Healthcare and the Free Market

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There have been a lot of shortages of generic cancer drugs lately, and Ezekiel Emanuel says part of the reason is related to reforms that were part of the Medicare prescription drug legislation of 2003. The nickel explanation is that the act required Medicare to pay physicians based on a drug’s actual average selling price, with price increases limited to 6% every six months:

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

Megan McArdle says this is a good example of why it’s a bad idea for bureaucrats to think they can control market forces:

Things like this are the root of my skepticism about technocratic rule-making. I have no doubt that the earnest people who drafted this rule spent a lot of time thinking about whether the allowed price increase should be 5% or 7%. But they somehow overlooked a rather significant feature of the market they were regulating, and the effect that their rule would have when it interacted with market reality. The more complex your system of rules is, the harder it is to keep track of these potential unwanted side effects.

Maybe. But I have one question: how do other countries handle this? That is, other countries like France and Germany and Sweden and Japan where price controls for pharmaceuticals are stricter than they are here? Emanuel answers this question later in his op-ed: “Most of Europe, where brand-name drugs are cheaper than in the United States, while generics are slightly more expensive, has no shortage of these cancer drugs.” Then this: “A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan.”

In other words, making this particular segment of the pharmaceutical business more market-friendly might well be a good idea. At the same time, it’s also obvious that every other country in the world seems to have addressed this problem without any of the difficulties we faced. Writing decent regs isn’t impossible, and it’s especially not impossible if you’re willing to look at what other countries do and learn from them. This was, to put it gently, not something that the Republicans who designed Medicare Part D were willing to consider.

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