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Megan McArdle on Big Pharma

John on August 18, 2009 at 9:02 am

She’s done it again, this time with a lucid explanation of how centralized control of health care will inevitably result in drug price controls which in turn dampen innovation:

The political logic of pharmaceutical price controls is nearly overwhelming.  You have a product that has a very low marginal cost and a very high fixed cost, which means that you can force them to provide it cheaply and eat the fixed costs if you have enough market power.  You’ve got program that is rapidly turning into the sucking chest wound of the US budget.  And you’ve got a big line item supplied by companies that are unpopular–unlike the other major players in the system, like doctors, nurses, assorted health care workers, and the local hospital.  This is why most of Europe has turned to some form of price controls…

We might hold out for a while.  But eventually, we’d have a combination of populists in office and a budget problem, and the pharma profits would go.

Actually, if this is accurate, some of those profits have already gone, i.e. eighty billion over the next decade.

The genius of the current system is that what’s best for Americans aligns with what’s best for Big Pharma:

“What’s good for General Motors is good for America” was a Great Society slogan, not a libertarian, or even a conservative one.  Right now, pharmaceutical companies spend a great deal of effort on innovation because they have to in order to survive.  But if survival means ditching the R&D labs and churning out low-cost copies of things they’ve already invented, then I’m pretty sure that’s what they’ll do.  To paraphrase Adam Smith, it is not to the benevolence of pharma that I look, but to its self interest.  In the current system, that self interest means inventing new drugs.

In other words, I’m not in favor of business.  I’m in favor of competition.

This article was tipped to me by a friend who works in the industry. This person has also agreed to take some questions on this topic, so long as we don’t get into specifics regarding this or that company. Having heard the preview of what he/she has to say, I think you’ll find it interesting. Stay tuned.

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Category: Health & Education |

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