There is another pharma scandal in the news over the astronomical increase in EpiPen’s price. Yet, before we begin to blame and denounce the abstraction “capitalism” for all our woes, it might be useful to recall my post on the Shkreli/Daraprim scandal and its discussion of healthcare regulations. This new case appears to be incredibly similar and the site Slate Star Codex has an excellent post contrasting the way the drug industry operates compared to the chair industry:
when was the last time that America’s chair industry hiked the price of chairs 400% and suddenly nobody in the country could afford to sit down? When was the last time that the mug industry decided to charge $300 per cup, and everyone had to drink coffee straight from the pot or face bankruptcy? When was the last time greedy shoe executives forced most Americans to go barefoot? And why do you think that is?
The answer?:
The problem with the pharmaceutical industry isn’t that they’re unregulated just like chairs and mugs. The problem with the pharmaceutical industry is that they’re part of a highly-regulated cronyist system that works completely differently from chairs and mugs.
If a chair company decided to charge $300 for their chairs, somebody else would set up a woodshop, sell their chairs for $250, and make a killing – and so on until chairs cost normal-chair-prices again.
And in his final act, he drives the point all the way home (worth quoting at length):
Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.
…Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.
And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.
If chairs were like drugs, that would be a sensible argument. But (1) they often require massive investment to develop, (2) have effects which most people literally cannot understand (or, often, detect), and (3) their development represents one of the most impressive vectors of modern progress on improving the lot of humanity.
3 means we really don’t want to give up the ability to incentivize such research, but 2 means the free market is ill-equipped to provide quality incentives (compare with the unregulated “nutritional supplements” market, in which products include widely varying amounts of the supposed active ingredient, and there’s no reason to think most of these ingredients reliably do anything, anyway). Taken together, 2 and 3 mean regulation is effectively required, which is why all civilized countries have it. 1 means that large legal costs may still be a small proportion of the total cost of bringing a drug to market.
An analogy which only makes the intended point because of the ways the actual situation differs from its analog strikes me as a poor analogy.
Just had this same conversation on Facebook. Effective and efficient regulation is a must, even for those who are more free-market oriented. Arguably such regulations are especially needed in the market for drugs and medicine. Nonetheless, journalists and the like should be more responsible in their reporting by understanding the economics behind situations like EpiPen or Daraprim. The incentive to hike the price comes not because of free market forces or competition, but because of the lack of them. Now one could still still say that *another* regulation is needed to combat price hikes. But in doing so, one shouldn’t pretend that this situation was brought about because of lack of regulation. The price hikes are the product of red tape. Possibly necessary red tape, but red tape nonetheless.
“Now one could still still say that *another* regulation is needed to combat price hikes. But in doing so, one shouldn’t pretend that this situation was brought about because of lack of regulation.”
Unless you can identify one of the existing regulations which is unnecessary, one shouldn’t pretend regulation is the problem, either. Particularly in Shkreli’s case, my recollection is that there was no government-enforced monopoly. The drug on which he so severely raised prices was off patent, it’s just that it was expensive to enter the market. Since he could drop his prices at will, he could ensure that entering the market would never pay off, so he was simply using the market to keep out competitors. But even in the clearer case of government-granted monopolies, it seems perfectly reasonable to suggest that, if such regulations are needed for products people can’t safely go without, they may need to be paired with other regulations which control prices. If that’s a person’s view, how is it pretending to suggest that the lack of these additional regulations is the problem? That seems perfectly accurate.
Now, myself, I wouldn’t claim that lack of regulation was the problem. Instead, I would identify the glorification of responding to financial incentives rather than displaying character as the primary culprit. The drugs which have recently seen price hikes weren’t introduced at these very high prices; it’s only been recently that their producers have decided to abuse their monopoly so egregiously. It’s not quite the same as old-fashioned greed, because it seems like a principled stand–lots of people now support the ideology that sellers ought to charge what the market will bear, and that any negative consequences which result aren’t the fault of the market, but of the failure of other institutions. But this whole paragraph is basically just an exercise in updating the “greedy Republican” argument along partisan, not especially fair lines. I’m embarrassed to have felt compelled to write it, but I pat myself on the back for at least acknowledging that it’s sort of a goofy compulsion.