Expanding the Market Through Fear

Wednesday June 15, 2016

There’s a good article in Vanity Fair about the scandal at Valeant, the pharmaceuticals maker. NPR has also covered this for those not interested in reading.

The part that has everyone up in arms has to do with their pricing strategy. The examples given are Syprine and Cuprimine, for treating Wilson’s disease:

[F]or years, Merck, the big pharmaceutical giant, owned these drugs and sold them for a dollar a pill. And then Merck sold these two drugs to another firm, who then in turn sold them to Valeant, and Valeant began to hike the price of the drugs. Today one of them, Syprine, is about $300,000 a year. That was sort of Mike Pearson’s argument: Because people need these drugs to live, either the people or the insurance system will pay any amount to keep them alive. Because, ‘Hey, it’s cheaper than liver failure.’

How do you get people to pay so much for a drug? We address this when I teach public finance. There’s a great question in our textbook, Hyman, that asks,

How do health care providers control the demand for health care? Suppose reimbursement rates to physicians under all payers is limited by law. Use supply and demand analysis to show how the limit in reimbursement need not decrease expenditures for health care if health care providers succeed in increasing the demand.

This question is a great wakeup call for the policy student, but the answer is simple and elegant. Tell the consumer they will die if they don’t get the treatment. Whether service or medication, profits can be increased by expanding the market, if prices are capped. This is one of the reasons so many unnecessary tests are run by the health care industry. But it works because the consumer, the buyer, never sees the price, since it is paid by insurance.

Image by the United States Marine Corps via Wikimedia.