Not from the Onion.
When nearly 100 drugs became scarce between 2015 and 2016, their prices mysteriously increased more than twice as fast as their expected rate, an analysis recently published in the Annals of Internal Medicine reveals. The price hikes were highest if the pharmaceutical companies behind the drugs had little competition, the study also shows.
This is from Beth Mole, “When supplies of drugs run low, drug prices mysteriously rise, data show,” ars technica, September 24, 2018. I looked in vain for any hint of irony or sarcasm in the piece but failed to find it. Cut the use of the word “mysteriously” in both the headline and the paragraph quoted above, and it’s not bad reporting. What makes it bad reporting is that the author and possibly some of the people she quotes think that when the supply falls, the upward effect on price is mysterious. Of course, it’s not. Also notice that the there’s less of an effect on price when the supply of one medicine falls but there are other close competitors, just as one would expect.
And Ms. Mole deserves no criticism for simply reporting the policy recommendation of the authors of the study. They state:
If manufacturers are observed using shortages to increase prices, public payers could set payment caps for drugs under shortage and limit price increases to those predicted in the absence of a shortage.
If by “public” the authors mean “government” and if their goal is to cut government spending on health care, then their policy could make sense. The pay caps would cause drug sellers to sell to others who are willing to pay more and people insured by government insurers would do without or, at least, do with less. They shouldn’t kid themselves, though, if indeed they are kidding themselves, that this would be one effect of the policy they advocate.
Can we salvage their argument to show that such a price cap wouldn’t necessarily have the effect I claim? I think so, but it’s a stretch. Here’s how it would go. It’s a straightforward exercise to show that when a price cap below the monopoly price but above the marginal cost is imposed on a monopolist, output expands and there’s no shortage. But if the cap were imposed only on what government payers could pay, then it’s not straightforward. The effect is likely to be the one I claimed earlier: rationing to the government payers with less quantity to them than would have been provided without the price caps.
HT to someone on Facebook, but I’ve forgotten who.
READER COMMENTS
TMC
Sep 30 2018 at 3:12pm
ars technica gets a lot of the tech stuff wrong too. It’s a pretty lightweight tech site with some interesting articles sometimes.
Mark Z
Sep 30 2018 at 10:17pm
Ars technica also seems to economics wrong pretty consistently.
Alan Goldhammer
Sep 30 2018 at 4:00pm
Unfortunately the Annals of Internal Medicine article is behind a paywall so I cannot look at the underlying data to see what is going on. When I was at PhRMA this is one of the issues I regularly dealt with and was often interviewed on drug shortages. Of course being at a trade association we never commented on pricing issues because of the legal problems relating to antitrust matters. The majority of these types of shortages are for sterile products where the manufacturing facility is out of compliance for such products (I don’t think any of us want non-sterile or adulterated drugs injected into us). Remediation of the manufacturing issues may or may not be trivial. If there is a long term shortage, either an alternative supplier (if available) or drug must be sought. It is entirely possible as the authors note that the secondary drug may be costlier.
The “public payers” that David highlights in the above quote are more than just the “government” (though the only direct “government” payers are Medicaid and the VA; Medicare drug payments are handled by private insurers). I suspect that the definition includes private insurers who provide drug benefit payments to their clients.
This is a complicated issue and it is a shame that the article is gated. This is in contrast to important articles published in either JAMA and The New England Journal of Medicine who often make such articles publicly available.
Dylan
Sep 30 2018 at 5:29pm
If you were familiar with Beth’s writing I think you would give the odds that the headline was ironic much better than 50/50 odds, although it isn’t clear she wrote the headline. But she is a master of the completely dry pun, and other touches without as much as a wink to let you know she’s kidding, so…I’m giving her the benefit of the doubt on this one.
Having read a number of her other pieces on health care and policy, I doubt you would agree with her policy positions (as much of them as I’ve been able to infer from her writing) but her humor is another story.
Dan Culley
Sep 30 2018 at 6:46pm
In fairness the Ars Technica commenters on that article were far ahead of you. Pretty much unanimously their response was: in what universe is it mysterious that prices go up when supply goes down?
David Henderson
Oct 1 2018 at 11:57am
I just looked. Right you are. Good for them.
Mark Z
Sep 30 2018 at 10:20pm
It’s possible the ‘mysterious’ was more meant to suggest nefarious behavior on the part of the drug companies. Companies are supposed to do the ‘nice’ thing and keep prices constant even if supply decreases, and the ‘coincidental’ price increase is an indicator of malicious profiteering on the part of those dastardly drug companies. Again, considering it is Ars Technica…
robc
Oct 1 2018 at 1:27pm
If they failed to raise prices wouldn’t that open the companies up to a class action shareholder lawsuit for failing in their fiduciary duties?
James Smith
Sep 30 2018 at 11:08pm
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David Seltzer
Oct 1 2018 at 6:12pm
Is the first law of economics…scarcity…really mysterious? Even accepting Ms. Moles’ droll humor?
Robert EV
Oct 1 2018 at 11:44pm
The key terms in that article seem to be that price increases more than double in magnitude after the shortage (ergo, after the shortage has resolved).
Without the paywalled article it’s impossible to tell if my reading or your reading is correct.
But why would the rate of change of price increases increase after the resolution of a shortage? Medication typically isn’t temporally fungible, so it’s not like more of it is being purchased to make up for what couldn’t be purchased during the shortage. Unless I’m wrong and this is what’s happening (scarcity encouraging hoarding just in case?).
I’ll tentatively blame this on pre-determined, 5-year plan EBITDA goals that weren’t being met during the shortage, and the artificial need to make up this shortfall to avoid being fired by the CEO as another way of hitting the EBITDA goal. And hey, maybe even get a bonus out of it since you’ve possibly just increased the new baseline EBITDA for the drug.
Cody Custis
Oct 2 2018 at 3:08pm
The problem not addressed is that, generally, pharmaceuticals are essentially “club goods” in that they are non-rival in consumption but can be excluded through patent protection and distribution channels. Most pharmaceuticals have a marginal cost of production in the penny range, with massive fixed costs.
The economists at Econlib mock physicians and tech journalists, but make economic arguments based on a model of normal goods. Because of the club good nature of pharmaceuticals, it makes no sense that there would be a supply shortage, any more than a shortage of television sets to view pay per view UFC events or shortage of Rolling Stones Pandora streams.
David Henderson
Oct 2 2018 at 5:06pm
You wrote:
They are not non-rival in consumption. A pill you swallow is one I can’t swallow. The R&D is rival in consumption but the pill is not.
You wrote:
You’re exaggerating on the penny issue but you’re that the fixed costs are massive and are the main story. That’s my point above about R&D.
You wrote:
The problem is that the paper is gated and so I don’t know what they mean by a “shortage.” I do know that sometimes, due partly to regulation and due partly to the vicissitudes of production, a production plant can fail to produce the number of pills that the drug company was planning on. In that case, there is less of a stock and the drug company can raise its price and sell all of this reduced stock. Your TV set example is apt but it doesn’t make your point. If a TV production facility shuts down and if the company producing the TVs is the only one, it may well raise its price.
Daniel Cooke
Oct 25 2018 at 5:25am
The mystery of supply and demand. How in the world do drug prices increase when the supply of said drugs is at a shortage? Not only is this question somewhat self-explanatory, but you also learn in intro to Micro Economics about the relationship between the downward sloping demand curve and the upward sloping supply curve. It is important to understand this relationship to be able to intelligently function in the “real world” and it is quite scary that some people cannot.
Demand is a downward sloping curve as the quantity of a product demanded is reliant on the price of said product. If the price is high, less of the product will be demanded, while if the price is low, more of it will be demanded. It seems that the author of the original section of the blog was experiencing this aspect but had no idea about how a supply curve works. The supply curve is an upward sloping curve in which the quantity of product supplied drives the price of such product. As the supply of a product increases, the price asked decreases and vice versa. If the reporter would have known about this, her article would have been better informed and their life in general would be better.
It is one thing to know this information, but it is completely different to be able to apply them to life. We see through this article that the reporter is incapable of doing this. I believe that it is highly important to understand some capacity of economics to be able to function in society as it is important for the buyer to understand the market and how it works in order to be able to intelligently make purchases.
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