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Hoisted from E-Mail: “New York Times Article Promotes Price-Fixing in the Drug Market”

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Reader Wade Riddick was not happy about a New York Times article and dashed off a well-argued missive, which we reproduce below:

That little cartel-hugging, rent-seeking suck-up, Austin Frakt, just posted that the solution to high drug prices is higher drug prices:

http://www.nytimes.com/2016/05/31/upshot/drug-prices-too-high-sometimes-theyre-not-costly-enough.html

The number of drugs in short supply peaked in 2014 at 320, the vast majority of which were generic injectables. That doesn’t mean the problem has faded.

These shortages do not occur in expensive drugs. They occur in cheaper drugs. A rational market rations according to price. Expensive items are rarer and cheaper items are more common. In this cartel- and kickback-controlled market, expensive items are plentiful and its all the cheap, generic, competitive, non-monopoly, low-profit, unpatented drugs that are hard to find: methotrexate, injectible magnesium vials, leucovorin, doxycycline, doxorubicin, etc.

Generic injectables are prone to shortage because of low profit margins and
high production costs.

No. They don’t occur in other countries with regulated markets. In fact, we often have to import from foreign markets to solve out shortage problem here at home.

Once we could go to compounding pharmacies, who deal direct with FDA-inspected chemical manufacturers, but the FDA has been closing off this last independent source with the goal of intermediating everything.

Except in unusual circumstances, generic drugs — whether injectable or oral — have low profit margins because no manufacturer retains exclusive rights to produce them.

Frakt wants to solve a problem caused by the privatization of public goods with more privatization of public goods. He’s implying we should patent all drugs and solve the problem of non-competitive monopolies by making everythinga monopoly.

What’s next? The Koch brothers pollute our air so Frakt lets them patent out air and we have to pay extortionate prices if we want to keep breathing?

If these companies can’t survive at these profit margins, maybe they should 1) stop paying dividends, 2) stop paying fat bonuses to the incompetent executives who can’t deliver a product on time, 3) stop giving campaign donations to politicians with money picked out of the pockets of sick customers, 4) stop paying lobbyists to kill competition, 5) stop buying up their competitors.

Prices are also held in check by group purchasing organizations.

No. Prices are high because of the price-fixing of these GPOs/PBMs. They introduce kickbacks into the supply chain. More expensive drugs pay a greater kickback (e.g., “stocking fee”) to the pharmacy and cheaper drugs can’t compete. In that “market” of incentives, the institutional bias quickly swings to the more expensive rival treatments (against the best interests of the customer). We now prosecute railroads when they do it. It’s called middleman fraud.

Railroads used to do this and it resulted in farmers getting squeezed but also end consumers. You can’t run a network and charge both the shipper and receiver. It creates an incentive to manufacture scarcity in capacity. Companies jack up prices instead of adding new capacity. We had a rehash of this in the recent debate over network-neutrality. If you let ISPs charge
senders in addition to their customers, you get the same behavior. Compared to internet services in other countries, this is exactly what deregulated local monopoly utilities have already given us – underpowered, overpriced services.

Most generic injectables are produced by three or fewer companies.

That’s called a cartel.

Cracker Jacks, calling. They want that economics degree back that you fished out of the bottom of the box.

When a manufacturing problem arises at one of them, it threatens a large proportion of supply, and sometimes for dozens of drugs at a time.

Yes, and isn’t it a tragedy how patients die because they can’t afford the more expensive drugs – also made by the same cartels – or there’s just no alternative at all… because, you know, “markets!”

Martin Shkreli or Turing explained his outrageous price hikes by saying he had a “price inelastic product” and an obligation to shareholders.

Translation: He was the only source of a drug and he could charge sick people whatever he wanted and they would have to pay or they would die. In this context, price inelastic = organized crime extortion (aka RICO).

Facing low prices, these few manufacturers must keep tight control over capacity in order to turn a small profit.

Coordinating the restriction of supply to jack up prices is textbook market extortion by cartels.

As technology progresses, it’s getting cheaper to produce these drugs, not more expensive. We have expensive drugs and widespread shortages because our leaders have made the political choice to do so. When you have for-profit public goods, it always descends into extortion.

For-profit war means war without end. Why would any military contractor win or lose a war? That would mean there’s no more profits. Yet the Corporate Welfare Apologists are willfully blind to this.

For-profit healthcare means sickness for profit. When everybody’s healthy, you don’t make money.

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32 comments

  1. jsn

    It really is astonishing how far this can go. I think it was Twain that said “markets can stay irrational longer than you can stay solvent”, but political economies can stay self destructive beyond the point where they are actually killing themselves, the bend we just rounded: http://www.nytimes.com/2016/06/01/health/american-death-rate-rises-for-first-time-in-a-decade.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news

      1. jsn

        You’re right! Twain did say something similar and I’ve confused them, now I’ll have to re-open the Twain autobiography!

  2. diptherio

    I am so effing sick of talking head “experts” who will, in the same breathe, tell you that corporate execs have an obligation to their shareholders (above and beyond all other considerations) and then tell you that somehow the actions of said executives are somehow really the best thing for the customer/workers/environment.

    They have an ethical obligation to be greedy…but that doesn’t mean we can’t trust them to make the best decisions for everyone…

    Sheer idiocy.

    1. Larry Coffield

      The entire neoliberal epistemology could be shattered if challenged via your comment. The notion of any private-public partnership makes no sense with a reserve currency. It explains why the Snyder regime and the EPA were complicit in poisoning the water to privatize Michigan. It explains why our stakeholder government is a euphemism for shareholder government.

    2. MikeNY

      More Keynes:

      Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.

      But ‘t ain’t always so… and to believe it is, is an unthinking fundamentalism of sorts.

    3. craazyboy

      It’s time for the government to create the “means of production” !!!!

      Comrades.

      1. financial matters

        You might be on to something there :)

        Seth Ackerman in ‘The Red and Black’ (from The Future We Want)

        “”What is needed is a structure that allows -autonomous- firms to produce and trade goods for the market, aiming to generate a surplus of output over input – while keeping those firms public and preventing their surplus from being appropriated by a narrow class of capitalists.

        But the precondition of such a system is the socialization of the means of production – structured in a way that preserves the existence of a capital market.

        What’s needed, then, is a socialization of finance – that is, a common, collective financing of the means of production and credit.””

        1. craazyboy

          It’s not that complicated really. Lot’s of countries have government owned industry. The USG can fund it with sales of 1.8% ten year treasuries. In the case of pharma, it would be quite easy to cover production costs and financing cost in the price. Prolly put in 10% profit for general debt reduction too just to make the Rs happy and still undercut industry pricing by a half or 2/3rds. Then Medicare/Medicaid spending goes down too – a Republican wet dream!

    4. hemeantwell

      I am so effing sick of talking head “experts”l

      Yep, they’re usually no more than elite appendages who have gained ideological maestro status somehow. They portray themselves as having that status due to their achievements in the supposed hurly burly of free discussion in the public sphere, but they’re more like priests elaborating a faith endorsed by the nobility.

  3. RW Tucker

    Thank you for writing this. It’s really crazy how the words “cartel” and “monopolistic” have completely left the nomenclature. Much like “corruption” and “bureaucracy” are both lost terms as well.

    But I’m convinced the loss of consciousness about these mega firms coincides with the death of small business starts (I’m sure all NC is aware of the figures surrounding small biz closings vs openings).

    Regulatory and financial compliance favors big firms. World trade favors big firms. And big firms favor big firms, because they eat up the small corps.

    1. flora

      The cult of perfect markets admits no heresies: words like “cartel” and “monopolistic” and “corruption”.
      The cult of perfect markets has grown to encompass many of the US govt’s former regulatory agencies.

      1. Clive

        That is such a good point. Some of our vocabulary has become “un-words” for the mass media. Those labels you’ve cited have a dog-whistle connotation. But sometimes you do really need to call the dog and the use of a whistle is entirely warranted.

  4. JohnnyGL

    Comments on the article at NYT are almost uniformly critical with phrases like “market failure” and “cartel” being thrown around.

    When you see the pro-Chavista crowd in Venezuela say that the private sector there is engineering shortages for profit….believe them! The media treats these possibilities as the stuff of fantasies. Just like they can’t bring themselves to admit that the drug cartels are doing it here, too.

    Good reply to a junk article.

    1. Uahsenaa

      Correct me if I’m wrong, but I thought the problem in Venezuela had mostly to do with currency manipulation, i.e. the going rate for bolivars to dollars being much better than on the black market, incentivizing selling all those dollars you acquire from the government there, but that dollars can only be acquired in this way for the purposes of importing. So, they bring goods into the country to get the dollars, but then send them right back so they can sell the dollars on the black market.

      I’m not trying to suggest there’s no market manipulation outside of this scheme, but it does seem to account for a lot of these shortages, if not most, since Venezuela is heavily reliant on imports.

      1. TheCatSaid

        here are 2 good articles I read on Venezuelanalysis.com

        1) Mark Weisbrot’s article in originally in The Hill about the exchange rate issues

        2) One of the best articles I’ve come across describing the diverse kinds of corruption and dysfunctional consumer/business coping strategies, by Jorge Martin.

        Remedies for Venezuela will have to address both dimensions.

  5. Mark

    Related drug manufacturer malaise

    “Already, 23,000 people die yearly from antibiotic-resistant bacteria in the U.S. and more than 2 million fall ill, according to the Centers for Disease Control. But as many as 10 million people a year could die from antibiotic-resistant bacteria worldwide by 2050 if new treatments are not discovered, according to a recent report from the Review on Antimicrobial Resistance.

    “For society’s preservation as we know it, there has to be a constant regeneration of new antibiotics to go after these progressively more resistant bacteria,” said Barry Eisenstein, vice president of scientific affairs at Cubist Pharmaceuticals Inc., which specializes in antibiotic development.

    Despite that urgency, most of the world’s largest pharmaceutical companies stopped making antibiotics long ago, citing high costs of development and low returns.”

    03/03/15 international business times

    1. TheCatSaid

      From the description of the Microbial Balancing Manual:

      “The Microbial Balancing Program (MBP) connects humans and nature in a new and intimate way. In this program, human health and balance are achieved by focusing not on the human, but on the health and balance of the vast and vibrant population of living organisms called microbes. Up to now, we have developed a highly adversarial relationship with viruses, fungi, bacteria and protozoa. We control them by killing them. After all, we humans are a lot bigger than they are and killing the “little buggers” should not be an issue for us. In the Microbial Balancing Program, we turn 180 degrees from this thinking and deal with human health issues by cooperating with and ensuring the balance and well being of the “little buggers.” We make peace, not war. . . . Instead of attempting to dominate and control viruses, fungi, bacteria and protozoa, we can use cooperation and care. We can change our attitude and how we approach our relationship with microbes. As a result of our changes, we can turn infectious disease on its ear.”

      It’s time we developed a different perspective on microbes, and act on that new understanding.

  6. Adam Eran

    Well put. For more in this vein, Marcia Angell, former editor of the New England Journal of Medicine writing in the NY Review of Books is really essential. She provides a broader and deeper perspective to the corruption of the present system.

    This is also useful in responding to the lumpen-libertarians who insist that high profits are necessary because the drug companies do so much research, doncha know. (Please ignore that 75% of pharmaceutical innovation comes from government-funded research).

    Angell notes that big Phrma spends roughly 15% of its gross profits on R&D, primarily to extend the patent life of existing drugs (think “time-release viagra”), but 55% of those gross profits on marketing.

    She also says she trust no drug company-funded studies.

    1. Wade Riddick

      With regards to corporate R&D costs for new drugs,

      1) Companies spend far more money on counter-productive advertising. Eliminate the ad budget and patient care improves and R&D budgets more than double.
      2) The tax payer is already paying for corporate R&D. It’s tax deductible.

  7. Howard Beale IV

    Go check out the price for a WHO-essential listed drug, clomipramine for treating OCD. It’s been a generic for decades. It used to be dirt cheap. Now? It’s more expensive than just-freshly approved anti-depressants. What’s really happening is that we have massive consolidation in the generic drug space that I’d be willing to be that there’s signaling happening with drug pricing to let others know who will run the table on certain meds.

  8. BondsOfSteel

    The solution to the problem becomes clear when you realize there really no one keeping track of how much of what is available, where, and for how much. We need such an actor in the market as well as one that when supplies (or even precursors) get low and front load the cost of production.

    I like the analogy to farm goods: https://en.wikipedia.org/wiki/Commodity_Credit_Corporation

  9. Wade Riddick

    With regards to infections, what’s less-widely known is that infection is a consequence of food and medical fraud. The following things make infection by viruses, bacteria and fungus more likely via diminishment of various innate immune factors (e.g., LL-37 and NPD1).

    1) Sugary foods promotes overfeeding, depresses FOXO and diminishes LL-37 (cathelicidin).
    2) Loss of fiber in the diet diminishes LL-37 production via bacterial production of butryate in the gut.
    3) Broad-spectrum antibiotics are per se medical malpractice. They kill friendly bacteria that regulate the immune system (see #2). Deworming the gut has similar consequences. It’s also medical malpractice. People with worms, for instance, never contract multiple sclerosis after a viral infection.
    4) Removing omega-3 fats and substituting omega-6 fats depletes NPD1 production, which impairs the spread of flu.
    5) Sunscreen depletes vitamin D3 production and LL-37. (Yes, it mostly reduces your skin cancer risk but then again a third of that risk is dietary anyway). Flu outbreaks fluctuate with seasonal UV light.

  10. Senator-Elect

    Wonderful post!
    What is wrong with economists? The pharma market is one of the most dysfunctional markets we have on planet earth. Why would their ECON 101 tricks have any relevance here? Break big pharma into a dozen pieces and get back to us.

  11. the blame/e

    I really don’t see what all the hubbub is about. If we can have price-fixing then why not drug-fixing? The two go side by side, hand in hand, with race-fixing. Just ask Lance Armstrong. “Live strong or die.”

    Ask T. Boone Pickens, whose not particularly novel approach to commodity fixing and resource fixing was to buy up a Texas aquifer, privatize, and other wise carry-off a little water-fixing. Maybe not today, or tomorrow, but someday, soon. Very soon.

    I say “not a particularly novel approach” because of the kind of unrelenting cancer of Capitalism that wants to run pipelines into the Great Lakes, securing for themselves what use to belong to the people living on and around the Great Lakes for free, mainly.

    These articles are really just a whining in the face of certain reality. Resistance is futile. One way or another, human nature will prevail over living, breathing, drinking and drug-seeking.

  12. cnchal

    From frowns to smiles.

    The other day near the end of an NBC national newscast was the story about medical billing and the hook was that the lady that gave birth to one child was charged for two. It was just a mistake by whomever does the billing at the hospital, and then came the news that 80% of hospital bills have mistakes hidden in the tally.

    What happened to the lady was that she was charged for a C section and a vaginal birth and her bill for having one child was $40,000 which greatly bothered her, so she went on a wild goose chase until she ended up hiring a ‘bill inspector’, when that particular mistake among quite a few others was discovered.

    After almost two years of back and forth with the hospital, she got her portion of the bill whittled down to less that $2,000 and paid the ‘bill inspector’ something like $1,600 for their services. I am going to presume that her insurance paid for whatever was the remainder, which was not disclosed in the newscast.

    It seems as if the hospitals, when constructing a patient’s bill, use a series of random number generators with the first number always greater than one.

    Clearly, hospitals have perfected the art of billing fraud., and seem to have immunity from prosecution, and I wonder why.

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