Wednesday, November 16, 2011

The Free Market God in Action in Health Care: A Lesson

I have worn out my fingers typing about the problems of markets in health care. There is a very long list of conditions which cause problems for markets as the way one distributes products and services, and the health care qualifies for every single one of those conditions! Some of those we could change, some of them we cannot change. The great uncertainty about future needs and the very asymmetric information are among the ones we cannot change. As an example of the latter, think how it would be if your trip to the bakery would start with the baker determining if you really need bread or not. Can you see the bad incentives there?

This post is not about that but about the market power in health care and about the case of desperately-needed-treatment-and-market-power:
Here's another jaw-dropping price on a new drug. The scorpion antivenom Anascorp, approved in August, is sold in Arizona these days for $12,000-plus per vial, meaning one course of treatment could run as much as $62,000. Across the border in Mexico, where Instituto Bioclon makes Anascorp, the drug has been marketed for years at about $100 per vial, the Arizona Republic reports.
What's more, Rare Disease Therapeutics won U.S. approval for Anascorp based on a tiny study--just 15 patients--led by the University of Arizona. The company didn't develop the drug and doesn't manufacture it, but rather just markets it under license from Instituto Bioclon.

Read the whole quoted article to see how the price keeps multiplying up the delivery chain so that the final price is 120 times the Mexican price.

How to explain something like this? I think the American suppliers would use the rare-diseases argument which goes something like this: To find a cure for a rare disease probably requires as much expenditure and work as the finding of a cure for a common disease. But the market for the former is so tiny* that the only way to recoup those development costs is by charging enormous amounts for the treatment. Or to have someone subsidize those costs in the first place.

But this case does not qualify, because it was the Mexican Instituto Bioclon who invested in the treatment and who should get those development costs recouped, not the American distributor.

A better explanation has to do with the price elasticity of demand for something like anti-venom for scorpion stings. Suppose you had been stung by a scorpion. How much would you be willing to pay for that anti-venom? Depending on the outcome without the anti-venom, the answer might well be all you own, all you could borrow or all you could steal.

Economists call such products price-inelastic, and markets usually price them very high if competition doesn't stop that. But competition in health care is unlikely to stop that because of that arrangement which stops hospitals from the US from simply buying the drug directly from Mexico or probably from any other intermediary but the one which has that price tag of $12,000 per vial.

So why not create the kind of competition that would bring the price down? Here's the real snag for the free-market idolators: They don't want governments to interfere. But the competition will not be of the right kind without government supervision and interference.

Consider the idea of just letting everyone buy the anti-venom directly from the cheapest possible global source. Wouldn't that take care of the high price?

It would. But it would also bring in bad quality venom, the need to inspect factories in foreign countries and other problems which the markets themselves CANNOT solve.
* Markets may not be tiny in the sense of numbers of affected people. They may be tiny in the sense of people being able to pay. For instance, getting stung by scorpions is not a rare incident on a worldwide level. It's just an incident that is more likely to happen to those who don't have much money for health care or much access to it.

Link to the story via David Atkins at Digby.