by

Andrew Bard Schmookler

I heard it on TV: the case was made that the price of our pharmaceutical drugs, far from being overpriced as industry critics claim, are less expensive than they should be on purely economic grounds. The case calls for refutation. The case is made by a former executive in the pharmaceutical industry, Mick Kolassa. Now teaching at the University of Mississippi, Mr. Kolassa spoke to us as part of an excellent report by Paul Solman on PBS's McNeil/Lehrer News Hour. Imagine a drug that can quickly cure the common cold, Kolassa often tells his students: What should determine the price of such a drug? Very rarely, he says, do his students give him the answer he is looking for. Beyond such things as the costs of development and production, Kolassa says, the crucial issue is: "What is it worth not to have a cold?" That's what people will pay, he says, so that's the proper price. Kolassa argues that by this criterion --called "value-based pricing"-- our prescription drugs are underpriced. If the pharmaceutical companies practiced the policy of "We'll charge what we can get," they could double or triple the prices of most drugs and improve their revenues. In the TV report, this argument goes unrebutted, but it has some serious flaws that should be noted as we prepare to adopt a national health policy to control the skyrocketing costs of health care. The purchase of pharmaceutical drugs has some unusual features that make the usual economic analyses much less relevant. If I choose to reach into my wallet to buy a drug to get rid of my cold, I will indeed weigh the question, what is it worth to me not to have this cold? But what if the benefits and the choice are mine, but the money is someone else's? Though generally not all the costs of prescription drugs are covered by health insurance, the issue of third-party payments is nonetheless an important factor. Solman begins his report on drug prices with the example of a medicine that costs more than a hundred thousand dollars per patient for a year's treatment of an uncommon, debilitating disease. Two patients are interviewed: one says that no price is too much, the other is off the drug because of price. Not surprisingly, the patient who is convinced it's worth whatever it costs has good insurance coverage while the other does not. An additional wrinkle in the pharmaceutical transaction is the division between the person who chooses the drug and the one who goes out and buys it. In this highly technical area, it is typically not the consumer who chooses among possible remedies but the doctor. Many factors can enter into a doctor's decision, not all of them representing the rational cost-benefit analysis presumed by "value-based pricing." Elsewhere in Solman's report we hear from a pharmacist who says he can always tell when his city has been visited by the sales representative of one pharmaceutical company or another. He knows because suddenly his customers will be bringing him prescriptions from their doctors for very high-priced new antibiotics, or other medicines, manufactured by that company. The companies' huge promotional budgets may make more sense for the companies themselves than for a country trying to spend its health-care dollars wisely. "If people buy it, the price is justified," says Kolassa. "Justification" is a weighty moral issue: We might ask how appropriate it is, where life and death are at stake, to let purely market forces of supply and demand hold sway. But even on its own narrow economic terms, Kolassa's argument about value and choice has holes too big to support the claim of justification.

Andrew Bard Schmookler is the author of The Illusion of Choice: How the Market Economy Shapes Our Destiny, published by the Press of the State University of New York. ??