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Gouging The Drug Companies
Peter Huber, a Senior Fellow at the Manhattan Institute, argues that differential pricing for pharmaceuticals benefits the rich and poor alike. Because wealthy nations like the U.S. pay top dollar for new drugs, underwriting medical research and innovation, pharmaceutical companies are able to subsidize cheaper prices for their medicines in poorer countries.
Unfortunately that business model is under assault in the U.S., as more and more policymakers at the state and federal levels declare their unwillingness to pay anything other than a pauper’s price for their miracle drugs.
Drugs should be priced in much the same way as seats on a jumbo jet. The guy in the business suit pays $1,000, the kid with the backpack sitting right next to him $200. The suit pays for most of the fuel, the pilot and the $200 million jet. The kid gets to fly for just a few dollars more than the cost of the extra fuel needed to haul his body and backpack. The 300 tons of fuselage and engine, and the fuel it takes to move them, are all free. For the kid.
This makes perfect economic sense. Any other pricing scheme would be less efficient. The economist, mathematician and philosopher Frank Ramsey proved this in 1927. The efficiency of "Ramsey pricing" has since emerged as one of the most profoundly important principles of our information-centered economic lives.
It is also routinely assailed by people in positions of economic authority. …
Drug-buying collectives and cartels have an unconditionally negative impact on economic welfare. As they coalesce, they transform drug manufacturers into price-regulated utilities. Sure, you can go ahead and invest a billion to develop a new vaccine or AIDS drug. But just like your electric power company, you can sell your product only at a price acceptable to Canada's minister of health. Or maybe Kenya's. Yes, Merck or Pfizer has honestly earned the government-issue, fixed-term monopoly that we call a patent. But when it tries to cash in at the store, it meets a government-established buyers' cartel on the other side of the counter.
“Flat-pricers” as Huber calls them, are determined to lower prices for all the drugs we have now—ignoring that patients in the future will have access to fewer new drugs for cancer, Alzheimer’s, and heart disease as a result. This doesn’t trouble politicians, however, since future lives lost to disease don’t enter into their penny-wise, pound-foolish calculations.
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