Pharma Joan Busfield (N.D.) Explores

Pharma

Joan Busfield (n.d.) explores the pharmaceutical industry as a source of rising health costs. She identifies a few different issues. One of these is the monopoly that pharmaceutical companies have over the drugs they develop, which lasts 20 years and is designed to allow them to earn back the cost of drug development. Another issue that pharmaceuticals are overprescribed -- one of per month for everybody in the developed world. While drug makers earn high profit levels in the west, developing nations are under pressure from bodies like the World Trade Organization to accept Western standards for intellectual property rights, which would force firms in the developing world to produce old, generic products almost exclusively, or pay licensing fees that would put those products out of reach pricewise for most of the people in those countries.

Busfield in particular calls attention to the lack of study regarding pharmaceuticals as consumer products, despite the size of the world's largest pharma companies and their influence of global social outcomes. She seeks specifically to call attention to the power and influence of the pharmaceutical industry in public and political discourse, and policy-making. She notes that while some within the industry complain about the costs associated with drug-testing for approval, many aspects of the process are designed to serve the needs of industry, rather than consumers.

Abraham (n.d.) postulates the idea of "pharmaceuticalization," which he defines as "the process by which social, behavioral or bodily conditions are treated…with pharmaceuticals" (p.290). He argues that the political economy of the pharmaceutical industry, consumerism and deregulatory state ideology are all contributing factors, interrelated, that drive the commercial success of the pharmaceutical industry. Abraham's overarching point is that these factors, more than medical necessity, are what have driven the increased use of pharmaceuticals and therefore health care costs.

Monopoly

The FDA has a multi-stage process by which it approves new drugs. This process, in general, takes several years and hundreds of millions of dollars to bring a product to market. Most new products that begin this process never reach FDA approval, meaning that they never come to market. For pharmaceutical companies, there is little incentive to invest in drug development in a totally free market, because after spending this time and money to develop a drug they would see competitors isolate the chemical composition of their work and replicate that drug within months or even weeks. The solution to this issue is the monopoly.

The monopoly is basic economics -- without competition, the firm can set its prices wherever it feels it will gain the highest profits. The pharmaceutical companies receive a 20-year monopoly on new drugs, which they view as an opportunity not only to recoup the cost of developing that drug, but the costs associated with developing other drugs that did not make it through the approval process, plus a profit margin on top of that. These are paid by the federal government through Medicare and Medicaid, and by insurance companies. In other words, these costs are paid by taxpayers, employers and consumers. The tradeoff is simple -- these payers are able to have some (if limited) access to a drug in exchange for paying inflated costs for it. The idea is that without the monopoly, pharmaceutical companies are unlikely to innovate new drugs.

The problem with monopoly is that it limits supply in the market. Thus, it serves the needs of suppliers, but not the needs of consumers. An efficient market has multiple competitors, and the price will trend towards equilibrium. The problem is that there is no efficient market in health care, and the distortions are cause runaway prices, and a drug-addled society. On the former, monopoly is always going to result in inflated prices. The issue with high prices is that it cuts out a segment of the market that is unable to pay. It must be remembered that demand in the market is not dependent on prices, as would occur in a normal economic model. Demand is dependent on the frequency of a condition in the population. This number, for most conditions, is generally known. Thus, the equilibrium point can be determined that would deliver the cost recovery and markup pharma companies seek, without allowing costs to escalate to gouging levels. The problem is that once the monopoly has been granted there are no serious cost controls beyond market controls.

There are two problems with this. The first is that without cost controls, it is difficult to improve bargaining power. First, buyers have little bargaining power because most buyers -- even insurance companies -- lack size to bargain over prices. Only Medicare and Medicaid have the size to drive prices down, because pharma companies are dependent on their money even with the monopoly. The second is that there is information asymmetry, which reduces the bargaining power of buyers. Again, only the largest and most sophisticated buyers will have any chance of determining the "right" price to pay for a drug, and everyone else will essentially be price-takers. For conditions where there are few if any substitutes, almost every buyer will be a price-taker. Thus, the conditions are ripe for abuse of monopoly power.

Where abuse of monopoly power exists, not only are economic outcomes negative but so are the social outcomes. Consumers can be priced out of life-saving treatments. This is the case in the private market, where insurance companies might balk, but also in public markets. Even governments might balk at high-priced pharmaceuticals where some sort of substitute exists.

Worse, the pharma industry has recognized the value of monopoly to its bottom line and sought to extend it. Drugs see new applications to the FDA for new uses, to attempt to extend the useful (monopoly) life of a drug. Some companies are now trying to patent human genes, even. The gene

BRCA is linked to very high rates of breast cancer, but the gene is "owned" by one company and they have a monopoly. Thus, while the entire human genome can be sequenced for $1,000, they charge $3,000 to screen for this one gene, and no other company can do anything with the gene. The case is actually before the Supreme Court to decide of a company can actually patent a gene that exists in nature (Carmon, 2013).