Tag Archives: Import Quotas

Rx Drug Prices Are Falling, But You’re Aging

08 Friday Nov 2019

Posted by in Health Care, Prescription Drugs, Price Controls

≈ Leave a comment

Tags

, , , , , , , , , , , , ,

Ask anyone on the street about prescription drug prices, or ask anyone in the press, and you’ll probably hear they are out of control. That contention is false. The conventional wisdom is typified by this exaggerated BS about insulin pricing … actually, you can find a vial of the kind I used for many years for about $25 without much difficulty.

Individual experience differs, of course. Yes, there are new drugs on the market that are exorbitant; there are older drugs still under patent that are pricey too. Those represent a fairly small part of the total market, however, and one on which policymakers should tread lightly if they hope to foster the development of new, life-saving drugs. Newer insulin varieties are not in that class, and those varieties don’t always incorporate meaningful improvements for patients.

Getting Old Is Hell

In fact, prescription drug prices have been declining for a number of years. The real problem is we’re always getting older! In a report from the Progressive Policy Institute, Michael Mandel describes what he calls the prescription drug escalator. Alex Tabarrok has a good summary of the article. The chart at the top of this post, from Mandel, shows that the number of drugs prescribed rises steadily with one’s age. The total bill rises along with age, which may create the perception that you’re paying higher prices. Unsurprisingly, more of each health-care dollar spent out-of-pocket  (OOP) goes to prescribed medications as you age, and more goes to prescription drugs as health declines. As Mandell says, the increases experienced by individuals are a matter of utilization as opposed to pricing..

Generic Dominance

Tabarrok notes that generic drugs account for somewhere between 80-90% of all prescriptions, and generic costs have been falling for some time. He links to one of his earlier posts on generics and to this study by the National Bureau of Economic Research, which states:

“… direct-out-of-pocket CPI for generic prescription drugs decline[d] by about 50% between 2007 and 2016 …”

Average OOP prescription costs peaked in 2006, according to Mandel’s data. Tabarrok quotes Mandell:

“May 2019 research report from the Agency for Healthcare Research and Quality reported that average out-of-pocket spending for prescribed medications, among persons who obtained at least one prescribed medication, declined from $327 in 2009 to $238 by 2016, a decrease of 27 percent. Data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.

Moreover, OECD data shows that average out-of-pocket spending on prescribed medicines in the United States ($143 per capita in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).”

The declines in OOP drug costs came despite a shift in health-care payment responsibilities from insurers to consumers in recent years — OOP costs would have declined much more had the shift not occurred, according to Mandel. As he says, consumers now have more “skin in the game”, and apparently they act on it.

Another basis of the misperception about escalating drug prices has to do with the way they are reported. Mandel says:

“List prices are the published prices that manufacturers charge to wholesalers. Net prices reflect the revenues that drug manufacturers receive, net of rebates and discounts to prescription benefit managers, insurance companies, and hospitals.

Studies of list prices invariably show very strong growth. For example the IQVIA Institute for Human Data Science found that the list price of the average brand rose from $364.92 to $657.08 since 2014, an 80% increase. Similarly, a widely cited recent study based on list prices found that from 2008–16, the costs of oral and injectable brand-name drugs increased annually by 9.2 percent and 15.1 percent, respectively. … By contrast, net prices and net pharma revenue have been growing much more slowly, once rebates and discounts are accounted for.” 

The Pricey Segment

There are a variety of circumstances that bear on the pricing of individual drugs. Clearly, non-generic drugs are subject to more upward price pressure and give rise to anecdotes that feed misperceptions about the overall trajectory of drug prices. These are either new drugs or older ones sold under extended patents, which are sometimes granted for even minor changes in a drug’s chemical makeup.

Some new drugs are life-saving breakthroughs targeting rare diseases. The unfortunate truth is that drug development is a very costly enterprise, often stretching well over a decade in the U.S. under the FDA’s approval process. Moreover, U.S. consumers actually subsidize the cost of drugs for European consumers, where drugs are typically subject to price ceilings or are directly negotiated by government. By the time drugs go to market, development is treated as a fixed cost; even the low prices in Europe cover the marginal cost of production, so pharmaceutical manufacturers don’t mind selling there as long as their development overhead is paid by someone. That’s the rub.

Drug development costs are heavily influenced by public policy, often to the detriment of consumers. The FDA’s drug approval process is in dire need of reform, and patent extensions should be severely curtailed. As an advocate of free trade, I also favor a lifting of restrictions on imports of drugs to the U.S.

Conclusion

You’re likely to see more physicians as you age, they’re likely to prescribe more drugs, and you’re likely to pay more for prescriptions OOP. That’s the escalator in action. You can minimize the slope of your personal prescription escalator by taking good care of yourself and using generics when possible, but the slope is often beyond a person’s control. Nevertheless, over the past 13 years in the U.S.,  most of those experiencing higher OOP costs have this escalator, i.e., aging, to thank… it’s drug utilization, not pricing.

A relatively small but important share of the market has experienced price escalation. Newer, highly specialized drugs can carry high price tags. Patents give drug manufacturers considerably more pricing power, and drug companies have sought to maintain “evergreen” patents by manipulating their formulations. U.S. import quotas and restrictive pricing abroad have left consumers in the U.S. holding the bag for a large share of drug development costs. These shortcomings can be addressed via streamlined drug approval, patent reform, and lifting import restrictions.

A critical policy prescription is to liberate market forces and foster competition in the pharmaceuticals industry. Price controls in the U.S. would eliminate all incentives for new breakthroughs, leading progress in many areas of treatment to a stand-still. Price controls merely substitute the arbitrary decisions of politicians and bureaucrats for the market’s ability to balance dynamic consumer needs, medical expertise, and the costs faced by sellers.

 

 

Trump Bumbles On Trade With Tariffs

02 Friday Mar 2018

Posted by in Free Trade, Protectionism, Tariffs

≈ 1 Comment

Tags

, , , , , , , , , ,

You can get away with lousy policy by calling it a “negotiating tactic” for only so long. But that dubious ploy is one of the rationales offered last week by the Trump Administration for imposing a 25% tariff on imported steel and a 10% tariff on imported aluminum. Sure, the tariffs are like gifts rendered onto American steel and aluminum producers, their shareholders, and their unionized workers. The tariffs allow them to compete more effectively, without any effort, with foreign steel and aluminum in the domestic market, and the tariffs may also give them leeway to raise prices. The tariffs are also forgiving of degraded performance by domestic producers, since reduced competition relieves pressure for efficiency, a primary social cost of monopoly power.

So who pays for these gifts to the domestic steel and aluminum industries? A tariff, of course, is a tax, and a significant portion of it will be passed along into higher prices of both imported and domestically-produced steel and aluminum. Therefore, the burden of that tax will be borne to a large extent by domestics users, including every domestic industry that uses steel or aluminum as an input, and by consumers who purchase those products. That erodes the job security of many domestic workers outside of the steel and aluminum industries. In fact, the tariffs are unlikely to create more jobs even in the steel and aluminum industries given the negative impact of higher prices on the quantities of those metals demanded.

The desperate story line in support of tariffs also includes the assertion that the U.S. steel and aluminum industries are in such dire straits that they are in danger of vanishing. Statistics on U.S. production hardly suggest that is the case, however. Steel output in the U.S. has been reasonably steady since recovering from the last recession, though it has not achieved its pre-recession level. While aluminum output has been declining, it is hardly in a free fall. The stock prices of major steel and aluminum producers, which are forward-looking, have not demonstrated a particular need for government aid (as if that could ever justify a too-big or too-important-to-fail mentality).

Defenders of the tariffs claim that one effect will include additional direct investment in the U.S. by foreign producers of steel and aluminum, because they can avoid the tariffs by setting up production within our borders. Perhaps a few will, but capital is mobile in other sectors as well. Producers in other industries requiring intensive use of steel or aluminum inputs will now have an incentive to shift production overseas, where the tariffs won’t apply. Attempting to prevent such shifts via import tariffs on final products would quickly become a nightmare of central planning.

Apologists for the tariffs go even further, noting that our new regulatory and tax environment will bring foreign producers to the U.S., essentially making the tariffs irrelevant. If that’s the case, why bother imposing the tariffs at all? And why penalize consumers and industries requiring intensive use of steel or aluminum?

The argument that tariffs provide a stronger position from which to negotiate with foreign “trading partners” (or rather, their governments) is tenuous at best. More likely, the tariffs will prompt retaliation by foreign governments against a range of American products. The very notion that “trade wars are good”, tweeted by President Trump on Friday morning, is as nonsensical as a suggestion that voluntary exchange is destructive. Already, the EU has announced plans to retaliate by imposing tariffs  on bourbon and motorcycles produced in the U.S.

Negotiations are unlikely to be successful. Perhaps some foreign governments who subsidize their steel and aluminum producers could be persuaded to enter talks. Our own domestic producers are penalized by various tariffs and quotas in place abroad, and those might be used by foreign interests as a lever in negotiations. However, the most fundamental foreign trade advantages, when they exist, have to do with low wages, less regulation, more efficient production facilities, and sometimes a more favorable tax environment. Wage levels reflect labor productivity, but those wage levels are valued more highly in their home countries than in the U.S, and penalizing these countries with trade sanctions merely penalizes their workers. Not all dimensions of a cost advantage can be negotiated, and in any case, healthy competition in any industry is always in the interests of a nation’s consumers.

National security is another standard argument in favor of protectionist measures. We’re told, for example, that we cannot allow China to produce all of the steel, but China provides only a small fraction of U.S. steel imports. Canada, Brazil and Mexico provide far more. In fact, China was in 11th place on that list in 2017. So our sources of steel are fairly well diversified. A domestic shortage of steel or aluminum caused by a breakdown in relations with one or more steel-exporting countries would lead to higher prices, but it would bring forth greater supplies from other countries and even from high-cost domestic sources. That is not a national emergency.

It’s possible that the Trump Administration will create “carve-outs”, exempting goods from certain countries from the tariffs. Presumably, those would be based on an assessment of each country’s trade policies and whether they are consistent with “fair” trade, in the judgement of U.S. trade authorities. However, all nations play the protectionist game in one form or another, including the U.S. Any carve outs would be better than none at all, but the remaining tariffs imposed by the administration will be a net burden to the U.S. economy.

Up till now, I have been pleasantly surprised by the Trump Administration’s efforts to de-tax and deregulate the U.S. economy. However, the threat that Donald Trump would adopt protectionist trade policies was one of my major trepidations about his candidacy. And here it is, as he promised. The dilemma often expressed by protectionists is that foreign producers can put elements of the domestic economy out of business by selling below cost. That drain on a country’s resources cannot span all industries — the U.S. has a comparative advantage in many areas. Such an effort cannot last forever or else these nations would cannibalize their own industrial base. Foreign governments quite simply cannot afford it economically and politically. On our end, the best advice is to accept the gift of low-cost goods. With access to ultra-cheap goods, whether steel, sorghum, or some finished product, American consumers and producers who use those imports gain unambiguously, and the purchasing power released can be spent on other goods and services.