It has become quite frequent during recent years to see some pharmaceutical companies skyrocketing prices of some of their drugs, to be able to profit from the inelastic demand they have due to consumer dependence on them. This issue has generated a lot of debate between scientists and political and economic analysts, even more when the cost of manufacturing these medicines tends to be relatively cheap, and in some cases these drugs are used to treat mostly chronical illnesses, which enhances a constant consumption, which translates into high prices having a higher effect on patients’ income distribution and expenditure. Even though it might seem controversial and even immoral, in most cases these high prices are justified, as they incentivize innovation and foster new research, which tends to be much more effective in the private sector, which without a profit incentive will stop spending billions of dollars per year just in R&D. We need to bear in mind that they are pharmaceutical companies and not NGOs. This doesn’t justify people not being able to get their medicines, as there should always be ways (as state aid or private solidarity, to pay for them), but is there a midway solution to this problem?
Recently, several politicians as President Trump have confirmed that they will do anything in their hand to lower prices of many prescription drugs, due to the devastating harm the inflationary trend in prices of drugs is causing to US citizens, being the elderly the most affected ones. But even though it may seem well intended, this won’t be an efficient solution to the problem in the long term. A search for a balance between capabilities as accessibility to all necessary medicines and scientific innovation should be found, and definitely undermining research by pushing down prices artificially is not a good policy. In a capitalist economic system, dominated by free-market economics, incentivizing supply of goods and services is essential, but no government intervention is needed for it, as the price system will work it out by itself. Scarcity leads to high prices, and even though drugs are not scarce, research and development (which are previous to the market launch) are in really restricted supply, as laboratories and similar facilities along with high wages for private researchers and accessing different medical patents and regulations, bring up costs of production easily. In these conditions, the only possible solution for big pharmaceutical companies to continue investigating is to belief they will make a profit out of it, which is why prices of drugs should outweigh the cost of research for them, and not only for manufacturing.
Consequently, in this market environment; considering demand for prescription drugs is inelastic and supply is limited (as the pharmaceutical industry is an oligopoly), the partial equilibrium of the market will end up being set at a very high price, due to the facts and reasons previously exposed. A great solution to this problem was introduced in the US in 1983 through the Orphan Drug Act, which supported development of research for rare illnesses and certain highly expensive treatments with public funds, along with tax deductions for companies which invested up to a certain amount in innovation and research for those drugs. Many companies joined this plan and developed several drugs which before didn’t exist, giving place afterwards to some medicines as palliatives for HIV.The key element of this policy was that it helped to maintain profit incentives for companies while making sure that people in risk of poverty were well attended and had access to a wide range of drugs.
When we analyse the economics behind medicine, many times effectiveness and ethics confront each other, and if the State intervenes in terms of moral values and prohibits certain research or forces prices to be lowered, this will just discourage investment of pharmaceutical firms, causing R&D to be prone to failure. For example, the Food and Drug Association in the US hasn’t helped at all to reduce the costs of medicines, as the regulatory processes are costly and burdensome, and while it’s true that consumers are protected by this regulatory process, it could be done in a much more efficient way, as instead of charging for registering a new drug, profiting from a commission from each new and successful drug launched in the marketplace, making the process faster and cheaper. This allow small pharmaceutical companies to enter the business, increasing competitiveness, and consequently forcing big firms to lower their prices to prevent losing demand for drugs with an extinct patent. If we take all costs into account, the top 15 global pharmaceutical firms, will be investing $3 billion, just in R&D for drugs related to bizarre illnesses.
As mentioned beforehand, small firms are also starting to participate in the process of developing innovative drugs, and they have been historically much more effective and successful, according to a paper from Harvard University. This firms have the incentive of selling the patent to a larger firm, for them to produce the drug, as small companies don’t have the capacity for large scale supply. To secure profits and be able to continue investing in research, small firms tend to sell the patents of the products they develop at a very high price, offsetting the costs of investigation and R&D. Investment in capital is essential, and this can only come from high market revenues from patents, which later on translate into higher costs for larger companies and large prices in the market.
At times, we might think these high prices are unethical and even immoral but deepening into the issue will show how the price of a drug going out into the market, and its corresponding revenues will determine the availability of capital to invest in research for the new drug. Patents are there to make sure that these monopolies can have sufficient revenues to be incentivized to research and develop new drugs, profiting from it during a fixed period of time. It’s a win-win. That’s why patterns are vital in the medical industry, as in any other where rights related to innovation and new discoveries need being preserved.
No patient should be left without their medicines, but that doesn’t mean companies have to lower their prices, as private solidarity of NGOs as Red Cross or even the Catholic Church employ funds to pay for healthcare of the needed and provide them with their basic needs. State aid nowadays is also pretty well developed, and many times covers the profit margin included in prices of some medicines, making patient pay a very small percentage of the total cost.
To conclude, we shouldn’t close our minds to different ways of seeing patents and high prices in the drug market. High prices don’t incentivize greed, but greater innovation and development, which in the end benefit the most needed. We should take into account all this efforts.