WSJ Gets It Half Right On Drug Prices

  • by: Robert Goldberg |
  • 12/07/2016
Thomas Sowell observed: “A cynic is said to be someone who knows the price of everything and the value of nothing. The same could be said of economic illiterates, many of whom are in politics and the media”.

But often what is perceived as illiteracy is really confirmation basis or just not understanding.  An example of the latter is WSJ reproter Jonathan Rockoff’s article “Drugmakers Find Competition Doesn’t Keep a Lid on Prices”.  Rockoff's article does transcend the usual narrative:that drug prices don’t decline in the face of competition because only drug companies can defy market forces and pass added costs onto consumers.  Rockoff acknowledges that drug companies are not the only culprits.  In making this point, he still implies competition should reduce drug prices without regard to the costs associated with producing goods or services.   In doing so, he perpetuates the meme that drug companies are so profitable they can cut prices and generate new medicines. 

Rockoff apparently has not looked at the relationship between competition, prices and production costs in other industries.

For example, when has Apple or Microsoft or Google engaged in a price war leading to lower prices over the long run? Have cable rates fallen in response to other ways of watching movies, tv shows, etc?   On the contrary, they have not.  Similarly, has Netflix or Amazon or Hulu reduced their prices as the battle for broadband viewership heat up?  

Have the prices hospitals and insurance companies charge fallen?  How about the cost of college? Or closer to home, why has the Wall Street Journal continued to raise its newsstand and digital subscription prices?  Heck, WSJ is laying off a bunch of high paid writers. Shouldn't prices go lower, not higher?   And why is the renewal price higher than the introductory price.  Shouldn't the $99 price be standard? 

The fact is prices are more than a response to competition.  And competition is rarely only about prices.  WSJ increases prices because the costs of staying in business and putting out a good product increase.   Netflix could have continued to charge 6.99 if it didn’t want to invest in new movies and original programming.  Would people be satisfied watching reruns of Law and Order?  

This dynamic is separate and apart from the increase in list prices that fuel higher rebates for insurers and PBMs.    But not totally.  List prices rise in response to the added cost of rebates and other discounts drug companies must give to get market share.  

As Sowell points out (should he really have to?) “Costs are not just prices arbitrarily put on things. Whether the economic system has prices or not, there are real costs for everything. Whether under capitalism, socialism, feudalism or any other system, the real cost of building a bridge are all the homes, factories and other structures that could have been built with the same labor and materials that went into building the bridge.’

To be sure, rebates and discounts don’t mostly flow to the consumers of the drugs generating rebates and discounts.  But that is due to the control insurers and PBMs have over retail pricing.  This is a huge problem as I have pointed out time and again.  Until recently most reporters were unaware of how rebates worked.  (Credit due to me and Peter for doing the explaining!) 

None of the above changes the fact that lower prices can often lead to less innovation across industries or that prices do reflect value in market economies. Generic drug companies don’t innovate and often stop producing essential medicines that go off patent because prices are often drop below increasing production costs. 

Rockoff, like many of us, seek explanations when competition doesn't lead to lower prices.   The key is to look deeper into how competition sustains innovation.  Companies compete on quality, on novelty and on value.  Prices reflect what those qualities or values are as well as the cost of making them.   If we want 1990s prices for anything, college, cellphones or drugs, be prepared for 1990s technology.  
A footnote:  Rockoff’s piece is featured in a WSJ weekly business ethics course reviewed by OC Ferrel, a professor of business ethics at Belmont University.  Ferrel writes: “Students should understand that 'fair' competition should result in competitive or lower prices. This phenomena (sic) is causing increased burden on the health care system and should have public policy consequences.”

Maybe Sowell was not tough enough.

Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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