Effects of goverments setting prices

Drug prices

It has been argued that the government can provide cheaper drug prices through economies of scale. Maybe everyone should order their drugs from Canada. But that won't work for long. The drug companies will stop selling drugs at a discount if that happens. Let's see why.

The cost of developing a drug (including the cost of clinical trials) is very large, especially if one takes into account of drugs that don't pan out. The marginal cost of actually producing the drug may be relatively small.

Canada, for example, may threaten to use a cheaper but less effective drug whereas this might not be an option in the U.S. So the drug compainies, to maximize profits by selling drugs more cheaply to Canada (and other foreign governments) than to patients in the U.S. Canada is getting a free ride. This practice is, I think, charging what the traffic will bear. But drug companies cannot give a free ride to everyone. Drug companies will simply limit the amount of drugs they sell to Canada at a discount.

Charging what the market will bear is, of course, not limited to drugs. Airlines, hotels, software companies and many other industry use it. The point is that not every

Now if the U.S. government, using its monopoly position, demanded the same discount as Canada, profits may disappear and drug innovation may disappear with the profits. I think that U.S. drug companies have been responsible for a disproportionate number of the major new drugs in recent years.

Charging what the market will bear is, of course, not limited to drugs. Airlines, hotels, software companies and many other industry use it. The point is that not everyone can get the best price. Those who pay more subsidize those who pay less.

I have heard (perhaps mistakenly but I think not) that there are some diseases that drug companies do not attempt to find medicine for because it wouldn't be profitable. Either the people are too poor (as in a third world country) or the disease is rare so that there won't be a large number of users.Drugs are expensive to develop and you can't get around the fact that someone has to pay for the development.

It may be argued that drug companies are making excessive profits. To take one example a large U.S. drug company Merck has indeed outperformed than the S&P indices but the moderate outperformance may be justified on risks that Merck takes.

I know that drug companies may engage in questionable practice. They may reformulate old drugs as new drugs and try to get a patent on the reformulation. But the dangers of government regulations may inhibit drug innovation and the questionable practices can be dealt with on an individual basis.

Medicare prices

Medicare and Medicaid sets a price they will pay for hospital stays. Generally hospitals charge the the highest rates to private payers, the next highest rates to insurance companies and lowest rates to Medicare and Medicaid. Therefore those not under Medicare (insurance companies and private pay patients) subsidize those under government programs. It is not possible for everyone to pay the same price at hospitals without the hospitals decreasing quality unless one assumes that hospitals are making very large profits at Medicare and Medicaid rates

Currently Medicare sets the prices they will pay for physician services. By so doing they affect the supply of different type of physicians. Currently it is said that general practitioners are underpaid but specialsts in other fields are overpaid. The result is that fewer doctors are studying to become general practitioner and more people enter the richly paid specialties. This is, in my opinion, a very serious indictment of the present system. I would rather let the market determine the number of people in each specialty. If there is shortage of a particular type of surgery, let those surgeons charge more. The supply of that type os surgeons should increase and eventually prices should come down.