Wednesday, November 2, 2011

Free Markets and Health Care: A Failure

Let's assume you develop Deadman's Disease.  Deadman's Disease is a lethal disease that can only be cured in one method - a shot to the arm.  The shot was developed by a large multi-national pharmaceutical corporation, which currently holds the patent for the drug.  If you were the CEO what would you charge for this shot?

From a pure Adam Smith Supply-Demand standpoint, there should be a point where the supply meets the demand, and you charge the equilibrium price.  However, what is the demand for a given price?  If you have Deadman's Disease, and the shot costs $1, you purchase the shot.  If the shot costs $10, then you purchase the shot.  If the shot costs $100,000, you buy the shot.  There is no firm dollar amount where one says, "You know, for $350,000... my life isn't worth it, but for $340K I'd consider it."  Or, even if you are wavering, there's probably a parent, spouse, child, or Cub Scout Troop fundraiser which may purchase the shot on your behalf.  Therefore, instead of a curve, you have a demand line where the quantity demanded equals the number of people diagnosed with Deadman's Disease per year.

What does the CEO of LMN Pharma Corp do?  Well, he could tally up the amount spent on research and development, production, marketing, and general overhead for this particular shot, add 10% profit, and then divide this by the expected number of shots to be sold until the patent expires.  Stop laughing - that's not the way the free market works.  The way it really works is that with a monopoly on a live saving drug, you charge as much as you can.  Turns out, there's really no limit.  The only person who really has the power to limit this charge is (no, really) health insurance companies.  However, if health insurance adjusters are former pharmaceutical executives (which many of them are), then a $125,000 shot may not seem out of line if you know that there are far more expensive options out there to treat the disease.  LMN Pharma Corp may even provide this more expensive option at $768,000 for a whole series of shots and a nifty medical device.  Relatively, in this case, the $125,000 shot saves half a million dollars.  Yippee!

Add a layer of fog between the consumer and the price board, and no one really knows what health care costs in America until the bill is mailed.  This is why health care, without substantial reform, is too important to leave to the whim of an amoral free market.  That Invisible Hand might be wrapped around your neck.

No comments:

Post a Comment