Open threads at the Open Thread tab every Sunday and Wednesday

Reverse Voxsplaining: Brand-Name Drugs

[Epistemic status: Uncertain, especially on the accuracy of the economic studies cited]


Sarah Kliff of Vox replies to my piece from last week. She writes:

Earlier this week I wrote about how a lack of drug price regulation in the United States allows pharmaceutical companies — including EpiPen’s manufacturer, Mylan — to charge exceptionally high prices for their products.

Scott Alexander at the blog Slate Star Codex argues that I’ve got it all wrong: The problem isn’t a lack of price regulation. Instead, its too much regulation, which has prevented generic competitors from entering the market and has left EpiPen’s price so high. […]

Alexander and I are both essentially pointing out two examples of how the United States has created a regulatory system that is incredibly favorable to pharmaceutical companies. We’ve set up a system that makes it incredibly easy for drug companies to score high profits and charge exceptionally high prices for their products.

One way it’s favorable is that we let drug companies pick their own prices — in this way the United States is exceptional, as the vast majority of developed companies regulate their drug prices. Another way we’ve created a favorable regulatory environment, as Alexander writes, is by allowing roadblocks to stand in the way of generic drug makers who want to enter.

More generics can help America’s drug spending problem. But they can’t solve it.

Greater use of generic drugs is widely accepted as a way to drive down drug spending. The FDA has found that drug prices decline to 55 percent of the brand-name price when two generic manufacturers begin making a product. Right now, the United States already uses a lot of generic drugs. In fact, about 90 percent of drugs prescribed in the country right now are generic. Brand name drugs are the reason that America has higher per-capita drug spending than other countries. Brand-name drugs make up just 10 percent of prescriptions filled in the United States, but account for 72 percent of drug spending.

Drugs that are under patent are the true source of high American drug costs. EpiPen is, in a way, a bit of a red herring […]

Harvoni, a [patented] pill that cures Hepatitis C, costs $32,114 here — and $22,554 in the United Kingdom. Less red tape around generic drug competition wouldn’t really change that fact. As long as we’re going to have patented drugs, letting drug manufacturers set their own prices will remain a key driver of America’s higher drug spending.

(the above is some excerpts stitched together to provide a taste; you should really read the whole thing)

First of all, thanks to Ms. Kliff and Vox for responding to me; it’s always neat to get featured in real news sources as if I were a real writer or something instead of just a guy with a blog. Additional thanks for a very measured and charitable tone despite my own tendency toward snarkiness. I worry that I am being unfair by acting snarky to somebody who is writing for a professional publication and so is not allowed to be snarky back; if so, I’m sorry and will try to control myself as best I can, which admittedly is not very good.

That having been said, I’m super against all of this and think it’s totally wrong.

I would kind of like to complain about Vox calling EpiPen a “red herring” when they were the ones who brought it up, but I think the problem is deeper than that. Discussing generic drug costs is completely different from discussing brand name drug costs, and the two issues have very different arguments around them. To transition fluidly from one to the other, saying we need more price controls for generics and then backing up your argument by saying that you were mostly thinking of brand-names after all – elides a distinction which is the heart of this entire subject.

Generic drugs are overpriced because we’re morons who can’t come up with a decent regulatory regime. Brand-name drugs are overpriced because of a deliberate decision to overprice them to encourage research.

The economic argument goes: the more profitable new drugs are, the more incentive a company has to make them. If we didn’t reward pharmaceutical companies for inventing new drugs, then they wouldn’t go through the $2.5 billion, ten-year hassle of seeking FDA approval with no guarantee of success. The way we reward them is by giving them a twenty-year monopoly when they can charge lots of money without anybody telling them not to.

(this isn’t quite right. The law says a twenty-year monopoly, but it’s dated from the time the drug is invented. Since it takes ten years to go through the FDA, it’s effectively more like a ten-year monopoly on actually selling the drug)

The reason I usually limit my griping about pharmaceutical overpricing to generics and avoid brand-names is that while high generic pricing is inexcusable, high brand-name pricing is debatably useful. Some people would say that the benefit of encouraging more drug development is worth the cost of higher prices, other people would say that it isn’t. I didn’t want to wade into this complicated debate.

But I guess now I have to. So. Lit review time. I searched the economics literature for studies, models, and arguments used to calculate whether price regulation would decrease drug development, and if so, how the benefits and risks balanced out. Here’s what I’ve got:

1. Golec & Vernon (2006) say that as a result of European drug price regulation, “EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms.”

2. Eger and Mahlich (2014) find that among pharmaceutical companies, “a higher presence in Europe is associated with lower R&D investments. The results can be interpreted as further evidence of the deteriorating effect of regulation on firm’s incentives to invest in R&D.”

3. Kutyavina (2010) finds that “brand-name pharmaceutical firms characterized by large R&D expenditures decreased their R&D efforts post 1993 threat [to regulate drug prices] relative to firms that did not engage in as much innovative R&D”.

4. Acemoglu and Linn (2004) find that “We find a large effect of potential market size on the entry of nongeneric drugs and new molecular entities”, which I think is supposed to generalize to mean that the more money they expect to make the more research they do. I will count this as half a study since the connection is not explicit.

5. Danzon & Epstein (2008) analyze price regulations and new drugs invented in 15 countries and 12 drug classes, and find that “If price regulation reduces drug prices, it contributes to launch delay in the home country.

6. Troyer & Krasnikov (2002) find that “the empirical relationship between pharmaceutical industry revenues and pharmaceutical industry innovation is estimated, allowing for an exploration of the impact of the Medicaid rebate program [which regulated drug prices somewhat]. Using the empirical results, the opportunity cost of the Medicaid rebate program is found to be as high as four new drug approvals annually. Given the increased interest in a Medicare drug benefit, regulators should be aware of the hidden cost of price regulation for pharmaceuticals.”

7. Vernon (2005) finds that “I simulate how a new policy regulating pharmaceutical prices in the US will affect R&D investment. I find that such a policy will lead to a decline in industry R&D by between 23.4% and 32.7%. This prediction, however, is accompanied by several caveats.”

8. Golec, Hegde, and Vernon (2009) find that “Results show that the HSA [a bill to regulate drug spending in the US] had significant negative effects on stock prices and firm-level R&D spending. Conservatively, the HSA reduced R&D spending by about $1 billion even though it never became law.”

9. Santerre and Vernon (2006) use drug demand data to simulate various regulatory regimes, and find that a certain price regulation policy they test, continued over twenty years, would have cost gains of $472 billion (!) but also “have led to 198 new drugs being brought to the US market” (!!). They note that “Therefore, the average social opportunity cost per drug developed during this period was approximately $2.4 billion. Research on the value of pharmaceuticals suggests that the social benefits of a new drug are far greater than this estimate. Hence, drug price controls could do more harm than good.”

10. Keyhani, Carpenter, et al (2010) find that “The United States accounted for 42% of prescription drug spending and 40% of the total GDP among innovator countries and was responsible for the development of 43.7% of the NMEs [ie new drugs invented]. The United Kingdom, Switzerland, and a few other countries innovated proportionally more than their contribution to GDP or prescription drug spending, whereas Japan, South Korea, and a few other countries innovated less…higher prescription drug spending in the US does not disproportionately privilege domestic innovation, and many countries with drug price regulation were significant contributors to pharmaceutical innovation.” This study does not attempt to address the effects of price regulation, only to say that European countries seem to do pretty well at innovation despite price regulation, which is suggestive that price regulation does not hurt drug innovation but not really scientific evidence for it. I’m going to count this one as half a study too.

So by my count, there are eight-and-a-half studies concluding that price regulation would hurt new drug innovation, and one-half of a study concluding that it wouldn’t. I’ve tried to eliminate all the studies sponsored by the pharmaceutical industry from this list, but I might have missed some, and I am always skeptical of anything that says anything the pharmaceutical industry approves of even I can’t trace the money directly.

One source I do trust is RAND, a think tank which is generally well-respected and pretty objective (despite the name, they are not associated with Ayn Rand or Rand Paul). In Regulating Drug Prices: US Policy Alternatives In A Global Context, they write:

U.S. consumers spend roughly twice as much on drugs as their European counterparts….Pressure is building in U.S. policy circles for the federal government to take action to regulate the cost of drugs. At the same time, there is debate about the pros and cons of doing so…To shed light on this debate, a team of RAND researchers examined the impact of drug price regulation…The results showed that:

— Globally, the regulation of pharmaceutical prices has increased in recent years.

— In most cases, regulation reduces pharmaceutical revenues.

— Regulatory approaches that reduce pharmaceutical revenues may generate modest consumer savings in the best cases, but risk much larger costs as decreased innovation leads to reductions in life expectancy.

In other words, such prices would be good in the short term as we get all the currently-existing drugs for very cheap:

Annual per capita spending in 2010 would fall for Americans age 55–59 by an amount in the range of $9,000 annually and for Europeans of the same age by an amount in the range of $400.

But bad in the long-term as pharmaceutical innovation declines and we have fewer interventions available to protect our health:

Life expectancy would fall by somewhere in the range of 0.2 years for Americans age 55–59 in 2010 and by approximately 0.1 years for Europeans in the same cohort and year. By 2060, this effect would increase for both Americans and Europeans to approximately 0.7 years.

Given the value they place on human life, they argue that this money-for-life-years trade is net negative:

Overall, as shown in Figure 1, the net value of price controls is positive in the short term (2010) for Americans age 55–59, producing approximately $1,100 in per capita savings, but negative for Europeans in the same cohort and year, who face increased costs in the range of $8,000. For both Americans and Europeans, price controls have higher per capita costs over the longer term: By 2060, reductions in life expectancy, after accounting for medical cost savings, would cost the equivalent of $51,000 and $54,000, to age 55–59 Americans and Europeans, respectively.

All of this sounds sort of boring and economics-y when you read it like this, and maybe your eyes are glazing over. So let me put this in context. In 2060 there will probably be 420 million Americans and 523 million Europeans. And suppose that whatever changes we make in drug regulations today last for one human lifespan, so that everybody has a chance to be 55-60. So about a billion people each losing about 0.7 years of their life equals 700 million life-years. Since some people live in countries outside the US and Europe [citation needed] and they also benefit from First-World-invented medications, let’s round this up to about a billion life-years lost.

What was the worst thing that ever happened? One strong contender is Mao’s Great Leap Forward, in which ineffective agricultural reforms and very effective purges killed 45 million people. Most of these people were probably already adults, and lifespan in Mao’s China wasn’t too high, so let’s say that each death from the Great Leap Forward cost what would otherwise be twenty healthy life years. In that case, the worst thing that has ever happened until now cost 45 million * 20 = 900 million life-years.

Once again, RAND’s calculations plus my own Fermi estimate suggest that prescription drug price regulation would cost one billion life-years, which would very slightly edge out Communist China for the title of Worst Thing Ever.

Am I exaggerating or being facetious? I’m actually not sure. Dammit, Jim I’m a doctor, not an economist. I’m not qualified to analyze any of those ten studies above beyond a quick check to see if they’re completely ridiculous. I’m not qualified to say if RAND is right or wrong to estimate a cost of 0.7 life-years, or whether I’m misusing their calculation to try to add up exactly how bad it would be. Maybe a real economist will look at this whole essay and say it’s really stupid. I don’t know.

The only thing I can say in my own defense is that I am acknowledging that the question exists. I am not at all sure that Vox has reached this level yet. They just wrote an article on price regulations for brand-name drugs which, first, mixed them liberally with generic drugs despite the different arguments around each, and second, didn’t mention anything about research or innovation. Call me overly demanding, but when you are proposing a policy which most economists think would decrease the rate of life-saving medical progress, and which by some calculations might edge out Mao’s China for the title of most disastrous and deadly thing in all of human history, then I feel like you should acknowledge, at least in a single sentence, that somebody has claimed, at least once, that the policy might have some slight downside. At least don’t act as if it’s the same issue as a different kind of drug regulation which doesn’t have that downside.

I think it’s an unfortunate omission to talk about the EpiPen cost increase as relating only to lack of price controls, and fail to mention the reason why this happens with EpiPen but never chairs or mugs. And I think it’s a further omission to talk about regulating brand-name medications but fail to mention that some people think it will backfire and impede innovation. While I appreciate the effort to say we’re both on the same team of reducing drug costs, I’m a little concerned about my teammates’ strategy here.

And there’s another way we’re not quite on the same team. I’m on Team Left-Libertarian, which luckily is so confusing and contradictory that I can define it however I want. And today it means that while I’m not opposed to all regulation in principle, I at least get really scared when somebody pushes for regulation today and promises to check whether it will have bad consequences tomorrow. I think that’s how we got in this mess where the generics industry is so regulated that EpiPens cost hundreds of dollars, and even if Vox and I are on the same object-level team of Make Epi-Pens Cost Less, I worry we are not on the same meta-level team of Learn From The Fact That Epi-Pens Cost So Much And Worry That The Same Kind Of Thinking That Caused The Epi-Pen Problem Will Probably Cause Other Problems Too.


So do I have a solution to the high price of brand-name drugs? Well, I have a partial, unsatisfying solution. But first, a digression.

Vox gives the example of Harvoni costing $32,000 in the United States, but only $22,000 in the United Kingdom. This is supposed to be an example of the United Kingdom’s drug price regulation system working. I guess this is good, but you may notice that both numbers are really really high. There’s generic Harvoni available in India for $900. I can’t find how much it costs to manufacture, but reading between the lines and looking at some similar compounds, it’s probably about $100. So good work, Britain. You’re paying $22,000 instead of $32,000 for a $100 pill.

There are a couple of morals to this story. The first is that Vox’s claim that generics made by two competing companies cost 55% of the brand-name price isn’t the right statistic to use here. Look at their source and you find that as number of competing companies gets to 20, generics cost 5% of brand names. As number of competitors approaches infinity, drug cost should approach manufacturing cost, which can be very low – in the cast of Harvoni, less than one percent. This seems true in the case of modafinil, which I’ve talked about before; it costs about $25 per pill in the US and more like $2 per pill in more generic-friendly India.

So the second moral of the story is that almost all gains in prescription drug prices are to be found not in price regulation bringing prices down from $32,000 to $22,000, but in switching from monopoly brand-name drugs that cost $32,000 to heavily-competitive generic drugs that cost $100.

In a lot of cases, this is easier than you would think.

Pristiq is the brand-name of desvenlafaxine, a new antidepressant which is still brand-name only. Desvenlafaxine sounds a lot like venlafaxine – which is Effexor, an old antidepressant which is available in generic. In fact, desvenlafaxine is a tiny change to the venlafaxine molecule which may or may not have any interesting medical benefit over the original, and which was invented solely to have something whose patent hasn’t expired.

Wyeth, the company that makes Pristiq, says that it’s better than Effexor because it doesn’t have as many drug-drug interactions. But Effexor doesn’t really have clinically significant drug-drug interactions, and this seems to be them just saying random stuff and hoping people believe them. There are no good head-to-head studies comparing Pristiq to Effexor, but if you try to piece together a comparison from unrelated studies (not recommended, but we’ll do it anyway) Effexor actually seems better than its newer cousin. Even the data I took from drug rating databases shows patients preferring Effexor to Pristiq by quite a lot. Carlat Psychiatry, which is psychiatrists’ insider news site on pharmacology developments, has a blog post called Top Five Reasons To Forget About Pristiq. Most of the well-informed psychiatrists I know agree that Pristiq is a slightly worse version of an older antidepressant with no proven advantages.

A month’s supply of Effexor costs $20. A month’s supply of Pristiq costs $300. So let me amend the paragraph above. Pristiq is a slightly worse version of an older antidepressant with no proven advantages that also costs fifteen times as much.

It should come as no surprise to anyone familiar with the state of psychiatry that it is the second most-prescribed antidepressant in the USA, with three million prescriptions per month.

Why would this happen? The relevant study is called Pharmaceutical Industry-Sponsored Meals And Physician Prescribing Patterns For Medicare Beneficiaries, so you know it’s going to be good. It shows that doctors who often eat drug-company-sponsored free lunches are more than twice as likely to prescribe Pristiq as doctors who rarely eat such lunches. This matches my observations perfectly. Doctors prescribe Pristiq because they don’t know very much about antidepressants, but they attend free lunches by pharmaceutical companies who tell them that Pristiq is great, and they believe it. If this surprises you, be more cynical.

I’m looking at the price of Pristiq in Canada, and it seems to range around $120 to $250. So if we instituted price regulations like Canada’s, we might lower the cost of Pristiq from $300 to $150. If we convinced doctors to prescribe Effexor instead, it would be $20, plus I really do believe Effexor is genuinely better.

Pristiq is far from alone in this. I don’t have good statistics, but I bet that at least half of brand-name prescriptions in the US are more like Pristiq (attempts to rip people off) than like Harvoni (genuinely wonderful breakthroughs in medical science).

So one of the best ways to deal with expensive brand-name drugs is to stop using expensive brand name drugs for no reason. Since I get to define what left-libertarianism means however I want, I will say that it is provisionally okay with banning pharmaceutical companies from buying doctors lunch, as long as there aren’t any studies concluding that this would kill more people than Communist China. There are probably lots of other ways to improve medical education and medical economics so that doctors are less easily bamboozled into prescribing these, but those can wait for other blog posts.

What about the genuinely novel brand-name drugs, the ones like Harvoni that really are better than anything that came before?

An optimistic answer: maybe after we stop spending our civilizational resources on Pristiq, we’ll have a little more money to afford them, and maybe we’ll be happy to subsdize the genuinely awesome pharmaceutical research that remains.

Another optimistic answer: once FDA regulatory requirements are loosened, there will be a wide selection of different brand-name drugs. For example, even when Prozac was a brand-name, pharma’s ability to inflate its price was limited by the existence of several very similar brand-name drugs, like Paxil and Zoloft. If there are twenty competing brand-name hepatitis wonder drugs – and I don’t think that’s outside the realm of what we can hope for – then I think that will tend to lower prices to cost. This would include the cost of research and licensing, and so still be pretty high, but as long as research is a real unavoidable cost it would probably be the best we can hope for.

(this would be a good time to bring up that chlorcyclizine costs fifty cents per pill and might work as well as Harvoni)

The pessimistic answer is that all we can do is ensure that the generics marketplace is fair and competitive. And then rich people can buy Harvoni now for $30,000, and poor people will have to wait ten years to buy Harvoni when it costs $100. Right now they’ll unfortunately have to figure out how to make do with the set of medications invented in 2006 and before.

And I know this is terrible, especially if someone has a disease with only one cure and it was invented after 2006. But think of it this way. This objection, rephrased, is that 2016 has more drugs available than 2006, and we want to maximize the number of new drugs available to the poorest patients. But if we try to do that by instituting price controls which decreases the rate of drug innovation long-term, then we end up decreasing the number of new drugs available to the poorest patients, exactly the opposite of what we thought we were doing.

Let me give an example. According to study (9) above, price controls would have caused about 200 fewer drugs to be approved over the period from 1980 – 2000. In fact about 600 drugs were approved during that period. So if they’re right, it would have cut the innovation rate by 1/3. That means that in Hypothetical Price Control World’s 2016, after 36 years of price controls, we would only have 24 of our years’ worth of drugs – ie, the drugs that we had in 2004 in our own world. But since drugs usually go off patent about ten years after approval, in fact we’ve genericized the drugs that we had in 2006 in our own world. So we have more drugs available just as generics than Hypothetical Price Control World has as generics and brand-names combined. If poor people can afford only generics or price-controlled brand names, our poor people are better off than Hypothetical Price Control World’s poor people (and our rich people are much better off than Hypothetical Price-Control World’s rich people). And as time goes on, our advantage over their world will only get bigger.

Maybe there are better ways to do this. Some people have talked about funding research via “prizes” rather than through an investment-and-profit model. Some people say we should fund it publicly through the NIH or something, which we already sort of do to a degree. Still other people say that we should abolish the FDA, cut the costs of drug development by an order of magnitude, and, um, see what happens. I don’t know about any of those things. I just feel like until you’re ready to set these up and have some idea that they work, do the thing that probably is going to result in people having the best access to the most life-saving drugs. Which right now looks like no price control.

Or maybe I am completely wrong about all of this. I am not an economist and have to take these studies at face value, and anything that touches pharmaceutical companies ends up being corrupted and full of lies. Maybe I myself am saying something very stupid that will end up killing more people than Communist China. If so I certainly hope that people who know more than I do will tell me why these calculations were wrong and how to look at this situation better.

But this is the level at which I think this discussion needs to be had.

This entry was posted in Uncategorized and tagged . Bookmark the permalink.

467 Responses to Reverse Voxsplaining: Brand-Name Drugs

  1. qwints says:

    I wonder what the worst thing in human history would be using the life year methodology? I’d bet the innovation of smoking tobacco tops communist China.

    Edit – probably. Around 5 trillion cigarettes were sold worldwide in 2014. Estimates for reduction in life expectancy ranges from 5 to 15 minutes per cigarette. We’re looking at roughly 10 million life years per year.

    • bluto says:

      I have to imagine it’s alcohol, only because I would imagine it’s been available to more population for a longer period of time than smoking.

      • thirqual says:

        On the other hand alcohol was useful historically to limit water-borne diseases, promote pro-social behavior, possibly as an incentive for developing agriculture, so….

        • Subbak says:

          I’ve seen several arguments that most alcohols consumes regularly through history (i.e. beer and wine, mostly) are not nearly alcoholic enough to do much about water-borne diseases. Also, the water was generally cleaner in pre-industrial times where there was not nearly as much population concentration and obviously no industrial waste. Waterborne diseases happened mostly in situations of sieges.

          • thirqual says:

            It’s very likely that the alcohol content was not the key for the weak beers and ales, more the process by which they were made and the rapid use (especially since early beer could not be kept very long).

            I strongly disagree about water being cleaner in the past, at least in cities. The Romans are, among other things, famous for building very large aqueducts to bring fresh water to cities, sanitation was a huge problem even at the height of Rome and even worse in medieval cities. Dysentery and typhoid were terrible killers even way before the industrial period and not only during sieges!

          • DES3264 says:

            Steven Johnson in The Ghost Map claimed that water borne diseases WERE the factor limiting concentration density until the late 19th century, with alcohol as the main way around it. Thus, if you believe that Paris having 500,000 people in 1800 was a good thing, you have to credit wine. This clearly gets into the problem of total versus average utilitarianism.

          • Gbdub says:

            Beer is not primarily sterile because of the alcohol (although fully fermented beer is an unfavorable environment for bacteria). It’s sterile because boiling it for a long time is an essential part of the brewing process. And if it does get infected during fermentation, this tends to be pretty obvious, because it usually goes noticeably “bad”.

            Add into that that you and your cattle would normally not be pooping into your beer kegs, unlike your water supply, and yeah, beer was probably much cleaner than many readily available water sources.

          • Matthias Görgens says:

            Yes, beer is better because it’s boiled. The introduction of tea drinking habits had a similar effect in Britain: more people boiling their water before they drink it, leads to less diseases.

            (I wonder how that worked out in East Asia where they consumed tea for much longer before.)

        • mobile says:

          And surely alcohol has caused several life-years.

        • eqdw says:

          Cigarettes are (were?) a legal stimulant that dramatically increased the productivity of STEM types whose jobs involve complex abstract reasoning.

          While I’m on board with the idea that cigarettes are a terrible tax on one’s health and are best avoided, I don’t think there’s zero upside to cigarettes, and if we’re counting the above as points in favour of alcohol (which we should) we owe tobacco the same.

          After all, people were starting to smoke long before mass broadcast media convinced them it was cool. Addiction explains why they _continued_ to smoke but not why they started. It’s not rational to act as if there is zero upside

          • Virbie says:

            I recall reading years ago, perhaps on this comment board, that the negative effects of tobacco smoking on life expectancy tends to show up mostly over longer lifespans. The upshot of this was that smoking cigarettes wasn’t even particularly irrational until fairly late into tobacco’s history, since your life was so likely to end earlier for other reasons that cigarettes didn’t have much time to chart as a cause of death.

            If I’m remembering this correctly, this would be an additional wrench in any calculation that extrapolates backwards too naively. Does anyone happen to remember what precisely I’m talking about and whether it’s remotely correct? I don’t know enough about the manner in which cigarettes affect life expectancy to easily check.

          • Ilya Shpitser says:

            Citation on effectiveness of tobacco for this?

          • Earthly Knight says:

            The upshot of this was that smoking cigarettes wasn’t even particularly irrational until fairly late into tobacco’s history, since your life was so likely to end earlier for other reasons that cigarettes didn’t have much time to chart as a cause of death.

            Remember that the great majority of premature deaths in premodern societies were caused by childhood diseases, while anyone who survived adolescence was likely to live to be 55-65 years old. Lung cancer does tend to afflict the elderly, but a lifelong smoker still has something like a 5% chance of developing lung cancer before age 65. So it’s doubtful that smoking was ever rational.

    • Kyle Strand says:

      10 million life years in 2014, sure. But of course this number won’t have been constant over time as population has grown and the popularity of smoking has waxed and waned.

    • Macbi says:

      I think you’re looking too close to the present day. Anything which happened in ancient times and pushed back the industrial revolution would probably have caused a very large number of deaths (although the count is confused by the fact that population growth would happen at a different time). I’d guess probably the fall of the Roman empire, although that can hardly be counted as one thing. I’m no historian though, perhaps there was some equally civilization-retarding event in China?

      • Rusty says:

        I always understood that in the long run the fall of the Western empire actually resulted in more innovation. The Roman Empire wasn’t really known for its interest in technology was it?

        • If you look at estimates for European population, they show it going down during the last couple of centuries of the Roman empire. About 600 A.D., with the Roman Empire barely cold in its grave, it starts back up.

          • Tibor says:

            The question is whether that is the result of innovation or of the fact that Pax Romana had already been an empty phrase towards the end of the western part of the empire whereas the Franks and later the HRE represented something of a new stable point. Obviously there were wars but there was a relatively stable social order whereas the late western empire was plagued by one would-be emperor’s (and his army’s) rebellion after another. Plus good friends like Attila or the various -goths who probably had their share in keeping the population down.

      • Hodag says:

        The Mongols. Whenever large events are discussed The Mongols need to be taken into account.

    • Squirrel of Doom says:

      That conflates shortening your own life with shortening others.

      Which is treating suicide like murder or rape like consensual sex. Which requires an hard to formulate definition os “worst”.

    • ACM says:

      My intuition is that a decent plague epidemic should easily top Mao. However, it should be an easily delimited event. So I would count the black death, but not something like malaria.

      • Tibor says:

        If every second person died because of a plague in a medieval Europe it would still only match Mao (with the 35 million deaths estimate). But the Spanish flu outmatches Mao…which is actually a good argument for the thesis. An unlikely epidemic like that, with catastrophic consequences, might be prevented if we have the right drug for it sooner (or by a lucky accident, if we have something that works against it already)…which is more likely with looser regulation.

    • Brad (The Other One) says:

      I wonder what the worst thing in human history would be using the life year methodology? I’d bet the innovation of smoking tobacco tops communist China.

      Probably eating the forbidden fruit in the Garden of Eden.

      That said (for people who do not believe in the above), how back in time are we going? Are we only counting years lost for those people who were born, or are people who are not born-but-could-have-been also a negative? If the former, I’ve heard it ascribed agriculture would be a net negative vs. hunter-gathering. (Although this method may imply ala Rust Cohle/Thomas Ligotti that the best way to avoid a loss at all would be to never ever ever have children.)

    • Edward Scizorhands says:

      I wonder what the worst thing in human history would be using the life year methodology?


      (rot13 this, and you will see why it was rot13ed in the first place)

      • Pleb says:

        If we are including possible life, than modern birth control was worst than nobegvba.

        • RCF says:

          If we’re including pre-conception, then abstinence. If between conception and birth, then miscarriage. If after birth, then heart disease.

      • Ghatanathoah says:

        Actually, nobegva doesn’t decrease the total number of life years lived all that much because it rarely decreases the total number of children a person has over their lifetime. It merely changes when someone has children. People who are unable to undergo nobegva usually compensate by having fewer children later on in life.

        Steven Levitt estimates that nobegva performed during the teenage years “reduces lifetime babies born to the mother by maybe one-tenth of a child, or possibly even less.”

    • Agrononaoxymous says:

      Probably the first few failed migrations of people to a new continent.

      You can probably go back and just say that the first life-molecules that got created 100 million before the ones that actually went on to reproduce and replicate and eventually became *us*, they got struck by lightning a second time and messed that up.

      Even further back, the Big Bang not happening several billions of years before it did was a real terrible thing.

      Stepping up into the world of math, and consider that there are probably at least as many alternate universes containing people as there are points on the real number line with time becoming a meaningless concept, then 42 is the answer.

    • Hepp says:

      I wonder what the worst thing in human history would be using the life year methodology?

      Contraception, probably nothing else comes close.

      • Anonymous says:

        If we are counting life-years for people that never existed, how about the time that I wasn’t made a god and so couldn’t populate infinite universes with infinite people. That’s clearly the worst thing that ever happened!

        • LHN says:

          Don’t worry– you were. You chose to populate one (or all) of the universes with a copy of yourself just prior to apotheosis to continue as before.

    • ChristianKl says:

      I don’t think there’s a singular innovation of smoking tobacco. Different people invented it across the world at different times.
      In contrast drug pricing regulations and Mao’s great leap forward are policy decisions made by one organization.

  2. Garrett says:

    Is there any value in looking at this as a game where Europe is basically a free-rider on all of the development we end up funding? That is, I think that at least the government should cap what they pay to the lowest of the rates allowed by the major industrialized nations. This would require a drug manufacturer to either negotiate higher rates with the other countries (distributing the cost across more countries), charging the US government less, or not offering the new drugs in price-controlled countries. This way we’d get the benefits of the drugs we are paying to develop.

    • Scott Alexander says:

      That’s what study 10 was investigating. They said no.

      • Abscalon says:

        European and US pharmaceutical companies both face European price controls and American pricing flexibility. All study 10 proves is that pharmaceutical companies act like the whole world is their market, wherever they happen to be located. It doesn’t really have anything to say about whether price controls amount to free riding on development spurred by a lack of price controls elsewhere. I’d expect a pharmaceutical company in a pirate drug haven to be just as innovative as a US company (holding all else equal and provided the IP friendly countries didn’t punish it).

        • Eelco Hoogendoorn says:

          The unfairness isnt in companies in one continent facing price controls and other companies not facing price controls; indeed its a global market. The unfairness is in Americans funding the lion’s share of what is a public good.

          I wish europeans would gloat a little less about the way they think they can outsmart the patent system; it would make me feel a little less guilty about being a freerider.

          • ConnGator says:

            You (and all ~400 million Europeans) should definitely feel guilty about free-riding. I can see poor countries negotiating lower prices but not German, Belgium, etc.

            My proposal: Cost for patented drugs in each country should be a ratio of GDP to the US. This would massively increase drug research and spur many medical breakthroughs.

            Who know, maybe Europe would no longer be in the Worst Thing Ever competition.

            (Slightly related: one of the many reasons I hope China grows rich quickly it to spur the demand for medical research.)

      • 27chaos says:

        It’s not specific to pharma drugs, but Acemoglu has a different paper addressing this question with regard to regulations generally:

        That’s a summary, am on phone so couldn’t find open access journal article easily. Should be out there somewhere.

    • Cypren says:

      Part of the problem you have to consider when proposing “just don’t sell drugs in countries where they won’t pay their fair share of costs” is that many of these countries (such as India) do have the necessary technological expertise to manufacture the drugs themselves if US companies won’t provide them. And their populations, faced with the choice of paying full market rates or saying “screw your patents, we’ll make a pirate version” will take the latter option and just dare you to stop them.

      And US politicians who started a trade war (or gods forbid, a shooting war) over drug patent violations would quickly find themselves accused of being pharma industry tools who want to purge the earth of third-world citizens and be run out of office or into prison.

      So the most likely case is that R&D slows to a halt because now nobody will pay for it.

      • Gazeboist says:

        Don’t we actually have pretty strong markets in India for pirate medicine that are somewhat controlled by having to compete with the companies that produce US-legal medications for not-all-that-much-more money? I remember that coming up in the nootropics post.

    • thirqual says:

      Percentages of GDP going to pharmaceutical R&D (2011):
      Switzerland .6
      Belgium .45
      Slovenia .45
      Denmark .38
      United Kingdom .3
      United States .3
      Iceland .29
      Japan .25
      Sweden .21
      Hungary .19
      France .15
      Germany .15

      Interesting to see that the US have only got way ahead in the last 15 years, with about equal spending in 2001 between Europe and the US, and in2011 basically a 1:2 ratio.


      • Given that a drug developed in France can later be sold in the US, it’s sort of strange to me that drug development spending should shift to countries that pay more for drugs. Though I suppose some of the “drug development” cost is getting FDA approval?

        • Justin says:

          Most of the drug development cost is getting FDA/EMA approval. Discovery is a drop in the bucket, it is the clinical trials that really knock prices into the stratosphere. But since the same clinical trials are generally used for approval by the FDA, EMA and other equivalents, you are correct that it doesn’t matter as much where they take place.

  3. Tom Hunt says:

    I don’t disagree with the overall thesis, but I have to object to characterizing the hypothetical innovation-retardant effect over a lifetime as being worse than the Great Leap Forward. QALYs are kind of dumb; it’s enormously obvious that killing a twenty-year-old (~60 QALY lost) is not the same thing as marginally damaging public health so that 120 79-year-olds die six months earlier than otherwise (still ~60 QALY lost).

    It’s occasionally useful to fight scope insensitivity by just multiplying numbers together. But utilitarians can be so desperate to get something they can do math on that they throw away context you really need.

    • Meh says:

      Or just use a non linear life function so we can still use math

      • Gazeboist says:

        Right, that’s why they’re QALYs, not LYs. How well are those 79-year-olds living? Not to mention, 120 is a lot of people. Is saving a 20-year-old’s life morally equivalent to stopping an experiment that would have frozen 120 other similar 20-year-olds for 6 months?

        • thirqual says:

          IIRC the current practice is to use an horizontal age profile for QALYs. Tom Hunt is making the correct comparison.

          An interesting difference between the 20 y.o. and the 120 79 y.o. being the ability to produce offspring if you are an utilitarian that likes to twist their head around unborn people utility.

    • Tedd says:

      Sure, they’re not the same thing, but it’s not obvious to me which one is worse. And you can’t get away from doing the comparison if you have to make a decision.

      Also, you appear to be using life-years, not QALYs.

      • Vamair says:

        Killing a twenty-years-old seems worse. A system that fails to treat one twenty-years-old, but lets 120 old people live 6 months longer is not obviously worse than the one that doesn’t. The reason is that killing a twenty-years-old seems more bad than failing to treat a twenty-years-old. I blame virtue ethics.

        • Ryan Beren says:

          Exactly. The equal and opposite case is to either
          – damage public healthcare so that it fails to save one 20 year old, or
          – kill one hundred twenty 79.5 year olds.

        • Ralf says:

          But it is obviously worse? 20 year old people are literally the future and _they can make other people_. You are not only losing a person, you are losing a potential future family and all the progenity! In comparison 79.5 year olds nap all of afternoon and watch The Price is Right.

    • DanielLC says:

      How many 79-year-olds need to die six months earlier for it to be worth killing a twenty-year-old? Maybe the problem is that you disagree with how much their life is worth.

      If not, would you say that someone who would have died at 20.5, someone who would have died at 21, someone who would have died at 21.5 … and someone who would have died at 80 all dying six months earlier is the same as killing a 20-year-old? Because if not, I can cycle around who dies when indefinitely and keep making things better/worse.

    • JenniferRM says:

      You mean that killing the 20 year old instead of 120 old people is obviously worth it, right?

      The 20 year old probably has no kids or grandkids. And they have less knowledge and less wisdom and less cultural depth. And they probably have less net worth. And they are way less likely to vote in a rationally self interested way. Also higher anxiety levels and lower conscientiousness. Since their frontal cortex isn’t that functional that probably can’t even empathize with or functionally engage with what that would hypothetically be like at age 45… Most of their loss will be psychologically processed in extreme far mode.

      Basically the only good thing about young people is that their cellular machinery works better, and the impact of their life will reach deeper into the future because that are statistically more likely to die later in history. If a tribe of baseline humans sacrificed all its youth for all its elderly that tribe would not exist 50 years later.

      Ignoring this logistical stuff, as *personalities* rather than as bodies with mechanical potential, young people are worse than old people in a lot of respects. And if you can patch the effects of entropy on biology and factor out mechanical concerns…

      I mean… I’m kidding… Sorta.

      It’s just… If your contrast object with the status quo is people living 1000 years, those very long lived people’s souls will be *incredible* and we are all practically mindless babies by comparison. Respect for the elderly has a decently strong factual basis, and it becomes more compelling the better our life extension technology gets.

      • Murphy says:

        Only if our health extension tech keeps up.

        19 year old me was a hell of a lot more inventive, he knew less but he also hadn’t decided so much was impossible and he had more intact and high functioning brain cells. He was quicker to solve problems and more willing to consider novel approaches.

        there’s a reason that IQ tests have to be adjusted by age. My father might get the same number of answers correct as 19 year old me but get classified as 170 while I’d be classified much lower.

        A world filled with not-quite-senile but horribly static and mentally non-plastic 800 year olds grumbling about how the world was better when they were younger, mostly struggling to come up with anything genuinely original while being deified by the young doesn’t feel intuitively ideal.

        there’s a reason the system of cycling a constant stream of grad students past elderly professors works pretty well. Without the grad students the professors tend to end up going in circles recycling their old ideas. They find systems which just about work then stick with them forever. Without the professors the grad students end up wasting time going down old blind allys.

        I wouldn’t find a world of lichs very appealing, even being one. The slide towards utter static conservatism is part of the slow mental rot. The loss of ability to deal with new things.

        keeping people alive and keeping people young are 2 very different things. Just keeping their bodies young without keeping their minds young (young, not just free of disease) sounds pretty horrifying.

        • Jiro says:

          It isn’t clear that a world of people who are 5 times as conservative as they are now, on the average, but live 10 times as long, would be bad. You can’t just say “old people don’t get new ideas” without considering that even though they may get fewer new ideas per year, they have more years to do it in.

      • Desertopa says:

        The 20 year old probably has no kids or grandkids, but the 79 year old probably has no parents or grandparents. They possess less wealth than the 79 year olds, but will most likely generate more wealth in the remaining 60 years they would otherwise have than the 120 79 year olds would generate in their collective 60 remaining years.

        The human brain is fully developed by the age of 25, but generally considerably deteriorated by the age of 79. Even if 20 year olds are less intellectually productive on average than 79 year olds (pretty unlikely,) the 20 year old’s peak intellectual time lies ahead of them, in the remaining 60 year period, while the 79 year olds’ collective time is not going to be spent in their peak intellectual period.

        As far as life extension comes into the question, there are probably some pretty strict limits to how much we can do to restore intellectual function which has been lost, and the 79 year olds aren’t going to live to see those developments anyway, but the 20 year old may. When we’re working with a population where people can live indefinitely without deterioration of their faculties, that’ll change the meaning of the calculations, but that just makes things more complicated in terms of translating life-years into utility, not less.

    • suntzuanime says:

      Yes, it’s enormously obvious that… uh… which one are you saying we should be preferring? And, for context, how old are you?

    • John Schilling says:

      I think it is perhaps misleading to characterize the effect of brand-name drugs as “[preventing] 79-year-olds from dying six months earlier than otherwise”. The cited example, Harvoni, cures Hepatitis C. Hep C seems to mostly kill people in their 50s and 60s, about 15 years earlier than they otherwise would have died, and Harvoni cures it. Scott brings up antidepressants of dubious value, but to the extent that they work at all one of the things we do with them is prevent twenty-year-olds from killing themselves for no good reason.

      And even if you find an example of a drug that treats some Old People Disease and is citied as providing a mean 6-month increase in life expectancy, that often means that the drug doesn’t do anything at all for 90% of patients but the remainder get to play with their grandchildren to age 75 in reasonable septuagenarian health where they would otherwise have died at 70.

      It is certainly true that the modern health care system wastes billions of dollars prolonging the Very Slow Decay of people who don’t really benefit from that. But if your virtuous moral intuition is telling you that we oughtn’t put a high priority on medical innovation because it is just about keeping the geezers on their deathbeads a little while longer, I’m going to prescribe a healthy dose of consequentialism, possibly brand-name Hedonistic Utilitarianism(tm).

      And that’s something I don’t do very often, because it usually doesn’t work any better than desvenlafaxine and no HU sales reps have offered to buy me fancy dinners. But it does seem indicated in this case.

    • Paul Barnsley says:

      Thirqual – 100% quality of life during old age is typically assumed, but loss of quality of life from the condition in question is taken into account when valuing life extension. So in this context you and Tom and probably right about the maths.

      A solution to the problem Tom Hunt identifies was floating during a recent review of UK health technology assessment practices, though not ultimately adopted: QALYs gained from an intervention would be weighed to reflect the degree of health loss (relative to normal endowments) experienced by the beneficiaries. QALY gains to patients with high “proportional shortfalls” of QALYs would be weighted more heavily. Your 20 year old would live, though a 25 year old might not, since research into societal preferences suggests the appropriate weights are not huge.

      Philosophically, this is equivalent to adopting prioritarianism in favour of those with a low endowment of health.

    • Ilya Shpitser says:

      I did not like that either, but I agree with the overall point (do lookahead before regulating).

    • Wency says:

      I agree.

      It would seem that morality must either be a set of arbitrary and contradictory primate heuristics evolved to provide some social advantage, or else a set of absolute principles handed down by God and implemented imperfectly by man. Either way, I imagine morality didn’t evolve around QALYs, nor do I visualize God counting QALYs. But people with highly systemizing minds recognize their intuitions are flawed, and having found that using math avoids certain other errors of human intuition, seek to apply it to morality. The problem is that, unlike the physical world, morality lives primarily within human intuition.

      The distinction you make above was addressed by the Thomian Principle of Double Effect the better part of a millennium ago. You can use math to arrive at consequences and determine proportionality, but you can’t use math to negate the importance of intention to morality. Maybe Aquinas was still systemizing too much, but I think the Principle of Double Effect sits better with human intuition.

      Of course cold-blooded murder is morally different from a flawed healthcare policy. Everything in our intuition says that it is, even if I could set up an equation that balances out the QALYs on either side. It’s why murder mysteries have more appeal than lost-QALY mysteries.

  4. dsotm says:

    Is there a requirement from doctors to inform patients about all the FDA-approved drugs relevant to their condition and letting them choose in a matter similar to choices of surgeries and procedures ?

    Also, shouldn’t one expect a pressure from the health insurance companies on the doctors that work with them to prescribe Effexor over Pristiq with effectiveness exceeding that of pharma-sponsored lunches ? Or is in the US health insurance policies only cover physician time and facilities with the drugs always being out of pocket ?

    • How are the doctors supposed to find out about all the FDA approved drugs for every condition? We’d ideally want to shift all the huge amount of money that pharmacutical companies spend marketing to doctors into some system with less inherent bias but also spend a lot more now that it has to cover many more drugs.

      • Anon. says:

        How are the doctors supposed to find out about all the FDA approved drugs for every condition?

        Journal articles? This seems like a really fundamental sort of thing for doctors.

        • John Schilling says:

          It is not possible to read every journal article in any field and still have time left over to do actual work. And if you were to impose a requirement that doctors inform patients of all the FDA-approved drugs relevant to their condition, that impossibility is what you would be calling for.

          It is a good idea for doctors to keep up to date on the relevant pharmaceutical options for the conditions they treat. This is one of the many, many circumstances where the proper response to “It would be a good idea if…” is absolutelynot, “There ought to be a law…”

          • arbitrary_greay says:

            Is there a a “FDA-approved drugs” database that can be searched? Like a Travelocity/Trivago for drugs. If doctors can now use printed checklists to assist with diagnosing, why not have a similar tool to assist with prescription decisions?

            In a world where such a thing is a thing that doctors/hospitals/clinics can purchase, the product they’re really paying for is the user interface (and the time/money saved from doctors not having to subscribe and check journal articles). The UI maker selling “the database” to them is paid to keep updating the database and keeping abreast of new developments and prices. (or however aggregate travel sites accumulate revenue)

            Even a company that just routinely publishes and sells compilation documents would be better than nothing.

          • This, essentially. I can imagine us overhauling doctors’ ongoing training in a way that sidesteps a lot of problems with the current system but we shouldn’t imagine that this is anything than a massive and fraught overhaul even if the benefits might be worth the cost.

          • Steven says:

            Database of FDA-approved drugs:

            Not a great UI, and not searchable by medical condition.

            Other databases of FDA-approved drugs (not maintained by the FDA), allow searching by medical condition:

            And many others.

          • arbitrary_greay says:

            Thanks for the links, Steven. There are also services like Health Care Blue Book (which is tied to certain insurance providers, I believe) that help with price-comparing other medical services.

    • Corey says:

      Insurers do do this (they’re one of the few downward pressures on US healthcare prices), they’ll make people jump through hoops to get more-expensive drugs covered (a related term of art is “step therapy”).

      That’s kind of what I expect to happen with EpiPens, actually; insurers start denying every claim for EpiPens with “have the pharmacist call the doctor and see about generic adrenaline injectors”. This could lead to one of three outcomes:

      1) EpiPen sales tank until their prices come into line with the generics
      2) Doctors’ staffs and patients just jump through the hoops and end up with EpiPens plus pointless (from their point of view) inconvenience; prices stay the same
      3) Various governmental units, in response to Mylan and/or citizenry, legally prohibit insurers from denying the claims

      All three have happened at various times with various treatments.

    • dsotm says:

      Yes by ‘all relevant drugs’ I meant ‘all relevant drugs of whose existence a competent physician can be expected to be aware of’, in particular the FDA can be expected to maintain a list grouping drugs into equivalency categories , this shouldn’t be too hard – after isn’t the whole idea of a clinical trial is proving the effectiveness of a drug against a specific condition ?

      With the case of Pristiq vs. Effexor this wouldn’t even be an issue because from what I understand from Scott’s post is that doctors wouldn’t even be able to legitimately claim to have never heard of Effexor.

      Really this sounds the sort of issue where a duty of professional disclosure should be the first thing to implement, yeah it’s far from being foolproof – I believe just recently Scott linked to a study showing that patients tend to be more accepting of higher-risk medical treatments when presented with the associated risks by trusted physicians than when not,
      but it would be harder to manipulate patients into a 15x cost without giving them a good reason for it. This disclosure would work in a matter similar to a consent form with the (quantified when possible, at least to the extend listed in the drug leaflet) advantages and disadvantages of each drug being listed and signed by the patient.

      • ChristianKl says:

        Knowing that Pristiq vs. Effexor both exist is one thing. Knowing how well the evidence for the two compares given that they haven’t been directly compared in drug trials is a lot harder.

    • nm. k. m. says:

      In my country, the *pharmacists* are required by the law to offer the customer the identical cheap generic drug instead of the whatever pricey brand name the doctor has written in the prescription, if a suitably similar generic drug exists and the doctor has not especially forbidden the switch in the prescription. There are some exceptions for some drug categories, though, but for common drugs the generic is offered.

      And even if I ask for a non-prescription drug by a brand name, the staff at the pharmacy I frequent also often offers the cheap generic (I don’t know if this is legally mandated, too)

      I don’t know the details, but I believe they have sort of database for which off-brand drugs correspond to the certain brand names.

      edit. Found an article at our FDA-equivalent’s website which states that when the policy was introduced in 2003, brand-name drug prices fell considerably, in the most extreme cases by 70-90%, and nowadays the generics are about 20-30% cheaper than the brand name drugs.

      • dsotm says:

        That would probably work too (what country is that ?), though the doctors would still be affected by this law by having to consider the possible substitutes and to screen for contraindications

  5. Decius says:

    Separate drug research from drug selling. Any company that brings a drug to the phase where confirmatory clinical trials can begin gets a payout based on the expected benefits of that drug would be if it works as expected. Any drug that passes confirmatory trials gets a larger payout based on actual benefits. Once a drug is approved through neutral or FDA-run confirmatory trials, anyone can manufacture and sell it.

    Anyone caught deliberately falsifying data to get a payout under the bounty system is tried for the attempted murder for profit of the trial subjects.

    • grendelkhan says:

      Those incentives are way, way too juicy not to game. The market may be corrupt and ugly, but I don’t think it can be quite that corrupt and ugly.

      • Edward Scizorhands says:

        C’mon, wouldn’t we all be better off if the pharma salesman spent all their time influencing the prize-deciders instead of influencing the prescribing doctors?

        That was sarcasm, by the way.

        • RCF says:

          What if we let the market decide? Shares in a drug license are auctioned off. A d20 is rolled. If it comes up 1, winners of the auction get to buy the drug license. Otherwise, they pay a small percentage of their bid in exchange for a small royalty on each pill sold.

    • Brett says:

      I like the idea of under-writing some of the development costs, and tying it to the gains from the new drug. The only downside is that incremental gains can still add up to major gains in quality of life and life expectancy over time, and having multiple varieties of treating the same disease is good in case someone is allergic/etc.

      I’m not sure whether it would restrain costs, though. As long as the pay-outs are fixed I think it would avoid the issues with Cost-Plus contracts.

    • Murphy says:

      There are certain drug classes where this would be a good system. like new antibiotics since the incentives align poorly with the patent system. If you get a great new antibiotic the smart thing to do is to hold it in reserve for the worst drug resistant cases but the patent holders incentives call for the drug to be thrown at every problem possible.

      Effectively this sounds like prize funds: find a drug which fits the criteria and passes safety testing and we’ll pay you a lump sum. The main problem is that the prize funds have to be so incredibly massive which is politically difficult. And if it’s politicians setting the prize funds then corruption is easy. if you know your wifes company has something promising you vote to bolster the prize fund and add conditions which only her companies drug can meet.

      • Edward Scizorhands says:

        This is a very good point.

        For all their problems, patents are good enough, and the people who want to replace them with something else typically devolve to hand-waving away significant problems, or insisting that no one would possibly cheat under the new system.

        But the patent system doesn’t work at all for antibiotics. The people who want prizes to work should try to set up antibiotic prizes. We’ll see what happens.

        • Deiseach says:

          For all their problems, patents are good enough

          But am I misunderstanding this, or isn’t the problem with the EpiPen that the manufacturer holds the patent for the delivery device (the “pen”) and that if any competitors come out with a similar gizmo, they fire off a lawyers’ letter telling them they’ll be sued for infringing their patent?

          As Scott pointed out, ephinephrine (the drug) is easily synthesised, we know its hazards, anyone can make it for a low cost. The unique part is the “instead of needing a syringe and a vial of the drug and knowing how to inject yourself, including knowing how to fill the syringe from the ampoule, you just jab yourself in the leg with the pre-loaded dose” and that’s what is patented and what is being protected?

          I have to wonder if Mylan didn’t jack up the price because they’re expecting a court judgement some day over-riding their patent claims (because it would be like saying only one company can legally make ballpoint pens) and they’re trying to squeeze the last few eggs out of the golden goose before that happens?

          • jaed says:

            Mylan has a patent on its particular auto-injector, but not on the auto-injector concept (whose invention goes back to around WWII). So it’s possible for another company to make epinephrine in an auto-injector device, with no syringe and vial needed, as long as it’s not a copy of the patented aspects of Mylan’s injector.

            The problem is the FDA has been reluctant to approve other auto-injectors. Since it’s a medical device, they have jurisdiction, and can (and do) require much testing and then withhold approval.

          • Loquat says:

            There are multiple other companies with similar injectors that are already allowed in the US – to my knowledge, 3 different companies, of which Mylan is not one, have insulin pens on the market, and those are basically the same thing only more complicated because they need to let the user adjust the dose and swap out needles after each use. I have no idea whether any of those companies have made a serious attempt to make an EpiPen alternative, though.

      • RCF says:

        But we already have prize funds. It’s just that it’s a highly fractures one, with much of the wealth transfer from government to pharma companies being indirect.

        We have federal agencies such as the VA buying drugs. We have Medicare and Medicaid providing funds for drugs. We have subsidies for health care given through employers. We have the ACA requiring medical coverage. All of this involves private entities profiting from government decisions. How does the government decide what prices to accept when it’s buying drugs? Why can’t it apply that decision making process to deciding how much to pay for the license instead?

    • John Schilling says:

      Anyone caught deliberately falsifying data to get a payout under the bounty system is tried for the attempted murder for profit of the trial subjects.

      I’m not falsifying data. I’m just taking my old colleague Bob from the FDA out to dinner and bragging about how wonderful my life is now that I’m pulling in seven figures as a VP at Wyeth. Hey Bob, remember when we were back at the FDA together, and you were supporting me on the Pristiq evaluation? What did we come up with as the expected social benefit, twenty billion was it? Ah, those were the days. Lots of subjective issues where there wasn’t any clear mathematical equation to guide us, just our professional judgement. And changing the subject, what are your career plans – going to stay at the FDA forever, or jump ship to industry sometime? We’re doing good work over here, you know – there’s this new drug we just submitted for evaluation that’s going to change the world…”

      Yes, you’re going to pass laws against that. Everybody passes laws against that. They never work. Yours won’t work either. Really, no, they won’t.

      And if my doctor falls under the spell of one too many free meals from a pharma rep, I can find another doctor without too much trouble. If the FDA evaluator for the class of drugs that treats my condition is similarly influenced, I can’t really get another FDA.

      • Deiseach says:

        I’m not falsifying data, I’m just using a particular model of statistical analysis that is perfectly legitimate and simply weeds out the awkward data, leaving the nice, shiny, honestly experimentally obtained results that our wonder drug does indeed do everything we claim*

        *(as long as you’re between the ages of twenty and thirty, at least six foot tall, left-handed, have some Finnish ancestry and take warfarin every day to prevent blood clots while on the wonder drug).

      • moo says:

        or, hell, “hey bob, how’s life? how are the kids? little sally got that postdoc position in france that she wanted? and someone offered your mom’s shitty neighbor a job in a different state? what a total coincidence you mentioned these problems that money could solve at our last meeting, and now you don’t have them anymore. so about that drug…”

    • Justin says:

      The clinical trials are the lion’s share of development costs. You’d basically be rewarding the cheapest part of the process the most handsomely.

    • Vamair says:

      Are the people testing a part of the company that is the drug inventor? I’d guess that if they’re not, it could be good to give it to a few different testing companies and maybe pay them extra if their findings are replicated by others.

  6. pku says:

    I broadly agree with the conclusion, but I have a few major issues:

    First, in the calculation about cost of saving medication, you forgot to count the benefits of the money saved. But they calculated about 9000$ saved per american, for about 0.7 life years. If we assume that those are still somewhat sick and worth about 0.5 QALYs, we get 18,000$ a QALY saved – which is about the rate of tradeoff we get now. (it increases a bit for when you consider people in the rest of the world, and is still probably a good tradeoff given that their assumptions are accurate, but there’s a huge difference between “somewhat bad healthcare spending tradeoff” and “killing seventy million people”. Add in the uncertainties in their study and a few other mitigating factors, and you lose even more accuracy in your calculation. At this point, comparing it to the grat leap forward is incredibly misleading (not quite as bad as the typical use of Godwin’s law, but still unfair).

    The first is that Vox’s claim that generics made by two competing companies cost 55% of the brand-name price isn’t the right statistic to use here. Look at their source and you find that as number of competing companies gets to 20, generics cost 5% of brand names. As number of competitors approaches infinity, drug cost should approach manufacturing cost

    This is minor, but still slightly bothered me – drug companies have other costs, like HR or advertising/lobbying, and that limits how low the prices are going to go. The convergence here should be pretty fast, and I doubt we can do much better then the n=20 case.

    Price regulation also has a bunch of potential positive effects by changing company’s incentives. For example, they’ll have less incentive to lobby for longer copyright laws or lobby doctors (since they make less money this way), and would probably spend less money on it (though not nothing). In the net calculation this is probably still a minor effect, though.

    Finally, does anyone know if we lose research money by multiple companies investigating similar drugs and hiding their research from each other, and if so, how much? (This seems like one of several reasons NIH research funding is preferable to drug company funding, but there’s probably an effective limit on that).

    • Gazeboist says:

      copyright laws

      A copyright is not a patent! They are very different! The problems are different in scale and to some extent in kind, and have different solutions. Please do not confuse or conflate them. That is all.

      • Sniffnoy says:

        …and on that note, please don’t confuse either of them with trademark laws, either.

      • pku says:

        Thanks for the correction, I always get those confused. But replace “copyright”with “patent” and the point still stands (though adjust the probability for patent laws not being as historically abused as copyright laws, IIRC).

        • Cliff says:

          Patent laws work perfectly fine in pharma and medical devices, they are really not controversial in those fields.

        • Titanium Dragon says:

          TBH copyright law’s biggest problem is that copyrights are held in perpetuity (effectively). The copyright system is otherwise just fine, TBH.

    • Richard says:

      If anyone can tell what’s going on with RAND’s numbers, I’d appreciate some explanation: I’ve tried to work it out myself and I keep hitting contradictions, or really unintuitive things, and I’m not sure if it’s because I don’t know how to interpret this or because their provided numbers are seriously flawed. You are right that Scott’s using only one side of the equation here; I’m just still a bit unsure how much this changes the conclusion. The RAND paper cites a few different numbers: they cite a drop in life expectancy in 2010 and 2060, a drop in annual costs in 2010 and state that it’s “even larger” in 2060 but provide no further numbers, and they provide a per-capita net dollar value “as measured by the monetized value of life expectancy minus the monetized value of medical and drug spending.” That last value they cite is the all-things-considered benefits-minus-costs number we want, assuming we trust their work. That value they cite is a cost of a bit over $50K/person in the US and Europe. If we take that number at face value, considering that the estimate used in the US is usually around $50K/QALY, we’re back around loss of the monetary equivalent of 1 QALY/person for 1 billion people, which puts us back around Scott’s estimate (actually a bit higher because Scott needed to include non-US/Europe residents to get to a billion).

      When I try to actually crunch the numbers to see how they arrived at this number, though, things don’t really add up. For the rest of this comment, I’d love clarification on anything from anyone who does understand what’s going on. To start with, the $50K cost estimate comes from taking the cost of the loss of .7 life-years minus the benefit of savings described as “even larger” than $9K annually. Even ignoring the savings entirely, for .7 life-years to cost over $50K, you need at least $70K/QALY (more if the lost life-years are at a quality-adjustment of less than 1.0). Incorporating that you need to subtract a benefit of at least $9K, it’s at least $80K/QALY. If you plug that value in, some of the numbers work out, but others don’t; it doesn’t make sense how losing .2 life-years at $80K/life-year, but saving $9K, could lead to Americans coming out ahead by $1K in the exchange, as they’re losing around $16K and saving $9K. Even if we assume that every number was rounded from the value that makes the numbers come closest to fitting (like if their .2 years lost was rounded up from 1.51), the numbers still don’t add up to putting Americans ahead in the short-term. Maybe there’s something else going on (does a life-year cost different amounts in different years? Yeah, probably, but does it in their model? Even then, I can’t get things to fit.), but it really looks like there’s no solution to this linear algebra problem that actually works.

      Further confusing me, it seems the life-expectancy dropoff is a onetime cost (it doesn’t really make sense to have a drop in life expectancy of .7 years/year, does it? In that case, everyone’s life expectancy is 30% of the counterfactual?), but the reduced spending is explicitly called an annual cost. If I’m reading that right, it really swings the numbers in the opposite direction: someone in the 55-59 bracket will live for 22-29 more years on average, which means that saving $9K/year adds up to a total in the neighborhood of $230K saved over the course of a lifetime. Saving $230K at a cost of only .1 life-years in 2010 and saving an unspecified “even larger” total in 2060 at the cost of only .7 life-years are both great trade-offs, and should end with this being a very strongly positive net value decision. Is multiplying the annual cost by the number of years not the right way to approach this?

      Another strange note: they note that annual per capita spending on drugs and medical care would fall for Americans and Europeans, and explain: “The higher number for Americans is attributable to both reduced spending and reduced life expectancy; for Europeans, the savings come entirely from reduced life expectancy.” Reduced life expectancy reduces annual per capita spending? Is this because if someone dies in the middle of the year, they only provide part of a year of spending in the numerator, but they count as a whole person-year in the denominator? And therefore would this same drop not occur if we looked at daily per capita spending (as someone would only count as a person-day in the denominator for the days in which they were alive)? This seems like a flawed measurement; in any case, it’s not what most people intuitively imagine when one describes savings from reduced annual per capita spending on drugs and medical care.

      I’d appreciate any guidance to understanding what’s going on here; it feels like their numbers disagree with each other, but I’m not sure if I should reconcile them in the way that says “actually, this looks like it might be 150% as bad as your previous estimate that called this the worst thing ever”, or if I should reconcile it in the way that says “adding up the savings and dividing by the costs, this looks like it saves 50x as many dollars per life-year as the commonly accepted price in the short-term, and 7x as many in the long-term, so it’s incredibly cost-effective”. I have a hard time imagining two more deeply contrasting conclusions.

      • Brandon Berg says:

        Maybe savings from reduced life expectancy are from the fact that old people are more expensive than young people?

    • dsp says:

      You’re wrong about the cost convergence, actually. In the limit of infinite competition, the influence of fixed costs (which, in this context, means any cost that isn’t measured per unit sold) on price is generally supposed to go to zero; that is, price equals marginal cost. This is at least partly because of dollar-auction-style effects where it’s better for any given vendor to eat the fixed costs and sell any units at all than to price too high and sell none (and still have to pay the fixed costs). The reason this doesn’t drive all the vendors out of business is because fixed costs prorate out over the total volume sold, so the effective fixed-cost-per-unit also goes to zero in the limit of infinite volume.

      • pku says:

        But this assumes that increasing number of competitors rises with increased demand; while I’d expect them to be correlated, adjusting the number of competitors while leaving demand fixed shouldn’t change much.
        More specifically, I doubt raising the number of competitors beyond 20 would noticeably lower prices because the convergence here should be exponential (coordination efforts become exponentially harder as number of participants rises, for example). In general, it’s a good rule of the thumb that any converging sequence is going to be indistinguishably close to its limit by the tenth element (especially in cases like this, where we have a reasonably high level of noise in the prices). There are some exceptions, but they’re rare, and I don’t see why this should be one.

        • Corey says:

          It seems to take about 4 big players in a market (see: cellphones and T-Mobile) to get healthy competition.

      • RCF says:

        “so the effective fixed-cost-per-unit also goes to zero in the limit of infinite volume.”

        1. No one has infinite volume.
        2. A loss is still a loss. Amortizing it over a larger volume doesn’t change that. There was an SNL skit where there’s a bank that does nothing but give change. To the question of how they make a profit, they say “volume”.
        This was supposed to be humorous. Why would anyone go into business when the absolute best case is getting an average loss of zero, as the limit of units sold goes to zero?

        “it’s better for any given vendor to eat the fixed costs and sell any units at all than to price too high and sell none”

        It’s even better to get out of the business entirely.

    • Justin says:

      Finally, does anyone know if we lose research money by multiple companies investigating similar drugs and hiding their research from each other, and if so, how much?

      That would happen every bit as often with NIH funding as with pharma company funding. Scientists at research universities are EVERY BIT as cagey about their research results as any pharmaceutical company. Getting “scooped” is at least as bad for a grad student or professor as losing some trade secrets is to big pharma.

      • Koken says:

        Which is why you publish as soon as you have some progress worth publishing. Your professional incentive is to get your work out there (with your name on it), not to keep it secret.

    • Ralf says:

      > But they calculated about 9000$ saved per american, for about 0.7 life years

      If I understand that correctly it is $9000 per year, right?

      And the higher healthcare costs in the US didn’t seem to translate to higher life expectancy, as they are behind almost all european countries and Japan.

      • Agronomous says:

        Japanese citizens have longer lifespans than American citizens.

        Japanese-American citizens have longer lifespans than Japanese citizens.

        It’s almost like there’s some other influence besides environment….

  7. MarIo says:

    I see some problems here.

    First, if we allow for more generics to enter the market and push doctors to prescribe those, we are also lowering expected profits for “innovative” pharmaceutical companies, because fewer customers means less money. I guess that would lower R&D activity, too.

    Second, you’re measuring “innovativeness” in number of new drugs per year, quantity that is. Then you go on to tell us that a lot of new drugs are just slightly altered old drugs and sometimes are even worse than their predecessor, implying that there is also a qualitative aspect.

    What if the dropped number of new drugs consists of rip-offs only? I’m sure that is not the case but still, think about it. Can we force companies not to develop these “bad” drugs, to cut their R&D of useless stuff?

    Then again these drugs are pure cash cows, see Pristiq. I assume part of their revenue is used to pay for more R&D. Does that mean the more shit, the more gold?

    How much do pharmaceutical companies actually spend on research? Does that number actually affect their net outcome? Are “cuts to the R&D” actually necessary after whatever regulation takes effect?

    It all boils down to them being companies, not generous philanthropists. They will do anything to keep profits up and that money will always come from those who suffer from some disease or sickness. Of course we can try to slow down that stream of income but then people might die.

    The Worst Thing Ever is that everything has a price tag, even life.

    • Michael says:

      This is my thought. How many of the 4 new drugs per year lost to regulation are Harvoni types, and how many are Pristiq? Seems like we could stand to lose the Bullshit Pills.

      • Edward Scizorhands says:

        Wouldn’t it be better to directly target the Bullshit Pills, through some kind of way (like Scott suggests) of stopping pharma reps from buying lunch for doctors, instead of instituting price controls and hoping that we only lose the bad stuff?

        You also have to watch out for what randos think are just “me too” pills. My son responds to a “me too” pill when he doesn’t respond to the one some people say it was ripped off from. I don’t know the story with Pristiq, but having a second anti-depressant that is similar-to-but-not-quite-the-same-as another drug can be very therapeutic for people who, for reasons we just don’t understand, aren’t responding to the first pill. (I don’t know if it’s worth the costs and if a rational cost-benefit analysis would still invent the pill, but I get really nervous when people casually suggest that the FDA could just refuse follow-on drugs.)

        • Ivan Ivanoff says:

          It’s hard to immediately and usefully distinguish BS pills from really useful pills, though. In many cases, pharma has done research “proving” that New Drug Y is a “breakthrough” drug, the press touts it, it gets prescribed a lot, the company makes a lot of money, then about a year later it’s discovered that, actually, follow-up studies show that Drug Y is about as effective as the older Drug X.

          And looking at the newest diabetes drugs, it’s not clear that these aren’t BS drugs. There have been a pair of promising trials recently (for liraglutide and empagliflozin) that showed a reduction in CV and all-cause mortality. But looking closer at the numbers, for empagliflozin 93 people would have to be treated for 3 years to prevent one premature death. That’s … not exactly encouraging. It might even be a borderline BS drug, despite widespread enthusiasm for it.

      • Deiseach says:

        That is the problem, though. Companies are in business to make money. If they can make more money off “enhancing your sex life” pills, then they will market the everliving hell out of those. A drug that cures or even just ameliorates a fatal but obscure disease that affects a couple of hundred thousand people globally won’t get the attention unless the company can charge a price to match – to make up for the low volume of sales, to recoup the expense of R&D and other costs, it has to cost an arm and a leg. Tough luck if most of those two hundred thousand people can’t afford to pay an arm and a leg, even if they live in countries with medical insurance.

        Either you pay full whack for the cost of the rare disease drug, or you let us keep our patent on the cash-cow drugs that make up for the loss we take on the price of the rare disease drug and discourage generics, or you get cheap generics and we concentrate on the big volume profitable lifestyle drugs instead of the rare disease drug.

        I have no idea how you solve that tangle.

        • Froolow says:

          I found your penultimate paragraph a little confusing and have worked in the industry, so just to be explicit:

          Pharma companies will never deliberately take a loss on a drug. They will sometimes accidentally take a loss because they mis-estimated the market, or define ‘gain’ in a nonstandard way (e.g. publicity, or to build a consumer base in a particular market) but they will never think internally, “Product X for an orphan disease will likely lose us £500m, but that’s OK because Product Y will gain us £750m for a £250m overall profit”; the drugs are evaluated separately, and ruthlessly for their profitability.

          Having said that, the feeling in the industry is that patent protection is far more important for orphan drugs than blockbusters; in blockbuster drugs the first mover advantage is massive because once doctors get comfortable prescribing a particular drug they don’t often switch because – by definition – they’re unlikely to be experts in the condition. In orphan diseases you’re likely being treated by at least a regional expert who focuses exclusively on the one disease and will be acutely aware of any generic competitors to your $300,000 / year treatment.

    • Furslid says:

      I don’t think you can force companies to not develop ripoffs. The reason is that one type of research is to check similar compounds to known effective compounds.

      Suppose that there is an interesting drug D1. D1 treats a condition, but the treatment isn’t perfect. Maybe D1 has bad side effects, or nasty drug interactions, doesn’t work in all cases or takes a really long course of treatment. A better D1 would be a good innovation.

      D2 is a similar compound to D1, but hasn’t been tested. Before research is done, it’s not known what D2 will do (this isn’t really easy to predict). There is a chance it is a better D1. So company begins to research and test D2. D2 could fail tests by not being medically useful. It could pass as medically useful with different results.

      1. D2 is also a treatment. It’s not generally better or worse. Still in some cases it is better, some worse. (allergies or different drug interactions.)
      2. D2 is a marginal improvement. It may be a little better, but just using D1 is medically responsible, especially if it’s much cheaper.
      3. D2 is marginally worse drug. It still treats the condition effectively, and in some corner cases may be preferable.
      4. D2 is a much better drug.

      Companies go into research hoping to find outcome 4, and this research would have to be justified. However, if they find outcomes 1-3 it is still rational to market the drug. It’s passed FDA tests, and it treats a real disease effectively.

  8. You don’t say much about an alternative approach–relaxing FDA rules that make it expensive to develop new drugs. You are probably familiar with Peltzman’s old article, a statistical analysis of the effects of the Kefauver amendments to the Pure Food and Drug Act. His conclusion was that the amendments, which required that a new drug be shown to be not only safe but also useful, an improvement on what was already out there (this is by memory but I think correct), cut in half the rate of production of new drugs while having no detectable effect on their average quality, measured by two or three different proxies.

    Cutting the rate in half is a large change.

    • Richard says:

      I wrote a comment then reloaded the page and mr. Friedman had beaten me to it, but meh – here it is anyway:

      So basically we’re saying to the drug companies: “You need to jump through all these hoops and over giant hurdles that takes a decade and costs billions and in return we’ll let you charge stupid prices in order to recoup your costs”

      What if we instead said: “You need to jump over this small hurdle that takes a year and costs hundreds of thousands, and in return we’ll let you charge higher but still sane prices to recoup your costs.”

      This should have the added benefit of reducing the incentive to re-patent old medicine with tiny changes.

      • jimbo says:

        If you do that, you end up with thalidomide babies. Or at least that’s the counter to your argument.

        Which gets into the question – would the plethora of cheaper drugs be worth the occasional malfunction?

        • Squirrel of Doom says:

          If you require showing only that drugs are safe, rather than both safe and effective, that would seem to prevent thalidomide babies just as much as now.

          • The Nybbler says:

            Even “safe” and effective to some fixed standard would be better than what we have now. If Drug Company A comes up with Excellenta which treats 75% of patients with condition Q and charges $1000/dose, and not much later Company B comes up with Mediocrata which treats only 50% of patients with that same condition (with complete overlap with the Excellenta-treatable set, alas), then everyone except Company A wins if Mediocrata gets on the market.

          • Mike says:

            Safe is also relative and dependant on the disease you are trying to treat. “Safe” for an anti-neoplastic is very different from “safe” for hay-fever. And unless you’ve demonstrated that it works in your chosen indication how do you know if it’s safe enough?

        • Wrong Species says:

          It takes years and years of tests to get FDA approval. How much of that is subject to diminishing returns? If we cut the time in half, we might have a slight increase in problems but that would surely be made up for in the vast number of people who are getting better treatments.

          • Deiseach says:

            If we cut the time in half, we might have a slight increase in problems

            Until you hit the problem that you could only find out by large-scale use over long periods of time, and then somebody takes a class-action case against you in an American court saying you should have foreseen the problem or not taken the short-cut on the testing, and you end up paying out millions and millions in damages and get the rep as “that killer-drug manufacturer” which probably explodes your business.

            That is the frustrating part; some of the FDA regulations probably are no more than red tape and box-ticking, but since you cannot absolutely say “Well, this will never have any unwanted side-effects!”, your only choices are: (1) short time testing, caveat emptor and let the public know there is always going to be a risk with new medications (2) long time testing, try and cover all the possible “what ifs?” before it gets to the public.

            Whatever approach you take, there will be a downside. But if you’re a government or in the place of government organisation, then taking extra time is a better choice (better for you); the public have higher expectations of the duty of care from the government than from private business.

          • Cadie says:

            I imagine that if the FDA rules were relaxed to approve drugs that pass safety testing only, in a shorter amount of time, there could also be reforms that limit people’s grounds for compensation if the drug met FDA safety requirements and they were informed about when human testing started. They could still sue and get paid out if the company negligently or deliberately hid safety problems, but if it’s a long-term effect that couldn’t have been discovered in the 2 years since human trials started, or a rare effect that simply hadn’t come up in a way that was obviously traceable to the drug yet, they’re SOL. Then consumers who are particularly worried about it could get their doctor to prescribe something that had been in use longer and had more long-term data, and the others can take their chances, especially since any drug is taking chances anyway.

            For meds that have been used in humans less than 10 years including trials, just make the pharmacy keep a record of the patient signing an “I know this drug has only been used in humans for [time] and understand that there is little data on long-term and rare consequences, and assume the risks associated with long-term harms and drug reactions not yet known myself” form, preferably electronic but paper works too, whenever the patient gets a new prescription (not refills). Fine the pharmacy to hell and back if they don’t, and let them increase prices by a few cents to cover compliance costs.

        • Larks says:

          Thalidomide was rejected by the FDA under the old standard. Thalidomide basically provided that the old system worked just fine!

          • Douglas Knight says:

            Nope. Not unless “the old standard” was reviewers ignore the standard, which it wasn’t.

          • Glen Raphael says:

            Thalidomide passed all the FDA’s tests and would have been approved…except that the FDA’s test process took so goddamn long that by the time they were finally about ready to maybe just possibly decide to approve it the drug had already been in use in Europe long enough for bad effects to show up there.

            Our tests for “safe” didn’t involve explicitly testing on pregnant women. In response, we later added extra testing for “effective”, but thalidomide was effective so it would have passed that too.

            If anything, Thalidomide seems to argue for a policy along the lines of “anything that’s okay to sell in EU should automatically be okay to sell in the US…five years later.” Building in a small delay would mean in such an instance we not only free-ride on the EU regulatory apparatus but also let their customers act as our beta test group.

          • FooQuuxman says:

            Wasn’t the problem isolated to not just pregnant women, but pregnant women with a B deficiency?

            Anyway, Thalidomide is actually a great example of what us libertarians are talking about when we bitch about regulation: Thalidomide worked for it’s intended purpose, but because horrible things happened that got big news stories it can no longer be used where it would be safe and effective.

            Pregnant women with a B deficiency is exactly the sort of edge case that you can torch endless resources hunting down and still get blindsided on a regular basis by black swans.

            And of course, at the time it was thought that drugs couldn’t cross the barriers into the fetus. How regulators (private or public) are supposed to see past this lack of knowledge of what is going on in the body also needs answering.

          • The Nybbler says:


            Thalidomide was approved in the US (though not for morning sickness!) in 2006.

      • Murphy says:

        I do sometimes get frustrated when people talk about evidence based medicine as if it’s just some kind of wishy-washy red tape there for no reason.

        it’s like walking into a room of happy clappy church people who think that “science” is just a fancy big city way to win arguments and isn’t any more real than what their book says.

        Ok, first the TL;DR economic argument:

        Actually proving if a drug is both safe and actually works is hard, expensive and slow. If it could be done with 100K then companies wouldn’t spend a billion or more getting to stage 3 clinical trials before the drug fails testing and either turns out to not work at all or turns out to kill people in large numbers. If there were some set of steps they could follow which cost less than a million dollars they would be doing it to avoid spending that billion and we could almost never hear about anything failing stage 3 trials.

        It’s like looking at the saturn V and saying “sure, I bet all that is pointless, I could do it with 10 bucks and a crate of bottle rockets!”

        Next, the matter of trust:

        These are companies which have been caught being genuinely malevolent. Knowingly choosing to do things like sell blood products they know are infected with HIV or selling drugs that their own internal safety testing has shown will make children suicidal but then hiding that info and selling them knowing they’ll be proscribed to children etc.

        They’re as close to actively malevolent as makes little difference. They’re malevolent like a weak-sauce paper-clipper with “maximize shareholder value” replacing “maximize paperclips”.

        People on lesswrong talk a lot about the dangers of nonhuman intelligence and then ignore that we’ve got these weakly superhuman (very) weakly super-intelligent entities that have shown a remarkable willingness to kill people for an extra fraction of a percent profit margin and shout “sure, lets let them off the leash, let them do whatever they feel like”

        Big pharma companies regularly get caught pissing in the fountain of truth with ghostwritten academic publications, faked data and organized campaigns to attack critics of their products while at the same time these are entities which reasonably regularly sue doctors for questioning the safety of drugs.

        Some people love to trust that every little village doctor will be able to see through the billion dollar misinformation campaigns. In reality you need something organized on a large scale. Drug trials are not something you can do effectively with 3 of your mates in a little anarchist commune.

        Some people souls convince themselves that ,magically, competent private organizations dedicated to doing the expensive leg work of assessing claims and letting people know which drugs really work will appear out of nowhere despite their strange failure to appear so far despite being utterly legal.

        We’re not going to get pharma snopes. You can’t debunk a drugs claimed effectiveness based on a few minutes research. You can’t run thousands of safety trials on ad views.

        It’s not going to happen. Ever. Remove the requirement to actually prove the drug works and you’ll get snake oil salesmen in droves, there’s about a million times more money in selling snake oil than in quietly assessing every snake oil salesmans claims fully and about a hundred times more desperate people who’ll try anything and believe a half dozen people on a message board saying “oh, it’s really good” and think that counts as real evidence, never considering that that system and ones like it is what convinced people that bloodletting worked.

        With the loss of real effectiveness you also lose most public trust.

        the alternative isn’t some private entity doing unbiased 3rd party safety testing, the alternative is nobody doing it and everyone just kinda hoping that someone will get around to it.

        Or possibly the pharma company doing some fake trials to drum up business and nobody else having a notable profit motive to prove them wrong except their competitors who’s trials everyone will sensibly ignore with good cause.

        • Corey says:

          actively malevolent

          A nice recent example is Purdue Pharmaceuticals, who claimed their extended-release opiod was good for 12 hours (actually it was good for 8, like all the others), and told doctors “just give patients higher doses if they tell you it poops out after 8 hours” which is a bit suboptimal.

          snake oil salesmen

          An interesting tangent: Based on another Vox article I took a look at Amazon’s supplements section (the supplement industry, being a lightly-regulated US drug industry, is a good example of how a lightly-regulated US drug industry would function).

          There is *fake* snake oil there. That is, bottles labeled “snake oil” that contain cod liver oil instead. So apparently we can’t even get genuine snake oil.

          • Murphy says:

            And at least one of the real snake oils actually has some pharmaceutical value. Which people love to bring up when they start their standard “we don’t need no skinkin science” talk.

            The sad thing is that while one type of snake oil actually had some pharmaceutical value most of what was actually sold was either like your example not even really snake oil or was different types of snake oil with zero pharmaceutical value.

            And the customers were in no way shape or form equipped to identify the small subset which actually worked.

        • Deiseach says:

          about a hundred times more desperate people who’ll try anything

          This. This is what fuels laetrile clinics, psychic surgeons, and peddlers of Miracle Mineral Supplement.

          The same people who pooh-pooh homeopathy then go on to say that we should unshackle pharma companies from government regulation and trust the judgement of the ordinary person as an intelligent, rational adult to assess the evidence and the risks and make up their minds for themselves if they want to take Drug Z which has just been rolled out by the newly-liberated drug companies.

          I don’t think I’m too terribly stupid but I have no idea what anti-depressant might be worth my while, and that’s taking into account drugs with enough accessible information for me to compare and contrast. How the hell am I supposed to judge if New Diabetes Drug is good, bad or indifferent? Will it make my liver explode? I rely on experts and specialist advice and regulatory bodies to protect me from drug companies persuading my GP that she should put me on this new WondaDrug that turns out to make my kidneys melt because it really shouldn’t be prescribed to patients with my particular set of circumstances, only they skipped that part of testing as soon as the rat results (thumbs up!) were in because that was good enough and they needed to get WondaDrug to market fast before their competitors could get their AmazeMeds out.

          • Tibor says:

            Well, I think most people realize they have no idea what antidepressant is good for them. Deregulating the drug market does not mean abolishing doctors.

            Musical instruments are not regulated (to my knowledge) anywhere. Still, if I want to start playing a guitar but I have no idea about what guitar to buy I go and ask someone I trust with that. Doctors are basically the same thing.

            One might get slightly less radically libertarian and require people to get a prescription from a doctor for an antidepressant when they go buy it – but not to buy the one the doctor prescribed. They’d just have to show the prescription with the correct date and stamp/signature/whatever from the doctor. It would just be a paternalistic measure to compel people to consult the doctor first, but if they want to do something else afterwards it is their choice. I think some people are stupid and might want to buy snake oil, some people are stupid enough to buy snake oil even if every doctor tells them that it is snake oil, but I doubt that any people who are not outright mentally handicapped are stupid enough to keep buying snake oil that does not help them.

          • Winter Shaker says:


            Musical instruments are not regulated (to my knowledge) anywhere.

            Well, not sure it counts as regulation exactly, but you could try Raqqa :-p

          • Tibor says:

            @Winter Shaker: Apparently, if you regulate musical instruments, you end up with Russia, Turkey and partly the USA going against you with their military (or at least military resources provided to others). Not a wise choice!

          • Murphy says:


            You seem to be modeling it as a trivial problem where you have 2 choices, 1 drug which works and one which does not.

            The reality is a shower of a thousand scams for each rare safe and working treatment. Large teams of highly trained specialist doctors often struggle to untangle the deliberate lies from real trustable data.

            Humans went thousands of years believing in spirit healers, magic men and homeopaths. Humans have not changed that much. It’s verifiable correct that we are stupid enough to keep buying snake oil that does not help us.

            As an individual human nominally a specialist in reading an understanding the evidence base around drugs I know damn well I’m not smart enough and lack enough time to cope with properly assessing more than a tiny tiny handful and that’s even with the help of a regulatory regime that helps to make sure that the papers I’m reading are probably at least not outright direct lies.

            In a deregulated scenario I can’t even have that modest level of trust in what I read. Without fear of regulators the billion dollar budgets can be turned directly to misleading people like me even more effectively.

            If a flat note could leave someone drooling with their brain hollowed out then I might give your Musical instruments comparison more weight.

            Doctors are not magical. Even they are not specialists in pharmacology and statistics. (oh god how I wish more of them were better at statistics)

            You’re expecting your village doctor to do things they can’t realistically do.

            They’re human and even in large groups they struggle to figure out whether a drug actually works at all. It can take years for doctors to prove that particular surgeries are better than placebo surgery.

            Deciding whether drug A is slightly more effective in patients than drug B is even harder but the effect in terms of years of life lost can sometimes be best compared to events we normally call war crimes or humanitarian disasters.

            Some problems can’t be solved by just standing back and hoping that people will deal with it. the combination of 1: getting stage three safety/efficacy trials done at all, 2: making sure they’re reasonably honest and 3: properly assessing them is something that costs on the order of billions and doesn’t have any ultra cheap alternatives despite the companies having strong incentive to find alternatives if they exist.

            step 3 is perhaps the only one which can be done on a small scale by individuals but for that to work you need a step 2.1: make sure that the results are properly fully released publicly.

            Which again, the little individuals can’t actually make happen.

          • Good Burning Plastic says:

            OTOH you’re very unlikely to seriously endanger your health by playing the wrong guitar.

          • Tibor says:

            @Murphy: As I mentioned elsewhere in this thread, there is a good argument for regulation (the one you presented) but I don’t see a good argument for a monopolistic state-run regulation.

            I am very satisfied with services provided by what one could call a regulatory agency (it is called d-test…but they only operate on the Czech market – there are similar things at least in Germany as well though). It is private (in fact they do get some money from the state but that they use for projects unrelated to the rating which is paid for entirely by a combination of subscriptions and selling the test results to other such companies) and they test a lot of stuff, even for safety (there are some legal standards for that too but still there are differences in products deemed safe enough to be sold).

            Now, I guess that it is more expensive to test drugs than to test bicycle helmets. But first, those cost can be borne by the pharmaceutical companies which just want an approval from this agency so they can put it on the package so that more people are willing to buy it. The agency just needs to check that what they submitted was fine.

            How would I know that someone simply did not simply pay a lot of money to that agency so that they approve of their drug? Well, I have no doubt people would try to do that. But for the agency it is a really bad deal. If it is not trusted enough yet, it won’t have too many customers which subscribe to their standards. If it is, then the subsequent loss of reputation (both journalists and especially their competition will make sure they don’t get away with doing that for a long time) is hardly going to be worth the bribe since it would have to be high enough to cover all future profits (minus interest).

            Just like not having a state owned postal service does not mean no letters, having no state-run regulatory framework does not mean no regulation. The difference is that there is a competition on the regulatory market and that you are free to choose which (if any) regulatory framework you subscribe to. True, some people would probably still ignore that and buy not just snake oil but even dangerous snake oil, but I think the advantages would outweight the disadvantages. A few stupid people would suffer because of what is basically their own fault (I do not weep for people who die while doing obviously extremely dangerous sports like the one with those squirrel suits either) and the vast majority of other people would get better and cheaper medical care.

          • Murphy says:

            it somewhat falls apart when so very very very much money is on the line that you could quite feasibly set up a half dozen “regulatory” companies, pay for PR campaigns to build a reputation for them and then have them slap an approval sticker on the box.

            Indeed doing so may be cheaper than running a proper set of phase 3 trials.

            Standard & Poor,Moody’s and Fitch still exist and are still profitable even after the triple-A rating of subprime mortgages.

            it’s important to remember that like everything else, reputation has a dollar value and can be bought.

            When the quantities of money involved get too big it can be cheaper to take the bribes and pay PR firms to buy back your reputation.

          • Tibor says:

            @Murphy: I think you overestimate the power of PR agencies. I actually think they are much less powerful than they present themselves (and of course it is in their own interest to look like they can convince anyone to do anything). Also, you cannot simply buy reputation with a good PR campaign. People are not going to going to automatically trust something, especially if it is possibly dangerous, I think they actually have the opposite tendency of being extremely unforgiving. Take Fiat for example. The car company still has some reputation today for making cheap bad cars which rust easily and break often. This was the case in the 80s but it is no longer true today. Still it is hard for the company to get rid of that reputation and there is a lot of money in the automobile business as well. I think advertising works much better in industries where there are no objective ways to measure things. Most notably fashion, broadly understood (so that a new cool Apple i-whatever falls under the fashion category).

            Also, you might set up your fake agency, put in a lot of money into advertising but you are not the only company in town. If there is a connection between your company and your certification agency your competition will find out and they will make sure everyone else does as well. That is enough to tarnish the reputation of your agency. Whether you set up 12 agencies or one is not very important, they all start with zero reputation.

            I am not saying you would not have any people buying really bad stuff, there are a lot of people in the world and so you can reach pretty much arbitrarily high stupidity. But you have to weigh it against the positives – cheaper drugs and more innovation as well as the freedom of choice (which is a value to me by itself, admittedly it is less important to other people).

            As for rating agencies in finance, I remember reading something about it, but it’s been some time. It is quite a complicated topic and the business is actually highly politicized and regulated. This is for obvious reasons – the credit rating of your country is something that can affect you quite a lot if you are a politician who’s currently in power and a rating agency decides to change it.

          • Ariel Ben-Yehuda says:

            I’m not sure how effective are the FDA’s effectiveness tests – many ineffective drugs *do* manage to pass.

            Blocking a drug on a 1B$ effectiveness-for-condition test sounds like a bad idea even abstractly: a 1% improvement on population P for metric M implies that any little bit of difference between your test and reality can *completely* invalidate your test results.

            Of course, these kinds of big studies can be very useful for public health. However, blocking drugs on them causes significant damage and creates huge perverse incentives – direct public funding may be a better, less-damaging option.

          • @ Murphy. On the financial rating companies. It is my understanding that US regulations only allow three rating agencies, and Standard, Moody’s and Fitch are them. So they are essentially pseudo government agencies. I just read this somewhere, please someone tell me if I am wrong. But it fits the history.

          • BBA says:

            @Mark: There are currently 10 government-recognized credit rating agencies with no formal barriers in the way of starting an 11th. In practice, market inertia has kept the big three dominant.

        • Jeffrey Soreff says:

          Well said!

    • Agrononaoxymous says:

      >cut in half the rate of production of new drugs while having no detectable effect on their average quality, measured by two or three different proxies…..Cutting the rate in half is a large change.

      It may not be a bad thing. Look at the nth variation of SSRI’s that still are questionably above placebos, or yet another cholesterol and blood pressure medication that probably does more good then harm.

      If you applied that same regulation to a different product I would expect the same result, less products being developed. But I don’t think its terrible if all those products are just very minor variations of the important 2 that exist.

      Considering how much corruption and stat fudging, leaving things out, ect…exists in medicine, perhaps it would be better for there to just be a few meds in category X so its risk/reward ratio over time could be more easily calculated, instead of having 15 of basically the same meds where the data just becomes noise.

  9. Douglas Knight says:

    when they were the ones who brought it up

    You should make it clear that it’s not just the amorphous Vox collective, but actually Kliff herself who brought it up in the original piece.

  10. Vaniver says:

    I want to say two words to you, just two words: Software doctors.

  11. grendelkhan says:

    My favorite ridiculous patent-extension drug is Nexium, which I keep seeing ads for the new (re-patented) time-release version of. AstraZeneca, the makers of Nexium, scammed taxpayers out of about two and a half billion dollars in Medicare payments every year up until around 2014 for a drug (Nexium (esomeprazole)) that wasn’t any more effective than a much cheaper, essentially identical, drug (Prilosec (omeprazole)). They did this by running studies so badly designed that they must have been intended to mislead: Nexium is the active enantiomer of Prilosec, so it’s twice as potent, but the trials compared equal doses.

    More here and here. To be quantitative, see here; esomeprazole cost $2.5B for 8M claims; omeprazole cost $0.6B for 32M claims, a ratio of about 17:1.

    • Cube says:

      I was going to bring this one up as my favorite, since I took it.

      Anthem tried their darnedest to get me to just take Prilosec OTC (available at Costco) in lieu of Nexium. And I would have considered it, except for one thing:

      It was cheaper (for me) to pay the copay for the Nexium than to buy the equivalent Prilosec OTC.

      In the end, I also preferred the Nexium capsule to the Prilosec enteric-coated tablet.

      (Gripe about the above: I wouldn’t even *have* a prescription insurance benefit that enabled the above transaction if it were only the case that 1. my employer didn’t pick my insurance for me, and 2. ACA-approved health insurance weren’t mandatory. I’d go catastrophic insurance only, and expect to pay for most things out of pocket.)

      • grendelkhan says:

        It was cheaper (for me) to pay the copay for the Nexium than to buy the equivalent Prilosec OTC.

        Shades of POTAXOR™®©, eh?

        Can we start calling the thing where patients are price-insensitive to the point where they’ll buy incredibly expensive prescription meds because the copay is less than the full cost of an OTC variant, “The POTAXOR™®© Problem”?

        I wonder if this could be solved by having insurance pay for OTC meds, maybe only if you got a scrip.

        • Snodgrass says:

          Britain fixes this by charging £8.90 to get a prescription dispensed (unless you are very poor, in which case it’s free, or seriously ill, in which case you can pay annually for a your-prescriptions-this-year-are-free certificate); so nobody buys paracetamol or loratidine other than over the counter.

          But the requirements for an OTC drug are quite tough – diclofenac was taken out of OTC status because it was causing a measurable level of heart problems, antibiotics obviously aren’t OTC. 10mg simvastatin *is* OTC, but I suspect the price per pill is such that people with prescriptions for 100mg simvastatin will pay £8.90 rather than buying ten times as many small pills.

          • Octapode says:

            The thing that gets weird on the british system is if you have a daily medication, and get a prescription for it, you’ll pay the same amount for a week’s supply as for a month. I’ve gotten venlafaxine prescriptions for 2 weeks and for 2 months, and they both cost the same. It’s not terrible, but it just leaves the feeling that there’s something gone wrong somewhere in the system.

      • Brandon Berg says:

        Aren’t there ACA-approved catastrophic insurance plans? IIRC some of the bronze plans have deductibles in the thousands of dollars.

        • jaed says:

          A real catastrophic plan would be, and used to be, quite a bit cheaper. The problem is that the ACA plans are all first-dollar plans (even the ones labeled “Catastrophic, for under-30s only”), with a lot of mandatory coverages.

          The bronze plans generally pay out like catastrophic plans, with out-of-pocket expenses up to $6K per person per year. But they have restrictions like comprehensive plans (you must go to the insurance company’s network and pay the insurance company’s mandated price — no shopping around or going to a non-network doctor, if you want it to count toward your deductible). Forcing everything to go through the insurance company’s administrative layer, plus fact that they’re larded with mandatory coverages, raises the premiums to levels that used to be seen for comprehensive plans.

      • AnthonyC says:

        My insurance is weird with drug prices (over the course of a year one prescription refilled at the same pharmacy for anywhere from $10/month to $600/month), but for me, prescription omeprazole is <$4/month, compared to $30/month for OTC

    • Corey says:

      TRICOR II and III are the canonical examples.

  12. DanielLC says:

    > The reason I usually limit my griping about pharmaceutical overpricing to generics and avoid brand-names is that while high generic pricing is inexcusable, high brand-name pricing is debatably useful.

    I get the impression that the people selling high-priced generic drugs are the people who invented them. In that case, it gives them incentive to make more drugs. It’s the same as high brand-name pricing.

    Regarding the company-sponsored lunches, is there any reason there aren’t insurance-sponsored lunches that convince doctors to use cheaper drugs so the insurance companies can save money?

    • Brandon Berg says:

      More importantly, why don’t insurance companies just straight-up refuse to cover drugs not proven to their satisfaction to be better than generic alternatives?

      • baconbacon says:

        Do you think insurance companies are unregulated?

      • Alex Godofsky says:

        Because the insurance company’s patients don’t want that; they want the thing their doctor prescribed. And if the insurance company won’t cover that it’s because they’re moneygrubbing bastards.

        • Edward Scizorhands says:

          Yes. It’s not just the government that hates price containment; it’s the American people: every man, woman, and child.

          Okay, I exaggerate a bit, but Americans really hate cost controls in the medical field. Quoting myself:

          Kids might not remember, but Denzel Washington had a 2002 movie where he’s the hero because he takes a hospital hostage as a result of him not liking the HMO’s decision.

          The best feature of HillaryCare was that it was going to do cost containment. It was also the easiest way to attack it. ObamaCare, as actually implemented, didn’t try for any of the serious cost containment, which is why it (barely) passed.

          • Corey says:

            Yeah, the 90s HMO movement did a decent job of controlling costs, but provoked a massive backlash.

            Today PPO networks do much the same thing, but the administrative annoyances and penny-pinching are all hidden from the consumer, they’re the office staff’s problem. (Until someone, intentionally or not, goes out of network). Though nowadays insurers are narrowing networks as a backdoor utilization-reduction method, spreading some pain back to consumers.

          • Edward Scizorhands says:

            If patients were simply never told that there was a procedure available but it’s too expensive, people would be a lot happier.

            Lots of countries do this, in practice. (There is one payer and that one payer isn’t covering it, so you don’t know about it.) I have no idea how you could get the USA there. There are significant legal, liability, cultural, economic, and free speech issues with any attempt at doing it.

          • The Nybbler says:

            @Edward Scissorhands

            The Internet and search engines make hiding the existence of all but the most obscure procedures from even a slightly motivated patient impractical.

          • John Schilling says:

            The Internet and search engines make hiding the existence of all but the most obscure procedures from even a slightly motivated patient impractical.

            So maybe we need to fill the internet with advertisements for cheap panaceas that don’t work, to reduce the odds of being suckered into buying an expensive drug that doesn’t work? The people who trust their doctors get approximately the right stuff, the people who insist that five minutes of googling makes them more knowledgeable than their doctor mostly wind up sold on placebos, the people who are capable of doing real research on the internet eventually get to someplace like CrazyMeds but have to suffer through an excess of bogosity on the way – meh, it’s not perfect but maybe it would work well enough?

            Of course, we’d want the cheap panacea to be provably harmless. Any chance we could sucker a significant fraction of the general public to believe that distilled water is the Most Wonderful Cure Ever?

          • rmtodd says:

            Any chance we could sucker a significant fraction of the general public to believe that distilled water is the Most Wonderful Cure Ever?

            Didn’t the homeopathy people already do this? Admittedly they did add some vigourous handwaving about 10^40-size dilutions etc…

          • The Nybbler says:


            That’s the joke.

        • Brandon Berg says:

          Sure, but consumers are money-grubbing bastards, too. I’d buy an insurance policy that offered coverage like that if most of the savings were passed on to me.

          I wonder, though, if maybe this just isn’t that big a deal. Prescription drugs are only about 10% of health care spending. The percentage of that spending that’s spending on brand-name drugs that are equivalent to or marginally better than the closest generic equivalent is probably pretty small. Maybe they think that telling customers they don’t cover certain drugs will cost them more business than the <1% savings they're forgoing.

      • Corey says:

        They do that when they can. In some drugs/states/plan types they are forbidden from doing so, in some other combinations everyone just jumps through the hoops (e.g. diet requirements before bariatric surgery), and in some other combinations it actually does what’s intended.

        Insurers do usually crank up copays and the like in these situations, and are always able to AFAIK.

      • Garrett says:

        Outright bans are a Bad Idea. (Different inert/filler/bulking/coating agents can cause allergic reactions in rare cases).

        Insurance companies usually achieve the associated savings by having lower copays for the generics and by requiring pre-authorization for the name-brand drugs.

    • jimbo says:

      >Regarding the company-sponsored lunches, is there any reason there aren’t insurance-sponsored lunches that convince doctors to use cheaper drugs so the insurance companies can save money?

      They don’t have to provide lunches, they can just write it into the plan.

      It’s not very popular among the insurance customers because if their doctor prescibes Pristiq, why the hell wouldn’t they get Pristiq. I imagine there’s also negotiations between the pharmacy benefit managers and the insurance carriers about what can be step therapied and what can’t.

      • grendelkhan says:

        Oh wow, that seems like a common-sense measure–I’d never heard of it before; thanks for linking it! I assume that if there’s any real reason for a patient to not be on the cheapest available treatment, that’s a valid reason to fill a non-fail-first prescription.

        But the optics are so bad! The mean Big Businessmen won’t give my Little Timmy brand-name POTAXOR™®©, and he’s going to suffer and die just because we’re poor! Despite that not being what the evidence shows. I sorely wish that I had a solution for that, because it seems like an effective method of cost containment which is designed to have the smallest effect on patients.

        Hell, don’t even make it mandatory; just make it as inconvenient to go outside the standard step therapy protocol as it is for doctors to write “epinephrine autoinjector” on their prescriptions, and you’re like halfway there.

        • Deiseach says:

          Is part of the problem the advertising? If you’re allowed to tell people “Ask your doctor to prescribe WondaMed” in your advert for WondaMed curing everything from falling hair to shingles, I’m sure a lot of people do ask their doctors. Or read the prescription and if they don’t get WondaMed they complain?

          Would stopping ads from doing that, or at least forcing them to put in “You are not a medical professional, how the hell do you know better what this crap does to your physiology?” (maybe in more tactful terms), be any use?

          • Edward Scizorhands says:

            “Ask your doctor to prescribe WondaMed”

            Do commercials actually say that? I thought the boldest they could get was “talk to your doctor about WondaMed.”

          • Deiseach says:

            You’re correct in that, I was eliding from the wording used to the meaning behind it (after all, what’s the point of asking your doctor unless there’s a good chance they’ll prescribe it, or you can try and get them to prescribe it).

            But I should be be more careful in future! 🙂

          • Jeffrey Soreff says:

            One thing that I’m fond of in the US regulations is that
            drug ads are evidently forced to speak of side effects.
            It is somewhat grimly amusing to count up the number of
            ways that WondaMed can kill you that an ad admits…

      • Scott Alexander says:

        To be honest, it’s really annoying when as a doctor I’ve done a good evaluation of a patient, prescribed the drug I think is best for them, and I get a call from the patient saying that the insurance company won’t approve it because have I considered something cheaper? Often I have but I’ve rejected it for some reason I know about because I’m a doctor and the insurance company isn’t.

        I’m not saying there isn’t a role for this, or that it might not be good on net, just that everybody (doctor and patient) hate it and I understand why there’s so much pressure against it.

        • Larks says:

          Minor nitpick: the insurance company isn’t a doctor, but their step therapies will have been designed by doctors they employ. The real issue is presumably that the insurance company doesn’t have as much personal information about the patient as you.

  13. Julien Couvreur says:

    I noticed that you’re ok with cost-benefit analysis, yet unsure about abolishing the FDA. Are there studies showing a net benefit to the FDA?
    Anyways, if you’re unsure about abolishing it, how about this seemingly harmless proposal: going from a licensing regime to a certification regime, for anything beyond basic safety?

    • grendelkhan says:

      I’d assume the argument is something like this, which is a generic argument in favor of cautious evidence-based incrementalism, or boring autistic milquetoast establishment liberalism, depending on your ideological bent.

    • Brett says:

      I’d be worried about another Thalidomide-style situation occurring.

      • Edward Scizorhands says:

        What if there was a drug that cured lung cancer but with thalidomide side effects if taken by pregnant women?

        If the rest of the system were rational — if doctors wouldn’t start out prescribing a worse drug because they got taken to lunch by that drug’s manufacturer — I’d be great with the FDA merely turning into a gate-keeper, being the official keeper of statistics of all the benefits and risks. But we aren’t at that world yet. Can we get there?

        • ReluctantEngineer says:

          What if there was a drug that cured lung cancer but with thalidomide side effects if taken by pregnant women?

          Kind of like thalidomide?

        • Deiseach says:

          The lunches as such aren’t the problem; the doctors get a nice meal, have a get-together, and learn about the latest fancy new drug that is going to do wonders for their patients. Most of them have no reason to think “yeah, they’re trying to get me to prescribe poison”; they get a few free samples they can hand out to Mrs Smith, who has an ongoing problem with that rash that never quite goes away. Maybe the new stuff will finally shift it, maybe it won’t, it can’t hurt to try and she’ll be no worse off than giving her the usual.

          Perhaps med schools should have a class on “Preparatory Cynicism: How to develop a thicker skin while chowing down at that pharma company’s expense and not feel guilty about not prescribing their new drug afterwards” 🙂

    • Nebfocus says:

      Public choice theory illustrates why government regulators err on the too cautious side, often at great cost. See the German response to Fukushima or the British and Japanese responses to mad cow disease.

    • Scott Alexander says:

      I have seen cost-benefit analyses saying that abolishing the FDA would be good, but I have a lot of uncertainty on the issue. Usually in situations like this I like to see incremental changes tried first (or even better, other smaller countries doing it first) to make sure it’s not going to be a disaster.

    • Agrononaoxymous says:

      Have you heard of DDT, or gone to elementary and middle school and read about some of the terribly unsafe products in american history?

    • Mike says:

      Again you need to know how safe is safe enough. And the only way to determine that is by looking at risk vs benefit. So you have to assess benefit (efficacy). Safety is meaningless without the denominator.

  14. Will says:

    I predict that this discussion will lead to Sarah Kliff changing her opinion in some significant way, visible in a future vox article, not necessarily to exactly Scott Aaronson’s opinion. For instance she will decide that the issues Scott brings up (pharmaceutical drug companies influencing doctors, FDA overregulation) are more important and write an article about one of them.

    I think this because I think both Sarah and Scott are reasonable people who share similar values, and this issue, despite being incredibly important, is not so divisive as to make rational argument impossible.

    • Sniffnoy says:

      psst wrong Scott

    • Squirrel of Doom says:

      If she did change her mind, would stating that be compatible with her professional role at Vox?

      What would it do to her personal social and professional reputation?

    • grendelkhan says:

      I don’t know–this whole thing underscores just how stupid our discourse is. I imagine a hierarchy of understanding; if you want to look behind the noise of clickbait on Mic or Heat Street or whatever, you can go to Vox or Wonkblog and find clever explainers, but they barely scratch the surface, so you read Slate Star Codex, which does deeper dives, and then you get interested in meta issues and wind up seriously questioning modernity. Or something like that.

      It’ll certainly be interesting to see if Kliff fixes the bugs in her writing as a result of this. I worry that given her bio, this is something she should already know, and that the issue is too politicized. Maybe the best we can hope for is that Vox will sometimes separate the issue of competition among generics from the issue of prices on brand-name drugs, maybe acknowledging the existence of a tradeoff between price controls and productivity, maybe acknowledging the human costs of any extra expense or delay in FDA approval.

      I find your optimism wonderfully intoxicating, anyway. Would that we lived in such a beautifully reasonable world!

    • A Non Mous(e) says:

      It’s like you don’t know what vox is for.

      Vox is for well-written, well-argued-seeming articles that absolutely always show that more regulation and more bureaucracy are needed.

      It exists because some people occasionally get cognitive dissonance from simultaneously believing that communism is bad and known to be a failure and yet the solution to every single problem is to move more in the direction of communism. Vox rationalizes this dissonance away. Vox only needs to exist for as long as there are enough voters who are bothered by this type of cognitive dissonance. Yeah, it’s not a great long term plan but in the long term the plan is to simply import enough new voters to win every election without the need for clever lies like Vox produces.

  15. Sniffnoy says:

    C’mon, Scott, you’re not going to miss a chance to link to Policy Debates Should Not Appear One-Sided in your whole section on exactly that theme, are you? 😛

    • Scott Alexander says:

      I’m reluctant to invoke that because I think there are some nearly one-sided questions here, like passing that act preventing pharma companies from bribing other companies not to create generics. Given that pharma has really good lobbying, I don’t think it’s necessary to invoke anything other than pharma company’s selfish advantages to explain some bad aspects of drug policy. I just think this isn’t one of those times.

      • Rainmount says:

        That issue looks two-sided to me. If big companies bribe others to not produce generics then why shouldn’t I set up a lab and get paid a fortune to not use it?

        • Deiseach says:

          Even better if you can convince them to pay you a fortune to not set up a lab that you will later not use 🙂

        • VivaLaPanda says:

          The pharma company only needs to bribe people already producing the drug to avoid this. The key number is how high the confidence of the pharma company can be that some generics company can compete, which if they already produce the drug is 100%.

        • AlexanderRM says:

          My guess would be that they pay you to focus your research efforts on other things instead, which means they get some verification they’re only bribing companies that are able to do research, and also is more economically efficient than leaving resources sitting around (presumably the required bribes are a *lot* smaller).

          But what about getting multiple drug companies to pay you to not produce a bunch of different generics all at once? Or even getting competitors to get into a bidding war trying to get you to produce a generic substitute for the other company’s drug instead?
          -I suppose the former at least wouldn’t work if bribes were publicly recorded- which would make the law against bribing other companies one anti-bribing law that might actually be *very* effective without much enforcement.

      • Mike says:

        So. I’m a major pharma company with a completely secure patent (in my opinion) for my leading treatment for psychosis or asthma or scrotal wrinkling. You are a generic company that knows if it can successfully challenge the patent and get your generic in 3 years early you will make an extra X million dollars at a risk of X/100 million for the legal costs. So you decide you want to risk it. Even if I defend successfully it will cost me X/100 and even though my patent real estate is secure there’s always a chance the judge will have a CVA and find against me. So I pay you X/200 to bugger off and save half my legal fees on a case I’ll win anyway. Who is acting unethically here? Me, you, neither or both of us?

  16. Here is a back of the envelope calculation:

    (1) prescription drugs are 10% of health care spending [] of

    (2) which about 70% is prescription drugs [], so about 7% of spending is in prescription drugs.

    Assuming cost controls would halve that, the savings are 3.5%. Health care spending has recently slowed down its rate of increase to around 5%/year. So, cost controls on brand-name meds could potentially bring down health care spending all the way down to the levels of February.

    Who doesn’t remember how much cheaper health care was in February?!

    Even somehow getting all brand-name drugs for $0 would only move the US back to the lost paradise of April 2015 health care costs.

    Focusing on drug pricing is excellent politics, but terrible policy.

    • Richard says:

      Looks like you’ve got a typo or something in your (1) and (2). As written, it says prescription drugs are about 70% of prescription drugs, and clicking through your links doesn’t make it immediately obvious what you mean.

    • OFOP (Overly fond of parentheses) says:

      The numbers provided in [1] are confusing to me:

      NHE grew 5.3% to $3.0 trillion in 2014, or $9,523 per person, and accounted for 17.5% of Gross Domestic Product (GDP).
      Medicare spending grew 5.5% to $618.7 billion in 2014, or 20 percent of total NHE.
      Medicaid spending grew 11.0% to $495.8 billion in 2014, or 16 percent of total NHE.
      Private health insurance spending grew 4.4% to $991.0 billion in 2014, or 33 percent of total NHE.
      Out of pocket spending grew 1.3% to $329.8 billion in 2014, or 11 percent of total NHE.
      Hospital expenditures grew 4.1% to $971.8 billion in 2014, faster than the 3.5% growth in 2013.
      Physician and clinical services expenditures grew 4.6% to $603.7 billion in 2014, a faster growth than the 2.5% in 2013.
      Prescription drug spending increased 12.2% to $297.7 billion in 2014, faster than the 2.4% growth in 2013.

      So adding those numbers back up, I get ~4.3 trillion total (or ~140%), instead of the 3.0 trillion mentioned. Presumably some of the costs are counted in both the insurance costs and the ‘actual medicine and service provided’-costs. In a healthy market (which admittedly, it isn’t), the reduced cost of medicine as paid by insurance should result in reduced NHE of the same order of magnitude. Since 80% of NHE is insurance + out of pocket, I’m not sure what the effect would be on your calculation.

      I’m also not convinced that Scott’s cost-benefit analysis is valid. Then again, I’m not convinced any cost-benefit analysis with time scales that large would be valid, since there’s no satisfying way to deal with uncertainty discounting.

      I assume the world will be a significantly different place 20 years from now, let alone 44 years. Advances in technology and science seem to provide game changers every once in a while (and the period between game changers seems to be shrinking). I don’t know where things like CRISPR, synthetic medicine-producing bacteria (they’ll probably want to market that differently) or lab-grown (from your own cells) organs will lead. Hell, even Peter Thiel-style vampirism has some probability of success. But I’ll bet there will be at least *something* that will break the current paradigm. Maybe even something completely different, like increased automation driving down the cost of brute-force research or of setting up production lines for generics. Maybe we’ll develop some series of standardized (mass-producible) tissue a la HeLa cells to test drugs on, driving down the cost of testing / approval. Maybe even something completely unrelated to technology. Maybe North Korea will decide to invite Big Pharma to run large, monitored drug tests on its people in exchange for medical aid and big piles of money. Maybe most of the population will be dead due to <insert favorite doomsday scenario>. Maybe everyone will be wireheading.

      Also, in these kinds of calculations, do you count people who might have been born, but weren’t? Does quality of life play any part in it (should we use QALY)? Now we’re entering the realm of ethics, which means you can forget about making clear-cut objective decisions based on the results of your analysis.

      • The comments about NHE perhaps being higher than 3T and not being able to assume perfect cost reductions, just make my point even stronger: reducing costs of brand name prescription drugs would move the costs back by not even a full year.

        From this POV, whether you count people who weren’t born 6 months ago or not, it really doesn’t matter.


        Synthetic drug-producing bacteria are a currently available feature of the drug business, but AFAIK the benefits are potentially lower costs to produce the same molecules. It’s not a big deal, actually. There was a lot of excitement about artemisinnin [] but it ended up being more expensive than the traditional route.

        Perhaps things will change over the long-term, but this is a business where 10 years is short-term, so adjust your scales accordingly.

  17. Michael says:

    The interesting thing about the cost benefit analysis is that it doesn’t distinguish between “good” reduction of drug company profits by switching to generics and “bad” reduction by price controls. In both cases the same reduction in total cost should lead to the same reduction in innovation.

    The real thing to combat is excessive profits by third parties other than the inventor because they have no corresponding incentive.

    • FeepingCreature says:

      No because not switching to generics incentivizes “bad research” – your ‘one bit of the molecule slightly out of place’ type brand drugs.

  18. Even valuing QALY at $0, Harvoni may be a money saving drug as the alternatives (liver transplant) are so much more expensive. Instead of “new drug saves healthcare system money” we’re getting “new drug is so expensive” because pharma CEOs are less mediagenic than doctors & nurses.

    Brand-name anti-depressants at $300/mo are still in the same price range as (and often cheaper than) talk therapy (and head-to-head studies do not show an advantage of drugs over talk therapy).

    • Edward Scizorhands says:

      One advantage of a prize system (which I generally don’t recommend, but it’s useful as a thought experiment) is that any organization setting a prize for a theoretical Harvoni, not knowing if it would exist but still knowing that setting the number too small would mean they don’t get it, would be totally happy with the current price.

  19. FeepingCreature says:

    Why not sell drugs for $10,000 but also give them for $100 to people who prove they can’t afford $10,000?

    I wonder what public funding of medical research in Europe looks like. It seems a bit unfair to only count corporate research.

    • Brandon Berg says:

      This is called price discrimination. We already have several mechanisms for that. Some drug companies actually do it voluntarily, for some combination of PR (or maybe not, since it doesn’t seem to be working) and profits (because price is still greater than marginal cost, and those customers weren’t going to pay full price anyway). I think doctors sometimes give the free samples they get from drug companies to low-income patients. And we have subsidized health insurance (Medicaid, Medicare, Obamacare) for the poor and elderly, and guaranteed issue and community rating for people with pre-existing conditions.

  20. Torvetrog says:

    It’s not only the price. We do know that the current patent system creates seriously wrong incentives for drug development. One example is the mentioned evergreening of drugs by changing it slightly without any functinonal improvement. In the cases where this actually leads to an improvement it’s often obvious that this improvement, especially when choosing the active enantiomer, must have been known from the beginning, which means they brought an inferior product to market in order to have an easy and patentable upgrade path ten years later.
    Maybe the worst is that this system excludes the most promising source of new drugs: existing chemicals, that are already in use or even known. Sometimes you get reports of university scientists finding, that some old drug shows a surprising new miracle benefit in a new context, like ketamine for depression or, recently, substances which seem to revert existing opioid tolerance (PDGFR-β inhibitors). Pharma companies will either exclude these chemicals from the beginning, or start the development of an analogue that’s patentable, even though it might be worse and more expensive. Or drop any research in that direction when it might be clear that it’s an analogue to an existing drug because it would point people to the old drug which would destroy the market for the newly developed one after it comes out. This is where the real opportunity costs are.

    • Loweeel says:

      This is not correct. You are conflating patents for a method of use/treatment with patents for the underlying compound.

      Patents for a novel and non-obvious method of use/treatment are still available even for existing compounds.

      • Torvetrog says:

        A use-patent is worth very little if any doctor can prescribe the 50cent alternative off-label. Additionally, if you don’t control the base compound, you also have no control over derivatives. A patent for the use of a drug for a certain treatment ist not nothing, but it’s worth much less than an original patent.
        A relative of mine did pharma research at university. They found that an existing and known chemical had useful medical effects, threw it away and designed a slightly worse derivative drug that was new and patentable (hooray for private research grants and incentives). Nobody in commercial pharma research would do anything else. This severely restricts the search space.
        Also, the high costs for proving that a new drug ist safe and effective are probably unavoidable, but often spent on the wrong things like Pristiq. On the other hand, you need some kind of certification mechanism because otherwise you get a ‘market for lemons’. A good example is Epicor, a ‘health supplement’ made out of brewers yeast. It modulates the immune system and basically prevents you from getting the usual respiratory infections and other communicable diseases. Which of course sounds like the bullshit promises that all other health supplement vendors make, except that it’s true (and there are small scale, academic studies to prove it). But there is no incentive for anybody to put up 100+ million for clinical trials, while we, as a society, put the same resources into certifying Pristiq. The opportunity costs are staggering.

        • Torvetrog says:

          Another example for why our incentives are wrong: our host once mentioned the ‘iron curtain of pharmacology’, that separates us from Russian drug markets. They have wonderful stuff like Selank, an anxiolytic that seems to work better than benzodiazepams (it worked for me in situations when 10mg diazepam did almost nothing), but is not sedating and not addictive. It’s very popular in the nootropic scene, but completely unavailable through official channels in the West. When you look at the cost and suffering that GAD is causing, we’re leaving an enormous amount of money on the table.

  21. Simon says:

    regarding RAND:
    reduction in expected net gain is not a loss. it’s not a stock market thing.
    also comparing an expected reduction in gain to a mass murder event is moraly wrong.

    • baconbacon says:

      Most of the deaths in the GLF weren’t murders, they came from starvation due to Mao’s policies screwing up the production and distribution of food. This is similar in some ways to a bureaucracy preventing medicine from getting to needy people.

      • Simon says:

        same error. we are not talking about medicine getting distributed, we are talking about medicine not beeing researched that /could/ increase your lifespan by 0.7 years.

        • satanistgoblin says:

          Implied solution: do not invent any new medicines. After all, if they are not invented they cannot be underdistributed. 🙂

          • Simon says:

            actualy the implication is that the researched medicine would increase the lifespan of the 10% that can afford it by 7 years.

          • satanistgoblin says:

            And preventing that would be eviI. And I really doubt that 90% americans can’t afford treatment drugs.

    • Matt says:

      I don’t get that either. Are we going to forget about drugs we’ve already discovered?

  22. Relatively Steve says:

    “it’s always neat to get featured in real news sources as if I were a real writer or something instead of just a guy with a blog”

    Haha, look at this guy who still believes in real news sources. Please no one tell him about Santa Claus, he might not have figured that one out either.

  23. Rusty says:

    Let me give an example. According to study (9) above, price controls would have caused about 200 fewer drugs to be approved over the period from 1980 – 2000. In fact about 600 drugs were approved during that period. So if they’re right, it would have cut the innovation rate by 1/3.

    Hasn’t it cut it by a quarter? If 200 drugs had been approved you wouldn’t say it cut the innovation rate by 100% would you?

    • baconbacon says:

      It is a projection, 600 new drugs were created, an estimate of the impact implies that only 400 would have been created under rule regime X, not 600 were created but 800 would have been.

  24. CecilTheLion says:

    Would expensive pharmaceuticals lead to lower life expectancies?

    ie. Lower income is correlated with lower life expectancy. In some sense expensive drugs would lower incomes, therefore costing life years, and also quality of life. I realize there are clear objections you could raise here, but is this tenable?

    There could also be the objection that current law is functioning as a form of economic protectionism. But wouldn’t a free market — or free-er market — drive down profits to the degree where investments in R&D would decrease as well?

    • CecilTheLion says:

      Also, pharmaceuticals siphoning less money out of the public would lead to increased spending in other areas, leading to innovation in non-drug areas. More money in the hands of consumers could also potentially mean a stronger economy in general, which has benefits of it’s own, though this is obviously debatable — at the very least, more funding for pharmaceuticals would lead to more job opportunities for biologists and lobbyists. And how the hell do you quantify increased quality of life, or length of life in some cases, as produced by general economic innovation?

      • Brandon Berg says:

        Look up value of a statistical life. It’s not an exact science, but it gives a good ballpark estimate.

    • Brandon Berg says:

      It’s not clear that the correlation between income and life expectancy is, within the ranges typically found in wealthy countries, is actually caused by higher income enabling you to buy stuff that makes you live longer. There are any number of possible confounders there.

      Besides, spending on prescription drugs in the US is only about 10% of total health care spending, and health care spending is about 20% of national income (note that this is different from GDP). If the government regulated prices down to half of their current levels—which would have a devastating effect on drug development—it would free up about 1% of national income. I can’t imagine this having a very large effect on life expectancy, even if income really is the causal driver.

      Moreover, as noted, drugs only have an effective patent-protected market life of 10-15 years. After that, prices drop precipitously after patent protection goes away. Gains from regulating the profits out of innovation would be short-lived, as the drugs whose price is reduced would have been reduced soon anyway, and there wouldn’t be many new drugs coming in to replace them.

      There could also be the objection that current law is functioning as a form of economic protectionism.

      That’s not an objection—it’s the whole point. Yes, if by “free market” you mean one that it has no patents, it would drive down profits from researching drugs to zero-ish. Maybe a bit from first-mover advantage. That would be horrible, which is why we have patents.

  25. Slow Learner says:

    As FeepingCreature mentions – there is room for substantial government and non-profit investment in pharmaceutical research, and that spending only needs to ~break even, not actually make a profit.

    In the UK, there is ongoing research conducted in the labs of e.g. AstraZeneca, which is funded by a combination of AZ’s own money, government spending from the Medical Research Council, and money from Cancer Research UK or other relevant health charities. That’s already the case.

    And honestly, the stream of researchers is coming into the job via biochemistry degrees & PhDs, mostly at UK universities (and thus self-funded or paid for by Research Council/charitable research funding); a large proportion of the money for R&D on new drugs is already coming from the government; and the main initial customer for drugs developed in the UK is the government-run NHS. Why not close the circle and have the drug development itself done in non-profit labs primarily funded by government and other non-profits? You could either have pharmaceutical companies bid for the rights to new drugs as they reach approval and get listed by NICE, or patent them and then make them available to generics manufacturers for a nominal fee, then take advantage of the fact that the labs’ results aren’t having to support a whole superstructure of a pharmaceutical corporation to keep costs down.

    Neatly cuts out the incentive to develop “patent extension” drugs as well.

    • Spoonman. says:

      What new drugs have been invented under this system? (Maybe it hasn’t been going on long enough to create any, so it’s an unfair question. But worth asking with the information you’ve given.)

      • Snodgrass says:

        Abiraterone is the standard example; research done at the very-sure-of-what-its-purpose-is Cancer Research UK Centre for Cancer Therapeutics in the Institute of Cancer Research in London, and I think taken through to phase II there, then assigned to a medium biotech for commercialisation, and Johnson & Johnson bought the medium biotech.

        Cambridge Antibody Technology is a spin-off of monoclonal-antibody work at Cambridge University, again it took twenty years and selling the research to enormous-pharma to get the antibodies to market.

  26. Oleg S. says:

    So, to reiterate:

    There are doctors, who don’t really care about patients, and care mainly about free meals. These doctors prescribe brand antidepressant with questionable or downright inferior efficacy, and have price that is 15 times higher than its generic analog, so the drug ends up being second most prescribed antidepressant in USA. The drug is being developed by a pharmaceutical company in a desperate attempt to salvage diminishing R&D returns, and its price barely covers years of fruitless research and huge appetites of CROs and marketing teams. CROs feed on coordinating enormous clinical trials are required by a FDA to get an approval, a condition on which the drug can be prescribed by a doctor and paid by an insurance company. Insurance companies don’t care about what’s in a bill as long as there is someone somewhere paying it; in fact the larger the bill the bigger the margin they are living on. So, cost of medical care rises, and everyone starts worrying about it, and then Vox issues fake explanations which make everything look even muddier and hopeless. The only visible way to cope with this depressing misery is that new wonder drug advertised all around, Preestick or something; I hope my doctor knows all about it.

  27. PedroS says:

    in the descriptio of study 9. , you state ““have led to 198 new drugs being brought to the US market” instead of the correct “have led to 198 FEWER new drugs being brought to the US market”

  28. Brandon Berg says:

    Golec & Vernon (2006) say that as a result of European drug price regulation, “EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms.”

    That’s interesting, because I would not have expected this effect. It’s not like companies headquartered in the EU don’t sell a lot of drugs in the US, and vice-versa. But according to the authors, EU and US companies do focus disproportionately on the markets in which they’re located. Although it’s worth noting that the size of this effect understates the degree to which EU prices controls discourage innovation, because EU companies still do have access to the US market, and vice-versa, so EU price controls discourage innovation by US companies as well, while high prices in the US do still encourage innovation by EU companies.

    • Brandon Berg says:

      Also, this is relevant to your interpretation of the tenth study. The fact that countries with heavy price regulation develop new drugs is entirely consistent with the hypothesis that price regulation discourages drug development. I wouldn’t even count it as half a study against the hypothesis.

  29. Almond says:

    “Since I get to define what left-libertarianism means however I want, I will say that it is provisionally okay with banning pharmaceutical companies from buying doctors lunch, as long as there aren’t any studies concluding that this would kill more people than Communist China. ”

    Even though it’s definitely not the point of this post (which I liked a lot!), I was just wondering how much this will cost and how it will be enforced 🙂

    • ReluctantEngineer says:

      Well, there are regulations limiting gifts for government employees that apply to e.g. VA and military doctors (they definitely prevented my father, a military doctor, from getting meals from pharma companies). It might be possible to find some information on how well those regulations work, what they cost, etc.

    • HeelBearCub says:

      This is Scott signalling that he has found a hard problem that he would like to ignore for the moment. Which he pretty much outright states a few sentences later.

    • J Mann says:

      You wouldn’t believe how many regulations there already are on drug marketing – it wouldn’t be hard to add new ones.

  30. Joao Eira says:

    Didn’t you in your previously article say that pharmacies are able to give generics to patients unless the doctor states otherwise? Or were you talking about something Europe has that America doesn’t? Anyway, that seems an effective nudge, to give pharmacies the freedom to give generics instead of brand-name drugs if the compound is the same and the doctor has not explicitly stated that it has to be the brand name drug. That does not solve the problem you stated wherein pharma companies would make a slight change in the compound though because there you don’t a suitable generic replacement…

    I don’t think a blanket-ban on lunches with pharma companies would be very effective (though I don’t think you were explicitly stating that the problem was the lunches) because then you would have to police every kind of interaction between doctors and pharma companies, which at face value doesn’t seem neither effective nor desirable (for liberty of association reasons)

    • Corey says:

      They do have this freedom, though there are ways to game it. With EpiPens, the drug is generic but the delivery device is not, and delivery devices do not enjoy the same freedom of substitution.

    • Scott Alexander says:

      Pristiq and Effexor are not the same drug. They’re two very very very similar drugs which were deliberately made just different enough that pharmacies aren’t allowed to do that.

  31. Jack says:

    The British NHS does some remarkable work in promoting generic prescribing. The National Institute for Clinical Excellence provides comprehensive guidance on evidence-based treatment, with cheap generics given priority over expensive proprietary drugs. The computer system used for prescribing shows the cost of drugs and automatically recommends less expensive alternatives.

    We can see the effectiveness of this work, because anonymised prescribing data for the entire NHS is publicly available. The average antidepressant prescription costs just £3.86 ($5.16). Wyeth/Pfizer didn’t even bother applying for market authorisation for desvenlafaxine in the UK, presumably because they know it would be a wasted effort.

  32. haishan says:

    One interesting idea to lower drug prices is patent reform. Stiglitz has proposed replacing drug patents with a prize fund to finance new drug development, so pharmaceutical companies would get a one-time lump sum payout instead of an artificial monopoly, and the new drug would immediately hit the public domain. There are reasons to think this might be a bad idea, but presumably the government wouldn’t be funding slight modifications to old antidepressants with no real benefit, so Pristiq wouldn’t be an issue. And it seems like you might be able to use a prize fund to compensate for the loss of innovation from instituting price controls.

    • Snodgrass says:

      That makes quite a lot of sense within a country, and is an absolutely perfect policy for a world government to have, but if a single country government does it then it represents a really very large spending on foreign aid to wealthy countries that don’t need it.

      And the lump sums have to be the sorts of sums more normally associated with unrealistic space programmes – Humira has probably produced fifty billion dollars in revenue for AbbVie.

      • Corey says:

        We already have this in the current system; most anti-price-control arguments explicitly assume the rest of the world is free-riding on US-paid innovation.

        We already spend several unrealistic space programmes a year buying drugs, see my top-level post for numbers.

    • Edward Scizorhands says:

      There are reasons to think this might be a bad idea, but presumably the government wouldn’t be funding slight modifications to old antidepressants with no real benefit,

      My son benefits from one of those “slight modification” antidepressants when the standard didn’t work.

      The current system has problems, but it’s actually making new drugs that help people. Do you think all those pharma free lunches would just go away, or would they end up targeted at the process for deciding “what really counts as a new drug”?

      • haishan says:

        I think the standard proposal has the people in charge of the fund saying “here are some things we want drugs to treat, first pharma company to develop one and prove safety and efficacy gets X billion dollars.” It’s not like the companies bring whatever in front of the FDA and the FDA is like, eh, sure, good enough. I’m sure there are still plenty of opportunities for regulatory capture here, but it’s not as obvious where they are. If the fund says “we’re offering a billion dollar prize for something to treat prostate cancer” I don’t think any amount of lobbying will get them to accept an erectile dysfunction pill.

        I agree that the current system is making new drugs that help people. But that’s sort of a positive externality of its actual telos, which is making new drugs that will make lots of money. One of the motivations here is to develop treatments for afflictions that are common in the Third World but rare in the First. Pfizer isn’t gonna spend money on antimalarial treatments, because people with malaria are really poor. (Indeed, the most recent major antimalarials — mefloquine and the artemisinins — came out of American and Chinese government research programs, respectively.)

        • Edward Scizorhands says:

          Who is the group in charge of the fund? Government or private?

          If government, you can’t lock them out from lobbying by the first amendment.

          If private, they can still set up a prize fund under the current system. The Bill And Melinda Gates Foundation has done some of these, from what I understand.

          Way upthread, I said that someone should get some prize systems going for antibiotics, where the patent system just isn’t aligned right.

    • Agrononaoxymous says:

      Few of these ideas matter due to the new most-saled antidepressant example Scott Alexander just posted actually *means*

      Who cares about all this faux regulation in industries about generics when doctors and companies are just going to sale minor variation XYZ and blatantly lie about its effectiveness so there is 20x more money in medicine? Dosen’t epi-pen have a generic that is just as good, and doctors just don’t even sell them?

      How do you change the system to prevent *that* from happening? Letting more generics on the market isn’t going to change that.

      Would the government tripling the subsidization of R&D somehow just be loopholed into it going into someones paycheck?

      What even makes up the money of R&D? Is it the cost of materials? The income of the researchers? The cost and safety of experiments? Cost of the computers? What is that broken down to?

      Or is even the total price of R&D mostly a smoke and mirrors game of statistical tricks, like the military claiming a toilet costs a million bucks to install when its realllly just to do something shady or off the books.

  33. Emirikol says:

    Umm, no.
    It seems to me that Vox inadvertently got it right and Generics & Brand medicine are exactly the same issue. If we’re going to use simulations to model Pharma companies’ R&D spending, drug discovery and such then we have to include the total profit they make from a drug discovery.

    It doesn’t matter if they get the money thanks to regulation-enforced monopoly or regulation-enforced crazy generics market, any same-size-time-discounted reduction in profit should translate to the same reduction in research.

    The most you could claim is that this is not an elegent solution and it would be better to lower the regulation on generics while lengthening the duration of the monopoly. this generalizes similarly to the scenario raising the chances of having competing brand names.

    I think my reasoning is solid, am I wrong?

    The question these studies and added reasoning raise should obviously be – should we lengthen the monopoly duration to get more research so future hypothetical poor people have even more generics?

    (Of course, Vox are still in the wrong as the post says – any discussion of drug prices that does not take into effect on R&D into account is just silly or dishonest)

    • NOTA says:

      In the Epi-pen situation, the drug patent is decades old, and I don’t think there’s any relationship between the guys making Epi-pens and the ones who orginally started synthesizing epinephrine.

      • Emirikol says:

        As far as I can tell with the Epi-pen the issue is getting FDA approval for the injector rather than epinephrine, and there is a direct connection between the approval to market it from 1987 and the current holder of the license even if it did change hands through mergers and sale.

    • Scott Alexander says:

      I think many of the companies profiting off high generics prices are different from the company that originally invented the product.

      • Emirikol says:

        The idea that a company that already has a license, the know-how, and a brand name for high-margin product and then does fails capture any considerable profit just sounds unlikely.

        Honestly in the time I gave myself to search I can’t find any useful info in any direction. Just comparing names of selling company and inventing company is far from enough, as one must follow trails of any acquisitions and deals.
        I’m undecided.

    • TheTrotters says:

      Yes, you’re wrong. Think on the margin. If investing in R&D and going through FDA approval process will lose the company money, it won’t do it. Even if they are profitable in either scenario.

    • Anonymaus says:

      The difference here is that a company deciding whether to invest in R&D can be (relatively) sure to profit off its patent, but is uncertain of whether it will still have a monopoly when the patent runs out. I’m sure someone is paying a risk premium on that (the company when borrowing money? the patient who would prefer paying a high price for a predictable time to paying it for an unpredictable duration with same expected value?), so increasing patent duration and reliably ruling out cheating afterwards would be Pareto dominant.

      There might be some other effects if the chance of retaining a monopoly depends on some quality of the drug. Maybe monopolies for drugs against rare diseases last longer than for those against common ones, and there is more R&D into rare diseases (and less into common diseases) than would be efficient.

      • Emirikol says:

        You seem to be agreeing with me – higher risk equals discount on expected gain, but does not nullify it, and sticking to one set of regulations is preferable.

        keep in mind that the company can always cash in to avoid some risk by selling the license and know-how of drug manufacture when generic season sets in. of course they potentially make even less money this way but my main point is that the generic drugs pricing and brand-name pricing both effect the revenue stream of companies dependent on their R&D investment.

        That the generic drug revenue is both smaller and less certain is obvious, but as long as it’s not trivial it’s in the game. and the costs of generic drugs are an issue worth talking about it seems unlikely the revenue they generate would be trivial.

  34. Leo says:

    Not sold on “foobarine works as well/slightly better than bazquxine and is also cheaper, therefore bazquxine is useless”. Psychiatric treatments seems to rely heavily on variance among patients. You throw every drug at the patient in order of increasing side effects, and stop when you find one that makes the patient’s life tolerable. If bazquxine works as a second-line drug in many patients foobarine fails for, it could very well be crucial.

    • Snodgrass says:

      If there is wild disparity among patients, which I’m entirely sure exists in psychiatry, then you won’t have tests which declare that X works as well as Y; you will have large expensive inconclusive phase-III trials at the end of which a panel at the FDA say ‘it’s not demonstrably worse than standard of care and we might as well enlarge the pharmacoepia’.

      • Leo says:

        Really? What I usually see is “Patients on average improved by a small amount on this scale, conclusion: our drug is helpful with p < 0.05", and the study either doesn't report variance at all, or reports huge variance but nobody cares.

        In fact, if there isn't huge variance, I want to know where they find their subjects! Almost everyone I know goes "this med's a dud, this med's a dud… OH LORD THIS MED SAVED MY LIFE", so I'd be shocked if there was a med that reliably produced a small improvement.

  35. HeelBearCub says:

    Ugh. This analysis has so many holes in it, it is disappointing.

    The most glaring is that while Kliff is advocating for a policy (price controls like everyone else), you are just complaining about various bad things without suggesting what the actual policy would be that avoids them.

    An example of a hole, the suggestion that “only rich people” could be made to bear the cost of new drugs. Guess what, your market is then too small and you still don’t get new drugs. It’s the ability of drug companies to charge exorbitant prices to the broad market that currently drives their calculations. Implicitly saying, “Insurance should just not cover expensive drugs” actually does the exact same thing (and worse) as price controls, reduces the pool of money available to drug companies to support drug development.

    If you didn’t mean “rich people”, but rather, say, 75% of the insurance market, then your snark is getting in the way of whatever point you thought you were making.

    In this same vein, refusing to enforce patents, like India, does exactly the same thing. It lowers the expected return on the development of a new drug.

    You complain that Kliff isn’t considering various questions, but you are engaging in this as well. On the whole this feels like a selective demand for rigor.

    • Scott Alexander says:

      By “rich people”, I mean “the people who can afford drugs under the current system”.

      I am not recommending refusing to enforce patents and I don’t think I claimed to be anywhere in this post.

      I am just comparing two alternatives – the current system, and UK-style-price-regulation – and saying that there are some arguments the current system is better. I don’t feel like I have to propose any other systems in order to do that.

      If you want something to be mad at me about, be mad that AFAIK most drug price regulation is within the context of a universal health care system and it’s hard to know how it would work or what it would mean outside that context.

      • HeelBearCub says:

        By “rich people”, I mean “the people who can afford drugs under the current system”.

        But, this is not “rich people”. At all.

        The complaints about drug prices in the context of the broad healthcare system is a complaint about how the overall cost of healthcare increases for all holders of insurance. That’s not stretchable to mean “rich people”.

        Mostly this plays out under the covers between insurance plans and drug companies, and only occasionally bubbles to the surface when insurance companies refuse to cover the cost of XYZ for certain plans or some people (or those without coverage get noticed).

        But that isn’t the iceberg. It’s motte-and-baileyish to talk about “rich people” being able to afford drugs when what we are really talking about is how much money we can squeeze out of the system as a whole, which presents mostly as premium rises for middle-income policy holders, and costs to Medicare D, which I suppose you could say was funded by rich people, as it is mostly supported by general revenues, but doesn’t provide drugs mostly for rich people.

      • HeelBearCub says:

        I am not recommending refusing to enforce patents and I don’t think I claimed to be anywhere in this post.

        You brought up the cost of the Indian Hep-C drug as a point against Kliff. Essentially saying, “if you want to control costs, why not buy the drugs from India”. But Kliff isn’t proposing doing away with patents like India does, so it’s not valid to object to her not bringing up that cost.

        • Scott Alexander says:

          That wasn’t my point. I was pointing out that the savings from switching from brand to generic are much greater than the savings of price regulation. So, for example, there are far more savings to be had in fighting Pristiq than in regulating Harvoni prices.

          • HeelBearCub says:

            So the second moral of the story is that almost all gains in prescription drug prices are to be found not in price regulation bringing prices down from $32,000 to $22,000, but in switching from monopoly brand-name drugs that cost $32,000 to heavily-competitive generic drugs that cost $100

            This paragraph makes no sense and/or is unclear and/or is unfair. Yes, I realize your argument is that people get to switch to generics in 10 years.

            Edit: And the reason I’m saying it makes no sense is that here you are saying that there is a savings to be had, but your actual argument is that we shouldn’t want to realize any savings on this particular drug. We should want them to get what the market will bear for the full duration of the patent.

            But see my previous statement that you are assuming into existence a market of “rich people” that will pay for those 10 years, when this is very much not the case. These two points are linked to each other.

            The people who are paying for drugs aren’t “rich people”, they are “people who pay insurance premiums” and that pool needs to be very big or you don’t get drug development at all. At the margin, as premiums rise, younger and healthier people leave this market, which can lead to very bad things.

            This is why the ACA contains an insurance mandate and things which try and bend the cost curve. If you don’t bend the cost curve on healthcare the end point is that the insurance market goes into a death spiral and you really will have to try and get by on literal rich people, which won’t be enough.

            And your basic point, that we should not reward bullshit patent tweaks is actually a call for more regulation. You realize that right? You are basically saying that the current patent regulations are too loose in what they allow to be patented.

    • Orphan Wilde says:

      you are just complaining about various bad things without suggesting what the actual policy would be that avoids them.

      There is no policy that avoids all bad things; hell, there is no policy that doesn’t make at least one thing worse than it was before. All policies result in bad things. The most obviously “good” policy, a law against murder, will result in some number of innocent people being imprisoned for suicides that looked too much like murders, among many other bad effects.

      It is frankly childish thinking, however common, to believe that, once you’ve identified all the bad things, you can then create a policy that avoids all of them. Every policy has trade-offs, and if you don’t understand what it is you’re losing, you shouldn’t support the policy.

      • NOTA says:

        Nitpick: I think there are policies that are Pareto improvements (at least one person endss up better off, and nobody ends up worse off), just not many of them.

        • Orphan Wilde says:

          You could maybe reduce the paperwork involved in doing some task.

          But that reduces the number of people necessary to complete the job that task is a component part of, which means some marginal person or part of a marginal person doesn’t have a job they would otherwise have had.

          I’d call that an improvement, but not a Pareto improvement, but then I don’t think Pareto improvements are actually possible in government policy.

      • HeelBearCub says:

        Yes, there is no policy that “avoids all bad things”. Therefore complaining about bad things in policy X without proposing policy Y, so that the tradeoffs can be analyzed, is a weak argument.

        • Orphan Wilde says:

          That does not follow, because the best policy may be the status quo, in which case it does not bear proposing.

          You assume the existence of a problem is sufficient justification to support a solution. This is not the case. Solutions must be justified on their own merits; an argument that does nothing but point out that a solution causes more harm than good, is still adding useful information. Even an argument that doesn’t rise to this level, but merely points out a harm, is adding useful information.

          • HeelBearCub says:

            Scott appears not to like the status quo of drug regulation in the US either…

            He did, after all, start this back and forth by saying that the problem is we are over-regulating things.

  36. Besserwisser says:

    Doesn’t universal healthcare create an incentive to implement price controls to reduce costs? Since whoever is charged with distributing the money probably has more political leeway than poor families who struggle to get by while paying their medical expenses. And if that’s true and price controls to more harm than good, does this mean universal healthcare isn’t worth the cost? That can only be true if we can’t keep price controls from coming up regardless but it’s still depressing to think about.

    Also, if cutting drug companies profit decreases their will to innovation, would it be bad to stop them from charging extra for new but comparatively ineffectual drugs because then they would also not develop new and useful ones? Do we have to pay a tax for bad drugs to get good ones? Granted, I’m generalizing from “lack of price controls” to “drug company profit” but at least I am acknowledging the question exists.

    Also also, do those studies take into account how many of the “new” medicine developed because corporations don’t need to worry about price regulations is more like Pristiq than Harvoni?

    • Corey says:

      Universal health care systems *are* a price-control system, more or less. Just like a PPO provider network in the US, only more so.

      • Besserwisser says:

        Are they inadvertendly so? When I think of universal healthcare, I think about the costs being distributed among all potential patients instead of only the unlucky actual ones, not necessarily a reduction in price.

        • Corey says:

          Insurers, private or public, set reimbursement rates for every particular thing. A plan that covers everyone in a country has a lot of negotiating leverage, and national governments have other sticks, e.g. they could just authorize knockoffs if a drug manufacturer gets too greedy. (Except Medicare Part D, which is specifically prohibited from negotiating drug prices; thanks, Dubya).

  37. Jamie_NYC says:

    From economics point of view, there is no evidence that pharmaceutical companies have above-average profitability (if they did, other firms, such as chemical companies, would switch over time to become pharma firms). Therefore, there is no “free lunch” to be had in reducing drug prices. If drug manufacturers’ revenue is reduced, they will slash costs (R&D first of all, since it is discretionary), and the capital would leave the industry until profitability is restored. Vox proposal is just another example of economic illiteracy that prevails on the left.

    • Murphy says:

      By that logic then airlines and grocery stores should be trying to move into broadband.

      In industries where monopolies, natural monopolies or collusion and barriers to entry allow massive margins other companies might want to move in but the whole point is that it’s hard to push out a monopoly already dominant in the sector. They already hold all the cards, they already passed all the barriers to entry and they already have all the connections.

      So from an idealized economics point of view, sure, real world: nope.

      • Yes, i am judging you says:

        By that logic then airlines and grocery stores should be trying to move into broadband.

        They are and they have.

        The airlines invest in / partner with / revenue share / own outright with Gogo Wireless / ViaSat / similar providers.

        Grocery stores chains make revenue leasing out roof space to cellular providers. In some areas, rather than lease out roof space, a store will own the tower structure itself, and then lease out tower space and rack space to the wireless providers.

        You can walk into a grocery store, and purchase a prepaid phone, prepayment cards for such phones, and can purchase things like Sprint WiMax plans or in lucky neighborhoods, purchase signups for a competing ISP. TracPhone, Sprint, and other such companies do revenue sharing with those grocery store chains for those signups.

        A large new greenfield shopping complex near me, the construction was paid for in part by the anchor grocery store, and the store thus ended up owning a portion of the entire complex. When the complex was built, a campus scale fiber network was built, because one might as well when one is laying down all new utility infrastructure. The local telcos, CATV, and ISPs pay to interconnect to it, and the tenant stores pay to connect to it.

        So, yes, airlines and grocery stores are getting into the broadband business.

        • Murphy says:

          And they they’re not doing a very effective job of it and those businesses still currently exist with thick margins.

          Which would seem to invalidate the claim that the industries with thick margins can’t exist for any appreciable time.

  38. J Mann says:

    I said this last time, but if you find that regulations are driving up a price higher than you want, the main choices seem to be (1) live with it, (2) reduce the regulations, or (3) impose price controls.* Those seem to be fact specific depending on the situation, so let’s look at the two examples Vox has offered – EpiPen and patented drugs.

    EpiPen: Europe has 8 competing products, all of which are available over the counter. My impression is that Europe is at least adequately regulated. I’d argue the preferred solution in this case is less regulation in two ways: (i) allow more competing products and (ii) stop requiring a prescription. To the extent that the US has more regulations in this area, I think that’s probably a regulatory failure.

    Patented drugs: The fact that patented drugs cost more isn’t a bug, it’s a feature. Allowing drug manufacturers a temporary monopoly over new and useful drugs is exactly what the system is designed to do. If you think it’s rewarding drug developers too much, then I guess there are various ways to reduce the reward for inventing new drugs. (You could pass a law that says that drug manufacturers can’t charge any more in the US than they charge the lowest paying purchaser in any developed country, for example, or you could just shorten the patent period). But as Scott says, you’ll obviously get fewer new drugs in the future, so “live with it” might be the preferred solution for people who want new drugs invented.

    It’s possible that Vox is still right that price controls are a better solution than the above, but the fact that they don’t seem to consider the alternatives is not encouraging.

    * There are other choices available, such as subsidize or shift the price, but let’s stick with 3 choices for simplicity

    • Corey says:

      Health economists generally have considered many alternatives and mostly found them lacking. To be fair, since Vox is supposed to be explaining for the layperson, perhaps they could explain *that*.

      There are some other serious proposals out there, funding via prizes instead of patents is one that gets lots of health-econ attention, so does regulatory harmonization (let FDA approval be good in Europe, and EU-FDA approval be good in the USA, for example). But those don’t solve price-based access problems as well as price controls.

      • J Mann says:

        Thanks Corey – I’d be interested to read some references if you have them handy and if any are publicly available.

        In the case of EpiPen, I don’t think the alternative is necessarily lacking, since the problem is “EpiPens are cheaper in Europe than in the US” and Europe does not have price controls.

        In the case of patented drugs, as I pointed out, the monopoly price is an intended effect of the policy (patents). You can introduce a second policy to remove the effect of the first policy, but then you don’t get the benefits of the first policy.

  39. Radmonger says:

    I don’t think you can cleanly split off generic from patented drugs when the entire medical payment/insurance/regulation system is set up to deal with the case of paying for patented drugs.

    Patents and everything else free market gives you ‘you now need this pill every day or you die. It costs 50c to produce, but for the sake of abstract benefits to society we are going to charge you $50,000. Pay up.’. That is obviously not sustainable; so you need insurance. Insurance needs to be regulated, because ‘This insurance company doesn’t suck, they didn’t steal the money I paid to them 50 years ago’ is not going to work as a competitive incentive.

    So now you have a purchasing mechanism that cares less about multi-thousand dollar price tags than trivial freebies. Which means anythng else sold to that purchasing mechanism is going to be able to take advantage of it.

    Any time anyone doesn’t abuse that opportunity is a modern miracle of morality, and probably a sign established complacent companies with insufficient competition to force prices up

    If all that was true of chairs, chairs would be priced the same way.

    • Skivverus says:

      At first I read the first sentence of your second paragraph as something like “patents, which are free market, along with all of the other things which are free market…”, which struck me as totally wrong.
      Then I reread it, this time as “having the system be totally free market, except explicitly including patents”, and it sounded much more reasonable.

    • FooQuuxman says:

      That is a mighty strange insurance company that only has clients which joined them 50 years ago. One wonders what they pay their employees with…

  40. artischoke says:

    So, I think both Scott and Vox have good arguments and both of you are a bit unfair to the other side. Also of course this is all 101 of Health economics.

    Scott points out that introducing price controls would decrease expected returns on drug R&D and thus lead to decreased R&D spending. So far so good. Even though people like Vox might point out that they think the proportion of drug revenues acutally reinvested in R&D for life-saving drugs is too low and could be improved by investing in research more directly. But so far I’m with ssc here. But then Scott seems to engage in a bit of magic: He spends the second half of the post talking about the benefits of generics on drug prices, supposedly vis-a-vis people-killing price controls. However, a pharmaceutical company thinking about investing in the development of new medication will take ALL factors into account that determine its expected future earnings. That includes price controls just as much as length of patent protection and entry barriers for generics after the patent has expired. Thus the same argument that can be made for price controls can also be made for generics: They drive down revenues for the inventor of the drug, thus reducing his incentive to development in the first place. So Scott’s main argument against price controls makes generics look just as bad since they’re also R&D-impeding, and thus people-killing monstrosities. This should become obvious if you look at the lobbying efforts of pharma companies, who push for increased patent protection just as much as for the right for free pricing.

    Are the comparisons of price controls with Maos great leap justified? Yes and No. Yes in the sense that the comparison illustrates the importance of the problem we’re talking about. No in the sense that there is an obvious trade-off between maximizing the drugs available and maximizing the affordability of available drugs to patients, insurers and public health systems. After all, to maximize R&D investment, we would advocate for infinite patent protections, which would maximize the incentives to invest in new drugs. There is no absolutely correct answer to determine the “correct” point on this trade-off scale, there are just obviously wrong policy choices that would decrease R&D spending on life-saving drugs *without* bringing drug prices down.

    Vox seems to think that we’re at a point were we spend too much on medication, thus they would like to decrease drug prices, even though this would probably decrease R&D too. Scott seems to think we’re already at the sweet spot, although he might be in favor of more generics? I’m not sure. Let’s leave this question aside since neither Vox nor Scott bring many arguments to the table whether we invest too much or too little in medicamentation.

    At the end of the day, the question Scott and Vox actually disagree upon is not about where the sweet spot is. The disagreement is whether (or in which cases or to which degree) price controls or introduction of generics should be the preferred way to bring down overall drug pricing to a level that you think is socially optimal, leaving just the right amount of money for the developer of a drug. But unless I’ve missed something, there have been few arguments that would actually differentiate the two here. So what remains is the general disposition of the author. Scott naturally favors a market solution, thus let generics manufacturers in. For the peole from Vox, price controls are the obvious remedy for prices perceivedly too high.

    Some actual pros and cons of generics vs price controls: Market-based solutions through introduction of generics can be easier on the regulatory side in that the regulator doesn’t have to think about what prodrucing a generic actually costs. Clear rules about length of patent protection and a lack of price controls remove possibilities for regulators to “fuck up” and increase legal certainty for pharma companies. Generics also have the advantage that they reduce prices at a point far removed from when the drug manufacturer actually decides whether to invest in development. Since rational agents generally discount future earnings based on their expected time of materialisation, a reduction in prices far in the future has comparatively smaller effects on the incentives of drug manufacturers than price controls immediately after market introduction of a new drug would have.

    Price controls can be better from a consumer perspective. With generics, there is kind of a “all or nothing” pricing where medication can be prohibitively expensive prior to patent expiration, but cost next to nothing after generics arrive. In cases where drug prices actually have an impact on affordability, for instance for uninsured people that have a fixed budget to spend on medication or for public health services in developing countries, this is bad. You price drugs out of the availability range while their patents are protected, leading to a lack of availability. At the same time, after patent expiration market prices will often be very significantly below the cut-off for affordability, thus you’re leaving money on the table that could otherwise have flown towards drug development. So in a perfect world, an all-knowing regulator could devise a pricing scheme, that would a) lead to hardly anybody missing out on treatments cause they can’t afford them through price differentiation by markets and b) exceed current revenues. The question, as always, is, if there are regulators that can beat the solution of “fixed patent duration with monopoly pricing proceeded by introduction of generics”. If you think there is a general answer to this question you’re speaking from ideology.

  41. Corey says:

    A great comment in the last drug thread pointed out that simply publicly funding pharma R&D might solve the competition problem, because it’s basically making all drugs “generic” in the sense of having multiple competing manufacturers.

    It would definitely save a ton of money over what the US spends on drugs, and may actually save money solely on what US Federal and State governments spend buying drugs.

    ETA: Googled up some numbers for 2014:

    Total pharma R&D spending: estimated $51.2 billion (actual 2013 $51.6 billion), per the industry’s own PR arm PhRMA
    Other numbers per CMS (Center for Medicare Services), actual for 2014:
    Total US prescription drug spending, public and private: $297.7 billion
    Medicare: $86.4 billion
    Medicaid: $27.3 billion
    Out of pocket: $44.7 billion

    So for about half of Medicare’s prescription drug spending, or twice Medicaid’s spending (Medicaid is pretty much wholly government-funded, unlike Medicare which has some premiums), we could just fund all of pharma R&D at current levels (implying little or no loss of innovation) and give away the recipes. And save the US government about $50 billion a year, the private sector a hundred billion or so a year, and save the rest of the world some money.

    • Snodgrass says:

      Everyone here presumably reads _In the Pipeline_, Derek Lowe’s fantastic medical-chemistry blog.

      The big underlying problem is that pharma R&D spending has become increasingly ineffective with time. The labs at Glaxo or AstraZeneca have not shrunk much, their scientists have not become much more stupid, and the drug discovery rate has been going down monotonically since the sixties.

      Because the remaining problems are difficult. In the rare case where something new appears on which the old tools are useful (Ebola, most obviously), the pharma equivalent of spare change from the back of the sofa produced a worthwhile vaccine in eighteen months flat.

      I suppose the difficult example here is Hepatitis-C; the approach against it pretty much mirrors the approach used against HIV, but the small-molecule drugs that came out of the approach are two orders of magnitude more expensive. They’ll be available from Teva at twice the cost of synthesis in 2028.

      What I think is really unjustifiable in the hepatitis-C world is that various companies managed to get patents on ‘cocktails of treatment including our inhibitor’ which will be valid for five years after the inhibitor goes out of patent; combination therapy for HIV has been around since 1997, it’s not at all obvious to me that combination therapy using antivirals with different targets on any other virus is not patent-sense-obvious given that 1997 work.

    • Corey says:

      Transition would cost more of course, the simple way would be to start the public system and let the private one wind down as patents expire. That would go from $50bn extra at first to $50bn net savings after 10-20 years (considering just government expenditures). Probably other devils in details.

    • CatCube says:

      The problem with a pure public find system, as Derek Lowe’s blog pointed out a number of years ago, is that it’s extremely susceptible to corruption. You have projects costing $500 million imploding for reasons totally mysterious to outsiders, and projects being approved for $500 million in funding for reasons totally mysterious to outsiders. At least when it’s private, it’s people spending their own money.

      • Edward Scizorhands says:

        When the government spends money, in order to avoid corruption, it has to spend on an entire administrative and auditing layer, which makes the whole thing more expensive, which might just end up costing more than letting the non-obvious corruption slide. But people really really hate corruption.

        The current system, for all its problems, is working at the mission of creating new drugs (except for antibiotics, see elsewhere). Which, once off-patent, is what economics call a public good. This shouldn’t be thrown away lightly.

        • Corey says:

          Matt Yglesias had a similar take on that a while back, that getting rid of government procurement red tape and letting small-d-democratic accountability take care of corruption might be better overall. Though democratic accountability doesn’t work very well.

      • Corey says:

        Well, about 1/3 of the money they spend is already coming out of the government’s pocket, per the numbers above.

        There are certainly failure modes we can envision, in addition to good old-fashioned graft, e.g. theocrats spiking research into STD treatments. But we’d get rid of patent gaming, and save a ton of money, so it might still be better on net.

      • pku says:

        But private drug companies also have massive corruption issues, some manifesting as (potentially dishonest) marketing to doctors, and others in different ways (such as Theranos – though I don’t know how common these kinds of issues are). They’re less noticeable, because people are less outraged when they aren’t being cheated as directly.

      • VivaLaPanda says:

        I think one simple half-solution is to just have government funded labs that produce new generics. They would probably be less effective than pharma labs, but would still help make generic alternatives available from someone.

    • DanielLC says:

      There’s certainly a good argument for making the government fund drugs, software, TV shows, and other IP. That way they can do it once well without having to worry about competition, and everyone can benefit from it instead of just people willing to pay what the price would have been.

      The problem is, the government isn’t very good at doing things. They don’t have the same sort of incentives as the free market. You can’t just throw money at a problem and expect people to do good research.

  42. baconbacon says:

    One partial solution that I think could fit decently well within the current system (which sucks, but if radical changes are out) is to have an avenue for drug companies to skip major parts of FDA approval by posting a large bond in escrow that would reimburse patients for complications. If you tie the bond to the expected size of the market this could accomplish several things.

    1. Shorten the time to market for some drugs (specifically the drugs that the Pharma companies have the highest confidence in low issues with).

    2. Decrease costs for drugs that have small target audiences

    3. Allow for a futures market in the expected complications of drugs, which would increase information (and the speed and spread of information) and save lives in itself.

  43. Zach says:

    I used to work for a company that awarded prizes to innovations that solved their clients’ technical problems. We all noticed that a lot of Russians claimed these prizes. About the same time, I remember reading that some Russian labs had automated the process of trying 6000 random chemicals to solve any given problem. I have to imagine that any switch to lump sum payouts would steer research in this direction. Maybe that is where we should go in the future when robots are cheaper, petri dish environments perfectly reflect human bodies, and failed experiments can always be safely disposed of. It seems like it wouldn’t be the best thing today, though.

  44. Madeleine says:

    Modafinil costs about fifty cents per 100mg pill these days. I think it has something to do with generics becoming available after the FTC settled this suit for $1.2bn in 2015.

    • Scott Alexander says:

      Huh! Last time I checked (one year ago) it costs $20 a pill or so, but I’m looking again and it seems down to $2 at my usual sources (though still not fifty cents; where do you see that?)

      Time to call up all of my patients with wakefulness problems and get them modafinil prescriptions!

      • Winfried says:

        Is it only a cost issue keeping you from going with armodafinil over modafinil?

        I don’t know what the real prices are in either the regular pharmacy market or the grey market, but armodafinil is much better for my wakefulness issues than modafinil.

        Fewer headaches and less of an issue with compulsive thoughts makes it something I can take during the week without any problems instead of just on days I really need it.

  45. Fluttershy says:

    This post does a good job of exploring why pharmaceutical price controls would probably be a bad idea.

    One thing that hasn’t been mentioned here is how drug development costs have gone up over time. One can imagine this may be because all of the low-hanging fruit in drug discovery has already been picked. This should be expected to cause someone to have to pay more for brand-name drugs in the future, unless either translational science gets funded in a way that drives costs down overall (see Holden’s opinion), SENS gets funded and works, drug testing on viable cryopreserved tissue slices from dead organ donors sufficiently narrows the drug development funnel (this is potentially a few months away from being a thing), or we suddenly become much better at computationally simulating drug-receptor binding.

    • Jeffrey Soreff says:

      Many thanks to you and Snodgrass, both for citing the decreasing R&D success problem.
      As your link includes:

      Yet the number of new drugs approved per billion US dollars spent on R&D has halved roughly every 9 years since 1950, falling around 80-fold in inflation-adjusted terms.

      Frankly, to me, this makes the whole question of “how many new drugs will we forgo”
      if pharmaceutical companies aren’t properly incentivized look academic.
      Given a smooth exponential drop in R&D success, with a halving time of 9 years,
      it isn’t as if there is a permanent steady stream of new drugs to be found or lost. That
      decaying exponential sums to a finite, rather modest total – the number of drugs we
      would get over the next 9 years at today’s rate. I’ll not lose sleep over drugs that might
      not be discovered in 2030 because the R&D system get misincentivized – there weren’t
      going to be a lot of them anyway.

      • Matt says:

        That might not be true. Isn’t it possible for the way we design drugs to change drastically? Sort of like the green revolution drastically changed crop yields?

        For example, a leap forward in computing power might drastically change the accuracy of in silico target prediction.

        I’m not saying this will definitely happen, I’m saying maybe we should be prepared to reap the rewards if it does. Isn’t your position a bit overconfident regarding something quite uncertain? I’m not prepared to dismiss drug research policy as basically irrelevant quite yet.

  46. Edward Scizorhands says:

    Several of your studies compared European firms to American firms, as if European firms would respond more to European price controls.

    But all those firms sell globally. The biggest European pharma companies get more money, by a significant margin, from the American market than the European market.

  47. Anon. says:

    What about the idea of only allowing doctors to prescribe the active ingredient instead of a particular brand?

    • Scott Alexander says:

      This is sort of true already; unless doctors specifically order them otherwise, pharmacists are allowed to fill prescriptions for a brand with any other drug containing the same ingredient.

      The problem is, desvenlafaxine is technically a different ingredient than venlafaxine.

  48. NOTA says:

    One big-picture thing I found really striking with this post was the idea that some subtle change in policy could plausibly have Holocaust-sized costs to human well-being, without anyone making the policy change even realizing it. I’m not sure about the calculation done in this case (there should be some kind of discounting, I think), but even so, it seems plausible that we could make small-seeming changes to policy that lead to huge differences in outcomes. (Imagine if some well-intentioned lawmakers had successfully stamped out Jenner’s risky and theoretically-unsound quack treatment to prevent smallpox. No big deal, right?)

    The disturbing thing is that there are probably decisions with this size of impact we’re making all the time, and we mostly don’t know it–we don’t even reliably know the *sign* of the impact.

    • Murphy says:

      If you look long term enough there’s almost certainly already been many such choices.

      Perhaps some UK ministers choice to try to prop up his local buggy whip factory delayed the development of some little vital bit of tech and slowed the industrial revolution by 6 months.

      Maybe some fisherman from europe who was an immune carrier of smallpox happened to decide that the sea was looking too nasty that day and didn’t start a trip that would have seen him introduce smallpox to the Americas hundreds of years early.

      Maybe some trivial argument about sewer design in rome could have pushed down the odds of the plague spreading and the roman empire had lasted a few decades longer.

      What if’s are tough to think about.

    • Anonymous says:

      The disturbing thing is that there are probably decisions with this size of impact we’re making all the time, and we mostly don’t know it–we don’t even reliably know the *sign* of the impact.

      …welcome to climate change discussions.

  49. NOTA says:

    I wonder how this might be affected by reciprocal licensing between FDA and other first-world countries’ drug regulators. There are apparently a bunch of alternatives to epipens for sale in Europe. It seems like that would make it harder to corner the market on an off-patent drug, and would decrease development costs a bit (because everyone would go through the easiest regulator for approval), but would also make it easier for an ineffective or dangerous drug to slip through.

  50. Deiseach says:

    Off-topic, but speaking of hiking drug prices, Martin Shkreli is entertaining the nation yet again. Honestly, mate, you’re both (a) taking on Captain America and (b) boasting about your soldiers, Muay Thai and God knows what-all destruction you can physically inflict, when we’ve all seen photos of you and I wouldn’t back down if you offered to fight me, is how Conor McGregor-style ripped you are not.

    • DanPeverley says:

      I’m not sure if I get why you’re saying that Scott is boasting about anything. Shkreli is a bit silly (if actually right in this discussion), and says all sorts of ridiculous things, but I don’t see anything particularly hubristic about this post. Maybe that long sentence is just confusing me.

  51. Excellent piece. To me the most pragmatic policy to advcoate, that is the one which has highest chance of passing given its benefits, is the one Alex Tabarrok (among others) has been advocating: drug reciprocity with Europe. e.g.

    And a big factor underlying the pushback against the economics argument (not only one, but one more particular to healthcare) is the Robin Hanson argument that health triggers innate human feelings about demonstrating care. McAdle had a recent post.

    Plus original Hanson paper

    I guess likely you’ve already seen or thought about those links. But it seems to me that without at some point pushing on the underlying issue, people only talk past each other on this topic. The ideal policy needs to harness this desire for showing altruistic care into effective care. Call it, say, Effective Health Care Altruism. EHCA. Yeah!

  52. Zeke5123 says:

    1. The RAND study (short term gain, long term loss) is perfectly consistent with a market where the marginal cost of a product is significantly lower than the average cost. Thus, I’m inclined to believe the directionality of the study.

    2. As someone mentioned above, the key is price discrimination. Right now, we have some ex post price discrimination that isn’t terribly effective. I wonder if ex ante price discrimination (eg Funding via kickstart where those people get the drug first) coupled with limited patent protection would be a better system.

    • Corey says:

      Price discrimination works well for some of these kinds of markets, like SiriusXM, where the cost of the first subscriber is billions of dollars and the cost of every additional subscriber is ~zero. Natural monopolies like cable companies also use this.

      For such products where we don’t want people to have to go without, then I think a better solution is explicitly subsidizing that first pill/unit, then outside of the subsidies marginal cost = average cost and competition can bring the price down to the neighborhood of the marginal cost. Funding such subsidies with income taxes acts as an automatic price-discrimination mechanism of sorts, if you squint right. (It does distribute the cost over everyone, rather than solely the product’s users, which has its upsides and downsides depending on the evaluator’s value system).

  53. vV_Vv says:

    RAND’s calculations

    How were RAND’s calculations done?

    As you note yourself in II., many new drugs aren’t actually any better than existing generic drugs, in fact they may well be worse, they only get invented in order for corrupt/incompetent doctors to prescribe them instead of generic drugs, preserving the pharmaceutic companies revenue.

    Since these sub-par new drugs still cost the company a ton of money just to go through the approval process, the incentive to invent them is reduced if there are price regulations, but this doesn’t mean that the public will lose anything valuable: really valuable drugs will still get invented since they will have a market anyway.

    In fact, since as you note, novel drugs can be worse, limiting this kind of “innovation” could have a beneficial effect on public health.

    • gbdub says:

      It seems like the opposite would be true. “Minor tweak to an existing drug” is basically a slam dunk – you’re pretty sure it’s going to work, pretty sure it will pass testing, and the actual R&D (as opposed to going through the regulatory hoops) will be minimal. They are thus comparatively cheap to bring to market, and as Scott showed, even price regulations don’t make brand-name on-patent drugs cheap.

      Bringing an actually novel drug to market is always going to be more expensive and riskier – you must do a lot more actual research and you’re not sure going in if it will pass the regulatory tests, so there’s a big risk your investment will be wasted.

      Big publicly-traded pharma companies are always going to have the incentive for short-term profitability, so if R&D budgets are tight, the sure-thing cash cows will get the most funding with little leftover for riskier swing-for-the-fences new development.

      *Sure, maybe the price regulators will be smart/flexible enough to realize “hey, this is the same stuff slightly repackaged!” and set a low price, but there’s no reason we couldn’t just as easily fix that problem through the patent and regulation system we already have, without explicit price controls.

  54. Binh says:

    If you take this a few meta levels up, isn’t all this stem from the principal-agent problem i.e. insurance pays for everything? Patients not protesting because in most cases insurance pays, doctors write prescriptions with very little regard to costs because they’re not the ones spending the money, FDA set regulations in whatever way then want because it’s not them who bears the reg costs etc. Perhaps the solution is a medical service system where insurance kicks in only for unexpected, catastrophic situations and everything else is paid from savings (i.e. some version of Singapore). This would create forces and incentives to solve the drug price problems plus other problems in the medical service sector.

    • Corey says:

      Singapore has price controls. Principal-agent is a problem, but even in the absence of insurance, there are still plenty of market failures with which to contend. And insurance currently is pretty much the sole *downward* pressure on US health care prices. Much insurance these days is high-deductible, even for prescriptions. People are terrible health care shoppers, high deductibles don’t lead to less unnecessary care, they lead to reduced care (both necessary and not). Even doctors have serious tendencies to weight their own clinical experience over research results. Nobody (doctors included) knows what anything healthcare-related costs in the US, sometimes even people whose job it is to navigate billing. I think I covered everything, perhaps I’ll make copypasta for future health care threads.

    • HeelBearCub says:

      Singapore is probably not what you think it is.

      It has robust price controls. Most of the medical market is government owned. Costs are heavily subsidized, increasing the lower your income. Savings are mandatory, essentially a tax.

      I’d take that system in the US, but when the Feds took over every Tier-1 hospital and made all the docs federal employees and said open heart surgery was now a flat, say, $5K, I think people would be shocked.

      • TheAncientGeek says:

        > I’d take that system in the US, but when the Feds took over every Tier-1 hospital and made all the docs federal employees and said open heart surgery was now a flat, say, $5K, I think people would be shocked.

        Isn’t that the system in the UK?

        • HeelBearCub says:

          No, because there aren’t much in the way of out of pocket costs in the U.K. As long as you stay in the public system, you don’t pay any costs, IIRC.

          Singapore takes a mandatory percentage of everyone’s salary and puts it in personal medical savings accounts. Then if you need medical care, you pay for it, but at a rate that is a) price-controlled, and b) subsidized based on your income level.

    • Scott Alexander says:

      “If you take this a few meta levels up, isn’t all this stem from the principal-agent problem i.e. insurance pays for everything?”


      “Perhaps the solution is a medical service system where insurance kicks in only for unexpected, catastrophic situations and everything else is paid from savings.”

      I’ve heard this before and I’m not sold. For one thing, there are a lot of cases where this is penny-wise and pound-foolish; if you refuse to pay for poor people’s insulin, you’re going to be paying for a lot of catastrophes where people to get hospitalized for blood sugar problems. For another, lots of people really need medication for reasons that don’t sound “catastrophic” but are still very important, and many of these people can’t afford them. Right now the insurance system is a giant subsidy from healthy people to sick people, and sick people really need that subsidy because a lot of them don’t really have any other options. If we remove it, we probably need to replace it with a different subsidy, but I’m having trouble thinking of what that would be which doesn’t have the same problems.

      (every so often I imagine an insurance that just gives “prizes” for getting sick; as in “you’ve got cancer, here’s a million dollars, use it to buy whatever cancer treatment you want, or spend it on heroin and die of cancer, your choice”, but there are probably a lot of ways that could go wrong)

      • Gil says:

        Isn’t it the whole point to separate the ‘Coverage of Catastrophic Loss’

        I mean, in theory one could make the same argument about contraceptives. If you don’t have insurance cover them (And engage in premium subsidies) — You’ll have a lot of unplanned children, which are extremely costly to the public purse in other ways.

        If you have the political wherewithal to transform the health insurance system into something for strictly catastrophic coverage, you should also have the public wherewithal to engage in a much more transparent and honest wealth transfer by making the things you describe part of Medicaid.

      • Edward Scizorhands says:

        Most of what man-on-the-street thinks of as “common sense money-saving prevention” is nothing of the sort. Diabetes sticks out because it’s such an outlier, and one that is probably unmet by today’s system, which needs addressed. But overall the answer seems to be to find the rare cases where prevention is welfare-increasing and budget-reducing and fix those rare cases, rather than hope we can find a bunch of new prevention to fund that we aren’t currently.

      • Matt says:

        I honestly think that if you have cancer or some other terminal disease the government should issue you a special ID card that allows you to do whatever the hell you want to yourself. You want to light yourself in fire, fine, as long as it’s on your own property. You want to take a million dollars in cash from a pharmaceutical company so that they can run a bunch of otherwise unethical tests on you, go for it. We won’t even tax you!

      • Keshav Srinivasan says:

        Steve Landsburg proposed this in an old blog post:

        “There are good alternatives to insurance. For example, as David Goldhill points out in a magnificent Atlantic Monthly article called “How American Health Care Killed My Father”, we could take, say, half of what’s currently being spent on insurance and Medicare and use it to give each American family close to a million dollars to put in a health savings account. We’d probably want to couple that with insurance for catastrophic events that cost more than, say, $50,000.

        Or, less radically (and therefore less effectively, but at least it’s a start) we could restructure medical insurance to look more like car insurance—where nobody asks how you spend your claim check. If you’re diagnosed with colon cancer, then instead of paying $X million to doctors and hospitals, the insurance company would pay $X million directly to you. That way, at least some of us would shop around for better prices and forgo treatments we don’t think we need—lowering demand and making medical resources easier for everyone else to afford.”

        • Corey says:

          What replaces insurer-negotiated prices in this scenario? Have you ever been balance-billed by an out-of-network provider? Ask someone who has and you’ll see why this is important.

          • Keshav Srinivasan says:

            Are you referring to the fact that the price out-of-network doctor visits and hospital visits are egregiously expensive? I think the reason they’re egregiously expensive is that insurance companies only pay X% of whatever price the doctor or hospital charges, so if doctor or hospital wants to get $Y from the insurance company, they have to set their nominal price at $Y / X%. That has the side effect of having to charge an exorbitant price to out-of-network customers, which reduces the demand among out-of-network customers, but the doctors and hospital are willing to handle that loss since most of their customers are in-network.

            But if we had a system where nobody was buying medical services through insurance at all, then doctors and hospitals would charge dramatically lower prices, since their customer base would be price-conscious and so charging too high a price would reduce the demand for their services too much. (That’s the theory anyway; some people claim that when it comes to healthcare, consumers aren’t price-sensitive even when they’re fully responsible for the costs.)

          • Corey says:

            @Keshav: In-network prices are not at a loss, as PPO networks are all voluntary (some exceptions may exist in Medicaid, and Medicare can be too big to blow off). Nobody’s taking on patients at a loss and making up the difference in volume.

            The health econ term of art is “cost shifting” and IIRC whenever they try to find some (e.g. from Medicaid to the privately-insured) they find between little and none.

            In-network insurers don’t reimburse at percentages of charge-master prices; they just have a list of prices that is individually negotiated with large providers, and take-or-leave with small providers. The difference is usually in hundreds of percent (I’ve seen 5x personally on hospital charges).

            Out-of-network services are only lightly covered by insurance because of balance billing. If your insurance covers, say, 50% of out-of-network charges, what that means is they cover 50% of the relevant in-network rate; if the provider bills you at 5x the network rate, the insurance ends up covering 10% of the bill and you pay 90% (or declare bankruptcy, etc.)

            If patients knew enough to have a functioning market then everyone would already know that, of course.

            We certainly could stand to have price transparency in procedures; currently patients have no idea, insured or not, what anything will cost until after the service is rendered, at which point the provider can name their price. Even auto repair would be untenable in such a system. Downside: that would be a *regulation*, ableit one only the most hardcore ancaps would oppose, I think.

          • Edward Scizorhands says:

            One regulation I would like is to see posting of price lists. It would make shopping around possible, which is often impossible right now.

          • Irishdude7 says:


            Over the past few years I’ve seen some surgery centers pop up that have transparent pricing. For example:

          • The health econ term of art is “cost shifting” and IIRC whenever they try to find some (e.g. from Medicaid to the privately-insured) they find between little and none.

            Or from the uninsured to the insured.

      • jaed says:

        That kind of insurance (medical indemnity insurance, or critical illness insurance) exists. You can choose payouts of five or six figures on diagnosis of various conditions (cancer, stroke, heart attack, etc.).

        Basically, you get a check and you can use it for medical treatment, ancillary costs (out-of-pocket costs if you have a comprehensive insurance policy, cost of travel, cost of a housekeeping service while you’re too sick to clean, cost of travel, etc. etc.), or else you can blow it all on a trip to Hawaii or takeout pizza.

        • Snodgrass says:

          I’ve got that kind of insurance, because it was very strongly recommended when I took out my mortgage; I pay £25 a month, and if I get any of a medium-sized list of common ways of becoming horribly ill, it pays off the mortgage balance so at least I’m horribly ill in a house that I own outright.

      • TheAncientGeek says:

        Right now the insurance system is a giant subsidy from healthy people to sick people, and sick people really need that subsidy because a lot of them don’t really have any other options. If we remove it, we probably need to replace it with a different subsidy, but I’m having trouble thinking of what that would be which doesn’t have the same problems.

        Insurance is a cost-spreading mechanism, so is taxation. And yes, they both have their problems.

  55. Thomas Jørgensen says:

    Question: Essentially everyone has highly regulated health care provision in some form or other.
    So what the current setup does is pay pharmaceutical companies tens of billions to develop new drugs via state fiat – first a fiat monopoly, then a insurance industry that can afford to pay monopoly prices that is also only in existence because the state says so.

    How, exactly, would it not be vastly more economically efficient to just set the budget of the National Institute of Health to 300 billion dollars in constant 2016 dollars and just revoke the ability to patent medicine entirely?
    The NIH has far better aligned incentives than the pharmaceutical industry does, and does not need to make a profit.

    • Corey says:

      A lot of people (including many economists) are still worried we might lose the Cold War 🙂

      • Thomas Jørgensen says:

        … But doing it via the NIH would be far less of an intervention in the free market.
        Artificial monopolies have got to be the most.. anti-market idea ever invented.
        If the US of A thinks it appropriate to allocate 300 billion / annum to the development of new drugs. Which it does, because it is currently doing so, just in a very roundabout fashion, then making that an explicit budget item would incur far, far smaller distortions in the economy than the current mechanism.

    • The NIH has far better aligned incentives than the pharmaceutical industry does

      What is the evidence of this?
      My local school board just spent $36,000 on chairs for themselves. I am not sure why the Emperor’s Golden Throne needs to be installed at administration headquartes, but I am not confident their incentives are my incentives.

      • Thomas Jørgensen says:

        .. Which no CEO of a private company would ever do. That’s sarcasm, by the way.

        300 billion is a rough estimate of the cost of having medical patents. The actual pharma spend on RnD is about 50 billion, so the actual money expended on research would go up at least five fold, and be directed at least somewhat more sensibly, simply because the government has no particular interest in me-too drugs.

        And research is one of the things the government does quite efficiently, judging by historical results.

        At least partially because while researchers go through money like drunken sailors, they’re not typically all that motivated by it. They just want a steady job where they’re permitted to spend money like drunken sailors on lab equipment.

  56. gbdub says:

    What if we were to implement something like a probationary approval for generics? Basically, submit us a sample of your pill and a copy of your last plant inspection. We verify that your pill contains the stated amount of active ingredient, and all inactive ingredients are from a pre-approved white list of “safe pill fillers”. Congratulations, you’ve created a good generic pill, you’re provisionally approved to produce it, and we’ll monitor your output and clinical results a bit more closely for 6 months or whatever for a final approval.

    Essentially, treat generic pills more like foodstuffs and less like brand new drugs, thereby letting generic producers come to market quickly with minimum upfront cost.

  57. Jill says:

    Great post, Scott, bringing up the relevant issues well.

    “what left-libertarianism means however I want, I will say that it is provisionally okay with banning pharmaceutical companies from buying doctors lunch, as long as there aren’t any studies concluding that this would kill more people than Communist China. ”

    Wow, maybe I am a Left Libertarian then.

    “Some people say we should fund it (research) publicly through the NIH.”

    I say this, but I know it’s impossible in the current political atmosphere, which is very much focused on reducing government expenditures for everything except the military security industrial complex, continuing to cut taxes on the wealthiest Americans which then expands the federal deficit more, which then triggers interest in decreasing government expenditures even more, for everything except the military security industrial complex

    With regard to pharmaceutical drugs, we end up with the Moloch problem, which Scott has so eloquently written about before. It is a central issue in most modern economic/political/social/cultural problems.

    Individuals, companies, or subsystems are very very often incentivized to do things that are disastrous for society as a whole– pharmaceutical companies buying doctors lunch and marketing expensive generic drugs to them being only a very small part of the tip of the iceberg here. Most of the problem is not easily visible, and so is even harder to solve than this.

    The whole point of regulation– when it’s done effectively for the purpose of helping the population as a whole, rather than for the purpose of helping crony capitalist companies– is to revise the system so that individuals, companies and subsystems become incentivized to do things that are beneficial for society as a whole– or at the very least things that are less of a disaster than Mao’s China.

    I have a currently impossible dream. I would love for the citizens of the U.S.– or a large and knowledgeable and motivated group of citizens– to come together and look at pragmatic non-ideologically determined ways that people can become incentivized to do things that are beneficial for society as a whole, in areas where people are currently incentivized to do disastrous things instead, and where many of us are suffering greatly from these disasters.

    If I understand it correctly, the standard Libertarian position (not Left Libertarian position) is to do nothing about issues where people are currently incentivized to do things that are as disastrous for our society as Mao’s China was– unless the disasters are caused by government intervention, in which case the government intervention should be stopped.

    The most common Libertarian position does seem to me like this: Government caused disasters are awful. Mega-corporation caused disasters are a natural and a normal part of the “free market” and should be accepted without any alterations. I acknowledge that I could be wrong about this. Please feel free to correct me if I am wrong, although I would appreciate it if people would not sling feces at me.

    My own position is that in such cases I would like to look at whether some kinds of government intervention or regulation might help people to become incentivized to do things that are beneficial to our society, rather than disastrous for our society, so that the widespread suffering from such disasters can come to an end or at least be alleviated to some extent.

    I appreciate and support your efforts, Scott, to become less snarky in your writing. I think this will help matters. Currently, people of different ideological leanings, are usually not simply snarky to one another in arguing their cases. It’s an outright feces slinging festival– something which you, Scott, have never participated in yourself, thank Gawd. And your lack of participation in this makes your blog attractive to people of all different ideological leanings. So you are very much helping the conversation on this to move along to a better place.

    A whole ‘nuther issue about medicines here is alternative medicine research which seems to rarely get done at all. Since plants growing in everyone’s back yard can’t be patented, there’s no incentive for drug companies to research them. So they rarely do get researched. I’m actually amazed that we ever found out that cannabis helps glaucoma. I think if alternative medical plants and treatments were researched more, many would be found to be snake oil, but some of them would work too.

    If good records were kept regarding how often natural treatments appear to work in clinical practice, that might help narrow down the choices of what to research, so that there might be a higher percentage of hits and fewer misses.

    I have read that pharmaceutical companies aim to develop “perfect drugs.” This does not mean a drug that cures an illness and does so quickly and with no side effects. No, this means a drug that is perfect for profit– one where the person will have to take it every day for the rest of their lives– and a drug that will manage the symptoms, not cure the disease. Because cures are not so profitable, since the person doesn’t take the drug forever.

    So there are biases in what kinds of drugs are researched– biases that are all about making more money rather than helping the patient. Pharmaceutical companies are incentivized to increase the bottom line.

    So are hospitals and clinics with their tests and expensive machines and surgeries and other procedures– leading to problem of hospitals refusing to tell patients how much their treatment will cost before they get that treatment. The patient isn’t allowed to find out whether the treatment will bankrupt their family or not. It will be a surprise.

    This would not be a problem in the case of companies manufacturing luxury goods. But it can be a huge Moloch type problem for poor people, and even for middle class people, who are ill. Anti-Moloch type regulations, and research funded by government rather than profit driven corporations, might solve the problem– but only if government could be made fairly transparent and reasonably free of corruption.

    However, making government more transparent and reasonably free of corruption is not a thing in 21st century America. The thing right now is decreasing spending on everything except the military security industrial complex, cutting taxes for the wealthiest Americans, and then cutting expenses even more to compensate for the fact that cutting taxes mushroomed the federal deficit more. I hope for that to change at some point in the future.

    • Loweeel says:

      I have read that pharmaceutical companies aim to develop “perfect drugs.” This does not mean a drug that cures an illness and does so quickly and with no side effects. No, this means a drug that is perfect for profit– one where the person will have to take it every day for the rest of their lives– and a drug that will manage the symptoms, not cure the disease. Because cures are not so profitable, since the person doesn’t take the drug forever.

      This is pretty ironic, given Scott’s post, which highlights Harvoni and its expense. As other commenters have pointed out, this drug (and the even better Sovaldi) actually cures Hep C, in a vast majority of cases rather than treating it. No wonder it’s so expensive — the total cost of care is actually far LESS than the less successful, longer-lasting drug regimens it replaced.

      • Edward Scizorhands says:

        Drug companies are in a “throw everything at the wall and see what sticks” mode. They don’t get to choose between a drug with 8 utils of social benefit and 4 dollars of profit and a drug with 7 utils of social benefit and 10 dollars of profit. If it produces both utils (since the FDA says so) and profit, they make it.

    • gbdub says:

      If I understand it correctly, the standard Libertarian position (not Left Libertarian position) is to do nothing about issues where people are currently incentivized to do things that are as disastrous for our society as Mao’s China was– unless the disasters are caused by government intervention, in which case the government intervention should be stopped.

      You do not understand it correctly, and you are in fact so far from understanding it correctly that it is very difficult to believe you have made a good faith effort to understand it correctly. Or you are intentionally being provocative, but in either case, given your professed concern with good faith argumentation, it is disappointing to see you continue to make such distorted caricatures of positions you disagree with.

      Trying to snipe Libertarians with “but what about monopolies and the tragedy of the commons?” is basically like attacking atheists with “but how can you be moral without God?”, or the religious with, “but how can God exist if there is suffering?” and acting as if you’ve come up with a novel superweapon. It is annoying, because it is literally the first counterargument… and therefore one any serious proponent of the philosophy has given some thought to, and either has their own preferred solution or has decided that the issue is less important than the issues their philosophy solves.

      It is perfectly possible to hear out these proposed answers to libertarian problems and continue to disagree… but to act as if libertarians don’t care at all about poor people or privately-caused disasters, merely because you personally don’t see an obvious solution, is uncharitable and frankly rude.

      The thing right now is decreasing spending on everything except the military security industrial complex, cutting taxes for the wealthiest Americans, and then cutting expenses even more to compensate for the fact that cutting taxes mushroomed the federal deficit more.

      This is certainly a common caricature of the Republican position, and some Republican politicians even have rhetoric that approaches that. But it’s not actually happening! Where are these huge new tax cuts? Taxes have gone up for the wealthiest Americans under Obama. Federal spending has remained high – where are the huge cuts? It has been increasing steadily in inflation adjusted dollars since Eisenhower. To the extent spending is dropping under Obama, it’s the intended-to-be-temporary stimulus funds, and the long term trend hasn’t shifted. So “the thing” you lament isn’t happening, definitely won’t happen if Clinton wins, and probably won’t even happen if Trump wins.

  58. Loweeel says:

    The way we reward them is by giving them a twenty-year monopoly when they can charge lots of money without anybody telling them not to.

    (this isn’t quite right. The law says a twenty-year monopoly, but it’s dated from the time the drug is invented. Since it takes ten years to go through the FDA, it’s effectively more like a ten-year monopoly on actually selling the drug)

    As a patent lawyer admitted to practice at the PTO and a patent litigator, no, this still isn’t right in a few different ways.

    (1) First and foremost, it’s not a monopoly. A monopoly is an affirmative right to practice; a patent, on the other hand, is a right to exclude others. Simply because you have a patent doesn’t mean you get to use it. “Patents are a monopoly” and “There’s an anti-commons problem”/”There’s a patent thicket” are both asserted, but they are incompatible ideas — you can’t have a patent thicket (ala sewing machines, or smartphones) if there’s a monopoly.

    For example, if Scott develops and gets a patent on some great anti-psychotic drug compound that has to be delivered via injection 4 times a day, and the next year, I figure out some way to preserve the active ingredient in vivo such that it can be delivered by injection once a week (or some other delivery mechanism for his compound), I don’t have a monopoly on what I’ve patented. In fact, not only is my testing likely infringing activity in the first place, but ANY unlicensed use of my “monopoly” while Scott’s patent is in force will infringe. I can’t use my “monopoly” at all until his patent expires or I get a license.

    (2) it’s not dated from the time the drug is invented — it’s dated from the time the utility patent application is filed.

    (3) Patentees can actually (and often do) get patent term extensions for much of the time chewed up by FDA approval. The process is rather involved and complicated, and I don’t think you get day-for-day term (but I neither prosecute patents regularly nor practice in the pharma space) as a matter of course.

    • Edward Scizorhands says:

      As a good try-it-at-home-experiment, the next time you see a drug on TV, see how long until the patent expires. It’s very likely less than 5 years. Jublia (the toenail fungus from the 2015 Superbowl) has 5 years now, so it was an outlier at almost 7 years. Probably the only reason they thought they had the budget for a Superbowl commercial.

  59. PGD says:

    If you want to judge coldly by life years gained, the Chinese Communists have an argument to be one of the better things that ever happened in world history, not the worst. They get kind of a bum rap. Yes, the Great Leap Forward famine was terrible. But aside from those couple of years, the Chinese Communist rule from 1947 on, and especially from 1962-1975 or so, saw huge declines in mortality and major increases in life expectancy. Much of this was directly traceable to government policy. Here are some details:

    If the ChiComs get all the blame for someone’s estimate of excess deaths, why don’t they get any credit for excess lives? On net they’d come out ahead.

    This record looks especially good compared to the awful history of China before Mao and Communism. The century from 1847-1947 saw massive death tolls due to famine and war and enormous human suffering. Indeed, the Great Leap Forward famine, awful as it was, might not even be the worst thing that happened in Chinese history. The Great Leap Forward famine resulted in between 20 and 40 million excess deaths. But the 1907 and 1911 famines in North China apparently killed 25 million. Over the disastrous period of the second half of the 19th century, China’s population fell by something like 60 million people, around 15% of the previous base, due to famine, civil war, and social unrest. But since all those deaths before the Chinese Communists took over don’t fit an anti-communist political agenda, they have kind of disappeared down the memory hole in the West. Not so in China though…

    • thirqual says:

      The first rule of the “we count the lives and the years lost” games is always that we don’t speak about the Taipei Rebellion.

    • CecilTheLion says:

      Here’s another reasonable article on this.

      Haven’t read the article in a long time, but iirc TL;DR the famine killed 5% of the population (estimates range from 2 to 78 million) but life expectancy doubled. So in terms of pure utilitarianism, the calculations are favourable.

      As I feel slightly nauseous having just engaged in Mao apologetics, let me just buffer my disgust by saying Mao was a really evil man and I don’t tolerate anything he did his arrogance was astounding and Maoism is a terrible terrible addition to Marxism and I’m glad he no longer is.

    • Shelley says:

      I see what you’re getting at, but your methodology is a bit flawed. Life expectancy increased pretty much everywhere in the second half of the 20th century, so we can’t really attribute compare China’s life expectancy in 1975 to that in 1930 and call all of that the great work of the communist party.

      I think the correct way to do the math is comparing outcomes between reality (=communist party rule) versus a realistic counterfactual over the same time period, e.g. what China would have been from 1949 onwards if the nationalist party stayed and ruled. One can’t just compare Taiwan to China, since the mainlanders that escaped to Taiwan in 1949 were pretty much the cream of the crop both intellectually and capita-wise. To be honest, looking at India and most African nations, I feel the communists might still turn out favorably in that analysis.

      Happy 50th anniversary of Chairman Mao’s death, btw.

      • On the other hand, the immigrants to Singapore, according to its ruler, were the skim milk under the cream, illiterate peasants. A lot of the immigrants to Hong Kong were refugees from communist China, so probably not all that elite. Both, I think, did better than Taiwan.

      • Agronomous says:

        Happy 50th anniversary of Chairman Mao’s death, btw.

        Sadly, it’s only been 40 years. Had Mao died in September 1966,* maybe the four-month-old Cultural Revolution would have petered out.

        (* Possibly from a heart attack after mistaking the just-premiered Star Trek for actual U.S. technology?)

      • PGD says:

        It seems unfair not give credit to Chinese Communism for anything positive on the rather flimsy argument that ‘after WWII everything was automatically good everywhere’. Particularly if we’re also accusing them of being history’s greatest monsters. China’s mortality record post-WWII looks good compared to e.g. India which is a reasonable comparison country.

        If you want a good middle ground that won’t require you to praise Mao, you can try for something like “Chinese Communist system surprisingly successful, Mao still bad”. Mao wasn’t always totally in charge in China, and the periods of his greatest influence tend to coincide with bad stuff (great leap forward, cultural revolution). The most impressive surge in health outcomes occurred soon after the great leap forward famine ended, which was a period where Mao’s influence was at a low point, since he was discredited due to the famine.

        But since Mao was crucial in the Chinese Communists coming to power it’s hard to separate them.

        • China did very well after Mao’s death. That’s evidence for something good about the rest of the system, with the bad outcomes significantly due to Mao.

          Part of the issue is what you count as part of Chinese communism without Mao. After his death, the economic elements of the system were gradually abandoned. But the fact that those in power were willing to abandon what they believed in in response to evidence that they had been wrong speaks well for the leadership group other than Mao, and arguably for the mechanisms that produced them.

  60. Agrononaoxymous says:

    Have you considered that its not in the governments self interest to properly regulate the market of lots of these pharma drugs, and that’s why it isn’t happening?

    What is the data on how much more likely people who agree to take an antidepressant, or feel the need to go on an antipsychotic are in terms of suicide, dropout rate, poverty, and other negative factors?

    If you go on most of these, you can no longer join large amounts of jobs related to government work. Its pretty clearly the case that the government uses mental health history, such as going to the therapist for >6 months, as a disqualifier for lots of different jobs.

    More or less, the government in charge of these regulatory agencies clearly uses the knowledge gained from citizens going on antidepressants, ADHD meds, therapy history for both job filtering, and the new welfare (SSI). As such, there is a strong dis-incentive to care about banning treatments that are not effective, as long as the knowledge gained from them is considered useful.

    More or less, the more somewhat dysfunctional people agreeing to go seek treatment, the more people can have a history to not get hired.

  61. Tibor says:

    Well, maybe a “standard” libertarian approach to drug safety regulation would be to say that you just have rating agencies who’s business depends on their reputation which rate drugs by safety (and possibly usefulness as well). Now, you would be allowed to buy whichever drug you wanted but everyone would know that if the drug is not marked as safe by a reputable rating agency, it is probably a bad idea. If you want to buy it anyway, your choice, you were warned. A slightly paternalistic approach would require you to get a proof of a consultation with a doctor before buying certain medication (so a regulatory body could “graylist” some medicine and require you to visit a doctor who explains you the risk of it before you buy it).

    The agencies could make money either from advertising unrelated things (work-out equipment or bicycles ads would go nicely with information about medicine for example) or by charging subscriptions (or a combination of both). There are such agencies today, I use one (subscription based), although they rate things other than medicine (they cover household appliances, some financial products, sports equipment including helmets and some other things). I pretty much always buy something they rate as one of their top three products in a category (as long as it has all the functionality I want it to have), which is often actually mid-range in price, and I’ve always been very satisfied. I wonder why more people don’t do the same, it also makes it easier to choose something, because you choose among maybe 5 products only, instead of 50. Anyway, this works with other things and I don’t see a reason why it could not work with drugs.

    Now, you would still probably have some people who buy not just snake oil but really dangerous snake oil that hurts them. I think this would happen rather rarely, but it would happen. So you would have some pretty nasty deaths. At the same time you have deaths from medication that does not exist (or not yet) because regulation raises the research costs too much, or because some people cannot afford it (but could afford an actually good drug which bypasses the FDA style regulation completely and thus saves money). You cannot really play safe. The only difference is that deaths by unsafe drugs attract a lot of media attention, deaths by missing drugs don’t.

    All that said, I think that Scott’s proposals would still be a vast improvement over the current state of things, a step in the right direction (compared to how things are it still is on net a reduction in regulation) and one should not let the best be the enemy of the good. Also his ideas are politically much closer to the current mainstream than the “crazy” libertarian ideas above, hence much more likely to actually get implemented. They would also shift the mainstream more to the “crazy libertarian” territory, which by itself is a good thing 🙂

    • NOTA says:

      I think nutritional supplements are more-or-less regulated at the level that a lot of libertarians would prefer to see pharmaceuticals regulated at. There are surely plenty of problems with that market, but I don’t think it’s such a horror show that it rules out consideration of expanding it.

      Further, if you imagine legalizing recreational drugs, it’d be kind-of weird to not also legalize other drugs. It might make sense to forbid me to buy either morphine or albuterol without a doctor’s prescription, and it might make sense to allow me to buy both over the counter, but it would surely not make any sense to let me buy morphine over the counter, but still make me get a prescription for albuterol.

      • Agrononaoxymous says:

        That is absolutely not true that the supplement industry is not a horror show.

        Walk into a GNC. Look around. Utterly everything in there is useless with horribly contradictory evidence besides the caffiene pills and the creatine…and the creatine is marketed at 5-10 grams per day, when most research says 2 grams a day is good, and above that is probably useless and perhaps getting risky. And it might even only really be useful to vegetarians, heavy meat eaters are probably fine.

        Every nootropic is total garbage besides modafinil, and that’s kindof a stimulant and alertant.

        Sports drinks like gatorade to replenish electrolytes might as well be replaced with salt water, and its wayyy cheaper and dosen’t have the rest of the crap in gatorade under processing.

        Its virtually all snake oil. Cosmetics promising to reduce wrinkles…all of this is terrible. Heck, conditioner is also useless besides for one day of styling.

        In this blog post Alexander posted how supposedly legitimate medicine is corrupted. Now look at the totally unregulated world of supplements and the 1800’s and see how bad it can be.

        • Tibor says:

          Well, like I mentioned in the post above, free market regulation solves this problem for anyone who is willing to listen to people who know more about the topic. You can still have FDA-style agencies with the main difference that they have to compete with other such agencies and that the customer is the final arbiter of which one to trust. Of course, you can still sell snake oil then and people can buy it, some will. But I don’t see the problem with that as long as everyone can easily check what’s actually useful and what is not. Also, I would not completely rule out the possibility that some supplements are actually useful even if the evidence is doubtful. If you go to a pharmacy in East Asia (well at least I noticed it in Hong Kong), they sell a lot of weird stuff there that you don’t get in Europe. I would be surprised if all of it were just snake oil. Since there is obviously a demand for regulation, it would be provided on the free market as well (it is now, actually, in some areas which are not regulated like drugs are). The main difference is that you still have a choice and you might prefer regulation by an agency which is more tolerant to risk, since drugs approved by them are going to be cheaper and approved sooner (so if you follow their guidelines, the new better drugs will be available to you sooner), or you might prefer a different one which is way more strict, playing it “safe” (it is not so safe if you are then unwilling to buy a drug which could otherwise save your life but of course you might argue that that is less likely than buying something dangerous the other “reckless” agencies approve of). I don’t see any reason other than paternalism to forbid people from doing that.

          Also, energy drinks taste way better than salt water (at least I usually like the taste…I know people who find it too “chemical”) and don’t make you thirsty afterwards.

          • Corey says:

            Vox had an article about *that* not too long ago, it tied into the Olympics. Since depending on who certifies your supplements you don’t have any idea what’s in them, elite athletes have to be very careful about what they buy. For example, it’s not uncommon for protein-powder manufacturers to (without disclosing, naturally) spice it up a bit with a little human growth hormone, which gets better results for ordinary gym rats but will kill an elite athlete’s career when it shows up on a test.

            “Male enhancement” supplements also have a tendency to (without labelling, of course) contain actual Viagra, which makes them work well for impotence, but if you’re taking them because Viagra is contraindicated for you, then you might have a nasty surprise coming.

            They mentioned USP as doing a good job of certifying that supplements contain what’s on the label and nothing else (no testing of efficacy or safety, obviously).

          • Agrononaoxymous says:


            This comment does a good job of showing the situation.

            but a few responses

            1. I think you underestimate the ability for *everything* to be snake oil, especially for performance enhancers.

            2. Oh sure, there will be a demand for it on the free market. But there will also be a large demand to bullshit.

            3. Reread this blog post. Basically Scott Alexander is pretty blantantly posting that his own profession that people trust as doctors to help get them through a bad time are blatantly lying about the effectiveness of an antidepressants because it gives about 20x more total income then some generic. And these are the guys people tell to avoid the homeopathic and acupunture and go here….and this has some governmetn regulation.

            4.How much more money can smoething make when it has corrpution, and then how much more can it market itself and sue those who call out bs into oblivion.

          • Tibor says:

            @Agrononaoxymous: I don’t think Scott said they were lying. He said they would prescribe some drugs for that reason (or rather they get treats from the drug company which tries to convince them how great their product is and so they prescribe their drugs…I don’t see how the doctors could get any cut from the profits directly if simply because the pharmaceutical company does not know what the doctor actually prescribed at the end).

            I don’t quite understand your point 4.

            If I say that your drug is hurtful, why should you be able to sue me for that? And at the same time, if you are allowed to sell stuff that actually is bad, then I cannot sue you because I bought your drug and it hurt me, there was nothing illegal about it.

          • AoxyMouseOnArgo says:

            The post on how the new pill was not so great and mostly a worse version of an already sold antidepressant happened in…2008.

            From 2014 up it was the second most sold antidepressant.

            What counts as bullshitting to you?

        • Psmith says:

          Goddammit, I got spam filtered.

          above that is probably useless and perhaps getting risky

          Citation needed. See The “does creatine cause kidney problems?” FAQ is also worth a look. (not linking because spam filter.).

          heavy meat eaters are probably fine.

          Red meat has about 350mg of creatine per 100g. Not many people eat a pound of red meat a day. Even fewer eat two and a half. Chicken has negligible amounts. “Probably fine” covers a lot of ground, but few heavy meat eaters are getting 2g of creatine from meat.

          it’s not uncommon for protein-powder manufacturers to (without disclosing, naturally) spice it up a bit with a little human growth hormone

          I don’t believe that for a second. Growth hormone is expensive and not terribly bioavailable when taken by mouth, which is why it’s usually injected. Additionally, it has little or no effect when taken in isolation (that is, absent AAS and possibly insulin and/or IGF-1) by healthy adults, and certainly such effects as it has will be subtle and take a while to notice.

          Now, it is in fact quite common for protein powder companies to engage in deceptive practices, but the usual routine is to add various fillers, sometimes fillers that test as protein in certain common assays.

          • Corey says:

            I don’t believe that for a second.

            And you were right, I dug around for the articles and I must have been thinking of muscle-building supplements with anabolic steroids.

            Also NSF is the certification preferred by athletes, since they also test supplements for a various list of banned things. link

        • Deiseach says:

          Cosmetics promising to reduce wrinkles…all of this is terrible.

          Cosmetic companies are careful to straddle the fine line between “contains Miracle Ingredient” and “contains Miracle Ingredient in dosage which will actually do something”, because in the latter case that makes it a drug not a cosmetic and it has to get FDA approval.

          And cosmetic companies don’t want to spend ten years and billions of dollars getting approval for what is basically a face cream.

          You want to avoid wrinkles when you’re older? Have a fat face – fat plumps out the face and keeps lines from being as severe. But of course, nobody wants to be fat if they’re trying to look attractive (and it has its own problems).

    • sards says:

      The agencies could make money either from advertising unrelated things (work-out equipment or bicycles ads would go nicely with information about medicine for example) or by charging subscriptions (or a combination of both).

      Wouldn’t they likely make most of their money from the drug companies paying to have their drugs reviewed?

    • FullMeta_Rationalist says:

      I had a similar train of thought. If we’re gonna mention Libertarianism, we might as well follow it to its natural conclusion. More specifically, I imagined a scheme where either

      A) The FDA introduce a drug pyramid. Grade A means a given drug was tested for 10 years (the current standard), Grade B means 3 years, and Grade C means 1 year, and Grade D is totally experimental. If I understand correctly, things like herbal supplements would fall under D.


      B) The FDA require manufacturers to label their bottles with “m x n”, where n is the number of people that the FDA tested for m years. So if new drug Foobar were tested across 50 people for 3 years, the bottle would be labeled “3 x 50”.

  62. Alex Zavoluk says:

    It does seem that pharmaceutical profit margins are “too high” in the sense that you should only be able to maintain above-market profit margins by rent-seeking. See for example

    If the higher margin is supposed to be compensation for the higher risk of having the FDA stop an expensive drug, it still seems too high, since I haven’t seen any major pharma companies collapse recently.

    Of course, I think the solution there is the same you recommended in your first post: regulate less and allow more companies to come in and do R&D.

  63. Laura Miller says:

    The only bone I have to pick with this is that generic drug prices in the U.S. are lower than in Canada, and probably as low or lower than in Europe. $5 generic programs? Yes, that’s what competition gets you. As long as there is a sufficiently large market, there will be plenty of competitors and prices will be reasonable.

  64. ilikebreakfast says:

    So, FDA probably isn’t even that good at stopping drugs that do harm people – e.g.
    We don’t really know whether we can trust all the current research about how life-saving medicines are
    And it feels like there have been very few pharmaceutical innovations since all the money started getting crazy with pharma in the 1990s post statins (which were developed in a Japanese caravan by pretty much one individual looking at fungi), so not sure prima facia there’s a case for additional investment = lives saved
    Hypothesis: The pharma industry is 99-95% wasted resources and an conflicted contribution to medical debates and treatments. Can anyone counter that?

  65. Daniel L says:

    When the question goes into the economic/regulatory system that produces best innovation outcomes it might be fair to also introduce other alternatives too. Chapter 9 in particular has some good arguments against the patent route altogether.

  66. Shelley says:

    Thank you, Scott, for highlighting some of the argument and evidence around this sad area that has gained much press.

    I just wanted to bring up value-based pricing here and see what you think. In my mind, we should not confound charging $300 a month for Pristiq vs charging $30,000 for a course of Harvoni. Pristiq, as you have pointed out, is an uninnovative piece of rubbish conceived and promoted for the sole extent of making Pfizer money. Hepatitis C drugs, on the other hand, are strong contenders for being the greatest breakthrough in medicine in the last 10 years. Pristiq is an abomination not because it’s so expensive, but because it delivers so little value. Hepatitis C drugs, on the other hand, deliver a great deal of value (see below). The problem is that the current patent-driven system awards both equally: if we can re-establish a link between how much a drug costs the payer (Medicare, out of pocket, you name it) and how much value a drug delivers, perhaps we will steer the market away from the former and toward the latter.

    Also, note how UK, which famously adopted value-based pricing in its approval and payment process, still pays over $20,000 for Harvoni and deems it cost-effective. Most studies in the US have concluded the same ( The issue is not whether these drugs are worth it, which they are, but whether we can afford to treat everyone who stands to benefit from treatment, and that is a vastly different question.

    • Edward Scizorhands says:

      As I was reading your post I was going to recommend the UK. They have a really nice QALY-per-dollar system, so the inventors know exactly what is worth it to pursue.

      • Shelley says:

        Right, I have been fascinated by the UK’s system for some time now, but I am curious about what the insider’s view is. Is there anyone from the UK or living there who can offer some insight?

        The tough thing about using cost-effectiveness analysis is exactly how to do it properly. Also it involves the politically unpalatable act of putting a dollar sign on human lives in the form of the willingness-to-pay threshold. It sounds too much like rationing, which is such a dirty word that Obamacare’s Comparative Effectiveness Institute is expressly banned from support cost-effectiveness research. Of course, the truth is there’s a dollar sign on everything, and medical care is being rationed every single second in the U.S.. I would argue that it’s better to do these analyses and ration based on some general principles that can be openly debated and established, rather than just close our eyes and ration based on who happened to win the lottery at life and was born with a rich parent. However, there seems to be many ostriches around.

      • Murphy says:


        it’s more acceptable in the UK because older people actually remember the more straightforward kind of rationing.

        To an extent it makes it easier, 1 QALY of yours is equal to one QALY of the person in the bed opposite you. If something would cost 10x more then you can point to the person across the room and say, “who would you like the 10 years to come from?”

        Plus, anyone with a real hardon for the american system is perfectly free to buy their own private medical insurance with all the bells and whistles.

        On the downside the company knows the algorithm that NICE use when assessing whether a drug is cost effective and can price towards the upper end.

        On the upside that effectively means that for R&D incentive purposes investors can have a very solid idea of how much they’ll be able to make with an effective treatment for a condition.

        • Corey says:

          We’d expect some political energy to go into trying to fudge QALY stats, and there’s no One True Way to calculate it, but there’s a limit to how off a QALY number can be and still be plausible.

  67. Bram Cohen says:

    The calculations around the effects of drug patents require a huge number of caveats. If a drug doesn’t make it to market, maybe it was a me too drug. Maybe the drug will make it to market but just a year or two later. Maybe it wasn’t a very effective or important drug and hence not having it is no great loss. In the case of Hepatitis C drugs several of them have come to fruition at about the same time, which seems to imply that the thing necessary to make them was some piece of scientific understanding of Hepatitis rather than the specific drugs, so allowing the first vendor to make a successful one reap all the profits for several years may be giving the reward to the wrong place, and at the cost of denying treatment to a lot of people with an already approved drug because it costs too much.

    This is not to say that Hepatitis C drugs aren’t a wonderful thing, but the counterfactual of what would have happened if there were a different licensing regime is very complicated and unclear. That’s also an exceptional case, where most drugs are me too’s, even in the case of drugs as undeniably effective as opiates, which are for the most part all the same thing and interchangeable.

    The case of generics is, as stated in the post, much simpler. There should be very few roadblocks in the way of producing them.

    • Loweeel says:

      But even the me too drugs still serve a valid purpose. Sometimes they’ll have different efficacy in different populations, or have different specificities, or one may have side effects that others don’t, ala Celebrex and Vioxx.

      If we only had Vioxx and no Celebrex, the pulling of Vioxx would have been vastly more problematic.

      • Bram Cohen says:

        Fair enough. Obviously fentanyl and buprenorphine are used very differently, even though both are opiates. But for the most part the differences between drugs within the same class are vastly overstated.

  68. Peter Dowdy says:

    I decided to read Keyhani, Carpenter, et al (2010) and the data don’t exactly seem to endorse their stated position that the United States’ price control-free pharmaceutical regime doesn’t increase innovation. They show that pharmaceutical innovation and prescription drug spending correlate strongly (it would have been nice for them to provide an r-value). With that in mind, wouldn’t it mean that the United States’ increased prescription drug prices yield increased innovation? They do make the argument that the United States does not have the greatest drug innovation per dollar spent, but that isn’t adequate to demonstrate the original argument, which is that the United States’ price control-free pharmaceutical regime doesn’t increase innovation. All it shows is that it doesn’t maximize innovation per dollar. Do I misunderstand?

  69. Omar says:

    There may be one more element :research costs themselves are inflated.. Onerous regulatory requirements and inflated and wasteful “standard ways of doing things” mean multi million dollar drug trials that could be done for less…. The pharma industry, like any industry, wants to spend less, but once drugs move into clinical trials it suits big pharma that the costs are very high. Keeps out the riff raff

    • Agrononaoxymous says:

      Are you sure that they are inflated in a way that is not corrupt? How much of these R&D costs go to salary to the workers and nice large screens that the workers may be able to take back home?

      If you pay the researchers 10x the amount that PHD students make for doing the same research, what then?

      I think even R&D costs need an audit. I really only want to consider the pure material, manufacturing, and safety costs, with perhaps a few related things.

    • Murphy says:

      Lets imagine a world where there was a cheap and easy way that a company could prove that a drug was both safe and actually worked that cost 10 million but regulators wouldn’t accept it as proof because they’re just mean people who ideologically hate progress and love red tape.

      So this proof is only useful for the company to prove to itself whether the treatment works.

      About 70% of drugs fail to make it past phase 3 trials in our real world where we live.

      Phase 3 trials tend to cost in the region of 100 million.

      If a company gets 10 drugs to phase 3 about 3 of them will make it and the company will have spent about 700 million dollars on the failed 7 which either didn’t actually work or turned out to harm people too much.

      Lets imagine a company which, after stage 2 trials spent 10 million and used their super magical, ultra efficient method of deciding if the drug actually works. if it doesn’t they stop there and never go to stage 3.

      Even if it can’t be done within the USA because of these evil regulators they could run these super efficient trials outside the reach of the FDA in europe, asia, japan or company friendly state of your choosing.

      This company would almost never have a drug which failed phase 3 trials. For every failed drug it would save 90 million dollars and for every successful drug it would only spend an extra 10 million.

      That company would dominate against the competition since they would have cut their trial costs by about 60%

      If there were some set of steps they could follow they would be doing it to avoid spending that much and we would almost never hear about anything failing stage 3 trials.

      Of course, if you believe there’s some ultra effective, cheap way of doing phase 3 trials that the man doesn’t want you to know then you’re basically claiming that modern capitalism isn’t that ruthlessly profit focused.

      There’s certainly inefficiency in drug trials but the failure rate of phase 3 trials sets a very high lower bound on minimum real costs if your goal is to find out if the drug actually works and is actually safe.

      • Daffy says:

        You created a hypothetical magical method and then based your conclusion on that method. I don’t think any anti-FDA folks are saying that companies have a cheaper way to get the same information that a phase 3 trial provides. If that were the case, I’m sure the FDA would require the use of that cheaper method instead of the expensive phase 3 trials.

        The actual argument being made against the FDA is that the information gained from phase 3 trials is not always worth the cost of going through those trials. Moreover, the FDA bureaucrats impose their own risk preferences on the entire population. The level of certainty I require before accepting that a drug is safe is probably different from the level of certainty you require. You might argue that the FDA appropriately picks the median or average risk preference of the population and uses that as their certainty requirement. But there is no reason to believe this is what’s happening. After all, FDA bureaucrats can lose their jobs if they approve an unsafe drug and almost nothing to lose from delaying the approval of a safe and effective drug.

        Essentially, nobody is arguing that there is inefficiency in drug trials. People are arguing that the drug trials are unnecessary.

        • Murphy says:

          Once you hit phase 3 trials, if the drug is for a serious condition and appears to actually work it has to have pretty serious side effects to be rejected. Drugs which include significant risk of death are fairly routinely accepted if what they’re treating is quite deadly.

          Thanks to the current existence of phase 3 trials we can quantify to some extent what we’d lose. At least 70% of the drugs you’d end up paying for would either simply not work at all or would one average do you more harm than good.

          Though thankyou! For being the first person to come out and simply say that it’s the abolition of safety trials that’s what’s really wanted.

          Most people like to pretend that we can keep all the informative safety data somehow while cutting costs to practically nothing through the destruction of “red tape” which is there for no reason at all. That it will somehow be all gain with no possible loss. You see it a lot in Forbes articles on the subject. They talk about “Red Tape” but never directly state that they want Phase 3 trials done away with.

          Like someone who loves to talk about tax cuts but doesn’t like to mention that they really really want to close schools and hospitals and prefer to imply that they have some way of doing the former without actually losing the schools and hospitals.

        • We do have some data on one piece of this question–Peltzman’s old article on the effect of the Kefauver Amendments to the Pure Food and Drug Act. His conclusion was that that particular ramping up of the requirements cut the number of new drugs coming out in half with no detectible effect on average quality.

          • Murphy says:

            “Consumer surplus analysis is then
            adapted and supplemented with “expert” drug evaluations to estimate
            the relevant benefits and costs”

            What the fuck?
            I mean holy fuck!

            Does he look at efficacy of drugs before and after the chance? God no!
            No, that would be peasant thinking!
            No, he looks at purchases of the drugs and uses that as a proxy!Seriously! Holy fuck!

            The author appears to lack even the vaguest glimmer of understanding of either medicine or pharmacology.

            And on the basis that hospitals bought similar amounts of drugs before the change with poor evidence to slightly after the chance with slightly better data.

            Again, I repeat, holy shitweavils!

            Highlight: “sophisticated hospital purchasers have always been able to discern ineffective drugs “

            Anyone who knows anything about the history of medicine will get a little eye twitch reading that.


            “hospital purchasers ” tend to suck a great deal at that.

            That’s why clinical trials are necessary. Without trials hospital purchasers can have a great deal of trouble telling the difference between real medicine and sugar pills.

            Before evidence based medicine it took hundreds of years to convince these “sophisticated” individuals that washing their hands between sticking them inside corpses and inside women giving birth might be a good idea. Experts are not magical and are terrible at dealing with things at the levels where you need clinical trials.


            it’s like when physics professors start talking about racial purity and consciousness without any background in genetics or neuroscience.


            Sorry for being more expressive than normal but the fantastically low quality of that made my blood boil.

            The best that can be said about that link is that most things you’ll find about assessing drugs from the era back when it was published read like amateur-hour. They were still fumbling around finding out all the ways to totally cock up assessing drugs. It’s merely a particularly low quality example.

            It’s like when you read an old paper from the 1800’s talking about “vital force” and miscreant vapors

  70. retail wage slave says:

    I am a retail pharmacist and I would be very surprised to learn that Pristiq is the second biggest selling antidepressant. If you prescribe Pristiq you will have to do a prior auth, meaning that the insurance won’t cover it unless the prescriber gives them a good reason why it is necessary to prescribe Pristiq instead of Effexor. Doctors don’t like to go to the effort to do this and in 2016 most of them know better than to prescribe “me too drugs” like Pristiq. I wouldn’t even keep Pristiq on the shelf unless I was ordering it for a specific pt, this is a pharmacy that fills 3000+ rx/week and is in an area with lots of ssi collecting crazy people picking up psych meds.

    There aren’t a lot of me too drugs are coming out anymore, and those that do barely sell. I understand this this was more of a problem ten years ago or so, before I was in this business, but the PBMs have the providers trained by now.

    Most of the drugs coming out now are very expensive specialty meds for cancer, ms, autoimmune diseases, and weird genetic diseases. And a gaggle of Hep C meds, of course. Nothing someone like me would deal with very often.

    Your source gives no source itself – I think maybe it’s only counting brand name drugs, in which case Pristiq may well be a top seller but only because hardly anybody is on brand name antidepressants anymore. This source seems more plausible to me based on what I see every day.

  71. TomA says:

    You accurately point out a glaring hole in the Vox article (namely ignoring the link between product pricing and the demands of funding research investment). Is this likely to be a coincidental oversight on their part, or perhaps an example of journalistic incompetence, or just maybe an intentional omission because it would conflict another agenda underlying the story’s purpose?

  72. Krzys says:

    One simple solution for high brand name prices is to require any company wanting to sell in the us to charge the same world wide. It’s high time we Americans stopped paying for world’s drugs.

    • Murphy says:

      You’re no more “paying for the worlds drugs” than some numpty at your office who never asks for a raise or negotiates his wage is paying for your paycheck.

      Sure, the company would be less profitable if he actually bargained, sure it would make it slightly harder for you to demand a better deal but he’s still the idiot in the corner not even considering trying to get a decent price.

      He could unionize and insist that everyone get the same wage which would cause other problems but literally anything would be better for him than what he does now.

      • Corey says:

        Scott’s explicit argument is that monopoly prices are necessary for funding drug R&D, and the US is the only rich country doing that, so how are we *not* paying for the world’s drugs?

        • Murphy says:

          you think the companies aren’t getting monopoly prices elsewhere? they’re getting negotiated monopoly prices elsewhere but they’re still getting monopoly prices.

          The company still gets 22K for Harvoni in the UK. lower than the 30k+ in the US but still monopoly prices.

          Put another way the UK paid for a non trivial chunk of the cost of the Harvoni R&D

          The NHS gets to negotiate. The company still gets to say “No” if the price the NHS is willing to pay isn’t good enough for them.

          Scott talked about Pristiq. Pristiq isn’t available under the NHS because they weren’t able to convince the NHS that it was worth a price the NHS was willing to pay.

          That doesn’t deprive the company of it’s monopoly on producing Pristiq. It just gives them an incentive to negotiate in a sane fashion. If their drug isn’t much better than the alternatives they need to price accordingly if they want the NHS to become a customer.

          Without the rest of the world, if the rest of the world didn’t exist as a market the US prices would have to be far far far higher to pay for the same level of R&D.

          • Corey says:

            Good point, thanks.

          • Krzys says:

            The stats are simple. The US with 5% of global population represents 50% of pharmaceutical revenues. Ergo, we are paying for drug development. Whatever exceptions here and there, by and large the world pays the marginal production costs only. The incentive for Pharma in negotiating their prices is to get any reasonable premium over marginal production cost. And the other side knows it.

          • NOTA says:

            Do we know how much they get for Harvoni from insurance companies in the US?

  73. Bonsai says:

    Incentives to come up with new pharmaceuticals are: 1) expected profits during the patent period plus 2) expected profit of selling overpriced generics while other companies struggle to get to market plus 3) expected profits generated by a slightly tweaked version that extends the patent.

    You say cutting down on 1) would be potentially terrible; why would cutting down on 2) and 3) as you advocate not have similar effects?

    • Murphy says:

      2 and 3 are both far more uncertain returns when the company is choosing whether to invest in R&D 20 years previously and rely on market failures. Once a company is relying primarily on 2 and 3 their incentives are to invest in breaking the system further rather than spending on R&D

      • Bonsai says:

        Sure, it’s more uncertain, although the regulatory regime can of course change just as much, with potentially bigger impact, during the patent phase. And if you think that 1) isn’t high enough, extending the patent period would be more sensible than the muddle of 2) + 3).
        My wider point was that what Scott is saying, that the branded and generic markets are completely separate and that therefore you only have to worry about r&d incentives in the branded market, is not correct.

    • satanistgoblin says:

      Other companies can also create slightly tweaked versions of drugs (at least I think so), so it does not incentivise proper inovation.

  74. Tibor says:

    I went to see a dermatologist today to give me some drugs for a fungal infection on my toe. He prescribed a drug which I should be taking during the next three months (apparently these fungi are nothing serious but you more or less have to wait for the toenail to grow away which takes some time). Then I went to the pharmacy and the woman at the counter told me that there is quite a high surcharge to this drug* but that there is a generic drug where I have to pay a lot less (I needed three packages, and I would pay what would be something like 22 USD for the prescribed drug and with the generic version I only paid 5). Of course, these are common drugs and even the brand one is not really all that expensive but it still shows how much the doctor cares (or rather does not) about how much the patient spends (of course, he has little incentive to do so). It is still enough money for a lunch in quite a nice restaurant here and had the pharmacist not told me, I would have wasted that money for no good reason. On the other hand, I was pleasantly surprised that it is allowed in the Czech system to sell a generic version of the prescribed drug even though it is not exactly what the prescription says. I thought this was not possible and that you had to ask the doctor to prescribe the generic medicine. Next time I get a prescription, I will ask at the pharmacy if they have a generic version instead (as long as the prescribed drug already is not one), those are sometimes even entirely covered by the insurance.

    *in the Czech medical system medical insurance is mandatory, paid basically as an income tax, where the price depends on how much you earn, and the prices are regulated by the state but sometimes the full price of a drug is not covered by the mandatory insurance…I think there is a more or less the same system everywhere in the EU

  75. J Mann says:

    Apropos – the FDA just reduced the market for nitroglycerin to a monopoly.

  76. US says:

    I only skimmed the post (it’s very long…), but I would like to add a little more data and a few more observations as this is stuff I’ve blogged before, so it was easy for me to add some potentially relevant details to the discussion that might be of interest. The quotes I have posted below are taken from chapters 14, on Health Care Cost Growth, and 22, on The Economics of the Biopharmaceutical Industry, of The Oxford Handbook of Health Economics, by Glied & Smith:

    “North America accounted for 45.9 percent of global pharmaceutical sales in 2007, compared to 31.1 percent for Europe”.

    “The cost of developing an approved new medical entity (NME), measured as a discounted present value at launch, grew from 138$ million in the 1970s to 802$ million in 2001 and over 1$bn in 2007 (DiMasi and Grabowski 2007). This high cost per NME reflects three main factors: high input costs of discovery research, animal and human trials; high failure rates, including the great majority of preclinical candidates and over four out of five compounds that enter human trials; and the eight-twelve years required, such that roughly half of the total cost per NME is foregone interest or capitalization cost. Although this capitalization cost is not an out-of-pocket expense to firms, it is an opportunity cost that must be returned to investors in order to attract capital.”

    “studies generally concluded that the 1962 Amendments, which raised safety standards and added efficacy requirements, increased costs for firms, added to delay in drug approval, and possibly reduced competition”

    “The pharmaceutical industry is structurally competitive, with relatively low overall concentration and continual entry of new firms and products. Patents constitute a government-granted barrier to generic competition for the term of the patent, in order to enable innovators to recoup investments. […] within each therapeutic class there are typically several similar but differentiated, competing compounds that are ultimately challenged by generics and by dynamic competition from new, improved originator products. Number of competitor compounds in a class depends on the size of the market (Acemoglu and Linn 2004) but successive entry occurs increasingly rapidly. The period of market exclusivity of first entrants to a new therapeutic class fell from 10.2 years in the 1970s to 1.2 years in the late 1990s (DiMasi and Paquette 2004).”

    “The theoretically optimal insurance/reimbursement contract for drugs must deter both insurance-induced over-use by patients and excessive profits by manufacturers, while paying prices sufficient to reward appropriate R&D, taking into account the global scope of pharmaceutical sales. […] An important conclusion is that patient cost sharing alone cannot simultaneously provide optimal incentives for efficient use of drugs, control of patient moral hazard and optimal provider incentives for R&D. In addition, given the global nature of pharmaceutical utilization, creating optimal R&D incentives require appropriate price differentials across countries […] generally, regulatory systems that induce price convergence across countries are likely to reduce social welfare.”

    “Overall, countries that use direct price controls do not consistently have lower prices than countries that use other indirect means to constrain prices (Danzon and Chao, 2000a and 2000b; Danzon and Furukawa 2003, 2006, 2008). Drug price differentials among industrialized countries are roughly consistent with differences in per capita income, which may be consistent with optimal differential pricing”

    “After patent expiration of the originator brand, entry of generics can lead to intense price competition and significant savings for payers/consumers […] In the US, generics now account for almost seventy percent of all prescriptions but only about 16 percent of sales, due to their low prices. Although US prices for on-patent drugs are on average 20-40 percent higher in the US than in other industrialized countries, US generic prices are lower (Danzon and Furukawa 2008), due to US regulatory and reimbursement conditions that align to promote intense price competition. […] many middle and low income countries have relatively high generic prices (Danzon and Furukawa 2008) and uncertain generic quality. Incentives for early generic entry are greater in the US than in other countries because of the Hatch-Waxman provision, that a generic that successfully challenges the orginator’s patents (a paragraph IV filing), rather than waiting for the patents to expire, obtains 180 days’ exclusivity as the sole generic in the market. Since the sole generic can gain significant market share and profits while shadow-pricing the brand, generic companies invest aggressively in challenging brand patents.”

    “Empirical studies of generic entry have shown, not surprisingly, that generic prices are inversely related to number of generic competitors […]; generic entry is more likely for compounds with large markets (measured by pre-expiry brand revenue), chronic disease markets (price sensitive patients) and oral-solid (pill) form”

    “In its oversight of promotion, as for its other activities, the FDA is required by statute to consider risks and benefits to patients. Costs […] is beyond the FDA’s purview. […] Currently the US lags other countries in the use of comparative and/or cost-effectiveness as an imput to reimbursement decisions. Recent increases in public funding for comparative research may change this, although so far there is no link to reimbursement. […] In contrast to the US, in which regulatory boards focus only on safety, most European and other OECD countries, by contrast, have standardized system-wide approaches for dealing with the impact of technology not only on safety but on cost growth as well”

    “evidence that pharmaceutical R&D investments on average earn a roughly normal rate-of-return is consistent with the theoretical prediction that, if the expected return on R&D exceeded the cost of capital, competitive entry would occur until the excess expected profit is eliminated. Such competitive adjustments are neither instantaneous nor perfect, due to the long lead times and unpredictable outcomes of R&D, and unpredictable competitive and regulatory conditions. But given the evidence of extensive competitive entry to exploit R&D opportunities, dynamic competition should reduce expected profits to competitive levels. This suggests that in designing policy, regulators should focus less on short run profitability measures and more on whether the resulting R&D yields a level and mix of new drugs that is socially optimal.”

    “The dominant factor contributing to rising [health care] spending is the development and diffusion of new medical technology […] The conclusion that technology is a primary driver of cost growth is based on a wide body of literature […] Alarm over health care cost growth is typically centered on the rise in health care expenditures at the population level. Expenditures reflect both unit costs (prices) and utilization patterns (quantities). Some interventions may reduce unit prices, but, because of the utilization response, may not reduce expenditures. […] This helps explain why innovative technology often raises expenditures in the health care sector, even though it is perceived to lower cost in other industries. For example, as technology reduced unit cost in the information technology sector, spending growth in the overall sector increased 26 percent annually from 1982 to 1996 (Haimowitz 1997). Expenditures are also not limited to any particular disease. Individuals cured of one disease inevitably get another. It is possible that reductions in expenditures on one disease may increase overall spending if competing conditions are more expensive. Finally, cost growth at the population level may not reflect trends in cost growth for particular services. Efforts to constrain spending in one area may simply generate greater spending in other areas. For example, in the United States, as inpatient spending growth slowed following implementation of prospective payment systems (PPS), outpatient spending soared (Miller and Sulvetta 1992).” (I’m not sure this stuff’s directly related to the post, but it’s stuff many people don’t seem to know so I included it here anyway – US)

    “In assessing cost containment strategies it is crucial to distinguish between those interventions that affect the trajectory of cost growth versus those that affect the level. […] This distinction is important in assessing the ability of systems which are more conservative in their adoption of new technology to control cost growth. A system that adopts new technology more slowly than another system may have the same rate of cost growth if the baseline level of costs is lower. For example, if a given country has a base spending rate that is 20 percent below that of another country, it will experience the same cost growth if it utilizes a new technology 20 percent less frequently.” (-ll-)

    • Bone Man with Shiny Hat says:

      Number of words in Scott’s post (excluding image quotes):

      Number of words in US’s comment:

      Ratio: 0.3076, or about 30% as long as the original post.

      Result: I only skimmed the comment (it’s very long…).

      (Also, there’s a typo: “imput”.)

      • US says:


        That observation made me chuckle, thanks for that! (though I’m not sure it’s entirely fair to exclude the quotes from Scott’s post…) (…but that said, you should definitely not spend any time counting those words as well on my account…)

        I never said my comment wasn’t long… But I did want to caution people reading my comment that I hadn’t read the post in full and that the comment was sort of a semi-lazy comment which was easy for me to add only because I’d read about- and covered related stuff elsewhere before. Relatedly, I wanted to explain how there was nothing mysterious about the fact that I couldn’t find time to read the post, but on the other hand could find the time to write a long comment; the point was that my comment was based on previous work I’d done, and my writing of it mostly consisted of copy-pasting relevant observations into the comment field.

  77. Gbdub says:

    How often do pharma rep lunches still happen? I was under the impression they’d been seriously curtailed (presumably by regulation); my mom runs the in-house lab at a general practice office, and 15 years ago catered lunches in the break room were at least a twice weekly occurrence and we had a lifetime supply of Viagra pens and Prozac notepads. These all but disappeared. I thought the reps could still visit, chat, give free samples, etc, but “gifts” like lunches and branded merchandise had been heavily restricted. Am I mistaken about this? It’s in the same state Scott currently works so it wouldn’t be a case of differing regulations.

  78. Keshav Srinivasan says:

    Steve Landsburg discusses an interesting proposed alternative to the patent system in this article:

    “The problem is to make ideas free while still rewarding their inventors. So far, the best solution comes from the Harvard economics professor Michael Kremer, who wants the government to go right on granting patents (or copyrights), but then to purchase those patents at a fair price and place them in the public domain.

    The sticking point is determining the fair price. Kremer’s idea is to put each patent up for auction. When the auction ends, a government agent shows up and flips a coin. If the coin lands heads, the auction bidder buys the patent; if it lands tails, the government buys the patent for the amount of the winning bid. That way, half of all patents end up in the public domain, and the government never pays more than some private bidder is willing to offer.

    Or better yet, the government agent can flip a weighted coin that lands tails 90 percent of the time. You just have to let the private bidders win often enough so that it’s worth their while to show up and bid sensibly.”

    • Corey says:

      Another interesting system for coming up with a fair price (though this does require an associated tax) is the Greek tax on antiquities.

      The owner simply declares the value and pays a percentage tax on that. But the government can, instead of accepting the tax payment, buy the item at the declared value.

    • Keshav Srinivasan says:

      For those interested in the full details, here is Michael Kremer’s journal paper. It addresses kickbacks and other issues.

    • TomFL says:

      This idea is only useful as a thought experiment.

      Looks good on paper, just like the patent system itself. Would likely work horribly in practice. The value of a patent is almost impossible to predict until it is really on the market. The patent system is unbelievably corrupt in practice with horribly vague patents being litigated over the inventions of wireless email (>$600M verdict) and rounded icons from Apple for some examples. If you want me to fund the government’s purchase of Apple’s rounded icons for general use, then I don’t think that’s a good idea.

      Genuinely good and valuable patents probably represent <0.1% of all patents filed. 300,000 patents were granted in 2014. People who truly have valuable patents won't want to sell them to the government and you will never construct a system in the US where this is government mandated from private investment against the patentee's wishes.

      Determining which ones are the good ones and how much they are worth are the end of this idea in practice. It is easy to imagine this process becoming corrupted by political influence.

    • Murphy says:

      Lets imagine I’m selling my patent.

      Why shouldn’t I get my friend bob to bid 1 billion dollars for it?

      If the coin flip ends with him buying it then both of us go into a room, he writes me an IOU for 1 billion and we both walk out with me declaring that we’re happy. I then never chase up the IOU.

      We do this again and again until the coin flip ends with with government buying the worthless patent for 1 billion.

  79. TomFL says:

    I agree that the mindless usage of expensive patented drugs over their just as good cheaper alternatives is a huge problem.

    Why can’t our best and brightest work this out?

    I mean this question in that doctors tend to be some of our most intelligent and rational people who have survived medical school and seemingly should be able to overcome this without regulatory intervention. I’m not buying the threat of losing free lunches is the primary driver here.

    Why don’t they fix it on their own?

    • Keshav Srinivasan says:

      The issue isn’t that the free lunches would stop if they didn’t prescribe the drugs that pharmaceutical companies want. Rather, the issue is that in the course of the free lunch, the pharmaceutical company mentions that a particular drug is good and then the doctors just prescribe that rather than doing the work of looking for whether there are cheaper alternatives that are equally good.

    • Maware says:

      Because intelligence and rationality aren’t really as good problem solvers in soft situations as you think. The intelligent or rational person only gets his goals achieved by using soft skills and navigating the complexity of using power over people. He can come up with great solutions all he likes, but if he doesn’t have soft forms of power in his organization or in society he’s doomed to frustration.

    • Murphy says:

      What do you expect when some of our best and brightest are chipping away at the problem of getting the best drugs for the best price and the most QALY’s for patients but another large group of very capable, very bright people with a lot of money and influence are working very hard at the problem of “how can we get the most cash out of these suckers, no we don’t care whether the drugs actually work though it’s sort of a minor bonus if they do”.

      Bright people are not omnipotent and can be downright ineffective when faced with other bright people who are working hard at stopping them from achieving their goals.

  80. Bizwacky says:

    I think you’re losing some information by combining all forms of drug price reducing regulation into one category, and then talking about the effects. Specifically, I feel that the evidence for reference pricing is pretty strong. It’s particularly well targeted to reduce spending in the Pristiq category, while allowing for very high priced and profitable drugs in the Harvoni category. None of those studies discuss explicitly the effects of a reference pricing scheme, as far as I can tell.

    They also share a common flaw, which is that they can’t distinguish between beneficial R&D and wasteful R&D. For instance, if we had a reference pricing scheme, in which patients who wished to take Pristiq had to pay the difference between that and the clinically equivalent (or superior) Effexor, we would certainly discourage Pristiq’s manufacturer from expending R&D funds on drugs like Pristiq, because demand would fall sharply. Also Pristiq’s launch may be delayed in the US, but on time in Canada, because they know the US isn’t a profitable market for that drug, etc. All of those effects would correctly show up as launch delays and a reduction in R&D spending in the above studies, but they would almost certainly not lower the life expectancy of any people in the U.S.

    While I feel like it’s wrong to discuss price controls on drugs without mentioning regulation’s stifling effect on innovation, I also feel like it’s wrong to fail to mention that many of the groups (i.e. ICER) proposing price reducing regulations have specifically developed ways to minimize the impact on actually beneficial innovation.

  81. Skivverus says:


    Abolishing the FDA is probably the wrong way to go, but what about opening it up to competition?

    • Orphan Wilde says:

      For all meaningful purposes, any kind of competition amounts to eliminating the FDA. If a private company can approve drugs, the FDA as we understand it today no longer recognizably exists.

      • Skivverus says:

        In the end result, quite possibly; in the time it takes to get there and the damage done along the way, I think competition is a better bet than a ban (up to a point; there’s only so much room on a pill bottle for “Approved by X” endorsements, after all).

        • NOTA says:

          Reciprocal approval of drugs approved by (say) the British or French or Japanese authorities would effectively give the FDA some competition.

    • Irishdude7 says:

      USPS:FedEX::FDA:Underwriters Laboratory

      UL already certifies and trains FDA inspectors around the world:

      Just let them expand their scope to ensuring the safety and efficacy of drugs.

  82. a6z says:

    I don’t think you’re being cynical enough.

    Thus, I am not so sure about free lunches for doctors. Without them, very possibly the doctors would know about neither antidepressant, which would serve the patients still less well.

    I am more familiar with defense acquisition. I realize that as a Left-Libertarian you are against it; but for a moment pretend not, to further understanding.

    At first I was scandalized. I realized soon enough that if defense contractors didn’t provide congressmen with opera-season fact-finding NATO-countries tours (with pliant female guides–or male, according to taste) then American warfighters would meet our enemies bare-handed, and by now we would be ruled by someone else.

    The defense contractors didn’t make congressmen ignorant or corrupt. The congressmen were already like that. Each defense contractor (like any entrepreneur; or like a mafia, if you prefer the comparison; better still, like an opportunistic infection) exploits that environment. I admit that I found it distasteful enough to leave.

    To be sure, the services’ mix of equipment is significantly suboptimal, and it (together with other factors) has cost us blood and treasure, will cost us more, and risks worse than that. On the other hand, we haven’t been conquered; nor have our allies, mostly, and not through poor equipment quality. The world’s other powers have often been similarly badly equipped, sometimes worse.

    For equipment substitute drug or medical device; for defense contractor substitute manufacturer; for congressman physician; for warfighter patient; for defense health. (Have I left any substitutions out?)

  83. Dave says:

    I think Scott is wrong to say that the UK regulates drug prices. The NHS negotiates the prices that it is willing to pay. As far as I know (and I may be wrong), if the NHS refuses to pay for a drug because NICE deems to not cost-effective, individuals may still buy that drug via a private healthcare provider.

    This seems perfectly in line with how markets work, freshman economics, etc.

    On the wider question of paying for drug R&D, there is another aspect I haven’t seen mentioned in this thread, which is that if companies have to recoup their R&D costs via sales, they will only research drugs that rich people will pay for. On a global scale, it may save more lives to research drugs that counter diseases that are widespread among poor people.

  84. Kai Teorn says:

    But, if we don’t do price controls and allow Harvoni to cost full $32000, and instead allow and promote $100 generics competing with it, wouldn’t that have an even worse effect upon research funding?

  85. nachterb says:

    Here is a question that bugs me about all this. If the shoe were on the other foot, and China or Japan or some other country were charging their domestic population 3x or 10x compared to “export” we would call it dumping and have a fit. Think small trucks or aluminum . Would we put up with it? no, not for a product that is essentially interchangeable. But every other country puts up with it to glean the benefits, like the FAA regulations created to keep the skies safe (really… domestic Asia airlines follow the same asinine announcement). So maybe we should tax the rest of the world for the invention of new drugs, and plow that back in to pay for the NIH.

    • Deiseach says:

      So maybe we should tax the rest of the world for the invention of new drugs, and plow that back in to pay for the NIH.

      Okay, great. But taxing the national government means, in effect, taxing the pharma companies in that country. (Little Island in Cork is the home of exactly such investment and employment coaxed over here by successive Irish governments). Do you tax the American parent company or the European divisional headquarters or the Asian divisional manufacturing? Because if you say “We’re gonna charge the UK X million dollars for the price difference between what the drug costs in the USA via private health insurance versus what it costs through the NHS”, then other countries are going to relatiate and recoup those costs by taxing the pharma multinational headquartered in their company.

      As Scott points out, Europe has several alternatives to the EpiPen. Do you tax European countries to recoup the cost of such a device – if you can find out what company originally owned the patent before it passed through the chain of buyers to end up with Mylan?

      Or what of the case of a company like Bayer, which is European in origin but has substantial American subsidiary? Do you treat the American and the German parts as separate? Suppose it turns out US WondaMed was actually the result of R&D in the German division – do you still tax Germany for the cost of R&D? Or does Germany get to tax the USA to recoup the costs? Remember, aspirin was first synthesised by a chemist working for German Bayer, I’m sure Germany would love a share of the money from every Bayer-brand aspirin sold in the US! Do you tax a country on the value of all the generic aspirin produced and consumed on the market there, since plenty of other companies can make their own-brand version? How do you decide what to tax and how much?

      Never mind that large concerns split themselves over several legally separate entities (think Google dividing itself up into Alphabet, etc.) Do you tax GSK’s OTC plants in Ireland? What about the new GSK plant in the UK making a snazzy and extremely expensive new cancer drug that was the result of R&D there? (My brother was part of the team that came over from the Irish plant to set up and train in the English production line; the company paid for everything while they were over there for six months, and I said that must have cost a bomb and he said yeah, but one morning’s production pays our entire expenses).

      “Tax the world to pay their fair share for free-riding on America” sounds good but can be messy when it comes to carrying it out, just ask my government about the EU decision that Apple owes us €13 billion in back-taxes (that my government does not want to charge them at all, even though that sounds like ‘why on earth would you turn down free money?’ Answer – because the consequences would be worse, as Apple would probably pull out altogether and we’d lose the benefits of more than just having them run their profits through here to avoid tax liability).

      • Thomas Jørgensen says:

        .. Actually, if you do the math, all the jobs apple provides Ireland are worth substantially *less* than 13 billion.

        But that’s not the part that’s funny. The stunt that Apple Ireland preformed was to use the EU transfer pricing mechanisms to allocate all their European Profits (and the profits made in a couple of other nations that have tax treaties with europe) to Ireland, and then claim to Ireland that their profits were made in the nation of Nowhere.

        Vestager then went in and said, “Yhea, no, pay up.”.

        So. By challenging Vestagers ruling, Ireland is claiming that the transfer of profits to Nowhere was legal.

        But the EU has no tax treaties with Nowhere. If that part of the Apple tax structure was legal, that means the reallocation of profits most emphatically was not, and suddenly Apple will owe – not 13 (19 with interest) billion to Ireland, but nearly 3 times that much to various european tax authorities.

        Prediction: Once Apple catches on they will start to lean on the Irish government to loose, and pay up those 19 billion right damn quick.

        • Deiseach says:

          If that part of the Apple tax structure was legal, that means the reallocation of profits most emphatically was not, and suddenly Apple will owe – not 13 (19 with interest) billion to Ireland, but nearly 3 times that much to various european tax authorities.

          This is why other European states are going “Hey, if there are back-taxes going, we’d love a slice of that Apple pie!”

          Of course it makes no goddamn sense, and of course the employment we get out of it don’t come to the same value as the taxes.

          But that’s our “pro-business” governments for you! I’m not just picking on the current lot, all the parties in power at whatever time were licking up to big multinationals to come in and take advantage of our educated labour force and cheap corporate tax rate.

          We can’t seem to manage to create home-grown industries, so we’re heavily reliant on multinationals coming in and providing 300 jobs for ten years in small town down the country. Otherwise, we have to fall back on emigration, as seen most recently after the construction and housing bubble burst – all the fancy jobs suddenly weren’t there anymore due to the global economy wobbling, nobody could afford to keep the housing bubble going, the construction jobs which were providing the lion’s share of tax revenue dried up, and once again people were heading off to Canada and Australia (and the US) for work.

          You would imagine any government, told it has a potential windfall of that kind of money coming, would be delighted. Instead, our current coalition nearly fell apart – the Independents want to claim the money, the senior partner party – Fine Gael – are falling over themselves saying they have no intention of asking Apple to do so. We’re going to appeal the decision awarding us the money and ask it be undone!

          The explanation lies in what our Minister for Finance said here:

          “Apple has been in Ireland since the 1980s and employs thousands of people in Cork. The company has continued to expand its operations in Ireland in recent times.”

          We stop providing tax loopholes, Apple will leave the country – it’s no big deal in the long run to them, it’s simply a matter of setting up another headquarters in a compliant country outside of the USA, which is where their main business lies, even if the legal fictions say otherwise.

          But we’ll lose thousands of jobs that won’t be replaced, or if replaced will be in hundreds rather than thousands. People now earning good wages and paying taxes and all the other bills will be unemployed, and either claiming the dole or leaving the country looking for work. The parties in power who let this happen will be unpopular and will probably lose in any local elections.

          It makes sense politically to refuse the money and keep the goodwill, even if the budgetary position would be vastly improved by having that lump sum of money tucked away for a rainy day (the problem if we get the money is also that then there would be expectations of public expenditure being revved up and taxes relaxed, such as the Universal Social Charge being done away with – something we’ve been told would put a severe dint in revenue).

        • “.. Actually, if you do the math, all the jobs apple provides Ireland are worth substantially *less* than 13 billion. ”

          I don’t see the relevance of that. The 13 billion isn’t money Apple took from Ireland, it’s money Apple failed to pay to Ireland.

          If Ireland had not offered Apple whatever tax deal it was they are arguing over, Ireland would have gotten neither the jobs nor the taxes.

          • Thomas Jørgensen says:

            … Uhm. Actually, it is pretty likely they would have.
            Hell, it’s probable they will still get both the money and the jobs, simply because there isn’t anyplace better in the union for Apple to move them to.

            The legal, as opposed to “complete bullshit accounting” corporate tax rate in the republic of Ireland is 12.5 %. Ireland is also anglophone and has a decently educated workforce – That means it’s a very attractive location for an EU office without the kind of special treatment they got, and an attractive place to declare your profits within the union.

            Apple can’t just relocate those activities elsewhere because there isn’t anyplace better inside the union to do those things, and they can’t declare the profits outside the EU in a no-tax jurisdiction because for some strange reason those places tend to not have the kind of tax treaties that permit easy transfer pricing.
            So the rational, logical, profit-maximizing thing for Apple to do is to just pay up and change absolutely no part of their corporate operations.
            That doesn’t mean they wont bail out of Ireland – it’s entirely possible they will, but it would be an act of spite, not an economic move.

            Wait. There is, in fact one aspect that might make them move to a higher corporate tax rate location.
            Vestager also highlighted the fact that Apple is engaging in blatant US tax evasion.
            US corporates are taxed on world-wide profits when they repatriate those profits. Apple Ireland has a massive cash horde they’re not repatriating to avoid those taxes – But Apple US is using that hoard as collateral for loans they’re using to pay dividends. Which is just blatantly an accounting fiction designed to avoid taxes.
            However, international profits are only taxed the difference between the US rate and the rate already paid on them where they were earned, so if Vestager’s report makes the loan dodge untenable, there is no longer any reason for Apple to care about the exact rate it pays in the EU, since said payments would reduce their US tax burden dollar-for-dollar, at which point they might as well operate out of Berlin.
            On the third hand.. relocating at all is a hassle.

          • The Nybbler says:

            Vestager also highlighted the fact that Apple is engaging in blatant US tax evasion.

            They are almost certainly not. US tax “avoidance”, yes. It’s legal in the US to structure your business in all sorts of silly ways (that is, to engage in blatant accounting dodges), even if the only reason for that structure is to avoid tax.

          • Right, Apple would still be based in Ireland because it’s still preferable to declare taxes their on a transfer pricing basis.

            It’s still basically a tax haven, just a less attractive tax haven.

            This is really a tax haven on top of a tax haven.

          • RCF says:

            ” Apple Ireland has a massive cash horde they’re not repatriating to avoid those taxes – But Apple US is using that hoard as collateral for loans they’re using to pay dividends. Which is just blatantly an accounting fiction designed to avoid taxes.”

            Wouldn’t any reasonable lender be willing to take only the portion of the horde that would survive repatriation taxes as collateral? In which case this isn’t really a tax dodge.

      • nachterb says:

        sorry to post and split- just catching up. So the tax idea in the practical sense is pointless due to so many reasons as you point out. How about a price model where all drug companies must charge the same whether domestic or export (with maybe some third world countries excepted for charity). They might fight it but would probably make more in the long run. I am sure there are holes in that too but it’s worth a think.

        As Apple came up: They and many other electronics companies have generally global pricing due to the internet and in the US many companies have MAPP pricing that is essentially legal price fixing. So if it’s good for the goose…

    • Murphy says:

      Production costs vs monopoly costs.

      As a country the USA is free to create it’s own internal rules that only Coca Cola can sell softdrinks and coca cola is free to charge whatever price they like but if they want to sell abroad they need to sell for realistic prices. So lets imagine they sell for double the price of the local soft-drinks but still 1/4 or 1/5 domestic prices.

      They might even have a reason like making a deal that in exchange coca cola becomes responsible for providing some public good.

      That would not be dumping. It would be the USA kneecapping it’s own citizens but not dumping unless the company sells it as a loss leader thanks to the domestic income.

      Thanks to the fantastically thick pharma profit margins it would be extremely difficult for drugs to be loss leaders even taking into account all the research costs.

      US patent law allows a company to sell a drug that may costs 100 bucks per dose to actually make for 30K per dose. Accounting for research costs it’s still likely far south of 5K per pill in real costs.

      The USA has happened to manage to get other countries to buy into this system and enforce patents. In general products subject to intelectual monopolies like patent/copyright don’t get regarded in the same way as commodities.

      Just because you’ve decided to enforce a local monopoly does not automatically require everyone else to help you fund every hairbrained scheme. So if you go to say, france, and demand they pay you part of their tax revenue because you feel entitled to it then they’ll rightly tell you to go fuck yourself.

      You might be able to negotiate something internationally as was done with the patent and copyright systems but remember that the USA is not world emperor, you need some way in which it directly benefits all those other countries to do it rather than telling you to go shove it up your arse and them manufacturing their own for 100 bucks per pill.

  86. Jacobian says:

    This is another argument in favor of repealing the banning power of the FDA.

    Currently, the patent is for 20 years, but it takes 10 whole years to get FDA approval so that companies only have 10 years to profit. Let’s say that the FDA (or my proposed GDA) still take 10 years to “certify” a drug, but you can sell it without certification albeit at reduced prices because most people are afraid to buy uncertified drugs. Even if the manufacturer gets 20% of the yearly profit before the drug is certified, they would get “2 years” of profit in the first decade, whereas right now they get 0.

    This is a huge win: we can either change the patent law to 18 years, so companies have the same profit incentives but generics are available two years sooner or we can keep the 20 years law and see more innovation because the profit incentive is 20% higher.

    • Murphy says:

      Desperate people will sell their houses for snake oil.

      Humans don’t change.

      Expecting people to properly assess the statistical safety data for drugs is like expecting the users on a large companies IT infrastructure to not download and run anything that promises to show them Emma Watson’s tits.

      70% to 75% of drugs fail phase 3 clinical trials. Of the remaining 25-30% some still turn out to not be as effective as believed or to have horrible side effects that only show up later.

      You’re proposing to throw these all straight to the public.

      The FDA do indeed have a “fast track” system where they allow promising drugs for particularly deadly conditions to get through without as much safety testing but with warnings that this is the case. It’s been a disaster.

      The companies super double swear that they’re going to complete safety testing real soon after their drug is given the green light.

      Under your system of beliefs you’d expect that these drugs wouldn’t do terribly well but in reality the companies don’t bother with any more testing in cases where this has happened. They’re not going to risk results coming back showing that their drug doesn’t work or is actively harmful.

      They’re already allowed to market it. They’re already allowed to show desperate people video of happy dancing people while overlaying “talk to your doctor about SnakeOil-itol”. They’re already allowed to invite doctors to very nice conferences which just happen to have speakers who believe in their heart of hearts that the drug is wonderful and are willing to explain to all the doctors why. They’re already allowed to “sponsor” “patients groups” to run letter writing campaigns to tell their congress critter than the drug is amazing.

      They have no more interest in doing safety testing. Honest safety tests are unlikely to help them and likely to hurt them because they know damned well that what they’re selling only has about a 30% chance of working.

      So no. Your proposed system in reality would be to simply do away with proper phase 3 safety testing and efficacy testing.

      70% of the drugs coming to market would be pretty much guaranteed to simply not work or to be actively dangerous.

      It’s a huge lose.

  87. naman says:

    Relevant read on Harvoni and where the research really came from and where the money is really going

    Oh and see the accompanying rapid responses

  88. I pinged a couple of the (former) RAND economists whose study was quoted, on twitter.

    I’d be happy to hear what they have to say, but as someone who has worked with their ilk, the argument seems basically sound, except that it ignores the fact that you’re using a point-estimate of a noisy approximation of the effect of patents on lifespans. That means that it’s plausible that the size of the effect is very different, or even reversed.

  89. ChristianKl says:

    It seems to me that there should be a business model where you get payed by insurance companies for telling their patients about generic drug alterantives to brand-name drugs.
    An insurance company could easily mail every of their patients who get’s prescribed Pristiq a booklet that informs the patient about why Effexor might be better and encourages them to ask their doctor to explain why the doctor chooses Pristiq over Effexor.

  90. mack says:

    I feel like the best way to solve these issues is with patent buyouts:

    Pharmaceutical patents, upon their filing, are put up for auction. Private companies would bid on the patented drug based on how profitable they believe it would be over the lifetime of the patent. The vast majority of the auctions would be fake; upon completion of the auction, the government pays the inventor the value of the winning bid and then releases the patent into the public domain. But a small proportion of randomly selected auctions would be real, ensuring that private companies submit real bids with the understanding that there is a real (albeit small) chance that, if they are the highest bidder, they will legitimately receive the right to the patent in question. You will need lots of regulations to prevent collusion between bidder and inventor, which will be somewhat costly, but the inventor is always compensated (either by the government or the private entity that wins the auction) for what the market deems to be a fair valuation of the drug in question, and, save for a small proportion of randomly selected auctions, the drug is immediately released into the public domain and eliminates a lot of deadweight loss associated with monopolies. It’s a win.

  91. Titanium Dragon says:

    You are making a rather large error here, which is that you’re ignoring opportunity costs. $9000 per year per person 55-60 is a hell of a lot of money. Surely, we would spend that money on other things. It may be more efficient to spend that money on other things than it is on drugs.

    There are other issues:

    1) The US is subsidizing drug development costs for these other countries, transferring costs to US from elsewhere. Their regulatory regiemes are externalizing costs onto the US. If the US regulates drug prices, then other countries would likely to be forced to foot more of the bill, which means that we might see a lower R&D cut than we would otherwise.

    2) The cost of drug development is somewhat illusory. That $2.5 billion per drug cost, for instance, while a reasonable estimate in some respects, is actually wildly inaccurate in many important respects. To put it bluntly: it includes a bunch of illusionary costs which don’t really exist. The actual “true” cost of developing a new drug is on the order of a few hundred million dollars. The rest is opportunity costs and marketing costs. This means that, if worst came to worst, we could in principle buy drug development for a lot less money than we’re paying now. If we funnelled some of those costs into government paid for R&D, we could potentially get the benefits back.

    3) The cost of drug development is arguably extremely inefficient but because the present system allows them to pass on arbitrarily large costs to consumers they have no incentive to reduce the cost of drug R&D. If you can make back 400% profit on $2.5 billion, and, in fact, can justify making $10 billion in profit instead of $2 billion in profit if you reduced your R&D costs to 1/5th their previous costs, there isn’t much incentive for efficiency and there is in fact incentive for inefficiency. The inability of drug companies to pass on inefficiency to the consumer could force them to be more efficient so that they could remain profitable.

    4) The ridiculous creep of R&D costs in recent years may be a sign of diminishing returns over time, which means that taking past trends and extending them out to the future may be methodologically flawed; in other words, we may not expect to see the same benefits over the next 50 years that we saw over the last 50 years.