I made several comments on this post by Robert Reich. Here is the last one:
Finally, why does everyone want to demonize the drug companies? Drugs account for only 10% of all healthcare spending but are one of the best ways to control chronic conditions and thus prevent much more expensive interventions later (i.e., they provide real value). And what other medical product or service can you say of them that “in 10 to 20 years after launch you will be able to buy this product at the cheapest price humanly possible”. In other words drugs go generic and are then available essentially just for the cost to manufacture them. Many stock analysts are decrying the upcoming “patent cliff” that many drugmakers will encounter in the next couple years when major blockbuster drugs go off patent and how this will adversely affect the stock prices of the drug companies. But think about this from the perspective of medical consumers --- in just a few short years you will be able to buy dirt cheap some of the most revolutionary medicines ever which cover some of the most common and expensive ailments (e.g. Lipitor and Plavix for cholesterol and heart problems will both very soon be available as generics). Has anyone investigated the likely consequence of these drugs going generic? I.e. they will be much more affordable and thus more people will be able to take advantage of them, greatly reducing the need for future more expensive interventions and this could be a real cost saver for health care.
The high costs you pay before drugs go generic allow drug companies to recoup their significant R&D expenditures. And if you don’t think it is significant, you are deluding yourself. Coming up with new drugs is a very risky and uncertain business, and when you buy one successful drug you are actually paying for a whole slew of failures before that. And it is only getting harder to develop new drugs, as much of the ‘low hanging fruit’ have already been taken (i.e. drugs for large scale health problems like high cholesterol are already widely available and there are numerous competitor drugs). As a concrete example of the risky nature of drug discovery, consider Pfizer’s Torcetrapib which was supposed to be the blockbuster followup to Lipitor, but they had to scrap it at the last moment after spending almost a billion dollars developing it:
http://pipeline.corante.com/archives/2006/12/03/the_torcetrapib_catastrophe.php
Finally, people complain that drug companies and other health care providers make too much profit and that is somehow evil, and profit should not be a motive in health care. Well, again, that is maybe a just moral stance but unfortunately idealistic and fails in the face of the reality of the market. The “risk/return tradeoff” is another core principle of economics --- the more risk you take on in your investment, the more return (i.e. profit) you will expect in order to be willing to take that risk. Again, drug discovery and likely a lot of other parts of healthcare, is a risky undertaking and people would not rationally do it unless they expected to get a commensurately larger return on it. If you think, e.g., drug companies and other healthcare providers should just be happy getting, say, 3 or 4 percent profit, well, what is the point of that --- better to just stick the money in a safe long term bond paying that much and not have to worry about all the aggravation of trying to discover new drugs or other new and innovative products!
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