An Economics Lesson From Erectile Drugs

-2The Wall Street Journal reported Wednesday that hospital and pharmaceutical companies have been pushing  through large price increases in the first quarter of 2009 even as most businesses struggle just to
stay above water. (And later Wednesday, the CPI recorded its first
actual decrease since 1955.)

As an example of drug company tactics, the newspaper reported a recent
20.7 percent price increase by Pfizer for Viagra and a 14.2 percent
price increase by Eli Lilly for Cialis, two popular erectile
dysfunction (ED) drugs. Sadly, neither the Journal nor
the drug makers took the opportunity explain the concept of “inelastic
demand” for treatments of a condition where elasticity is the problem.
Pfizer and Lilly are betting that very few of their customers will say,
“Honey, I was in the mood for love tonight for $15, but for for
$18…let’s go see a movie.”

Of course, I shouldn’t be surprised by the lack of economic clarity
because the drug companies clearly don’t understand some basic economic
concepts. For example, a Pfizer spokesman, asked to defend the
aggressive price increases, responded that “the vast majority of our
customers receive some type of legislated or negotiated discount off
our announced list prices.” Gosh, I guess he never thought about the
fact that if you get a 10 percent discount off list price, and the list
price goes up 20 percent, the price you pay also goes up 20 percent!

Some other big corporations may also need economics tutoring. The Journal reported
that HCA Inc., “one of the largest hospital owners in the
country,…expects to report higher revenue for the first quarter even
though it had fewer hospitals and its admissions declined. It also said
its income before taxes had nearly doubled.” The Journal attributed
this to HCA raising its prices. HCA declined to comment on its secret
for boosting revenue when the number of total customers plummets. (To
continue our economics lesson, the risk of patients doing some
comparison shopping for heart attack and stroke treatment bargains
isn’t something that keeps hospital execs up at night.)

Oh, wait — you say that HCA, Lilly Pfizer and the rest of them actually
have a sophisticated understanding of elastic and inelastic demand,
monopoly pricing power and short-term profit maximization? So maybe
it’s the employers, health plans and government folks who need to grab
an economics textbook. And when they look up, if they notice a certain
something HCA and the drug company honchos have that they lack, they
may want to pop one of those little blue pills. Because it’s pretty
clear who’s getting…well, you know.

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Emily KaminskikennyMarkBFD Recent comment authors
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Emily Kaminski
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Thanks for the attention to this. This should have been a bigger news story especially as the pharmaceutical companies have an interest in how health care is reformed and soaring costs are a big problem. I’m not all that surprised. These businesses don’t have to respond as immediately (or at all) to the same economic pressures that other businesses do because consumers don’t talk about prices of prescriptions or other healthcare needs the way that they do with almost every other product on the market. This is somewhat expected with the personal nature of a lot of medications and services… Read more »

kenny
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Mark
Guest
Mark

Further confirmation that there is no ‘free market’ in medicine but only a complex set of monopolies… time for more regulation.

BFD
Guest
BFD

Ever heard of a “lead?” As in, get to the point?
Blah, blah, blah … no wonder Air America radio went bankrupt …