Citing a recent report in the Los Angeles Times, an article in FirecePharma entitled “Some generic drug prices soar despite heavy competition” rises questions on the ability of market forces to reign in drug prices – for example, on the idea that the price of Mylan NV’s EpiPen would not have risen to $614 per 2-pack from about $100 per 2-pack or less in 2007 if the Food and Drug Administration (FDA) had not prevented Sanofi’s and a new product by Teva to come on market, leaving Mylan NV in full monopolistic control, of this blockbuster market.
According to data assembled by the Los Angeles Times, prices of generic drugs can rise sharply even if multiple manufacturers compete for market share. As an illustration, the article cites the generic drug ursodiol for gall stones, produced by no less than 8 manufacturers. “Several years ago, the wholesale price ran as low as 45 cents a capsule. In May 2014, Lannett Co. ($LCI) bumped its price for ursodiol to $5.10 a capsule, a price hike of more than 1,000%. Rather than keeping their own generic versions of ursodiol low to steal market share, each competitor followed Lannett’s lead and priced their versions the same or close.”
I doubt that many economists would have predicted this outcome, although it must be added that economists have very few theories that reliably predict the future. For the most part we have shelves full of theories one of which usually can explain, ex post, how a particular outcome might have come about.
In this case, for example, we might drag from the shelf the price-leadership model in an oligopolistic market, that is, one usually thought to have only 3 to 5 or so competitors with differentiated products. If in such a market structure there is a dominant producer of a product who raises the price of the product, other competitors may just follow to do the same, rather than go for greater market share. It is an implicit but legal form of collusion. I rather doubt, however, that many economists would apply this model to a market with 8 competitors selling a virtually identical product.
It seems fair to ask members of the health insurance industry and their agents, the pharmaceutical benefits industry, what role they play in this market.
Specifically, if as their agents in the market of health care you cannot manage to exploit to the advantage of your principals – ultimately patients and the insured public— a market with 8 competitors selling a virtually identical product, what can you do for us? How is it that, in real life, the makers or, say, ursodiol can raises prices by 1000% in the face of the putative competition of which economic theorists can wax so mushy? Did you not have enough countervailing market power to put a lower limit to that increase? Why not?
You may respond with what I have come to call the “All-American Knee-Jerk CEO Response (AAKJCR).” It is an almost instinctive reaction by CEOs whenever there is untoward behavior in the private sector. Somehow it always ends up government’s fault. I have heard it hundreds of times from CEOs over the years – and, of course, from many economists — to the point that I now simply anticipate it. (Somehow, for example, it was the government’s fault when AIG sold bond insurance with a potential liability of over $500 billion without setting aside adequate cash reserves to cover claims on that insurance. It’s a bit like going out into a snows storm without gloves, blaming your mother or your wife for the fact that your hands are freezing, because she did not tell you to wear gloves.) So perhaps government is at fault again in the ursodiol case, even though I cannot think in what way. Can you explain why it might be government’s fault?
You may also respond that you actually do not pay the prices that the Los Angeles Times reports, that you in fact do use your market moxie to extract from the manufacturers sizeable discounts and ex-post rebates on top of discounts, so that the net prices you paid the manufacturers actually did decline in the face of competition. Fair enough. But then explain to us what prices patients are made to pay, when they still are under a deductible on their insurance policy or pay coinsurance? Is it the manufacturer’s list price, is it the discounted price prior to rebates, or is it the net price you actually pay, net of rebates which, in my view, would be the most decent approach?
In fact, how is it that actual transaction prices, net of rebates, in the market for health care goods and services are kept so opaque from those who ultimately have to pay for these goods and services? Why, for example, is the market for drugs such an impenetrable mess from the patient’s perspective?
In the meantime, a major lesson for non-economists from the market of generic drugs – and from health care in general — is that when economists assure the public that competition in health care will take care of cost control in health care, it may be a good time to run for the hills, a form of “safe zone.”