Arnold Kling  

Drug Price Discrimination?

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Derek Lowe compares the fact that prescription drugs cost less outside the U.S. to the phenomenon of price discrimination by airlines.


Most consumers [of pharmaceuticals] in the US don't realize that they're subsidizing the lower prices for everyone else, whereas I think most high-fare airline passengers have internalized it. They at least wouldn't be as surprised by it if it were brought to their attention, and there's no move afoot to force the airlines to lower all seats to the price of a coach ticket.

In the case of airline tickets, a business traveler who buys a ticket for a convenient flight a few days before departure presumably has a high willingness to pay. In the case of pharmaceuticals, it is different governments, notably Canada, that protect their citizens from having to bear the research costs of pharmaceuticals. The price discrimination in the airline industry represents the choices made by the producers. Not so with pharmaceuticals.

For Discussion. If drug manufacturers were to engage in price discrimination, what sort of approaches would be profitable and sustainable?



COMMENTS (9 to date)
Jim Kling writes:

Interesting. So could this also be used as an argument against a flat tax? The current tax bracket has the high end consumers carrying the rest of us.

Paul Jeanne writes:

Related to this issue is the Canadian drug reimportation controversy. I have been surprised to see traditional defenders of free trade (Cato Institute, Wall Street Journal) argue against it in the case of drugs reimported from Canada.

It seems to me that drug makers only have themselves to blame. After all, no one is forcing them to sell at prices so low that reimportation is profitable. If they don't like the price Canada is willing to pay, they can simply walk away from the deal. Isn't this the "law of one price" in action? Over time shouldn't we expect prices to rise in Canada and fall in the U.S. until there is the geographic arbitrage diappears?

dsquared writes:

What I'd like to see is some version of this argument that makes explicit allowance for the levels of subsidy given to basic pharma research by governments out of general taxation. I suspect that Canada would still come out as a free-rider, but that France might not.

Arnold Kling writes:

Paul,
You write as if drug prices in Canada were set in a free market. They are not. Canada's government sets the price of drugs, and they negotiated a price close to marginal cost. If reimportation happens to a large enough extent, the drug companies should walk from Canada.

Eric Krieg writes:

It isn't just that the drug companies negotiated with the Canadian government, it is that they negotiated in good faith under the assumption that the drugs were for CANADIANS. If now the Canadians think that they're going to sell to Americans (and that's what the provincial government of Alberta is gearing up for by encouraging internet pharmacies), then the drug prices need to be renegotiated to take into account American sales.

It seems to me that the drug companies have every reason to play hard ball with the Canadians. The Canadian health system is a basket case already (SARS in Toronto proved that), I wonder what would happen if the drug companies embargoed the whole country?

dsquared writes:

>>The Canadian health system is a basket case already (SARS in Toronto proved that)

Really? How? How did a single localised outbreak of a highly infectious disease which was brought under control within a fortnight, prove anything other than "stuff happens"?

Eric Rescorla writes:

Of course, it's possible that reimportation *is* a form of price discrimination. The people with high willingness to pay just buy the drugs on the open market, whereas the people with low willingness to pay reimport. If that's the case, it wouldn't be in the drug company's interet to stop reimportation, just make it inconvenient enough so that it doesn't cannibalize their market.

Eric Krieg writes:

One outbreak of SARS is an example of "stuff happens". That's not what happened in Toronto. They had two outbreaks, spread out a few weeks apart.

Our health care system is screwed up because we spend too much. The Canadian system is screwed up because they don't spend enough. In one, you're broke, in the other you're dead. I know which one I prefer.

Patrick R. Sullivan writes:

Courtesy of Mark Steyn:

___________-quote___________--
February 11th: The WHO issued its first SARS health alert, which was picked up by the American ProMed network, which distributed it to Toronto health authorities. The original alert has been described as "obviously significant" by those who saw it.

February 28th: Kwan Sui-Chu, having recently returned from Hong Kong, goes to her doctor in Scarborough complaining of fever, coughing, muscle tenderness, all the symptoms of the by now several ProMed alerts. As is traditional in Canada, the patient is prescribed an antibiotic and sent home.

March 5th: Having apparently never returned for further medical treatment and slipped into a coma at home, Kwan Sui-Chu is found dead in her bed. The coroner, Dr. Mark Shaffer, lists cause of death as "heart attack." Later that day, Kwan's son, Tse Chi Kwai, visits the doctor, complaining of fever, coughing, etc. He too is prescribed an antibiotic and sent home. Later still, the son takes his wife to the doctor. Likewise.

March 7th: Tse Chi Kwai goes to Scarborough Grace, and is left on a gurney in Emergency for 12 hours exposed to hundreds of people.

March 9th: Scarborough Grace discovers Tse's mother has recently died after returning from Hong Kong. But Dr. Sandy Finkelstein concludes, if Tse is infectious, it's TB.

March 13th: Tse dies, and Scarborough Grace calls Dr. Allison McGeer, Mount Sinai's infectious disease specialist, who finally makes the SARS connection.

March 16th: Joe Pollack, who lay next to Tse on that Scarborough Grace ER gurney for hour after hour, returns to the hospital with SARS. He's isolated, but not his wife. Later that day, while at the hospital, Mrs. Pollack comes in contact with another patient who's a member of a Catholic Charismatic group.

March 28th: At a meeting of the Charismatic group, the ailing Scarborough patient's unknowingly infected son exposed 500 others to SARS ...

....
In rural China, SARS got its start through the population's close contact with farm animals. In Hong Kong, it was spread by casual contact in the lobby, elevators and other public areas of the Metropole Hotel. Only in Canada does the virus owe its grip on the population to the active co-operation of the medical profession. In Toronto, the system that's supposed to protect us from infection instead infected us. They breached the most basic medical principle: first do no harm. Even after they knew it was SARS, Scarborough Grace kept making things worse.

.... A chronically harassed, understaffed, underequipped system reaches reflexively for routine diagnoses, prescriptions. Did Kwan Sui-Chu's doctor, an Asian Canadian herself with many Asian patients, get the Toronto Public Health alert? Is it normal for coroners to mark "heart attack" as cause of death for elderly patients even when they've been prescribed antibiotics for a new condition in the last week? Why, after Scarborough admitted Mr. Pollack, whom they knew to have been infected during his previous stay with them, did they allow Mrs. Pollack to circulate among other patients? Why did Scarborough compound its own carelessness by infecting York Central?

Most of what went wrong could have been discovered by a few social pleasantries: How's the family? Been travelling recently? The so-called "bedside manner" isn't just to cheer you up, it's meant to provide the doctor with information that will assist his diagnosis. In Canadian health care, coiled tight as a spring, there's no room for chit-chat: give her the antibiotics, put it down as a heart attack, stick him on a gurney in the corridor for a couple of days. Maybe you could get service as bad as this in, oh, a Congolese hospital. But in most other Western health care systems the things Ontario failed to do would be taken for granted. There might be a lapse at some point in the chain but not a 100% systemic failure all the way down the line.
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