Me too! Me too!

Critics of the pharmaceutical industry often claim we could realize fantastic savings by eliminatng "me too" drugs that treat the same condition. Derek Lowe has an excellent post on the case of Merck and Novartis:

if both compounds had made it to market, wouldn’t the people who tally up lists of “me-too” drugs have considered the first compound (from Merck) to be the original, and the Novartis one to be the copycat? After all, they target the same enzyme for the same disease in the same way. (I should mention that a DPP-IV inhibitor itself is just the sort of thing the industry is supposed to be turning out, a completely new way to treat a major and growing public health problem, but we'll pass over that for now).

But these compounds were developed more or less simultaneously, with the two companies racing each other to the market. It’s not like either company sat back and watched the big profits roll in, and said “I need to latch on to some of that – let’s make one of those, too.” The whole thing was done on a risk basis, because while the biochemical rationale behind DPP-IV inhibition makes sense, a lot of things make sense and still go nowhere. No one really knew how the drugs would perform, either in the clinic or in the marketplace.

And take a look at the problems that the Novartis compound has. Like so many other toxicology hits, these came out of the cloudless sky. Well, actually, it’s more accurate to say that the sky over the toxicologists is never cloudless, because you never know what’s going to happen. In this case, Novartis has taken an especially painful and expensive beating, since the drug had advanced so far before the problems began to make themselves clear.

I’d like to ask some of the critics of the industry what they think about this situation. Me-too drugs are a particular arguing point with many of these people, so here we go: does that term apply in this case? If not, then why not? Should companies go after the same target in the same way at the same time? If not, then why not? How do we deal with the fact that any compound can fail at any time, other than turning companies loose to compete with each other and take as many shots at a target as possible? Do you have a better solution – and if not, well, then, why not?

Comments

I actually like to complain about things like this:

Fresh Pain for the Uninsured
As doctors and hospitals turn to GE, Citigroup, and smaller rivals to finance patient care, the sick pay much more
by Brian Grow and Robert Berner

http://businessweek.com/bwdaily/dnflash/content/nov2007/db20071120_397008.htm

Posted by d | November 28, 2007 10:59 PM

If you sell something for the same price as a competitor, that's collusion; if for a higher price, that's gouging; and if for a lower, that's predatory.

Now we have a similar set of inescapable accusations regarding competition: If you make drugs that go after the same problems as those made by your competitors, you are wasting resources to generate me-too drugs, but if you coordinate research with them to eliminate duplications, you are colluding. It shouldn't be too hard to predict the recommended solution, should it?

Posted by Eric H | November 29, 2007 12:05 AM

I prefer a Masonomics viewpoint. Lose the "we."

Who am I to say that the random walk of the market won't result in the best overall allocation of resources for the greatest common good? Especially when it comes to medical care, research, pharma, etc. Else I am acting as god and jury. And I am responsible for the outcome once I interfere. Not a good place to be. This is one of the fundamental reasons for (democratic) governments to be as small as they can be (but no smaller) – there's a moral responsibility of every voter (no matter what side of an issue we are on) to be responsible for the outcome once a decision is taken.

We should go back and review the laws and regulations and undo decisions that have made us (or the "we" as in the people who have decided to govern themselves with a democracy) responsible for something so fundamental to (my own) "end of the world." If we had not, were not, did not continue to interfere (starting back in T.R.'s day), how much longer would we be living today (to say nothing of how much richer even the poorest of us would be)? How many more wonderful inventions would exist?

Granted, it's an act of faith to trust that two parties acting in their own interests will allocate resources for the greatest common good (in both individual transactions and in the aggregate). However, the other two mechanisms for distributing resources (to achieve either the greatest common good or a "fair" result by someone's measure) are both faiths as well (but seldom admit it. i.e. It's only a Faith we have in the decisions of a majority in a democratic process to allocate resources for the greatest common good (a faith that often fails us), and the faith in our parent, pastor, king, or dictator to do the same. All have their place and their strengths, but the last two tend to gang up on the first as something less-than-they both pretend they are not. And in a democracy we have the additional burden of now being responsible. Which makes me pray that there isn't a hell. Granted, some observe that when we don't have faith in the market we create a hell-on-earth (for the least of us who suffer the most when others make pocket-book decisions for them).

IIRC, Mr. Clinton authorized 30,000+ pages of new regulation in his last week in office. I know the rich could have cared less. So the poor (and most middle class) paid, and continue to pay - i.e. business expense per blue-collar employee has never been higher – up 15-25% from 2000 after inflation, but net take-home has stalled.. so automation continues to replace these workers.. Interstingly we've never manufactured more goods in the U.S., and never had fewer manufacturing employees..

Posted by Ari Tai | November 29, 2007 12:19 AM

This is just the latest form of the same old Marxist claim that socialist economies are more efficient and can outproduce capitalist economies due to the "anarchy of production" or "wasteful competition" or whatever.
Most proponents of socialism gave up on such claims when it became quite obvious that they were wrong, and now rely on lower-brainstem appeals to "fairness".

Posted by bil. | November 29, 2007 12:59 AM

Who am I to say that the random walk of the market won't result in the best overall allocation of resources for the greatest common good? - Ari Tai

Someone with a brain capable of analyzing data? (Hopefully?) I don't think Hayek ever said "The market is better than I am at making decisions, so I will stop writing papers and let the market decide what to write next."

And the answer to this "conundrum" is pretty simple. If both companies were developing the drug at the same time, then no, this isn't an example of "me-tooism". If one already had a drug that did the job and the other THEN spent vast amounts to copy it, then, yes, it's an example of "me-tooism". Is me-tooism a problem? Well, if me-too drugs result in demonstrable reductions of prices of both drugs, then they have a benefit that can be weighed against the cost of parallel redundant development costs. If they don't lead both drugs to cost less due to competition, because competition in the health care industry doesn't work that way, then there is no benefit to me-too drugs and the phenomenon is a genuine problem.

Health-care analysts mostly are not idiots, and when smart people identify a problem, it usually exists, at least at some level. Finding one case of something that doesn't seem to be a case of that problem doesn't mean the problem doesn't exist or suffers from some kind of conceptual inadequacy.

Posted by brooksfoe | November 29, 2007 4:32 AM

I mean, the fact that there are now way too many freaking bank branches taking up real estate in Manhattan is a genuine problem. Maybe there is no solution that isn't worse than the problem. Or maybe there is a solution that isn't worse than the problem. But you can't tell me it isn't a problem, because as an occasional resident of Manhattan, I join many other Manhattanites in thinking it sucks; hence, there is a problem.

Posted by brooksfoe | November 29, 2007 4:34 AM

When I think "me-too" I think Clarinex, a metabolyte of Claritin, but still prescription and produced under a separate patent.

Posted by Rob Lyman | November 29, 2007 9:26 AM

Brooksfoe,

If there are too many bank branches in Manhattan, then that real estate will revert to some more profitable use because you and your other fellow Manhattanites will not utilize them enough to keep them open. If they don't close, then we can be sure that your identified "problem" is just your individual, limited point of view.

Incidentally, the same applies to me-too drugs- if the additional drug really has no benefit, then the two drugs will split the same market, and pharmaceutical management will be revealed as the idiots they are, and wasting the capital of the shareholders, not the patients.

Posted by Yancey Ward | November 29, 2007 9:27 AM

Lexapro is a me too drug for Prozac, the first SRI. More proximally it is a me too drug for citalopram; actually the escitalopram isomer of racemic citalopram. The Swedish experience with citalopram in overdose was a problem with seizures, and I had a patient to die when Ultram, which has a seizure side effect, was added to a low dose of citalopram and lithium, also in overdose causing seizures. I haven't observed seizures with Lexapro All the me too drugs are 'me too' bit also unique. Shoes and motor vehicles are 'me too' products and could be produced more cheaply if we produced just one variety; my father told me it would have been, for something between a Cadillac and a Chevrolet, $750 in 1961 dollars. Heh, we could be spending new money on the same old car.

Posted by michael | November 29, 2007 10:10 AM

brooksfoe,

Is me-tooism a problem? Well, if me-too drugs result in demonstrable reductions of prices of both drugs, then they have a benefit that can be weighed against the cost of parallel redundant development costs. If they don't lead both drugs to cost less due to competition, because competition in the health care industry doesn't work that way, then there is no benefit to me-too drugs and the phenomenon is a genuine problem.

Different companies make similar products and compete in the marketplace in virtually every sector of the economy. Cars, planes, computers, food, clothes, houses, insurance policies, televisions, cell phones, vacation packages, car loans, etc., etc. Why do you believe that "competition in the health care industry doesn't work that way?" In what way does "the health care industry" differ from these other industries that precludes the benefits of markets and competition?

Posted by Mixner | November 29, 2007 12:09 PM

And that is exactly the blinkered Panglossianism I would expect from Yancey. Of course, if the increase in bank branches is driven by the fact that most people do not care which bank they use, and just sign up with whoever has the closest branch to their house, then it might be cost-effective for banks to compete on number of locations even though it delivers no added utility to bank clients whatsoever. The bank might still be able to pay a higher rent than, say, a toy store could, even though most people in the neighborhood would prefer a toy store in that location. This is a normal model of how a system gets stuck in a non-ideal state for the average citizen, because it is a more ideal state for the average bank. Similarly, the fact that TV networks break up their shows with commercials does not imply that most people prefer to watch their TV shows with commercials.

And similarly, I have no doubt that drug companies which design me-too drugs generally do right by their shareholders. The question is whether they do anything of value for the rest of society, or whether they simply suck up research dollars that would be better employed looking for new drugs. The fact that it is profitable does not actually mean that patients benefit. michael's post argues that for many me-too drugs, patients do benefit. That is actual evidence, rather than market-Panglossian incantation.

Posted by brooksfoe | November 29, 2007 12:18 PM

Why do you believe that "competition in the health care industry doesn't work that way?" In what way does "the health care industry" differ from these other industries that precludes the benefits of markets and competition?

The consumer in the average health-care transaction is not the same as the payer. Thus, consumers are often not at all price-conscious.

I'm not saying brooksfoe's right, I'm saying that your car insurance doesn't buy you a free car when you decide you need one.

Posted by Rob Lyman | November 29, 2007 12:20 PM

brooksfoe,

And similarly, I have no doubt that drug companies which design me-too drugs generally do right by their shareholders. The question is whether they do anything of value for the rest of society, or whether they simply suck up research dollars that would be better employed looking for new drugs.

Well, I'm still waiting for your explanation of why this alleged problem of "me-tooism" applies to the pharmaceutical industry but not to every other kind of industry (including industries that make other kinds of health care products, like MRI machines and surgical equipment).

Ford and GM and Toyota and Honda make very similar models of cars and trucks. Heavens, what a waste! All that duplication of R&D! All those "wasted" dollars in marketing and profit! Clearly, it would be much better if the government took over the auto industry and assigned each company exclusive rights to manufacture a particular kind of automobile.

Posted by Mixner | November 29, 2007 12:32 PM

If "most people" preferred a toy store to a bank branch in that location, why wouldn't a toy company be willing to outbid the bank for the facilities?

Posted by Scott Wood | November 29, 2007 12:49 PM

The consumer in the average health-care transaction is not the same as the payer. Thus, consumers are often not at all price-conscious.

That's not true. Health care consumers are made price conscious through deductibles, co-pays, "usual and customary" reimbursements, differences in the prices of premiums, the substitution of generic drugs for name-brand ones, and other mechanisms. All insurance insulates customers from costs at the point of delivery to some extent, but ultimately it is the customers who bear the costs. Health insurers who have to pay excessive prices for drugs because of the alleged problem of "me-tooism" will pass those costs on to their customers in the form of higher premiums (co-pays, deductibles, etc.), just as, say, car manufacturers who make "me-too" products pass on the costs of their duplicated R&D to their customers.

Posted by Mixner | November 29, 2007 12:53 PM

brooksfoe:

To expand somewhat on the implied trade-offs in my previous (10:10 AM post) above. When an MD writes an Rx for Lexapro, I believe the most prescribed drug in the class now, at some point he is likely to get a request from a pharmacy benefit manager to substitute the earlier version racemic citalopram. Now I would argue that Zoloft (sertraline), now a generic, would be a more appropriate substitute not having the seizure propensity. The lower cost citalopram 'beneifts society' but, if there is another case like my patient, well that 'societal benefit' will be at the cost of death for some individual.

Posted by michael | November 29, 2007 1:03 PM

Brooksfoe,

There is nothing panglossian about it- all I am pointing out is that if you are correct about revealed preferences, then these "toy stores", or any other business you and an appropriate number of fellow Manhattanites actually have a revealed preference for, will outbid the banks for the properties (or outbid other businesses).

And, the added utility to the customers is the nearness of their bank's branch. If people are choosing their bank based on the nearness of the local branch, then they are getting utility from this. You constantly confuse your stated preferences with the revealed preferences of other people- and you do it in the following quote as well:

And similarly, I have no doubt that drug companies which design me-too drugs generally do right by their shareholders. The question is whether they do anything of value for the rest of society, or whether they simply suck up research dollars that would be better employed looking for new drugs

You understand revealed preference in the first sentence- shareholders and the management they hire put the shareholder's capital into the discovery and development of me-too drugs. However, then, in the second sentence, you substitute as better your stated preference for what the shareholder's should do; and then you completely lose the thread of logic by stating that the shareholders are somehow "sucking up research dollars" in their pursuits of me-too drugs- it is their capital being employed in the endeavor, an endeavor that you, yourself, state is in their interest.

Posted by Yancey Ward | November 29, 2007 2:02 PM

Health care consumers are made price conscious through deductibles,

which are probably so low they are met regardless of whether spent on drugs or on office visits

co-pays,

which are flat fees per action, not dependent on the actual price of the action

"usual and customary" reimbursements,

which affect suppliers, not consumers

differences in the prices of premiums,

Which are often borne by other third parties, namely employers, and which in any case are only distantly tied to the cost of drugs

the substitution of generic drugs for name-brand ones,

Which may make some difference in your co-pay, or might not, or might make a much smaller difference to the consumer than to the insurance company.

All I'm saying is that the demand curve for drugs is very flat. You have no use for them at any price if you're not sick, and you want the best and fastest if you are, while health insurance insulates you from the true cost. That is a good condition for two products splitting the market without producing price reductions.

Furthermore, there's an information problem; most consumers don't know anything about drugs and are just taking what their doctor prescribes (or what they saw on TV last night). So they might not even be aware of the existence of a lower-cost alternative, even if they would really prefer to pay less.

Posted by Rob Lyman | November 29, 2007 2:56 PM

which are probably so low they are met regardless of whether spent on drugs or on office visits

Huh? There is a huge range of deductibles, from zero up to tens of thousands of dollars. The typical catastrophic health care plan trades low premiums for high deductibles. The typical HMO or POS plan does the opposite.

which are flat fees per action, not dependent on the actual price of the action

Nonsense. Of course they're dependent on the "actual price of the action." Under my insurance plan, for example, which is a fairly typical POS plan, the co-pay for an out-of-network office visit is $35, versus $20 for an in-network office visit. And the difference in co-pays for out-of-network vs. in-network in-patient services is even greater, potentially thousands of dollars. These co-pay differences reflect the different costs to my insurer of providing in-network vs. out-of-network care.

Which are often borne by other third parties, namely employers, and which in any case are only distantly tied to the cost of drugs

Also false. First, employees usually share in the cost of premiums, and a high-priced premium will result in a higher cost to the employee. Second, employer-provided health care is part of an employee's compensation package, and the employee is therefore sensitive to the cost of that benefit just as he is senstive to the cost of any other aspect of his compensation. An employer who provides gold-plated health insurance to his employees is either going to have to charge them extra for the privilege, or reduce some other aspect of their compensation, such as their salary, retirement benefits or vacation benefits. And third, many people purchase their health insurance individually, rather than obtaining it through employment or some other third party.

Which may make some difference in your co-pay, or might not, or might make a much smaller difference to the consumer than to the insurance company.

It may make a signficant difference to either your co-pay, your deductible, your premium, or some other component of your total health c are costs, depending on the type and number of pharmaceutical drugs you consume and the price differential between generic and name-brand versions. A health insurer who provides inferior generics in place of name-brand drugs to his customers without passing on the savings in some way will be at a competitive disadvantage and stands to lose business.

All I'm saying is that the demand curve for drugs is very flat.

On the contrary, the demand curve for drugs is not at all flat. It's sensitive to price just like the demand for any other product or service. The substitution of cheaper generics for name brand equivalents is a clear example of consumer reaction to price differences.

Furthermore, there's an information problem; most consumers don't know anything about drugs and are just taking what their doctor prescribes (or what they saw on TV last night).

There's an "information problem" with respect to virtually every product or service people buy.

Posted by Mixner | November 29, 2007 3:28 PM

Mixner,

We can go back and forth all day about this. But I won't waste my time unless you acknowledge one thing here: health care is funded in a significantly different way that most other consumer industries. Yes, consumers bear the ultimate cost no matter what. But the question is not whether they bear the cost, it's whether they bear it in a way that makes markets work well, such that prices and consumption levels accurately reflect people's preferences.

I say they might not, because the decision to buy and consume a particular drug is largely divorced from the price of the drug itself. Sure, the company will ultimately take it out of you in the premium. But you won't refuse a covered drug in the hopes that your premium will go down. In that sense, the price of a particular prescription is really something of an externality that I impose on the other people in my risk pool; my consumption decisions trespass on the commons (in this case, insurance company funds) in a way which is not well reflected in the cost to me (the premium).

And while there is informational asymmetry in any transaction, the problem is much more acute in the context of medicine, where most of us just do what our doctor says. The doctor, of course, doesn't pay your health insurance premium, which means that in many cases the decisionmaker in a medical case has absolutely no relation to the cost of the decision at all.

Posted by Rob Lyman | November 29, 2007 3:52 PM

We can go back and forth all day about this. But I won't waste my time unless you acknowledge one thing here: health care is funded in a significantly different way that most other consumer industries.

I do acknowledge that. I don't understand why you think that difference means that "me-tooism" is a serious problem with respect to pharmaceutical drugs, but not other products and services, including other health-care-related products and services. If you have an argument to support that assertion, please present it.

Yes, different drug companies produce similar products. So what? Different car companies do the same thing. So do different computer companies. And different food companies. And different airlines. And different television manufacturers. And so on. Should we assume that the market for midsize family sedans "isn't working" on the grounds that the Toyota Camry, the Nissan Altima and the Honda Accord are very similar vehicles, and that the design, production and marketing of those vehicles involves a great deal of duplicated effort? Sorry, the argument just doesn't make any sense.

Posted by Mixner | November 29, 2007 4:06 PM

I don't understand why you think that difference means that "me-tooism" is a serious problem with respect to pharmaceutical drugs, but not other products and services, including other health-care-related products and services. If you have an argument to support that assertion, please present it.

I wasn't trying to make that argument; I was trying to argue that the existence two nearly identical drugs need not lower the price of either one, as you would expect to happen if, after years of one car company monopolizing the market for a particular type of vehicle, a second company started producing one.

Your original question, directed to brooksfoe, was why the market for drugs should be considered any different than the market for other consumer products. My response was: because it is structured differently; the actual price of a single transaction is not reflected in the price a consumer pays for that transaction, unlike in most industries.

Posted by Rob Lyman | November 29, 2007 4:16 PM

I wasn't trying to make that argument;

Well, that alleged problem ("me-tooism" in pharmaceutical drugs) is the subject of this thread. If you agree with me that it's not a problem, great.

I was trying to argue that the existence two nearly identical drugs need not lower the price of either one, as you would expect to happen if, after years of one car company monopolizing the market for a particular type of vehicle, a second company started producing one.

Well, the appearance of a competitor for any product or service does not guarantee a price reduction, but there is overwhelming evidence that competition is likely to produce lower prices than monopoly. You still haven't explained why this effect does not apply to pharmaceutical drugs. Yes, the fact that our health care system is primarily funded through private insurance tends to make a cost-benefit analysis harder for end users, but that's true of everything we fund through insurance or insurance-like mechanisms. Information is always imperfect, and consumers make purchasing choices on the basis of incomplete or incorrect information all the time, whether the thing they're purchasing is a book, a house, the services of a plumber or car mechanic, or health insurance.

Your original question, directed to brooksfoe, was why the market for drugs should be considered any different than the market for other consumer products.

I asked him what difference he thinks there is between the drug industry and other sectors of our economy that prevents the market for drugs from working properly and creates this alleged problem of "me-tooism." I'm still waiting for an answer.

Posted by Mixner | November 29, 2007 5:10 PM

Yes, the fact that our health care system is primarily funded through private insurance tends to make a cost-benefit analysis harder for end users, but that's true of everything we fund through insurance or insurance-like mechanisms.

What other consumer product is purchased primarily by insurance-like mechanisms? The only one I can think of is body-shop work.

And what other consumer product features a decision maker (the doctor) who literally has no financial stake in the decision?

Posted by Rob Lyman | November 29, 2007 5:26 PM

While Rob is right that the consumer demand curve doesn't look like the one for normal drugs, insurance companies do bargain down the price, by giving or withholding inclusion in the formulary, so I think it's fair to say there's competition in the market.

Posted by Megan McArdle | November 29, 2007 5:32 PM

What other consumer product is purchased primarily by insurance-like mechanisms?

As I said, all insurance tends to obscure the cost-benefit calculation for end consumers. They know the cost of their premiums, deductibles, co-pays, etc., but the bulk of the costs of a claim are paid by the insurer, not the customer, whether it's health insurance or any other kind of insurance.

Posted by Mixner | November 29, 2007 5:49 PM

Yes, Mixner, insurance distorts the market. But since no market other than health care is paid primarily by insurance, no other market suffers from the same degree of pervasive distortion. Thus health care cannot be glibly compared to automobiles, as you have repeatedly done.

Posted by Rob Lyman | November 29, 2007 6:03 PM

'Me-too' drugs aren't exactly the same as the drugs they are similar to; they can't be. This means that they may have different side effects and thus may be tolerated better by a patient than the other medication (or vice-versa). Thus, they are not exactly equivalent, even if the primary way they work is identical.

Posted by Matthew Brown | November 29, 2007 6:28 PM

Of course, if the increase in bank branches is driven by the fact that most people do not care which bank they use, and just sign up with whoever has the closest branch to their house, then it might be cost-effective for banks to compete on number of locations even though it delivers no added utility to bank clients whatsoever.

Convenience isn't a utility? Particularly in one of the few areas of the country where walking distance is a primary measure of accessibility?

the fact that TV networks break up their shows with commercials does not imply that most people prefer to watch their TV shows with commercials.

Uh, in this day and age, people have more options than ever for obtaining shows by other means, most of them involving an in-advance exchange of money. Yet the commercial advertising model lives onward.

Sure, people like to complain about the commercials, but talk is cheap, and their actions continue to show that, in many cases, they would rather let advertisers pay for the airtime. That may work as a model for your WWE match of Bob Bank versus Tom Toy Store, but not quite the way you were proposing.

Posted by anony-mouse | November 29, 2007 6:35 PM

I don't understand why you think the comparison to cars is "glib." Is the presence in the market of very similar cars from different auto manufacturers an example of this alleged problem of "me-tooism?" Ditto for very similar computer products, very similar TVs, very similar clothes, and so on. If not, why is the presence of very similar drugs from different pharmaceutical companies a problem? It just doesn't make sense. In a market economy, we expect different companies to compete for the same customers.

And your claim that "no market other than health care is paid primarily by insurance" is just nonsense. People buy insurance to protect against all sorts of risks, not just health risks. Fire, theft, car crashes, disability, death of a spouse, unemployment, natural disasters, and so on.

Posted by Mixner | November 29, 2007 6:37 PM

Mixner, I'm starting to wonder if we're speaking the same language. I didn't say there weren't lots of different kinds of insurance. I said that no market other than health care is so thoroughly dominated by third-party payers.

Fire, theft, car crashes, disability, death of a spouse, unemployment, natural disasters, and so on.

The construction, household goods and paycheck markets (for fire, theft, disability, death, unemployment, and natural disaster insurance) are not funded primarily out of insurance dollars; mostly, you buy these things with cash or labor. The body-shop market is (for car crashes), which I said above. Can you name another industry in which most purchases are funded by third parties?

The problem with "me-too" drugs--which may or may not actually exist--is that, due to a market where the decision of what to buy is divorced from the price, and further where information is more difficult to obtain in other markets, consumers may be convinced to buy expensive goods when cheap ones would be just as good (or only slightly worse), and thus profitability may be more driven by successful marketing than by innovation creating superior products. Thus, shareholder money may be (rationally, from the perspective of profits) allocated to the creation of goods of dubious utility.

A car maker must deliver a car with comparable features and quality for a comparable price because 1) consumers know what they're paying, and don't like being ripped off, and 2) comparisons between cars are relatively easy to make, especially if you subscribe to Consumer Reports. Drug consumers can't make the comparison as easily (who reads clinical studies?), often don't try because they rely on their doctor, and don't care if the pills are overpriced because they're paying a $5 copay either way.

Posted by Rob Lyman | November 29, 2007 7:10 PM

The construction, household goods and paycheck markets (for fire, theft, disability, death, unemployment, and natural disaster insurance) are not funded primarily out of insurance dollars

But money to pay for home repairs or rebuilding resulting from fire, flood, or storm damage is primarily funded through insurance. So are car repairs and replacements resulting from accidents. So are retirement pensions. So is unemployment compensation. So is replacement of goods lost to theft. And so on. Insurance funds all sorts of goods and services in American life, not just health care.

The problem with "me-too" drugs--which may or may not actually exist--is that, due to a market where the decision of what to buy is divorced from the price,

There you again. Your premise is just false. The decision of what to buy is not divorced from the price. Whether the consumer of the product is buying it directly from its manufacturer or through some third party such as a retailer or insurer, his choice is most definitely influenced by the price the manufacturer charges.

and further where information is more difficult to obtain in other markets, consumers may be convinced to buy expensive goods when cheap ones would be just as good (or only slightly worse),

Again, information is incomplete or incorrect in all markets. Consumers "may" be convinced to buy expensive goods over equally good cheaper ones in any market. Do you seriously think the average American makes a fully informed, rational choice whenever he buys a house, a TV, a cell phone plan, a car, or any other common product or service? Of course he doesn't.

A car maker must deliver a car with comparable features and quality for a comparable price because 1) consumers know what they're paying, and don't like being ripped off, and 2) comparisons between cars are relatively easy to make, especially if you subscribe to Consumer Reports.

Oh please. The vast majority of car purchasing decisions are not made on the basis of a rational, dispassionate evaluation of quality and features, they're at least as much a matter of emotional choices influenced by styling or advertising or peer pressure, and so on. In contrast, a health insurer is likely to make a careful, rational cost-benefit analysis of competing drugs to pick the ones that will be most satisfactory to his customers.

Unless you can show that the market for pharmaceutical drugs (or is it the market for all health-related products and services?) is somehow uniquely vulnerable to the problems of imperfect information and irrational decision-making by consumers, I don't see what basis you think you have for your position.

Posted by Mixner | November 29, 2007 8:24 PM

Mixner, are you even reading what I write? Of course insurance is commonplace. But its distortions of non-healthcare markets are much smaller than in health care, because the insurance funding is a much smaller percentage of the market.

Whether the consumer of the product is buying it directly from its manufacturer or through some third party such as a retailer or insurer, his choice is most definitely influenced by the price the manufacturer charges.

If you have a health plan that charges you $5 for a prescription regardless of what it actually costs, how are you influenced by the price the insurer pays for your prescription?

Do you seriously think the average American makes a fully informed, rational choice whenever he buys a house, a TV, a cell phone plan, a car, or any other common product or service?

No. But the decision is more informed and rational than "Doctor, I'm sick." "You need drug X to feel better." "OK."

Posted by Rob Lyman | November 29, 2007 8:35 PM

anony-mouse, I'm getting the same feeling Rob is that you're not actually reading what I write. The point is that because different businesses compete in different ways and have different incentives, it is not necessary that all the decisions they make combine to maximize the utility to customers, though they do necessarily maximize the utility to the businesses. I was trying to provide an easy model which shows that problems for customers can exist, even under capitalism, which ought to be an obvious enough statement: there can be non-ideal situations for humans in the capitalist world.

In the bank example, here's how I'm imagining things work. I don't know whether they do, but it's a plausible scenario. Let's posit that yes, it is convenient to have two or three bank branches near my apartment. But it is not particularly convenient to have six, because I could just switch my account to the one that's near my apartment. It is however crucial to each bank that it be near my apartment, or it will lose my business. Because the amounts of money traded by banks are vastly larger than the amounts processed by toy stores, and because banks must compete on location rather than on price (they can't really attract distant customers by offering higher interest rates), banks may decide to outbid toy stores for real estate even though residents would prefer an urban mix that had fewer bank branches. The incentives and revenue models differ for banks and toy stores in deciding how much to spend on urban rent, and this can lead to non-optimal results for residents.

But we were talking about drugs. Yancey says "it's the shareholders' money" that's being used to finance me-too drugs, so the idea that it could be used to do something else is moot. Well, if me-too drugs provide no social utility at all, then everyone would be better off if researching them were banned, in which case shareholders would be forced to use their money to finance research that was productive. So the question, again, comes down to whether they do or do not provide some kind of utility. As Rob Lyman says, the fact that third parties pay for most drugs means that the pressure on prices exerted by competition may be lower or absent. So there is no substitute in this case for actually looking at the facts: do me-too drugs cut prices? Do they sometimes work better for some patients? You can't just theorize the issue out of existence by positing that capitalism is perfect for everyone.

Posted by brooksfoe | November 29, 2007 9:30 PM

Brooksfoe,

See, you again confuse your preferences for someone else's. Investors would not necessarily be forced to fund research into some other drug if you banned me-too drugs; absent the freedom to invest in a me-too drug, they might very well invest in the expansion of banks with lots of branches in Manhattan. So, I gather you would simply force people to invest in the drugs that you think are important. To borrow Mixner's arguments for a moment, there is no reason not to extend this idea of maximizing "brooksfoean social utility" by banning the production of any me-too product since the resources wasted in the development of such products are going to often be exactly the same as the resources wasted in me-too drug development.

Posted by Yancey Ward | November 29, 2007 10:22 PM

OK, paradigm shift, folks.

I think that all of us--brooksfoe, Yancy, AM, Mixner, MM--can agree that goods with positive externalities are generally under-supplied because they have social benefits which are greater than the producer is able to capture in the price.

Well, a truly innovative, new drug in a world where me-too drugs are permitted has at least one positive externality: it points out a successful mechanism for treatment. Target this enzyme, this metabolic process, try this class of chemical. The me-too drugs which come after can then capture some of the value of this innovation for themselves rather than letting it all flow to the original innovator.

The me-too drug may actually prove highly beneficial, even superior to the original (which is a good argument for not banning them), but it will not have this externality. Thus, we would naively expect, even in a world of perfect competition, that innovative drugs would be under-supplied relative to me-too drugs.

Right?

Posted by Rob Lyman | November 30, 2007 12:08 AM

Thus, we would naively expect, even in a world of perfect competition, that innovative drugs would be under-supplied relative to me-too drugs.

Right?

Not necessarily, no. That would be true if me-too drugs could be rolled out right away. But they take time to develop. Which means that the manufacturer of the innovative drug gets the market all to itself for a period of time, and gets the concomitant monopoly pricing, whereas none of the me-too drug manufacturers do.

Posted by David Nieporent | November 30, 2007 7:00 AM

In the bank example, here's how I'm imagining things work. I don't know whether they do, but it's a plausible scenario. Let's posit that yes, it is convenient to have two or three bank branches near my apartment. But it is not particularly convenient to have six, because I could just switch my account to the one that's near my apartment. It is however crucial to each bank that it be near my apartment, or it will lose my business.

The flaw in your argument should be obvious: if it were true, then why "six"? Why not every building in Manhattan being a bank? If there ere an infinite supply of customers, your imagined scenario might make sense. But since there isn't, there reaches a point at which the extra branches don't bring in money.

Similarly, the fact that TV networks break up their shows with commercials does not imply that most people prefer to watch their TV shows with commercials.

Actually, it does. Because, of course, the word 'prefer' that you use is missing something: prefer it to what? They may not 'prefer' it to some idealized situation, but they prefer it to the actual alternative. (Not the status quo sans commercials, but television that they have to pay for. And actually, for those people without DVRs, commercials are useful -- nice to get a chance to go to the bathroom, get a snack, whatever -- without missing the show.)

Posted by David Nieporent | November 30, 2007 7:08 AM

I don't want the government to regulate what drugs drug companies research. Absent that, there really isn't a way to prevent research into me-too drugs.

On the other hand, I am a big fan of government funding through bounties. Rather than dumping tons of government money into drug research, I'd like to see the federal government fund some basic medical research that is freely shared with all and then offer bounties for successfully developing a drug for conditions that aren't being treated. The advantage of bounties is that the government doesn't pay for failed research.

Selecting what to offer bounties for will still be an imperfect process, but then you have to involve humans in the process somehow.

I would like to see this method applied to more areas of research and development. It's much easier for some government bureaucrat or politician to determine what we need to accomplish (Better gas mileage! Better batteries! Fusion power! Free ice cream!) than it is for a government bureaucrat or politician to determine whether LabCo ResearchCorp has a credible research proposal or method to solve a problem if only it had $42 billion dollars in federal funding (pork).

EI

Posted by Earnest Iconoclast | November 30, 2007 11:37 AM

I don't want the government to regulate what drugs drug companies research.

I don't either. But because the course of medical research depends heavily on government decisions at the FDA and USPTO, it's worth asking if those decisions are being made in a way that benefits society the most.

Posted by Rob Lyman | November 30, 2007 12:18 PM

I had crippling, suicidally severe depression as a teenager. They tried me on Paxil, they tried Zoloft . . . no effect. They tried Prozac, I broke out in hives. They tried Wellbutrin, and I became agitated. They tried Effexor, no effect. They tried amoxapine (a tricyclic) for a while, and they tried lithium; no effect.

Then they tried Luvox, and it worked. Hey, you notice something? Luvox is an SSRI -- just like Paxil, Zoloft, and Prozac. It treats the "same condition in the same way" as those three drugs.

Oops! It turns out those "me-too" drugs are all different drugs, which means they all have somewhat different effects, and so affect different people different ways.

Look, if you socialists are going to eliminate wasteful me-tooism, could you please go harass makers of ties? Do we really need all those different colors and patterns and lengths? One-size-fits-most is a much smaller problem when applied to neckwear than when applied to human health.

Posted by Oildrilling Lunatic | November 30, 2007 1:33 PM