Free markets are always the best way to set prices where supply and demand meet. This simple rule of economics applies to all prices, including prescription drug prices.
The best way to serve the purpose of getting people lifesaving drugs in times of need is to allow the market to function and to avoid price fixing schemes that inevitably lead to shortages and rationing.
Economics 101 teaches us that high demand for drugs will help drives up drug prices. Higher prices will motivate companies to crank out drugs to meet the high demand. Sadly, there are organizations that use flawed formulas to recommend drug prices that, if implemented, will end up hurting consumers.
One organization that attempts to replace market forces with recommended drug prices is the Institute for Clinical and Economic Review (ICER). According to the website, the ICER is “an independent non-profit research institute that produces reports analyzing the evidence on the effectiveness and value of drugs and other medical services.” This calculation puts politically motivated individuals in the role of market forces. This control of market prices is also known as socialism.
Earlier this month, ICER came out with a flawed review of the coronavirus drug Remdesivir. The ICER put out a recommendation very close to the time the drug was granted emergency use authority as a treatment for the coronavirus. They used two arbitrary pricing models, a cost effective and a cost recovery. These two models ignore market forces and will lead to shortages if allowed to be imposed by government.
The two models used to price the drug are both seriously flawed. The so called “cost-effective” model, recommended a price of $4,500. That is a very low price for this drug and the ICER did not factor into the price the societal and economic benefits of having an effective treatment for the coronavirus.
The so called “cost-recovery” model set a price of $10 for a ten-day treatment. The ICER claimed that most of the research and development (R&D) was completed, because the drug was first developed in the 2003. At that time, it was used to first treat Hepatitis C, and later was used as an experimental treatment for Ebola. The rationale is that since the drug was already created, then there should not be significant R&D costs associated with it. This is a mistake because it is a novel virus and R&D is necessary.
An economist from George Mason University analyzed the study and found critical flaws. Wayne Winegarden wrote in Forbes on May 11, 2020, “According to the report last updated on May 1, 2020, ICER ran two models: a cost-recovery model that claims the price should be $10 for a 10-day course and $5 for a 5-day course; and a cost-effectiveness model that ‘suggests a price of approximately $4,500 per treatment course, whether that course is 10 or 5 days.’ While surrounded by jargon and impressive sounding methodologies, both of these methodologies are without scientific justification because they depend on a litany of assumptions that cannot yet be known.” Flawed assumptions impact the model and sets up a price point that will end up distorting the market.
Winegarden points out a number of problems. One problem was the assumption of no R&D cost that ignored the fact that there was a research need to figure out how effective the drug is against the coronavirus. Another flawed assumption is that the R&D done in the past should be priced at zero. The drug approval system “is predicated on innovative companies receiving a patent for their treatments in order to recoup their capital costs once they are approved therapies,” therefore a zero price for R&D would punish drug companies. This price point also ignores the fact that this drug may help restart an economy experiencing tens of millions of newly unemployed and an economy on the brink of depression. The ICER explicitly ignored societal benefits. Modeling is far inferior to using market forces to determine a price, especially when the model used to fix the price of the drug is way off.
The company that produces the drug, Gilead Sciences (GILD), has been helping to quickly respond to the crisis with donations and being open with their drug patents. They are donating the entire stockpile of the drug, which they actually ramped up production of back in January when they first thought it had potential. Also, the company has granted authority to numerous generic drug manufacturers to make the drug so it can be used in over 100 countries around the world. To price fix in a way that will hamper further production from the company will serve no useful purpose.
Socialism in drug pricing will end up hurting Americans impacted by the coronavirus because it will end up leading to scarcity of the drug and rationing. Let the marketplace perform.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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