels in the particular markets. Thus there is room for curbing monopoly power if governments allow so-called parallel importations. The same drugs in the Philippines could be priced at much less than half they do in India, although the price difference may not all be attributable solely to differentiated monopoly pricing. In the supply side, the degrees of adherence to ‘intellectual property’ rights and real production cost differences also play a role. These two sets of factors may also explain why drugs are cheaper in Canada than in the U.S.

One other way to lower the cost of medication is to to educate people that generic drugs are as effective as their branded counterparts (notwithstanding the claims of the pharmaceutical companies). But this assumes that governments have effective mechanisms for quality assurance checks.

Memo1: For economists. prices above variable or marginal costs always entail unnecessary suffering.

Memo2:On a personal note, my brother recently sent me capsules of Wellbutrin (also marketed as Zyban) to help me quit smoking. It was meant to to be an anti-depressant but was accidentally discovered to suppress the craving for nicotine. Prices in the US are four times those prevailing in Thailand. I had to apologize to my brother for not using them because after reading the fine print warning of frightening side-effects, I concluded I couldn’t afford the risks. How many of us read the fine (literally) print? Lesson: in addition to the arguments elucidated above, we should all take responsibility for our health.

Memo3: The economics columnist of Slate.com, Steven Landsburg, has proposed that government should just purchase the property rights (patents) of the drug companies so that the products can be produced and marketed competitively. Good argument but it can be practicable only if a reasonable price can be agreed on; otherwise this might be an intractable pricing problem.