Four Reasons Drugs Are Expensive, Of Which Two Are False


“North Korea and the drug industry are the last bastions of Marxism”

Matthew Herper ,

Guest post written by Jack Scannell

Editor’s note: When Jack Scannell, the guy who coined the term “Eroom’s Law” (Moore’s Law backwards) to describe the exponential increase in the cost of developing a new drug between 1950 and 2010, tells you he wants to tell you everything he thinks about drug prices, you listen. What follows is long — at 10,000 words, it’s more than triple your average Forbes cover story — but I think it rewards a look. Take it away, Jack.

If I offered to buy your shoes you would think I was strange, but we could probably haggle a price. If I offered to buy your children, we would not get to the haggling stage. The difference between trading shoes and children is not merely legal. It is also moral. People find it unpalatable, even taboo, to put prices on things that we treat as absolutes; life, liberty, or health. People have moral qualms about the cost of medicines for the sick or dying, but not about the cost of Botox or liposuction.

Yet life-saving medicines do not exist in a parallel moral universe, free from economics. Taxes are paid, as are health insurance premiums; healthcare budgets are set; doctors earn money, often in direct proportion to the quantity of treatment they provide; professors seek riches as biotech entrepreneurs; venture capitalists gamble other people’s money on the professors’ ideas; drug companies pay wages to employees and dividends to shareholders; and former hedge fund managers set up firms to play pharmaceutical arbitrage, buying drugs low then selling them high.

A recent uptick in commercial drug discovery in diseases such as cancer, hepatitis C, and multiple sclerosis means that the price of drugs is firmly a First World Problem; not merely something that troubles poor people in faraway countries. This article focuses on the economics of the problem. The aim is to explain why many drugs are so expensive that even First World health systems struggle to pay for them.

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