Rule Number One

A few years back there used to be a
used car salesman in Somerset from whom I learned an elemental lesson
in economics. He didn't teach it to me directly but rather through a
story I heard about him one time. Seemed that this young couple came
to him to purchase a new car. They had shopped around and saw one
they liked on his lot and inquired as to the price. He told them the
price and it was considerably higher than some prices they had gotten
on some similar vehicles around town and they told him so and asked
why. His reply was, “Well, I make more money that way.”

This seems like one of those obvious
things that everyone knows but I recognized it as a fundamental rule
of capitalism. Everyone wants to maximize profits and will charge
whatever they feel the market will bear. It is up to the purchaser
to be wise.

I applied this well known rule to a
discussion I had online with some people over the past week or so.
They were remarking on the very high price of some cancer drugs that
were up around $100,000 per year or more. At the same time I had
watched a television special on the prices of drugs where some had
gotten to the public relations group that represents Big Pharma
asking why this was so. Of course the stock reply is that it costs
millions and billions to put a new drug on the market and they should
be compensated adequately to insure motivation for research and
development and to cover the costs of production. One of the drugs
mention was Gleevec which is a very effective drug that combats
leukemia. When it first came out it cost $28,000 per year for the
drug regimen. Soon some other drugs came on the market that were in
direct competition. One would expect the competition to force prices
down but Gleevec rose to almost $90,000 per year. This was an eye
opener because it flew in the face of accepted free market ideology
and that meant that there was another dynamic at work here. What was
at work here is the economic rule I spoke of earlier. They make more
money that way. But why didn't the competition force prices down?

The thing that forces prices down is
the willingness of the purchaser to shop elsewhere for the product at
a cheaper price. That assumes that the end user is the purchaser
which is not the case here. The purchaser in this case is the
insurance company that pays for the drug. People without access to
insurance obviously can't afford it and so they die. Just not in
large enough numbers to affect the bottom line. The largest insurer
in the United States is Medicare but Medicare is prohibited by
legislation that was written into the Medicare D bill that President
Bush the Second pushed. That legislation forbids Medicare from using
the enormous purchasing power of the federal government to negotiate
a lower price. The law states that Medicare must pay whatever is
charged by the pharmaceutical pushers.

Two things that are unacceptable here.
One is that the taxpayer is forced to subsidize the profits of the
pharmaceutical industry and the other is that the insurance companies
are guilty of de facto rationing of medical care based on ability to
pay. The United States is the only developed country in the world
that pays full retail for drugs. All other civilized countries have
negotiated prices well below what we pay. If the pharmaceutical
companies are so focused on recovering costs then how can they sell
at those steep discounts to those countries? Make no mistake. For
drugs still under patent protection there is no one else making those
drugs so one can't use the excuse of them being made overseas under
poor supervision. And, in the case of Gleevec, if costs were being
covered under the lower price then what was the justification in
tripling the price. The drug companies also say that they take into
account the value of the quality of life of those using the drug. In
other words, if it is a real good one they want to charge a lot.

This is the way the free market works,
right? Well, it would be if medical care and pharmaceuticals
competed in a free market but they don't. If a person has leukemia
and there is one drug that can help that is not a free market. If an
insurer has a single drug on its formulary that is not a free market
but at least the insurance company can negotiate a lower price. The
largest insurer in the country can't even do that since that was a
gift to Big Pharma in order for them not to lobby against the law.
Why would they? It is the largest cash cow to come down the pike and
it dumped excessive profits on them like the rain in spring. If it
were a free market people would be able to shop for prices and
Medicare would be able to negotiate on behalf of the taxpayer.

Big Pharma does many things in order to
keep the cash cow giving milk. Gifts and honorariums to physicians.
Free drugs. Trips (ostensibly to attend training or seminars but
more likely to play golf or scuba dive) are quite the draw. But the
biggest of all is the lobby Big Pharma pays for in Washington,D.C. to
keep Congress growing the grass for the cash cow.

So, what is the reason drugs cost so
much? “Well, I make more money that way.” Rule number one of
capitalism. Hold it close to your heart.