[Ip-health] Four Reasons Drugs Are Expensive, Of Which Two Are False - Forbes

Claire Cassedy claire.cassedy at keionline.org
Tue Oct 13 10:55:48 PDT 2015


Four Reasons Drugs Are Expensive, Of Which Two Are False - Forbes

Oct 13, 2015 @ 11:00 AM

Matthew Herper, Forbes Staff
Guest post written by Jack Scannell
(Innogen Associate, Innogen Institute, & Associate Fellow, CASMI)

If I offered to buy your shoes you would think I was strange, but we could
probably haggle a price. If I offered to buy your children, we would not
get to the haggling stage. The difference between trading shoes and
children is not merely legal. It is also moral. People find it unpalatable,
even taboo, to put prices on things that we treat as absolutes; life,
liberty, or health. People have moral qualms about the cost of medicines
for the sick or dying, but not about the cost of Botox or liposuction.

Yet life-saving medicines do not exist in a parallel moral universe, free
from economics. Taxes are paid, as are health insurance premiums;
healthcare budgets are set; doctors earn money, often in direct proportion
to the quantity of treatment they provide; professors seek riches as
biotech entrepreneurs; venture capitalists gamble other people’s money on
the professors’ ideas; drug companies pay wages to employees and dividends
to shareholders; and former hedge fund managers set up firms to play
pharmaceutical arbitrage, buying drugs low then selling them high.


“Cost”, “value”, “power” and “prizes” are four ways that people think, talk
or write about the mechanism by which drugs are priced. “Cost” refers to
cost-based pricing; the idea that the price of goods is based on how much
it cost to produce them. “Value” refers to value-based pricing; the idea
that the price of goods reflects their value to the buyer. “Power” is the
exercise of intellectual property rights, to create scarcity and to find
the maximum price that the market will bear. “Prizes” are the incentives
provided by profit tomorrow, made credible by profit today, for investors
gambling on the R&D that might create tomorrow’s drugs.

In what follows, I start with more familiar but less truthful explanations
of drug pricing, cost and value, before moving to more truthful but less
palatable ones; power and prizes.

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