"IN the meantime, we need a fair and transparent system for setting prices. In much of Europe, insulin costs about a sixth of what it does here. That’s because the governments play the role of pharmacy benefit managers. They negotiate with the manufacturer directly and have been very effective at driving down prices. In the United States, we rely on the private sector and a free market for drug pricing. But in order for this to work, we need to regulate it better and demand greater transparency."
She then presents structural estimates of how equilibrium drug prices are affected by competitor entry into a market;
"The first generic competitor usually sets a price that is only slightly below the branded insulin. Research shows that once there are two manufacturers of a generic drug, the price typically drops by about half; with eight, it drops to about a fifth. But because insulin is a biosimilar, the decline may be more modest. And this will take time; additional testing is needed to ensure the safety and effectiveness of each new generic before it is approved."
So, this could have been a very interesting piece if she had teamed up with one of Yale's IO economists to write this piece. In the last sentence, she touches on a key tradeoff. If a drug is "risky" but lowers prices in the market, is it "good or bad"? In a world with no free lunches, how risk averse are we? What are these risks? How do we tradeoff lower prices for risk? These are economic questions but the NY Times commissioned a bench scientist to write the piece. Interesting!
As the NY Times roots for the U.S to become Europe, it should try harder to sketch out the key economic issues at play here and actually get some economists involved.
Her piece ends with some editorializing without any evidence:
"In general, our faith in newer and “better” drugs — coupled with our unwillingness to police this marketplace — has done little to help Americans like Mrs. B. Sure, we need to protect the intellectual capital of pharmaceutical companies so that they continue to invest in innovative new drugs. But those drugs should ultimately result in better health for patients, not just wider profit margins."
SWITCHING Gears: Now consider the following letter to the Editor.
To the Editor: David Brooks’s column is based on the faulty premise that American innovation is driven principally by the desire to make money, and that without free-rein capitalism, there would be no motivation to invent the next iPod.
I believe that most Americans are driven to innovate by the restless, imaginative energy that is part of our country’s daring fabric, and that Thomas Edison or Bill Gates would have invented what they did even if the United States had a high tax rate, free medical care, clean, cheap transportation and minimal poverty.
I cannot imagine Alexander Graham Bell saying to his assistant: “Watson, don’t come in here. There’s no money in this thing. Let’s forget it.”
LEE KALCHEIM
New York
Yikes! I won't bother to add any comments on this one. My only comfort here is that I don't believe that reading this newspaper has a large "treatment effect" on one's thinking. I believe that confirmatory bias is at play here as people read stuff that reconfirms their prior worldview.
UPDATE: The common idea across these two pieces is the belief that both drug companies and other innovators would engage in the same effort even if their marginal returns were lower. This "inelastic effort" hypothesis is a structural claim that can only be tested using a potentially very costly experiment. By asserting the value of key structural parameters (such as the supply curve of effort's slope as a function of after tax returns), without estimating such parameters, we are in danger of making a foolish policy choice.