Maybe This Is Why Drug Prices Are So High?

If you’ve ever taken an Econ 101 class, you will have learned that even monopolies are constrained on how high they can price something. The reason is because if the price is too high, people will just do without the thing, or they’ll substitute something else to fulfill that same job in their life.

Any medication under patent is a monopoly, but nearly all of them have substitutions available or can be lived without. For those drugs not under patent, they can be manufactured by several different companies, so there should be price competition pushing the price down even further.

Then why are drug prices so high?

I am not trying to force-fit my ideas to make them explain everything about the whole world, but let’s just think about value-sensitive decisions in the drug market for a minute.

Value-sensitive decisions come about when people are considering the price and quality of their options and making a reasoned decision about which one is the best value to them. This is what stimulates competition to offer the highest value to people.

Do people make value-sensitive decisions in the drug market?

I’ve prescribed thousands of medications, and not once have I enabled a patient to make a value-sensitive decision.

For example, let’s consider anti-depressants. There are many options. And there are even some decision aids out there (for example, this one created by the Mayo Clinic) to help doctors and patients together choose the one with the best benefits and side effect profile for the individual. So we are looking at the quality of their different options.

But nobody knows the price.

Often doctors will know that a certain med is still under patent and others are generic, but that’s about as good as it gets. I’ve written before about how difficult it is to find the cheapest price for a medication–it was even impossible for me, and I was knowledgeable and highly motivated and spent a lot of time searching.

So here we have a market where the person actually paying for the product usually isn’t the one choosing which one they will buy, which means out-of-pocket costs are often completely forgotten, and neither the consumer nor the one choosing the product for the consumer has any idea about relative prices other than an occasional very general notion.

This sounds like a perfect setup for the suppliers of these products to take advantage of that, doesn’t it? They know setting a high price will make little difference on their sales. For them, given their incentive scheme, setting a high price isn’t greedy; it’s a rational profit-maximizing response to a horrible incentive scheme. And, while setting a super high price, drug manufacturers use other means to try to persuade people to buy their product, whether it’s by advertising to doctors in many creative ways or advertising directly to patients. This advertising arms race inflates prices even more, by the way.

So if we want to get drug prices down, we have a choice between (1) fixing the core cause of the market failure by finding a way to get doctors and patients to know out-of-pocket prices at the time they’re choosing medications or (2) just straight up administratively setting prices. I guess, realistically, there is a third option of getting the insurance companies that are the intermediaries in this market to try to negotiate for better prices on behalf of their enrollees. This can help, but it will not be nearly as effective as value-sensitive decisions on an individual level. And having read The Road to Serfdom recently, the enormous downsides of trying to administratively set prices are fresh in my mind.

I will be very excited the first time I see a politician propose to lower drug prices by helping patients make value-sensitive decisions, but I haven’t seen a proposal like that yet.