When a Conservative Business Paper Questions Pharma's Pricing

It actually shouldn't be too surprising when the bastion of American corporate capitalism, Rupert Murdoch's Wall Street Journal, prints a front-page article deriding the pharmaceutical industry for its regular, cartel-like price increases.

After all, even before the Chicago School of economists and Ronald Reagan sanctified the market as the ultimate standard of the good life, the Journal was denying reality by doing the same thing. For such true believers, the market is the be-all and end-all. A long-time member of the Journal's editorial board, for example, has often expressed the opinion that a market economy is more important than democracy.

Such idolizing of markets demands ignoring the fact that truly "free markets" exist nowhere in the world and they never have. In fact, markets couldn't function at all without governments to grant and enforce certain preconditions (e.g., patents, copyrights, contracts) and thousands of other "special favors" such as tax benefits, legal protections, infrastructure and public education.

But even for true believers, pharma's flagrantly extortionate violation of the market seems too much to endure. So two weeks ago Joseph Walker authored a page-one Journal article that addressed pharma's price gouging head-on.

In recent weeks other media outlets and several political figures have been chastising pharma's pricing, but Walker pointed out their criticism centers on a couple of high-priced, novel drugs (e.g., Sovaldi, the PD-1's) and some older drugs whose new owners abruptly jacked up prices. After examining the past five years of prescription drug sales, Walker showed those few cases of huge percentage price increases are not the real problem.

Instead he found that consumers, taxpayers, and employers are being gouged by a pharmaceutical industry whose profits increasingly derive from less dramatic, but steady price increases, even as demand and sales volume for prescription drugs have steadily declined.

Over the past five years pharma increased prices on its 30 top-selling drugs by 76%, more than eight times greater than overall inflation. Among the 20 leading pharma companies, 80% of their net profit increases between 2010 and 2014 resulted from price increases. And these price increases occurred even as the total number of prescriptions filled by customers declined.

So how has pharma been able to regularly raise its prices well beyond inflation levels while demand falls, a clear contradiction of normal market behavior?

The industry's lobby, the Pharmaceutical Research and Manufacturers Association (PhRMA), responded to this question from Walker with their usual evasions and lame excuses. Their first point amounted to saying that people should ignore price increases because using more drugs at earlier stages preempts larger costs down the line.

While earlier drug use may produce long-term cost savings in some cases, by no means does it apply to everyone in all circumstances. Yet the pharma lobby wants everyone to take more pills and injections at steadily rising prices.

PhRMA's second justification for counter-market price increases is the old line that it takes the me-too's (new, expensive drugs that are no better than older, less expensive ones) to fund research on new compounds that can genuinely advance the standards of care.

That contention was considered and dismissed in a Labor Day column here that examined findings from a university study.  That research showed no connection between high prices and the amounts of drug research conducted by various countries.

Walker implicitly recognized that pharma's lobby is full of it and he offered two alternative explanations for the industry's ability to defy the market, one of which is correct and the other not.

His valid explanation is that pharma companies possess monopoly power to raise prices, regardless of demand, because governments grant them exclusive patents, thereby restricting the supply as a result of preventing competition from other companies.

Walker's other explanation, one that he got from an MIT economist, is rightwing-libertarian dogma that doesn't hold water.

In this version, pharma is able to gouge prices because of health insurance that insulates both patients and physicians from the actual costs of medications.

This insulation idea led the Cato Institute and other, protect-the-rich interests, to propose schemes for lowering drug costs by making people pay appreciably larger percentages of their drug bills. In public policy circles, this remedy is known as the "skin in the game" solution. The problem with it, as with most of what passes for thinking from the rightwing, is that the evidence shows it to be nonsense. In this case, the RAND Corporation, a California think tank that works for corporations and governments, found that when people have to pay more for health care, they don't become smarter shoppers. Rather they become non-shoppers by avoiding necessary care.

At the same time, more holes keep appearing in this health insurance insulation layer that supposedly hides the real costs. As premiums rise steeply, consumers and employers are starting to realize that if drug and other health care costs don't bite them this year, the bills will come due next year in the form of higher monthly premiums.

So aside from patents, what else does account for pharma's ability to defy market forces?

Well for one thing, government has made itself a subverter of any drug market by either handicapping or totally relinquishing its own, enormous purchasing power. Medicare is totally prohibited by law from even negotiating drug prices, while Medicaid and the Veterans Administration each buy drugs with one hand tied behind their backs. Although the two programs do pay lower drug prices than Medicare, they still pay substantially more than any of the national health systems elsewhere in the world.

Other factors also allow pharma to thumb its nose at the market. These include the fact that in some cases, consumers cannot defer their drug purchases.

Then there is what economists call an intrinsic "asymmetry of information" between pharmas and its customers. Most physicians and patients don't know when particular medications are crocks, that is, not worth what the pharma companies are charging. That inability of customers to assess value also lets drug companies operate without market constraints.

But at least the WSJ is going in the right direction by showing that not only does the pharma emperor lack the clothing to justify its prices, it is running through town in this buck naked way and openly assaulting people.

The Journal's decision to expose pharma's monopolistic behavior shouldn't come as a surprise, not only because the paper's owner worships markets, but because it represents big corporations, their managements and wealthy people in all sectors of the U.S. economy. Pharma's defiance of decent market behavior allows it to unjustifiably prosper at the expense of these other sectors, companies and individuals.

The Wall Street Journal, in its own way, is similar to the commissioner of a professional sports league who seeks to enrich all the bandit owners that gave him the job. To accomplish that goal, a commissioner cannot allow one rogue franchise to jeopardize the enormous profits of all the others. In this respect, pharma is to health care what Donald Sterling – the previous owner of the Los Angeles Clippers – was to professional basketball.

The Journal is fulfilling a commissioner's duty by calling out the harmful behavior of one franchisee.  But unlike the NBA's commissioner who denounced Sterling and then forced him to sell the Clippers, even Rupert Murdoch cannot expel and replace a rogue industry such as pharma that is enriching itself by making employers and individuals pay too much for medications.

That's something the American public will have to do for itself. Until then, people will continue to pay the unconscionably high prices for medications that their complacence deserves.

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