"Kf on drugs: I'm confused!
1) I understand why,...drug companies need to make big profits on successful drugs if they are going to finance the risky research to discover new drugs, which involves following a lot of false leads....I also understand why, if there's a drug benefit within a government-run Medicare system...the government might use its massive buying power to demand low "dictated prices that don't cover" the costs of discovering those new and better drugs.
2) And I also understand why, ..."new entitlements always wind up costing far, far more than initial estimates," and the Medicare drug entitlement is likely to be no exception. I understand why, under the alternative, partly-privatized program initially proposed by President Bush, in which you could choose from a variety of private health plans, "[m]arket pressures" would "control costs."
3) What I don't understand is how both these right-wing critiques of the Senate's prescription drug entitlement can be true at the same time. How does the partly-privatized plan give more money to drug companies (solving problem #1) while simultaneously being cheaper (solving problem #2)? I should think that, as a crude first approximation, controlling costs through "market pressures" would involve controlling the cost of drugs (substituting generics, bargaining down prices, making sure treatment is warranted, etc.)--which would mean less money for the drug companies to use to reward investors and fund risky research.
Either the drug companies get more money or they get less money, right? A system that sends them more money will be more expensive, no? Or is the miracle of the market even more miraculous than I thought?"
Ok, not that he is going to read it here, I think I'd like to take a stab at this "conundrum".
The thing is, the drug companies cross-subsidise development of "false lead" drugs by "overcharging" on the "successful leads" drugs. But they are still operating in a market so they have to find the right level of cross-subsidy: just enough to fund all the research but not so much that their drug will be undercut by an opposing drug company.
The problems with the government controlled system are that the market is distorted by one big customer and the extra costs incurred by the government arise mostly from waste - my sister is a pharmacist and as part of her pharmacy she administers our government's medical card system. It is a regular occurrence for card-holders to obtain extra drugs, inhalers etc free on their card because they can't be bothered looking in their house for the drugs etc. they already have. They are facilitated in this by doctors who are paid a low flat fee for card-holders and prefer to prescribe longstanding patients in the absence of a consultation. This is obviously a clear example but in a "free" medical system there are less clearcut cases where medical assistance and drugs may or may not be needed but as they are "free" you might as well avail "just in case". The lack of a cost disincentive for medical care is a huge contributing factor to waste within a government controlled system.
In a freer market the drug companies will tend to be more efficient with their internal cross-subsidies. The conundrum arises from assuming that the drug companies will operate at the same level of efficiency regardless whether the bulk of their money is coming from a government contract or "earned" in the market.