Today (9-24-11) on page 9 of the Casper Star Tribune I am reading 3 articles that show how bad liberalism is for our nation. I have already discussed one article about No Child Left Behind. Another article talks about the EPA (we will discuss that article tomorrow) and the third article talks about drug shortages. We will discuss pharmaceuticals and economics today.
The drug shortages article is authored by Linda A Johnson. It is titled, “Hospital drug shortages prove deadly and costly”. It is obvious by the tone of the article that the author does not understand, in the least, how the free market works or why shortages occur. First I will share parts of her article and then we will discuss “the turd in the punch bowl”. Do you see it? I do. I am not going to drink the punch. Do you want any? Here we go:
A drug for dangerously high blood pressure, normally priced at $25.90 per dose, offered to hospitals for $1,200. Fifteen deaths in 15 months are blamed on shortages of life-saving medications.
A growing crisis in the availability of drugs for chemotherapy, Infections and other serious ailments is endangering patients and forcing hospitals to buy from secondary suppliers at huge markups because they can’t get the medications any other way…
Hospital pharmacists are really looking at this as a crisis. They are scrambling to find drugs. ” said Joseph Hill of the American Society of Health-System Pharmacists.
At a hearing Friday before the health subcommittee of the House Energy and Commerce Committee, hospital officials and other experts testified that the worsening shortages are preventing them from giving many patients the best care and are driving up costs.
“Considering the nation’s budget crisis and our skyrocketing health care bill, these markups are nothing more than profiteering at the expense of patients and providers who are struggling to afford vital medicines,” said Mike Alkire, chief operating officer of Premier Healthcare Alliance..
On Monday, the Food and Drug Administration will hold a meeting with medical and consumer groups, researchers and industry representatives to discuss the shortages and strategies to fight them.
Nowhere in the article did Ms. Johnson say anything about the cause of the drug shortage or the reason for the price spike that accompanies that shortage. Does it seem strange to you that she doesn’t talk about the why? It does to me. I am reading between the lines a little bit, but I understand enough about the market that I am certain I understand what is going on here. What causes shortages and price fluctuations in the market?
Why do prices go up in a free market? Prices go up if demand is high. Demand is generally high with new, hard to get, products or when the supply diminishes for any reason. In general, prices increase if demand exceeds supply. If more people want a given product or service than can be supplied, prices will go up. If, on the other hand, something is plentiful, if supply is equal to or greater than demand, prices will drop. Pretty simple. Supply and demand control price and help producers understand what consumers want.
In a free market, what causes supply to be lower than demand? If a new product comes out on the market, especially if that product is a popular product, the production of that product often times can not meet demand, initially. However, because of the profit motive, it generally doesn’t take long for supply to increase to meet demand. As supply increases to meet the demand, prices drop. Those prices drop even further as competition enters the marketplace and other suppliers see the demand and move to meet it.
But why would supply decrease on an existing product? If a product can not be produced at a profit, manufacturers will stop making that product. I believe this is what is happening with pharmaceuticals. Liberals have been demonizing the drug companies just like they are demonizing the oil and gas industry. There are those in government that believe they know how much profit should be allowed by a producer. They try to make it look like drug companies are charging too much and that their profits are too high and, as a result, impose, if possible, price controls. Price controls never work. They are not fair, of course, and they ultimately hurt everyone but when we ignore the Constitution, and the rights promised in the Declaration of Independence of life, liberty and the pursuit of happiness we wind up with shortages and price spikes in the market.
Do you know how much it costs a drug company to bring a new drug to market? In 2002 it was estimated that the cost of bringing a drug to market ,was, on average, a little over $800 million and those costs were estimated to increase about 7% per year. So I would guess that the cost of research and development as well as the process of gaining FDA approval for a drug must be close to $1 billion in today’s dollars. Plus you need to understand that few drugs that do make it to market ever turn a profit. Some drugs make companies a great deal of money, but many others really don’t perform so well. So when a bureaucrat tries to impose price controls, it always distorts that natural feedback of the market which in turn effects how drug companies do business.
As government price controls are imposed upon drug manufactures, we can be assured that at least five things will happen. First, drug prices will initially decline. Second, pharmaceutical company profits will decline. Third, research and development for new drugs will decline. Fourth, fewer drugs will be profitable for drug companies to produce. Fifth, we will start to see shortages in the availability in less profitable drugs.
So now, the liberals are trying to blame the drug companies for price gouging and for the shortages, even though the liberals are the guys who are bent on destroying the profitability for drug companies and forcing them to do things differently in the first place. What do you expect? Do you expect a company to continue to operate at a loss? Do you expect a drug company to produce new drugs or sell existing drugs if they lose money in the process. Mr Alkire is spewing liberal garbage. He is accusing the drug companies of being greedy, when in fact it is the power hungry liberal establishment that is the greedy entity to be blamed.
Whenever freedom in the market place is tampered with, two bad things happen, shortages occur and prices increase. Thank you big government for producing this drug shortage. You did it to us. Go see who you can blame.
And that folks is the “turd in the punchbowl”. Everyone can see that government is wrecking the economy, but everybody is afraid to say it. They don’t want to be the one to point out the turd. I just did. You can tell everyone else now.