Prescription for Reform



I heard it on TV: The case was made that our pharmaceutical drugs, far from being overpriced as industry critics claim, are less expensive than they should be on purely economic grounds. The case calls for refutation.

The case is made by a former executive in the pharmaceutical industry, Mick Kolassa. Now teaching at the University of Mississippi, Mr. Kolassa spoke to us as part of an excellent report by Paul Solman on PBS's McNeil-Lehrer News Hour.

Imagine a drug that can quickly cure the common cold, Mr. Kolassa often tells his students: What should determine the price of such a drug? Very rarely, he says, do his students give him the answer he is looking for. Beyond such things as the costs of development and production, Mr. Kolassa says, the crucial issue is: ''What is it worth not to have a cold?'' That's what people will pay, he says, so that's the proper price.

Mr. Kolassa argues that by this criterion -- called ''value-based pricing'' -- prescription drugs are underpriced. If pharmaceutical companies practiced the policy of ''We'll charge what we can get,'' they could double or triple the prices of most drugs and improve their revenues.

In the TV report, this argument went unrebutted, but it has some serious flaws that should be noted as we prepare to adopt a national health policy to control the skyrocketing costs of health care.

The purchase of pharmaceutical drugs has some unusual features that make the usual economic analyses less relevant. If I choose to reach into my wallet to buy a drug to get rid of my cold, I will indeed weigh the question, what is it worth to me not to have this cold? But what if the benefits and the choice are mine, but the money is someone else's?

Though generally not all the costs of prescription drugs are covered by health insurance, the issue of third-party payments is nonetheless an important factor. Mr. Solman began his report on drug prices with the example of a medicine that costs more than $100,000 per patient for a year's treatment of an uncommon, debilitating disease. Two patients are interviewed: One says that no price is too much; the other is off the drug because of price. Not surprisingly, the patient who is convinced it's worth whatever it costs has good insurance coverage while the other does not.

An additional wrinkle in the pharmaceutical transaction is the division between the person who chooses the drug and the one who goes out and buys it. In this highly technical area, it is typically not the consumer who chooses among possible remedies but the doctor.

Many factors can enter into a doctor's decision, not all of them representing the rational cost-benefit analysis presumed by ''value-based pricing.'' Elsewhere in Mr. Solman's report we heard from a pharmacist who says he can always tell when his city has been visited by the sales representative of one %o pharmaceutical company or another. He knows because suddenly his customers will be bringing him prescriptions from their doctors for very high-priced new antibiotics, or other medicines, manufactured by that company. The companies' huge promotional budgets may make more sense for the companies themselves than for a country trying to spend its health-care dollars wisely.

''If people buy it, the price is justified,'' says Mr. Kolassa. But even in its own terms, his economic argument about value and choice has big holes.

Beyond those terms, however, is a question of a different sort. Where life and death are involved, how appropriate is it to let purely market forces of supply and demand hold sway?

Imagine a miracle drug that, while costing almost nothing to produce, can cure all cancers. Imagine, too, an income distribution in the country which made the most advantageous price, from the point of view of the drug company owning exclusive rights to the drug -- the point at which price times quantity sold yields the highest revenues -- $1 million per dose. Would a wise or humane society allow the price to be thus determined?

What is it worth to be cured of a disease that is killing you? Worth to whom? A Ross Perot might be willing to pay more to get rid of a cold than many of us could raise to save our lives.

There is nothing new, of course, in the disparity between rich and poor in their access to goods. Some movie star may buy his fifth Rolls Royce while others must go on foot. The market will attend to the desire of one for several closets full of finery while being deaf to the desire of another who has no money to have a single decent suit. Evidently we accept these differences in the ability of rich and poor to ''vote'' in the marketplace.

But if we are willing to allow the purchase of relief from great suffering, or even the purchase of the preservation of life itself, to be mere commodities priced by supply and demand, what kind of society are we?

Andrew Bard Schmookler is the author of ''The Illusion of Choice: How the Market Economy Shapes Our Destiny.''

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