From
The US Has Low Prices for Most Prescription Drugs by Alex Tabarrok. I first took an economics course in high school in 1977. 47 years ago it was already well-established that competitive free markets both generated high levels of nominal economic inequality (i.e. before taking into account various government income transfer programs) but also had the best levels of improvement in the material well-being of the poor. A corollary to this was the fact that while the rich lived better lives by being able to consume the newest in scientific, medical, and technological innovations, such innovations inevitably eventually became accessible, indeed, the norm, for everyone.
What was less obvious then and much more obvious now is that the S-curve of innovation was already then steepening. In 1900, the average time between an innovation introduction (such as electric refrigerators) and universal consumption of that innovation was nearly fifty years on average. Two generations between introduction for the rich before it was available and used by everyone.
Especially from the sixties onwards, with the miracle of Moore's Law, and the consequent digitization of everything, the mean time between innovation and mass utilization has shrunk from 45 years to 5-10 years. Think of the rocket like take-up of smartphones after 2007. That is the steepening of the innovation S-curve.
There are consequences to this phenomenon of rapid innovation and commoditization. From Tabarrok:
The US has high prices for branded drugs but it has some of the lowest prices for generic drugs in the world and generic drugs are 90% of prescriptions. I’ve been saying this for years but here is the latest study:
U.S. prices for brand-name originator drugs were 422 percent of prices in comparison countries, while U.S. unbranded generics, which we found account for 90 percent of U.S. prescription volume, were on average cheaper at 67 percent of prices in comparison countries, where on average only 41 percent of prescription volume is for unbranded generics. U.S. prices for brand-name drugs remained 308 percent of prices in other countries even after adjustments to account for rebates paid by drug companies to U.S. payers and their pharmacy benefit managers.
Branded drugs are expensive but that is why we have insurance which works reasonably well, albeit far from perfectly. For example, insurance and the low price of generics is one reason that out-of-pocket costs for medical are low in the United States.
If you don’t want to pay high prices for branded drugs just use generics! As I wrote 20 years ago, in what was called a heartless and cruel post:
People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years [new reference for today, 13.5 years, AT]. Competition from competing but non-infringing pharmaceuticals makes the de facto patent life even shorter.
Thus, my response to the seniors and others clamoring for lower pharmaceutical prices is to be more patient. Does this sound harsh? Consider this, the people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here. Remember, those drugs were recently considered the very best modern medicine has to offer, so it’s not like I am expecting those who can’t afford the newer medicines to go back to using leeches.
Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.
For totalitarian market planners, one-off stories of exorbitant drug costs are a staple of their criticism of free markets. And of course there are such instances. And it is always true that the first innovation to market will tend to be expensive and only affordable by the wealthy.
What is now clear is that the Classical Liberal free market does a spectacular job of advancing well-being for everyone. In general, in the US, for virtually all consumables in all sectors,
90% of what is consumed is one-quarter to one-half as expensive as any other developed market and the time frame for the 10% that is more expensive to come down to commodity prices is now faster than anywhere else in the world, on the order of 5-12 years.
That is truly astonishing. A miracle of well-being. Yet the process by which that is achieved, the Classical Liberal model (rule of law, equality before the law, due process, innocence till proven guilty, checks and balances, republican constitutionalism, natural rights, property rights, human universalism, right to self-determination, individualism, freedom, consent of the governed, etc.) in combination with Rational Empiricism/Scientific Method is reviled by Intellectual-Yet-Idiots everywhere (to us Taleb's phrasing).
Totalitarianism, Autarky, Central Planning always fails everywhere. Classical Liberalism combined with Rational Empiricism/Scientific Method (usually undergirded by universal humanist values) always works everywhere. Why is there any contest?