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Market Failure, Epinephrine Injections, and Societal Failure

2017 February 13

This is not a competitive market:

Pharmaceutical company Kaléo – already under fire for raising the price of an overdose antidote – now plans to put an alternative to the EpiPen on the market for more than seven times the cost of the leading $608 drug.

Kaléo’s epinephrine injector, used to stop severe allergic reactions, will go on sale for $4,500 for a pack of two beginning on February 14. The auto-injector’s innovative audio instructions walk caregivers through administering less than $5 worth of epinephrine.

Remarkably, because of a system of coupons and discounts, Kaléo’s epinephrine injector Auvi-Q may have the lowest out-of-pocket costs for patients, a strategy some critics say may help some customers, but leads insurance companies to redistribute the cost of the drug through insurance fees to remain profitable.

The materials in such epinephrine injectors are worth about $8.

This is market failure. In a free market without collusion, if something is this high-priced, the price drops to more closely match the cost of production as other producers move into the market. It does not radically increase. As it stands, if you need an epinephrine injector and don’t have one, you stand a good chance of dying.

The rational reaction to these sorts of market failures, increasingly common in pharma, would be: (1) to either restructure the market to prevent them, which would require breaking up big pharma companies, streamlining approval processes, and allowing reverse-engineered knock-offs, or; (2) more simply, for the government to just manufacture them itself and charge a fair price.

There are some government services which should be kept entirely in-house. (The military, for example. Mercenaries are failure mode for any government.) There are many other services for which the government should be one provider among a number. The government stays in the business, providing about a third of the service; because if you aren’t in the business yourself you can’t always know if you’re being rooked by private companies and if you are being rooked, it’s very difficult to do anything about it because you don’t have the expertise to provide the service yourself.

At the same time, you want private companies involved to keep the in-house providers honest. You have multiple contractors, and those who do the best for the least are rewarded, so they have incentives to improve. You swap out the lowest performing ones on a regular basis, especially allowing a few upstarts in at the lowest viable level, so that radical new ideas can be tried.

If those new ideas work, everyone, government and private, adopt them.

At any rate, the market failures in pharma, with price markups in the thousands to tens of thousands of percents, are now so common that it’s clear that a radical solution is needed. The simplest solutions are price control and government getting into the business. Ideally, both should be done at the same time.

Note that price control includes forcing companies to take a profit. Dumping is (theoretically) illegal for a reason. If the government was to get into epinephrine injectors, for example, the logical solution for private enterprise would be to undercut their prices until the government pulled out because, “The private sector is more efficient.” Then, once the government was out of the business, they would jack their prices back up.

So you mandate a healthy profit, and because you’re in the business, you have a decent idea what a healthy profit is, not just for manufacturing, but also for distribution, sales, and so on. “You will make inflation +X percent on this.”

None of this is particularly complicated to do, in theory or in practice, though that isn’t to say that the technical details of setting it up are easy. But pharma is full of scientists and engineers who hate their jobs, and there have been vast waves of lay-offs as well; there’s plenty of expertise lying around.

I should add that this is a solved problem. It is simple to fix. This sort of price-gouging simply wasn’t tolerated in the past, and it is now, and pharma executives know it. Stop tolerating it, and it will go away.

But private pharma is a stupid way to invent and produce drugs anyway. They spend more on advertising than on research, they sponge off publicly-funded research, and they have vast incentives towards palliatives because a pill a day for life is far more profitable than a cure.

Medicines in the public interest, such as new antibiotics, receive little research because they are not profitable, and medicines long out of patent are subject to horrific price-gouging, and so on.

If you’re sick, you’ll pay almost anything for a cure. Medicine, drugs, and medical devices are one of the last things which should be provided through the private sector. If they are, they must be very highly regulated or in an engineered market with careful oversight–one from which the profit motive is largely excised at any level where decisions of patient care are being made.

The fact that our societies can no longer manage something as simple as drug prices is yet another sign of deep social failure.


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21 Responses
  1. Arthur permalink
    February 13, 2017

    I think this points to the fact that the Greco-Roman world is really coming to an end and no one has a clue what to do about it.

    On my morning run today I got to thinking about Steve Bannon. His crackpot view of history and the present state of affairs has been all over the news lately. But I’m wondering how serious is he really? Of course he may really believe what he says and sincerely wants the present order to come crashing down. The more pain for his enemies the better, and at the end he’s. . .what? The leader. Maybe. After all, the Nazis believed their garbage and brought about 15 years of terrible pain. And at the end when some stood on the gallows their last words were “Heil Hitler”.

    But could it be just as likely that he’s playing everyone for a fool? He’ll ride this horse for awhile, and then have the creds to sell that movie script (isn’t that the American Dream. . .make it in Hollywood) to fellow jackass Mel Gibson. The movie will star Jim Cavizel and make millions off the dolts.

  2. Billikin permalink
    February 13, 2017

    Until around 1980 medical costs in the US were around par for medical costs in other advanced economies. Then they took off, and now we pay much more than people in those economies. This suggests that something happened around 1980 that profoundly changed the cost of medical care in the US. What was it?

    Well, Reagan got elected, but that is no answer in itself. I have found nobody who ought to know who has answered that question. During the debates about health care costs and insurance people seemed to be arguing about other things. But one thing happened around that time (IIRC, in 1978) that may be relevant. Congress changed the law to allow private drug companies to patent drugs that were developed with Federal dollars. To which I say, WTF!? If our dollars paid for the development of those drugs, and there is a patent, why don’t we own it?

    (To be sure, development is only part of bringing a drug to market, but surely we could provide a license to companies that wanted to do the rest of the work.)

  3. Willy permalink
    February 13, 2017

    Whatever happened to the small business doctor? These corporate medical organizations suck! If I get misdiagnosed again I’ll give them something to heal. Thank god dental hasn’t gone that route.

    And assholes like Joe Manchin need to be primaried. That’s all.

  4. February 14, 2017

    @Billikin

    I don’t know how it works in pharmacy, but in other areas of Government contracting (defense), the contractor can file the patent, but the government automatically gets a license for unlimited free use. If that does hold for pharmacy, then the Government can do exactly what Ian suggests–start manufacturing it themselves.

    The other area that this can be more easily but not comprehensively addressed is in new research grants. The Government simply starts declaring that they own all rights, period. It’s work for hire. That’ll push research out of private industry and into universities and non-profits amazingly fast. It’s not comprehensive because it doesn’t deal with older medicines and a bunch of the other ways the pharmacy companies get the FDA to help them preserve their monopolies, but it’d be easier to implement.

  5. Tom permalink
    February 14, 2017

    Yeah Dental has largely avoided the medical business fuckups.

    Universal Healthcare is a must, but Americans keep buying the lies it doesn’t work.

    Oh and Michael Flynn just resigned as NSC Advisor. Constant hammering of him for being pro-Russian did him in.

  6. V. Arnold permalink
    February 14, 2017

    I find it interesting that societal failure is a predominately western feature.
    The ME societal failures are also a product of western societal breakdown’s aggressive foreign policies; specifically the U.S. and Britain.
    S.E. Asian societies seem to be the most stable at this time. And, they are pivoting away from the U.S. and towards China and Russia.
    The same cannot be said for Asian and South Asian societies.

  7. Will permalink
    February 14, 2017

    Nice post Ian, it is something that needs to be said and repeated. As often as necessary.

    This is another one of those issues where you have an obvious market failure and/or crony capitalist abomination that hides behind the auspices of an unfettered market. And this has worked very well for decades. It has made quite a few mediocre businessmen and researchers wildly rich.

    At his point I say just get a global map of with all of the other advanced economies shown in red. Throw a dart and try to install the healthcare system of whatever nation your dart lands closest to. It wouldn’t really matter, all of them have our system beat all to pieces.

    Will

  8. Billikin permalink
    February 14, 2017

    Thanks, Ed. 🙂

  9. Willy permalink
    February 14, 2017

    Is seems “crony capitalism” is the best phrase we’ve got for what’s happening, and it’s trickled down to the common culture. MBAs come out of school believing that working the books is the only thing that matters, besides Machiavelli.

    In my former business dedicated inventors were so frequently marginalized by experienced players (who’d then capture the patent as their own), they’d give up and take on a ‘just punch the clock’ attitude. Occasionally they’d start their own business, but personal connections are everything in that world today.

    These things have always been around, but I can’t remember it ever being so bad.

  10. bruce wilder permalink
    February 14, 2017

    I found this story via Corey Robin and Naked Capitalism. It goes directly to the point that letting unrestrained greed drive the organization of health care is a recipe for disaster and tragedy.

    https://projects.seattletimes.com/2017/quantity-of-care/hospital/

    It is kind of a quibble in a way, but I would like to raise an objection to the use of the term, “market failure” in this context. There is a canon of market failure outlined in the framework of neoclassical economics, but it is mostly irrelevant to the economy we live in, which is predominantly organized around bureaucracy and finance. When economists start in with cant about the free market economy they are drawing us all into a Big Lie, one that hamstrings thought even when it permits a few helpful insights about bargaining power (as in this case). In textbook economics bureaucracy does not exist and money is an illusion. That is not the world we live in.

    I can scarcely detail all the things that get ignored when the idea of a market is allowed to block out the reality of hierarchy and finance, but you don’t get from $8 to $4000 on the strength of simple market bargaining. The ratchets and gamesmanship, not to mention the cultures created under domination thru hierarchy, as detailed at my link, get lost too easily when we adopt the conventional discourse devised by ideologues like Friedman. Anyway, something to consider being more circumspect about.

  11. Hugh permalink
    February 14, 2017

    Spot on. I am a big advocate of government drug production facilities. There are several classes of drugs where this makes a lot of sense.

    1) Generics, lower production costs, better quality control, and there is absolutely nothing which would prevent more convenient reformulations (which is what BigPharma does to keep prices high for what is the same drug)

    2) Vaccines, Big Pharma, in general, hates vaccines because they are one or two and done. You can’t keep selling them to the same patients for years and years.

    3) Orphans, these are drugs used in rare conditions. Few patients = no profits.

    The most recent example of drug price gouging is with some variants of naloxone used to treat opiod overdoses. I agree with Ian that some form of government control of private corporations is also needed. You get X% in profit as we define profit. Any deviance from this, and use lose your license to sell in the US, your C-level execs and board go to jail and are financially liable, and if you are a US corporation, your patent is seized.

  12. Some Guy permalink
    February 15, 2017

    “I should add that this is a solved problem. It is simple to fix. This sort of price-gouging simply wasn’t tolerated in the past, and it is now, and pharma executives know it. Stop tolerating it, and it will go away.”

    Spot on, as it the whole post, but I see this same pattern everywhere, an epidemic of uncontrolled rent seeking from hollywood to silicon valley to manhattan, where once government intervened to deflate the rents, in different ways in different markets but always to the same goal.

    Imagine if mail service (e.g. USPS) was starting from scratch today, what it would look like and then multiply that across half the economy. This is decay in our ability to self-organize – in our ethical understanding of how to manage our economy, at root it is a moral decay, but what can be done – honestly I have no idea. Yes, of course we can point out specific fixes here and in every industry – as you rightly say the solutions and the reasons for them are obvious – but that is the whole point – we are no longer capable of accomplishing even obvious things.

  13. Mike permalink
    February 15, 2017

    I’d just like to point out that in the UK, we don’t have Government drug making facilities, and we don’t pay $4000 for an epi pen.

  14. Anon permalink
    February 15, 2017

    Yet so many liberals still want Corey Booker to run for president in 2020. They never learn. Someone so blatantly bought by the pharmaceutical industry should be voted out of office.

  15. Nancy permalink
    February 15, 2017

    @Tom
    “Universal Healthcare is a must, but Americans keep buying the lies it doesn’t work.”

    I totally agree. If every other 1st world country can provide this for their citizens, why can’t we? Get the greedy bastard insurance companies out of healthcare.

    If rich people think they are too good to participate in a universal healthcare system with the great unwashed, let them set up their own private concierge medical networks so that they can feel superior.

  16. Nancy permalink
    February 15, 2017

    @Tom
    “Universal Healthcare is a must, but Americans keep buying the lies it doesn’t work.”

    I totally agree. If every other 1st world country can provide universal healthcare for its citizens, why can’t we? Aren’t we supposed to be “the greatest country in the world”? I recommend repeated viewings of Michael Moore’s “Sicko” to counter the anti-Universal Healthcare indoctrination of Americans victimized by years of right-wing propaganda.

    Matters of life or death should not be subject to the profit motives of the greedy bastard insurance companies. If the rich think they are too good to participate in a universal healthcare system with the great unwashed, then they can set up their own private concierge medical networks. That way they can feel superior and pay whatever they want for the privilege.

  17. Billikin permalink
    February 15, 2017

    Yeah, “market failure” is one of those funny terms that suggests that economics is not exactly a science. When a fire goes out chemists do not talk about an oxidation failure. When an asteroid is perturbed in its orbit so that it escapes the solar system, physicists do not talk about a gravity failure. Markets do what they do and don’t do what they don’t do. If our markets don’t do what we want, the failure is ours.

  18. Hugh permalink
    February 15, 2017

    Some Guy, great comment. I especially like

    This is decay in our ability to self-organize – in our ethical understanding of how to manage our economy, at root it is a moral decay, but what can be done – honestly I have no idea. Yes, of course we can point out specific fixes here and in every industry – as you rightly say the solutions and the reasons for them are obvious – but that is the whole point – we are no longer capable of accomplishing even obvious things.

    Re rent seeking, intellectual property is another big locus. There’s a lot of material from the 1930s, 80+ years ago, still under copyright. Everyone concerned with its creation and production has been dead for decades. Yet the rent seeking from it marches on. Anyone born after the mid-1970s will live and die in a world where everything created in that time frame will be under copyright from the moment they are born to decades after their deaths. This completely subverts the purpose of copyright which was to promote creativity both by rewarding the creator of a work and, after a reasonable period, enriching society by granting free access to and use of that work.

  19. February 15, 2017

    Ask a related question: who benefits?

  20. February 16, 2017

    Oddly, this sort of syncs up with my thought for today, which is that health care and higher education are two places where the traditional “more competition means lower costs” thinking in the economics profession fails because economics know the price of everything and the value of nothing. When something is literally beyond value to the person — like his own life — then competition no longer is about price. It’s about whether you can be cured. Because all the money in the world will do you no good if you’re dead. Your life is, literally, priceless to you.

    One of the things that the current Republican takeover of government has done is clear out some of the logjams where we might start seeing things happen. Unfortunately, most of what they propose is to double down on already bad ideas. This is not so much a societal lack of ability, in somuch as it is a societal lack of imagination. As with the Roman Empire towards its end, things had been done in a certain way for so long that people had literally forgotten that it was possible to do things in any other way, and if you proposed to do so, will issue loud shrieks of “Heresy!”.

  21. Lisa permalink
    February 17, 2017

    Inevitable result of the financial/rentier model we exist under. This is the ‘new norm’ that can only get worse.

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