A question was asked of me on Facebook, but the answer was going to be long enough that I thought I would do it here. Here is the question:
I have a question that's been bugging me and maybe you can offer some insight. I know you advocate the government getting out of, well, just about everything, which would be good if possible, but how do you deal with rampant problems in an unchecked capitalist society? In many ways, especially in the pharmaceutical industry, they seem more about profits than ethics and if they can make an unethical buck, then they'll do it. Is regulation part of the giant beast of a government, or should it be considered more a part of law enforcement?
First of all, let me point out that we haven't lived in "an unchecked capitalist society" in well over a hundred years. Perhaps you don't fully appreciate the level of government involvement (interference) in the "free" market. But just for fun, let's pretend that there is an idealized capitalist free market, and see how it is supposed to work to control problems. You used the pharmaceutical industry, so lets stick with that.
In our example, let's say two drug companies each come up with a new product. ImAJerk Pharmaceuticals comes up with a drug to reduce cholesterol levels in the blood; Health Co. comes up with a new medication to slow the advancement of HIV into full-blown AIDS. The CEO of Health Co. is a doctor who truly believes his Hippocratic Oath and demands the highest quality of research and testing before sending a drug to market. However, the CEO of ImAJerk is far more concerned with profit; he routinely instructs his scientists to cut corners, down-play potential side effects, and uses inferior ingredients because they are cheaper.
When the cholesterol medicine hits the market, patients immediately begin having serious side effects. Doctors quickly stop prescribing it, the company loses money. In addition, the patients harmed by the drug (or their insurance companies) sue the company to recoup any medical bills incurred as well as to cover any future treatments that might be required for the complications caused by the new drug. Also, doctors are now much more leary about recommending any product made by ImAJerk.
By contrast, Health Co.'s product underwent rigorous testing before coming to market. Are there still potential side-effects? Of course. But they are stated up front and the patients are able to weigh the risks versus the benefits and make an informed decision. Because of the stringent testing, the only side effects that regularly occur are fairly minor, so no law suits are filed. In addition, the drug is very successful, so Health Co. makes enough money from drug sales to recoup their R&D costs and make a profit.
Now, in an ideal case, that would be how it worked. ImAJerk will go out of business because no one will trust their products; Health Co. will prosper because they took care of their customers. Now, let's see how far we have moved away from that ideal.
The federal government, through the FDA, has a number of hoops drug companies must jump through to bring a drug to market. According to the FDA's own website, there are over 200 laws thay are responsible for enforcing. The FDA is also a bureaucracy which is part of the Department of Health and Human Services; the Secretary of HHS is a cabinet-level position within the executive branch, meaning it is run by whoever the President chooses to appoint (subject to Senate confirmation). The current Secretary is Kathleen Sebelius. According to the HHS website, she lists no work ever held outside of political elected office. Not exactly ideal, if you ask me. Anyway, the approval process can take several years, and this is on top of whatever testing the drug company did before bringing the product to the FDA for approval. During this time, the company has invested millions, or even billions, of dollars in R&D costs and is seeing zero return on that investment.
Once the FDA approves a new drug, the company is granted a two-year period in which the drug is protected. During this time, no generics are allowed. This is supposed to allow the company an opportunity to recoup the investment made to create the drug before other manufacturers swoop in, make a cheap immitation without all the R&D costs, and undercut their prices. However, after two years, the generics come out and no one buys the name brand anymore. This is why we have some companies that specialize in research (developing new drugs) and others that specialize in manufacturing (making generics cheaply).
Once a drug has been brought to the market, the drug company also faces the risk of lawsuits. Some are legitimate, some are frivilous. Some seek reasonable compensation, others seek outrageous sums for minor side effects. The trial lawyers make a fortune off these lawsuits, and drug companies are forced to "factor in" a certain amount of lawsuit settlements into the cost they charge for their medicine.
One other "hidden" factor that may make it seem like the drug companies are price gouging is how they price medicine in the US vs. the rest of the world. It is my opinion that there are two major factors that cause drug companies to charge more in the US. First is the lawsuits that I mentioned, which are much more prevalent and costly in the US. The second is that the population of the US is far wealthier, on average, than any other country in the world. If drug companies charged $2 per pill in Zimbabwe, people would have to work for 2 years to afford a single pill. So they charge what the market will bear. Is that wrong of them? If they charge too much, no one buys the medication; if they don't charge enough, they don't recoup their R&D costs on the medicine and then they may not have the funds available to fund their ongoing research into the next "miracle drug."
I do not begrudge companies for making a profit. Out of that profit, they pay the salaries of hundreds of employees, they create medicines that have improved and extended the quality of life for millions of people all around the world, and they have provided income for their shareholders and investors.
I would ask you to cite some examples of major pharmaceutical firms that have engaged in unethical behavior. I am not saying it hasn't happened, just that I can't remember any instances.
As far as regulation goes, I think the government does more harm than good in most cases. By only allowing drug companies two years to manufacture a trademarked pill, they force drug companies to jack up the price in order to recoup their R&D expenses. If the government did the same thing with copyright laws, books would have to cost a lot more and CDs would be priced very high, because after two years, anyone could download the book or song for free without any fear of punishment. The artists and authors would rightly want to make money during that short period of time before it became legal for others to profit on their hard work.
I think the single biggest thing we could do to improve the pharmaceutical industry is to implement tort reform (cap the punitive damages that can be awarded in lawsuits). This would lower the risks to the drug companies, thereby costing them less in attorney fees and settlements, and thereby requiring them to earn less and still be profitable. However, that will never happen: most lawmakers are lawyers and they know that when they get out of government (if that happens before they die, a la Sen. Kennedy and Sen. Byrd) they will go back to working at law firms, so why make laws that will negatively affect their own futures?
Hope that answers your question. If not, post a comment and we can attempt to resolve it.
2 comments:
I'll agree that our bureaucracies are out of control in many ways. I wish there was a way that could do away with them. Unfortunately, that is how our government has chosen to run its programs.
I can also agree that there should be a cap on damages but I think that would hurt the legitimate grievances.
It also makes sense that if a company only has two years to recoup their R&D expenses, then they'd have to do it in the way you describe. However, I've heard of much longer time frames for patents to expire on drugs. For instance, Omeprazol is a drug that I take that helps with acid reflux. This pill was created in the 80's and the patent for this drug lasted 10 years. The generic is still cheaper approximately 25 years later. I wonder if they are still recouping R&D 25 years later or if they are simply trying to recoup money for other programs. Either way, it's shady, but maybe I say that because I'm greedy and really don't want to pay that much for the same medicine.
Then there is health care in general. The system is broken. Many of the same problems that exist in hampering the availability of low-cost drugs, is causing the health care system to fail. Or perhaps fail is wrong in that insurance companies are succeeding but are killing the people who rely on them.
I've always felt that whatever the government decides to do with health care, they need to get a handle on the lawsuits. That, to me, would clear the way for success in whatever the path we choose. Of course, you still need to require pharmaceuticals to jump through the hoops before they can bring drugs to market. I would think the intent should also be to limit frivolous lawsuits by requiring appropriate testing. It would be unethical not to do the testing.
But what about Microsoft? How does a company as sneaky and, dare I say, unethical as they are continue to survive and abate monopoly break up? Seems that other countries are attempting to spank them in ways we've dared not and are easily succeeding. I know their success is not because owed to having the best product. So capitalism clearly isn't living and breathing like it should in this case. Why should they succeed? Should they be allowed to continue they way they are or have been?
Also, is there a way to post questions on here to start new topics besides asking them on Facebook?
Sorry to be so slow in responding.
When you say that "this is how our government has chosen to run its programs," you overlook one very important point. Our government didn't choose to run its programs that way until the early 1900s. Teddy Rooseveldt and Woodrow Wilson were the architects behind the bureaucratic nightmare that we have now. One of Wilson's favorite novels was Philip Dru: Administrator. In the book, Dru overthrows the government, throws out the Constitution, and establishes a Fascist regime. He appoints "administrators" over different sectors of the economy that do not answer to the people (can you say Obama's 27 Czars?). They were life-long bureaucrats who could throw out laws that they deemed "against the public good." Wilson used this as a model for his administration. He called his administrators Dictators (back before Hitler sullied the term forever). This was perpetuated by Progressive politicians for the last 100+ years, but it doesn't have to be that way.
I don't know the details of the history of Prilosec, but the brief checking I have done indicates that they may have been able to extend their patents by coming out with an extended-release form. But as for whether or not that is shady, how could it be? You are free to buy the cheaper generic! I buy most of my OTC medications at Wal-Mart because the generic are usually half the price. I am not saying that we shouldn't allow generics, but it does explain why they feel a need to make as much money as possible during the time their patents are protected.
I also think you make an outrageous claim that insurance companies are "killing the people who rely on them." What good would that do the insurance companies?!? Fewer premiums mean less income. Don't get me wrong, there are many problems with the insurance industry (my aunt died of cancer when her HMO refused to biopsy a tumor), but I think these problems get addressed as they come up.
President Obama, in his speech to the AMA, has specifically stated that he does not favor capping lawsuit damages. This means that doctors will continue to pay enormous malpractice insurance premiums, and therefore will continue to pass those costs on to you and I.
And let's not forget the heart of the Obama health plan: taxes. If you refuse to have health insurance, you would be subject to a special tax. If your employer refuses to provide health insurance for every full- and part-time employee, they would be subject to a tax. If you pay (out of pocket) for better health insurance than the government-offered health plan, you would be taxed on the difference in the premiums (no child left behind because no child gets ahead). Plus, the Congressional Budget Office estimates that the plan will add $1,000,000,000,000,000.00 ($1 trillion) to the budget deficit over the next 10 years, and will still only cover about 30% of the people without health insurance in this country!
Microsoft could be the subject of a whole series of other posts. Don't get me started, please!
As for a way to post questions, I don't really know of a way. You can either find me on Facebook as Brian Bucklein or you can email me at bbucklein {at} gmail {dot} com.
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