• The limits of the free market and health care

    I got a lot of email about yesterday’s post on Tricor. Many of them defended the actions of Abbott Labs. I think this one captures the flavor of them:

    What you don’t understand is that this is how the free market works. Abbot Laboratories is doing just what a company is supposed to do. They’re making money for their shareholders. They didn’t break any laws. They didn’t do anything wrong. They’re making money to compensate for the high cost of research into new drugs like Tricor.

    Well, first of all, I think the fact that they settled lawsuits for $300 million means they might have done something wrong. But that’s not what I want to focus on.

    Second of all, Abbot didn’t do the research into Tricor. They licensed it from another company. So I don’t know what we need to compensate them for. But that’s not what I want to focus on either.

    I want to focus on the free market argument. See, I’ll concede that this is how the free market works. But if I do, can those of you who wrote me concede that therefore maybe the free market isn’t the answer to “how do we reduce health care spending”?

    Cause I agree that this is how companies act. I really do. But by maximizing their profits, Abbott Labs is costing the US an extra $700 million each year.

    The FDA could change any number of policies, though, to make this better. They could make new regulations to eliminate the “moral hazard” of the 30-month grace period when a patent infringement suit is filed. The FDA could decide not to allow drug makers to continue to use the same name for simple reformulations of a drug, making it harder to get everyone to make the switch. These would both result in reducud health care spending. But that’s “interfering” with the free market.

    We could also allow pharmacists to switch people to “bioequivalent” doses of generics even if they’re not exactly the same dose. But that’s “interfering” with the free market.

    We would start using carrots and sticks to get physicians to stop prescribing the expensive name brand drugs when the generics are pretty much exactly the same. But that’s “interfering” with the free market.

    You can support the free market here; that’s fine. But can you then acknowledge that “unleashing the free market” isn’t always the answer to reducing health care spending?

    UPDATE: I should have put “free market” in air quotes every time I used it. YES, I know this isn’t a real free market. Health care will never be. But people in the political world use “free market” to mean “not government” and making any change that goes against your interest is portrayed as “interfering”. I should have been clearer. My bad.

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    • There’s nothing inherent in the nature of free markets that includes our patent laws, including what’s covered, the length of protection (i.e., government grant of monopoly status), etc.

      Dean Baker argues that a free market would not include any patent protection and that a free market in pharmaceuticals would save us hundreds of billions in healthcare costs.

      • There’s some truth there. But the patent protection isn’t even there anymore, and still an unreal number of people are on the branded drug.

        • There appear to be two issues here, if I read your earlier post correctly,

          First, Abbott is using the patent system, litigation system and FDA to maintain exclusivity on specified dosages (or the like) of the drug. All of this is governmental action rather than free market.

          Second, there is the issue of doctors prescribing the protected Abbott versions rather than the much cheaper, and seemingly medically equivalent, generic versions. This appears to be the free market at work. However:
          – as you say, the market is not working well if doctors are prescribing a more expensive version for no good reason
          – due to its government abetted exclusivity, Abbott has tremendous incentive to induce doctors to prescribe its versions. I would not be surprised to learn that Abbott is acting to cause doctors to prescribe its versions and that its actions are not actions we would associate with a well functioning free market (I have no evidence other than motive, opportunity and result).

          • The “free market” is often companies and individuals doing the best job they can to make money. There will never be no regulations. So the “free market” often means using those regulations to make a profit as best you can. This does not reduce spending.

            • We don’t have a system that’s close to a free market in healthcare. We have an extensive system of regulation that grants certain groups government enforced barriers to entry. These barriers raise prices compared to a theoretical free market (which you’re right, we will never have).

              We then have “free marketers” objecting to any changes that would favor other groups (at the expense of the currently favored groups) as interfering with the free market.

            • You said it better than me in your last sentence.

            • The “free market” is complicit in creating a bias towards the big pharmaceutical companies. Abbott was able to fight the law suit and not affect their bottom line. “Ultimately, Abbott settled each of these lawsuits at a combined cost to the company of more than $300 million, which amounts to less than 4% of total sales to date of Abbott’s fibrate franchise.” This also served the generic company, but absolutely does not serve the public. So ultimately the “free market” is not so free.

        • In some ways (though still inexcusable) I can understand how physicians and patients can be duped into staying on name brand drugs. I think pharma strategies like coupons and samples play a big role in such schemes. For example, I could totally see a patient on branded Tricor-1 coming in and being given samples of Tricor-2 or coupons for Tricor-2 (during the period when there still was no generic), and then on that patient is on Tricor-2 and both physician and patient stay the course potentially because no one realizes that a generic has been developed…
          This is certainly not to excuse physicians who should know better and also realize that there is no free lunch when it comes to prescription drugs (those coupons and samples are getting paid for somehow….). But I can see how it happens.
          What I don’t understand is how the (often) very large organizations that pay the lion-share of that 700 million (Medicare, medicaid, and private insurers) allow such schemes? Why don’t insurance companies just say no (or at least make the process of getting Tricor-2 extremely painful….)?
          I guess this falls under the umbrella of the broader question of “why haven’t insurance companies managed to keep health care costs down?” I’m sure that question requires a complex answer, but in situations like these (where even a non-medical person could probably see that that 700 million was simply wasted…) how did someone end up paying for it!?

    • I was not one who e-mailed you, but I don’t see why “free-marketers” have to get all defensive about this stuff. Your last comment is fine by me. After all, I don’t see how any free marketer would even WANT to defend the free-market as a tool to reduce spending. I might be inclined to defend it for precisely the opposite. After all, the free-market has allowed spending on mobile computing to explode. The free-market has allowed spending on leisure activities to increase. I don’t think personally this is the right argument to be having, I am no expert on Abbott Labs so cannot weigh in on what went down, but I don’t see why free-marketers have to knee-jerk defend their work. And you know, even if the Abbott incident is a black mark for markets, that does not imply that markets ipso facto suck. I enjoyed Tabarrok’s thoughts on patent reform in his short e-Book recently.

    • Of course, in an actual “free market”, would “we” really NEED to reduce our health care spending? In a free market, what other consumers do with their resources is none of my business, as long as they’re not harming me.

      I think it’s important to keep in mind that no living American has ever experienced an actual free health care market, so pointing to evidence from our current situation and saying, “See, this is how it would be!” is not altogether fair.

      • Peter,

        Given the realities of healthcare – we’re all only a step away from needing expensive, life-saving care – none but the wealthiest among us has any choice but to participate in a system of insurance, where risk is pooled and costs are spread more or less evenly accross the pool.

        That means that the resource use habits of other consumers do have a direct impact on you, and if they’re used poorly or ineffectively, they will harm you in the form of higher insurance premiums.

        Unless you can afford to completetly self-insure yourself, this is unavoidable.

        • Mike,

          In our current system, you’re absolutely correct. But, again, what we currently have is not a true free market.

          In a true free health care market, my participation in insurance pools would be completely voluntary and determined by only two parties: me and the insurer with whom I am contracting. If I had reason to believe that there were others in that insurer’s risk pool who were behaving in ways that were unduly costing me money, I could terminate that contract and find an insurer who charged less by only providing generic drugs or only paying for interventions that are effective or whatever it was that I thought was the best option for me.

          What it boils down to is that in a voluntary association of the kind that forms in free markets, I can terminate my relationship with people whose habits are adversely affecting me. The only situation in which I can’t do that is if the government is forcing me to mix my resources with those of others. That’s the definition of an unfree market, but under those circumstances, I’d agree that I would have an interest in how others utilize their health care resources.

          • I’m just saying that given the realities of the human health condition, truly voluntary associations, and thus a truly free market, aren’t ever really going to be that widespread.

            I think we agree – we don’t have a free market now, and we probably can’t, so let’s stop pretending and work off of that information.

            • Peter is missing the point. In a “true free market,” yes you could associate and disassociate from an insurance provider if they are providing care to people not as healthy as you. The problem is that that would create two groups, the healthy with insurance and the unhealthy without. Once you become sick, you’d fall into the later. Someone is born with type 2 diabetes, they become uninsurable; asthma, forget about it; etc. Unless you are willing to let the sick die (or believe that charity will come to the rescue) a true free market doesn’t work.

              That’s different than saying we can’t use market forces!

              I use to believe that HSA, free maker, etc were the solution, than I dis a residency and a fellowship and don’t see that working. Listening to the good Dr. Carroll is almost as enlightening (and certainly less tiring!).

    • Abbott was repeatedly given 30 month monopoly power by the government. I fail to see how there is a free market at work here.

    • You wrote;
      “I’ll concede that this is how the free market works”

      No! This is not how a free market works. This is how a rigged market works with the aid of government.

      You wrote;
      “We could also allow pharmacists to switch people to “bioequivalent” doses of generics even if they’re not exactly the same dose. But that’s “interfering” with the free market.”

      On the contrary, this would be a move in the direction of a free market.

      • Perhaps I wasn’t precise enough. I meant that market in health care works where companies are trying to do everything they can to make the most money. That’s not how we reduce spending necessarily.

    • Here’s something I’ve been watching with interest. My daughter’s psychiatrist has her on 4 medications (and she needs all four – not enough space to explain why). One of them is Guanfacine: 2 1-mg tablets in the morning, 2 at night. Allows her to get through the day without the flashbacks to the orphanage. Cost: $14/mo.

      So, I’ve noticed with great interest recently that Shire has gotten Guanfacine branded as Intuniv (4 mg ER) approved for ADHD. Cost (according to Costco’s web site): $215/mo.

      Dr. Carroll, this is up your alley. Have you noticed anyone urging pediatricians to prescibe Intuniv? Any pressure from Shire to NOT prescribe generic Guanfacine?

    • Most other nations have what Canada calls a Pharmacy Price Review Board, which sets the maximum price for any drug.

      This kind of institution that for the very ill patient, buying a drug is what Michael Walzer calls a “desperate exchange” or a “trade of last resort.”
      We should not be shy about regulating prices in these circumstances.

      The complaint will be made instantly that price controls will stifle innovation. The real history of any high-priced drug will tend to destroy this argument.

      But just to be sure, we could give a $10 million award to the inventor of any new drug that is approved by the FDA. After that, the drug would be sold at the price ceiling, which would rarely exceed $100 for a month’s supply.

      This would reward innovation but save the nation billions.

    • I would like to argue that this market is not really free and this is the crux of the issue based solely on one of your statements.

      When you say that to “allow pharmacists to switch people to “bioequivalent” doses of generics” would be “interfering” with the free market solution, that seems counter-intuitive. This seems to be the definition of a free market solution and seems to be the primary reason that the effect you are describing has occurred.

      If people were able to easily change and choose their products and had more “skin-in-the-game” they would search for a better product. It is specifically this regulation preventing this and causing the problem..

    • In virtually every other area of economic activity the best way to maximize profits is to offer better value (some combination of quality and price) than your competitiors are able to offer….unless you are able to persuade the government to grant you special status that insulates you from competition via tariffs, etc. Profit seeking vs rent seeking.

      The answer here is to reform the drug approval and patenting process to reduce or significantly mitigate eliminate rent seeking by pharmaceuticals, not profit seeking via innovation and discovery.