Monday, September 21, 2015

Socialism subsidizes price gougers

The 18th and 19th paragraphs of this New York Times story on pharmaceuticals gouging are the most important:

Daraprim cost only about $1 a tablet several years ago, but the drug’s price rose sharply after CorePharma acquired it. According to IMS Health, which tracks prescriptions, sales of the drug jumped to $6.3 million in 2011 from $667,000 in 2010, even as prescriptions held steady at about 12,700. In 2014, after further price increases, sales were $9.9 million, as the number of prescriptions shrank to 8,821. The figures do not include inpatient use in hospitals.

Turing’s price increase could bring sales to tens or even hundreds of millions of dollars a year if use remains constant. Medicaid and certain hospitals will be able to get the drug inexpensively under federal rules for discounts and rebates. But private insurers, Medicare and hospitalized patients would have to pay an amount closer to the list price.

By raising the price 5,000 percent, Turing is betting more than one-fiftieth of the market will continue to buy Daraprim. It’s a good bet.

In a free market, Martin Shkreli’s apparent greed would have deadly consequence for Turing. First, use of Daraprim would not remain constant after such a sudden and severe price spike. People would immediately curb their consumption. Then, the price gouge all but begs a competitor to come up with a cheaper alternative to Daraprim and in effect shoulder Turing out of business.

But this isn’t a free market. Under our socialist, bureaucratic healthcare regime, innovation and risk-taking are heavily disincentivized. The liability risks, FDA regulations and clinical trials, and costs of research and development may in fact reflect the true price needed to keep Turing profitable and churning out Daraprim while it looks to diversify its product line. New entrants into regulated markets, especially healthcare, have a harder time than established powers staying in business. In other words, a cheaper alternative to Daraprim is likely not forthcoming.

Furthermore, consumers will continue to use Daraprim as long as health insurance shelters them from the increased costs. Health sector inflation is the worst of any other economic sector because of the divorce of runaway demand from finite, government-regulated supply. Private insurers, Medicare, and Medicaid trying to meet consumer demand and their coverage requirements assures the debt of millions owed to Turing, smaller than a rounding error in the federal budget, will be diffused across the rising subsidies of the subsidy-dependent healthcare sector.

The free market is better than this.

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