The Simple Economics of Why Prescription Drug Prices Are So Darned High: Econ 101 – My Apologies

To all:  My apologies, but I just mistakenly pressed the “Publish” button on this blog post.  But it is only in an early draft at this point.  Please ignore it.  I hope to complete the post at some point, but it is far from that yet.

Frank

The Simple Economics of Why Prescription Drug Prices Are So Darned High: Econ 101

My apologies, but a draft of this was posted when I mistakenly clicked the “publish” button when I was working on it.  It still has far to go before being a completed piece, and it may be some time before I finish it.  There is more I want to look into.  Please ignore this for now.

Frank

 

A)  Introduction

The prices of prescription drugs – drugs that are often essential to our health and well-being – are unconscionably high in the US.  Generics can be an exception, although even for these it might not always be the case.  And even with such high prices, there are nevertheless critical gaps in what drugs are developed.  Delays in the development of a new generation of antibiotics is one example, as will be discussed below.

Why is this so?  The short answer is that they price them high because they can.  A more detailed answer requires an examination of why they can, as well as a look at how they determine how high to set their prices.  This goes into some basic economics of how someone with monopoly power (as pharmaceutical companies will often have, for several possible reasons) will set prices in a market such as this, with particular features on both the demand and on the supply side.  We will examine that below.

And the prices are not simply high, but also have grown sharply in recent years.  The chart at the top of this post shows prices for baskets of the most commonly used prescription drugs, as reported in a series of analyses undertaken by the AARP (see here, here, here, and here for the most recent in the series for each category of drug).  These most recent reports cover prices from 2006 through to 2017 (with the exception of the series for brand name drugs, which is now available also for 2018).

The set of all prescription drugs cover a basket of 754 drugs with the prices as billed by pharmacy benefit managers to health insurance plans.  The prices are what the cost would be to take the drugs for a one-year period, and the drug price indices are weighted by retail prescription sales in 2014 to Americans aged 50 and above.

 

note fixed 2014 weights will bias downwards

f

f

Top 6 US firms, both by sales revenue and by market cap

f

f

f

f

f

f

f

f

f

g

g

f

g

g

g

f

f

f

f

f

f

g

Polling Results Should Indeed be Worrying for the Democrats

The Washington Post and ABC News jointly sponsor a regular poll of American voters on a range of political issues, including whom they would vote for in upcoming Congressional elections.  Their most recent poll, released on November 14, showed that registered voters nationally would favor a Republican over a Democrat in their local congressional district race, by a margin of 10 percentage points.  The pollsters noted that this margin is the largest margin Republicans have enjoyed in all the polls they have conducted asking this question, in a series that goes back decades.

Numerous pundits soon followed with commentary on this, with articles such as “Why the generic ballot is so ominous for Democrats”, and “Democrats face a 2022 superstorm”, and “Democrats Shouldn’t Panic.  They Should Go Into Shock”.  Viewed in a longer-term context, and not simply in terms of the current polling margin in favor of the Republicans, should there indeed be such a concern if you are a Democrat?  As we will discuss in this post, the answer is yes.

The chart at the top of this post shows the responses that have been given to this question in the Washington Post / ABC News polls over the last two decades.  The figures for the past polling results are provided online here.  The polls asking this specific question have been undertaken in the periods leading up to each midterm election, normally starting about one year before the midterm election date and then repeated every few months until the November election.  There is then a gap – normally of three years – before they start the cycle for the next midterm election.

The specific question asked is:  “If the election for the U.S. House of Representatives were being held today, would you vote for (the Democratic candidate) or (the Republican candidate) in your congressional district? Would you lean toward the (Democratic candidate) or toward the (Republican candidate)?”  They also allow for possible responses of some other candidate, or neither, or would not vote, or no opinion, which I have combined into a single “Other / No Opinion” category in the chart.

Some points to note:

a)  The swing in preferences seen in the current midterm cycle is not unusual.  One saw a similar swing in favor of the Republicans in the period leading up to the 2010 election, and in favor of the Democrats in the periods leading up to the 2006 and 2018 elections.

b)  The initial polling results (one year before the midterm elections) were generally a pretty good predictor of the final outcome.  The polling results generally fluctuated within a relatively more narrow range in the multiple polls in the year leading up to the midterm itself.  The year 2014 was an exception, where the early indication was that Republican support had declined, but with it then recovering prior to the election.

c)  The “Other / No Opinion” category generally fluctuated within a range of roughly 5 percentage points, and in an understandable pattern.  Uncertainty on whom (if any) to vote for generally rose in the three years since the prior midterm, and then fell as one got closer to the election date.

d)  The substantial swings (from three years earlier) found in the initial polls in several of the cases (for the 2006, 2010, and 2018 midterms), coupled with the relatively smaller fluctuations then found in the year leading up to the election, were thus highly predictive.  The electoral results were net gains for the Democrats of 31 seats in 2006 and 41 seats in 2018, and a net gain for the Republicans of 64 seats in 2010.

Based on this pattern, Democrats can expect to lose a substantial number of seats in the 2022 midterms.  The closest parallel is to 2010, for several reasons.  Both 2010 and 2022 were (or will be) the first midterms of a newly elected Democratic president (Obama and Biden).  In the period leading up to 2010, Democrats saw their polling result fall (in the initial poll one year before the 2010 midterm, from three years before) by 9 percentage points, while that of the Republicans rose by 7 percentage points.   In the new poll one year before the 2022 midterm, the Democrats have seen the same fall of 9 percentage points in their polling result, while the preference for the Republicans rose again by 7 percentage points.

The Democrats had a net loss of 64 seats in the House of Representatives in 2010.  These early polling results suggest they could expect a similar result in 2022.

There are, of course, a number of provisoes:

a)  As they always say when investing in the stock market:  “Past performance is no guarantee of future returns.”  While there may have been this pattern in several of the recent midterm election cycles, there is no guarantee that pattern will continue.

b)  Furthermore, that pattern is based on a very small number of cases.  There have only been five midterm elections in the last 20 years, and substantial swings in voter preferences in only three of them.  And only one case (2010) with a Democratic president in his first term in office.  it is dangerous to generalize from figures for such a small number of election cycles.  But it would not be helpful to go back further in time as the political environment has changed, with more of a left-right polarization now than one had before.

c)  There will also be an impact from the substantial gerrymandering of congressional district lines now being redrawn to reflect the new census numbers.  The Supreme Court in 2019 ruled that it would not intervene in this practice when it considered two cases brought before it (of North Carolina and Maryland).  Each had egregiously gerrymandered district lines, and there were open and public statements in each from the politicians who had drawn those district lines that they had done so for the greatest possible partisan advantage that they could manage.

The Supreme Court nevertheless ruled that gerrymandering was not reviewable by any federal court, on a 5-4 vote where the five in the majority were the five Republican appointees to the court.  As a result, a number of states are now redrawing district lines to maximize partisan advantage.  And the ruling heavily favored Republicans, given their control of a larger number of states where politicians are allowed to draw the district lines that they will then be running in.  Republicans at the state level have full control of redrawing the lines for 184 congressional districts this year, while Democrats have full control in states where lines for just 75 districts will be redrawn.  In part this is because several of the larger Democratically controlled states (including California, Washington, and Colorado) now use independent, nonpartisan, commissions to draw the district lines.

The consequences of this gerrymandering will be on top of what one should expect from shifts in voter preferences.  And the margin in seats in the House that gives Democrats control of the chamber is only five following the 2020 election.  Already by this point, with only a small number of states having completed the redistricting process, a mid-November analysis at the New York Times concluded that Republicans will pick up a net of five congressional seats, and thus gain control of the House, even if the voting numbers in each locale were the same as what they were in 2020.  It would simply be a consequence of the newly drawn lines.

Coupling the gerrymandering with the shift in the preferences for Democrats vs. Republicans found in the polling results, there is every reason to expect Democrats will lose control of the House.  This in itself is not surprising.  Since the presidency of John Quincy Adams in 1826, the party of the incumbent president has lost seats in the House in the midterm after their first term election in all cases other than the sole exceptions of Franklin Roosevelt in 1934 and George W. Bush in 2002.  With the Democrats holding a majority in the House of just five seats, most have expected that Republicans will gain control after the 2022 midterms.

But the polling results, on top of the gerrymandering as well as the historical norm, suggest the Democratic losses are likely to be large.  Furthermore, the losses are most likely to be in the more competitive districts, which are more likely to be currently represented by the more moderate Democrats.  Thus the remaining Democrats in Congress following the 2022 election are likely to be the ones further to the left.  That is, the center of the Democrats is likely then to be shifted to the left, just as the center of the Republicans has shifted in recent years to the right.

Polarization, already large, would grow.