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Drug price shenanigans

A recent podcast episode and a recent blog post show how screwed up the American drug market is, and in how many different ways.

In his Healthcare Unfiltered interview focused on generic drug shortages, the FDA Commissioner Robert Califf blamed Group Purchasing Organizations for driving down the cost of generic drugs to below what’s economically feasible. The manufacturers don’t have an incentive to shore up their process, the fragile production line fails, and presto, you have a shortage. Which is fine if you are manufacturing a placebo, but in recent years the FDA’s Drug Shortages Database has been ever-growing, and as of today includes potentially currative cancer drugs like cisplatin and carboplatin, many antibiotics, and even some formulations of sugar-water. Not to be confused with placebo.

This all reminds me a bit of my childhood in Serbia back in the mid-1990s, when bread was dirt cheap and never available. But that was too much price regulation. Here, we have too efficient of a market leading to a shortage. Only, I am sure there will be hands raised wanting to tell me that — well, actually — this was a clear example of over regulation, since new factories can’t just pop up too meet the demand and make use of the temporary market inefficiency, being dependent as they are on pesky FDA regulations — like the ones about drugs being safe. If only we could price in the risk of death by sepsis, we’d be in great shape!

So, on one end we have Medicare/Medicaid paying through the nose for brand name drugs because it is forbidden by law from negotiating for a better price, and on the other private GPOs negotiating too well for generics, to the point of extinction, forcing payers to get those expensive brand name drugs. Heads, brand-name pharmaceutical industry wins, tails, payers loose.

It was encouraging to see some movement in the price negotiation area: the comically misnamed Inflation Reduction Act allows for CMS to negotiate the price of some drugs, and the list of those drugs was recently made availalbe. Ideal? Far from it — in an ideal world the federal government would not be involved in any of this; but it’s not the world we live in. This is where the blog post comes in: from Alex Tabarrok, about how we are bad at pricing drugs because of unknown externalities (true!) but also with a side-comment reframing measures the IRA takes allowing nogiation as “price controls”, linking to [a policy paper][10] which suggests yet another set of measure to mitigate the adverse effects of IRA’s proposed solutions to the drug pricing problem. Efficient markets for me, but not for thee, as Tabarrok’s writing partner would quip. And so the measures pile up from both the pro- and anti-regulation side. Ad infinitum, I suppose.

See also: better drugs don’t cost more, and a list of a few earnest but misguided attempts at cost control.

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