Don’t Make Yourselves Scarce: Class Resentment Isn’t the Path to Life-Saving Drugs

Mo

Kevin Williamson from National Review has been writing lately about scarcity and how it applies to health care.  

The 'Right' to Health Care: There Isn't One.
Health Care, from the Top: We cannot vote away scarcity.

As he describes it:

“Scarcity” is a term from economics, and it refers to the fact that there is never enough of anything to satisfy every possible desire …. So we have to come up with a way of dividing up that which is scarce.

In the free market system, we divide up scarce goods through trade—buying and selling.  With healthcare, however, nearly everyone (including people who call themselves conservatives), seems to think we should divide it up through central planning or at least more government intervention. And much of that belief is driven by an irrational bias against profit, as Kevin explains:

There is no substitute for abundance. And the great enemy of abundance is the bias against profit. There is something deeply rooted in us that instinctively thinks we are being abused if someone else makes a profit on a deal. That is a dumb and primitive way of thinking — our world is full of wonders because it is profitable to invent them, build them, and sell them — but the angel is forever handcuffed to the ape.

In the pharmaceutical industry, what we hear are loud complaints about the high cost of drugs without any consideration of why they are high or the benefits that come with those high prices. Without question, the FDA approval process needs to be streamlined to bring down drug companies’ costs. Also, tort reform could help to reduce costs. But the primary driving factor in drug prices is exclusivity—sometimes patents and sometimes statutory.

Exclusivity typically allows a drug company to exclude competitors from selling the same drug for a specified period of time. When drug companies can exclude competition, they can price a drug very high, and often do. Just last week, for example, the FDA approved a new drug to treat ALS, edaravone, which can slow the decline of physical function in ALS patients. Its list price is $1000 per infusion, or about $150,000 a year for treatment.

Sounds outrageous, right? What about the people with ALS who can’t afford it? Shouldn’t they have access to this drug too?  Well, here’s the other side of it.  ALS affects only about 12,000-15,000 people in the U.S.  This market isn’t large enough on its own for drug companies to invest in R&D to develop treatments for this disease, and many others, so we have the Orphan Drug Act, which gives drug companies a 7-year period of exclusivity as incentive to develop drugs for rare diseases like ALS.  And that exclusivity allows the drug company to charge high prices.

Instead of bemoaning the price of this drug, we should consider the fact that we likely wouldn’t have it at all without these exclusivity incentives. To paraphrase Kevin, there is something deeply rooted in us that instinctively thinks we are being abused if someone else has access to something we don’t. But it is, without question, better that some people with ALS have access to this drug (even if not everyone), than that no one does.

And there’s more. Drug development doesn’t take place in a vacuum but, like all technologies, builds on what’s already known. So, discovery of a useful new drug invites further research on more new uses for that drug as well as chemical variations on the drug that can make them even safer and more effective. This happens all the time. Thalidomide was a drug originally used to treat morning sickness. It was taken off the market when researchers discovered it caused birth defects, but was later discovered to be useful to treat multiple myeloma. That research led to the discovery of a chemical analog, lenalidomide, which also treats multiple myeloma.

And the prices of these drugs come down as the exclusivities expire and generic versions are brought to market. This creates abundance and makes drugs more readily available to everyone, just like large, flat-screen TV technology and competition drove the price of them from $20,000 to $4,000 in the early 2000s. Not coincidentally, the high price point of a drug provides a huge incentive for competitors like generic drug companies to develop and bring to market competing products.

This isn’t to say we should ignore market distortions that exclusivity periods create. In fact, we should be looking closely at, and in my opinion, revising exclusivity laws like the Patent Act to create a better balance between promoting innovation and competition. But the knee-jerk reaction to the high pricing of a life-saving drug—that the government must do something to force the price down—isn’t helpful at all. It exacerbates scarcity, when what we need is abundance.  
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