Arnold Kling  

Drug Prices

Inelastic Demand for Gasoline... Fama vs. Thaler...

Can we lower drug costs by importing from Canada? Perhaps not, according to this story.

Canadians must stop Americans from using Internet pharmacies to raid its medicine chest or face a drug shortage, a coalition of Canadian groups representing seniors, pharmacies and patients has warned.

The groups, claiming to represent 10 million Canadians, or about one-third the population, called on the Canadian government Monday to ban prescription drug exports.

This is why the Cato Institute's Roger Pilon says that drug re-important might not have the consequences that its supporters expect.

with the ban lifted, and the threat of underpriced drugs flooding the American market, companies would be "forced" to adjust. They could offer a country lower prices, but the country would have to police its exports, since America would no longer be policing imports. That places the incentive where it belongs, on the country benefiting from the bargain.

In The New Yorker, Malcolm Gladwell writes,

As the economists Patricia Danzon and Michael Furukawa recently pointed out in the journal Health Affairs, drugs still under patent protection are anywhere from twenty-five to forty per cent more expensive in the United States than in places like England, France, and Canada. Generic drugs are another story. Because there are so many companies in the United States that step in to make drugs once their patents expire, and because the price competition among those firms is so fierce, generic drugs here are among the cheapest in the world. And, according to Danzon and Furukawa’s analysis, when prescription drugs are converted to over-the-counter status no other country even comes close to having prices as low as the United States.

Read the whole thing. Thanks to Nick Schulz for sending me the pointer.

Laurence Kotlikoff takes on what Bryan Caplan would call anti-market bias against the drug companies. Of drug-company basher Marsha Angell, he writes

she claims the drug companies are super profitable, don't spend enough on R&D, waste money on marketing and advertising, don't generate enough new discoveries, and free-ride on government research support. Rather than debate these dubious propositions, let's assume, for argument's sake, that they are all true. In this case, Dr. Angell should set up a new drug company or engineer the buyout of an existing company. With her new company, she can choose to spend more on R&D, make more discoveries, bring more drugs to market, cut back, if not eliminate, marketing and advertising, benefit from government research support, and end up with higher profits than current drug companies.

In contrast with Dr. Angell's prescription, Forbes reports on an economic approach to lowering prices and profit margins in the drug industry.

George Mason University economist Alexander Tabarrok has a different idea: Abolish FDA-required efficacy testing altogether. Such testing is a big reason it typically takes 10 to 15 years from the time a new drug is discovered until the FDA approves it for sale. In Phase I trials a company studies how a drug moves through the body and its safety for human use. Then a drug enters Phase II and Phase III trials, which typically take years and focus on efficacy as well as safety. The long wait can cost lives and runs up new-drug costs--to an estimated $900 million per successful drug.

Thanks to Tyler Cowen for the pointer to the Forbes piece. Later on, the Forbes piece says,

Tabarrok and Klein also offer some alternative proposals at One is to make all FDA testing optional. Drugs that didn't go through the process would be labeled "Not FDA Approved." Under this approach, they say, "the FDA would become a genuinely voluntary institution, much like Underwriters Laboratories." Another idea is for the FDA to award letter grades, A to D, to claims made by drugmakers, much as it is considering doing for health claims for foods and dietary supplements. The FDA could still have its say, but wouldn't be able to impose long delays, since a new drug could be marketed at first as "unrated."

In other words, replace regulation with what I call a reputation system (borrowing the term from Howard Rheingold).

For Discussion. If we could replace drug prohibitions with reputation systems, why not also replace medical license requirements with reputation systems?

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The author at The Club for Growth Blog in a related article titled Friday's Daily News writes:
    Relevant News and Commentary And the Budget Says… - Larry Kudlow, National Review Forbes Touts Tax Cuts, Says Economy Growing - A. Drury, TJN Drug Prices - Arnold Kling, EconLog Codewords - Adam Smith Blog Who Bears The Tax Burden... [Tracked on October 22, 2004 9:13 AM]
COMMENTS (9 to date)
quan nguyen writes:

I do not see any need to "replace medical license requirements". We currently have the "reputation system" in place.

As I recall, recent reports show that around 40% of patients use alternative medicine in the past 12 months. Supplement market is huge for most common ailments or prevention. Hospitals in India, Singapore, China, South American, and Southeast Asian countries have been attracting paying foreign (including American) patients in increasing large number due to their high standards and low costs.

Thus, medical licensees in this country are judged as a group like everybody else on reputation. Take away the licensing authority of the medical societies, whom the public rely on? Consumer Reports or Ralph Nader's organization?

"This is the pilot speaking. We have a medical emergency onboard. Is there a five-star rated health practitioner aboard? no license needed of course."

Lawrance George Lux writes:

I advocate a Bonding process which replaces Malpractice insurance, as I am sure Underwriters will do the best job of performance appraisal. I suggest a minimum bond of $5m. Failure of appropriate Bond gaining an individual ten years in prison without benefit of Probation or parole. Punitive damages will be limited to the size of the Bond, though the Individual's income can be garnished to pay for remedial costs.

The prior scope of your Post needs examination. The only effective manner for Drug Patent registration may be a two-tier system, where a awarded, stipulated Patent royalty is granted until registered R&D costs are recouped, then a much lower Patent royalty is granted thereafter--posssibly only minescule in amount for perpetuaty. The incentive remains, but the amounts allowed are regulated. lgl

Bernard Yomtov writes:

And how, exactly, is the FDA going to assign these letter grades without clinical trials?

Frankly this is market-worship at its worst. Information is not free, and relying on a "reputation system" for medical practitioners or drugs is likely to have huge costs.

J Thomas writes:

Thank you for bringing these facts to light.

Bernard Yomtov writes:

Quan Nguyen raises a serious point that I overlooked in my previous comment.

A reputation system depends on consumers making informed choices. In an emergency, how is the patient going to make such a choice? Doesn't there have to be a minimum standard that practitioners must meet, and isn't that what a licensing system aims at?

Kevin Carson writes:

Portraying Big Pharma, the poster child for state capitalism and corporate welfare if their ever was one, as a victim of "anti-market" bias takes chutzpah. Do away with their patents, the half of their R&D funding that's carried out on the taxpayer's teat, and their reliance on the FDA and the licensing boards' "standards of practice" to suppress competition, and I'll take that seriously. The drug industry has about as much to do with the "free market" as ADM's Dwayne Andreas, who said "The competitor is our friend; the customer is our enemy."

spencer writes:

The entire thing about importing drugs from Canada is a tempest in a teapot that does not meet the basic test of common sense. Importing drugs from Canada is taking advantage of a loop hole. As long as a few people do it they can get away with exploiting the loophole. But once a significant number of people try to import drugs from canada the system will break down. Put the numbers for Canada vs the USA in perspective and you will see that the issue is not worth your time thinking about.

Ken writes:

"And how, exactly, is the FDA going to assign these letter grades without clinical trials?

Frankly this is market-worship at its worst. Information is not free, and relying on a "reputation system" for medical practitioners or drugs is likely to have huge costs."

Having a 10-15 year ban on new drugs also has huge costs.

There are situations where people will need to take drugs even if they haven't been through the whole testing process - is it right for the FDA to deny them their shot at survival and seal their doom? I think not.

"A reputation system depends on consumers making informed choices. In an emergency, how is the patient going to make such a choice? Doesn't there have to be a minimum standard that practitioners must meet, and isn't that what a licensing system aims at? "

Well, a reputation system, just like a licensing system, only requires someone to make informed choices and prove themselves trustworthy, and not necessarily the people having the emergency. The only difference between a reputation system and a licensing board is that the private operators lack the power to make their word into law, and thus must prove their judgements trustworthy. And long before you have an emergency, you will have plenty of opportunity to decide whose judgement you will accept.

Ralph Lee writes:

And how do you propose to measure the quality of a practitioner? I'm fairly ignorant of health economics, but if you revoke or "downgrade" a medical practitioner for each "error", it would seem like providers of health care would see incentives to perform only risk-free procedures, thus starving the market for procedures that can possibly give rise to such penalties. In addition, grading would seem to only punish those who have wronged (intentionally or not), instead of rewarding those who do well.

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