This is a clear example of a cartel that's only possible because of bad intellectual property laws. Without these dubiously long patents, there would be plenty of new competitors who would want a piece of that $12 billion.

There's nothing "dubiously long" about the patents here. Drug companies are lucky to get 10 years out of a patent (in a field where things change far more slowly than people in the tech industry are used to). Injectable insulin is long out of patent. What's patented are the iterative improvements to manufactured insulin drug manufacturers have been developing over decades: http://www.medscape.com/viewarticle/841669.

Serious question: what stops a company in the US from, tomorrow, setting up shop and making the insulin recipe from 14 years ago? Is it FDA regulations?

Nothing much. FDA regulations are a major hurdle though, and means you'd need to sell a pretty high volume to break even, but nothing insane.

Problem: You set up shop, you make up a big batch of generic insulin and then...you don't sell any, because doctors aren't prescribing it. Why would they? Most probably haven't heard of it, and the ones who have will also know (correctly) that the patented improvements may be minor improvements, but they are improvements. All you've got to compete on is cost, but the doctors aren't paying the cost. Nor are the majority of their customers; they have insurance. The minority who are paying the cost directly would probably prefer a cheaper option, but that would require them to hear of it, and it's not clear there's enough of them to cover your overheads even if they did hear of it, and your generic drug margins don't cover the cost of the massive marketing campaign you'd need; you're not selling Viagra here.

Your success will rely on getting the big insurers to stop covering the better forms of insulin, or at least stop covering it in the general case. Which they absolutely should do! And the second one of them tries the "insulin cartel" will do a little lobbying, and some patient groups will express outrage, and a congressman will start talking about hearings, and the NYT will run an nominally balanced news piece about insurance company greed forcing diabetics onto archaic, inferior forms of insulin, and the insurance company will give up, because hell, they just pass the costs on in the form of premiums; it's no skin off their nose.

And you'll go under. And the worst part is, there's no big conspiracy or villain. The system is just incredibly screwed up.

From your story, it sort of sounds like doctors are the villains. Isn't it their job to choose the best medicine for their patients. If an uninsured patient asks for a cheaper older one, then they should be prepared to find that. But then perhaps you could pass the buck to the patient for not finding a doctor willing to search for cheap drugs. It just goes round in circles.

For insulin, is there even such as thing as "better"? It's not treating a disease with some probability of success that you want to maximize. It either works or it doesn't. At least that's my limited understanding.

Well presumably, if current regulations did not turn out to be a lethal roadblock and a pharma company was lucky enough to become successful - and new regulations were not created as a response to new market entrants (via lobbying/agency collusion) nor were illegal marketing practices utilized [1] - then they will likely just get acquired by the big corps.

There are plenty of good reasons there are only ever ~6 pharma companies and most have been around for 150yrs. There are few markets where oligopolies have maintained power for as long and as consistently as pharma. A few reasons why:

- Plenty of capital to support M&A

- Legendary regulatory hurdles for new entrants

- An obedient judicial system where the annual major legal cases for illegal marketing by big pharma cos result in a slap on the wrist

[1] https://en.wikipedia.org/wiki/List_of_largest_pharmaceutical...

But couldn't you argue that the problem is in the patent system, not in the free market? 3 companies holding on to patents longer than normal doesn't sound like a free market to me.

As the article says, if the patents didn't exist, we could have a generic brands.

Patents aren't free market, since they require the government to play a role (enforcement) in favour of patent holders. A free market wouldn't be able to protect the IP, it would use DRM and peer-to-peer contracts, and as soon as the receipe gets out, they'd be in for ther investment. A socialist government would define a type a company that is allowed to conduct medical research and fix the bounds within which the company can invest or the sale prices.

That's stretching the definition of free market a bit. You could apply it to real estate property rights too and argue that a corner shop isn't in a free market because the owner has paid for a monopoly on access to that building which is most suited to selling things from. His property rights are protected by the police to stop competitors sending their goons in to take over the building. The same goes for any business that owns any sort of valuable property, especially if their ownership gives them exclusive access to it. So I think a useful definition of free market has to include various property rights, including IP. As long as people can trade those rights among each other, whoever holds the patent would probably have spent a fair amount of money to either invent or buy it.

There is always debate over the extent of "free". At the extreme, the state doesn't enforce land property and the landlord is responsible for hiring an army to protect some land.

In a more moderate situation land and property are organized and enforced by the state, because this protection is more efficient for everyone.

Intellectual property is incredibly hard to enforce, because anyone can copy an idea, or bits on a hard drive, so you'll have to come up with convoluted solutions to check for the presence of information at every point in a network, and we're expecting citizen to pay taxes to pay the police force who will enforce those rights in favour of the owners.

There are other, more efficient means, but they involve the richest to get a smaller cut (e.g. instead of the state enforcing DRMs for free, they have to pay for good DRM themselves), so it's very valuable for them to leverage the state to enforce their self-proclaimed rights.

There's a fundamental difference between physical property and intellectual "property": an owner of the former can conceivably hire guards to protect or restrict access to that property, since physical objects are generally localized phenomena.

But there is no conceivable way to enforce things like copyright or patents without something at least as powerful as a government, since they are supposed to be binding on every single person, everywhere, all the time.

IMO the concept of "intellectual property" is at best orthogonal to that of a "free market".

The fact that drugs are cheaper in Europe does not mean the market there is fairer or more efficient: https://en.wikipedia.org/wiki/Monopsony. European governments have monopsonist power: through negotiating with manufacturers directly, they drive prices below the efficient level.

If the OP allegation that just three companies control the insulin market is correct, then it doesn't seem appropriate to use the term "efficient" to describe the equilibrium condition that exists without the monopsony. Of course, we'd all probably be better off with a well functioning market free from monopolies or monopsonies.

Is that a monopsony though?

The market for drug companies is global. If you were talking about doctors or some type of medical provider that was limited to providing goods and services within a single jurisdiction, you might have a point.

Even if it is a monopsony, the questions are 1) do they abuse its monopsony powers, and 2) what factors go ino defining 'efficient' and 'abuse'?

No, the monopsony designation is key to the comment I was responding to and the point I was trying to make.

If there is no monopsony power, it's hard to make any claim of abuse on the part of the government. Single payer governments are leveraging their bargaining power like any rational market participant. Drug companies are not required to sell to them. They do so of their own volition at a price favorable to their bottom line, otherwise they wouldn't do it.

Most shareholders would be up in arms if instead of a 5% loss in profit due to government monopsony, the company CEO decided to shut down the company and not sell anything at all, so the statement "not required" isn't that relevant.

"They do so of their own volition". No. You are expressing the Panglossian viewpoint that just because something happened it was the best choice.

We know from experimental economics that people make decisions different than rational market theory would predict. The heads of large pharmaceutical companies are not exempt from this irrationality.

Nor are all people in government short-sighted pennypinchers. The price negotiations also include the reality that some of the profits are turned into more research for future drugs. Hence the questions of what "efficient" and "abuse" means, which go into the pricing negotiations.

I think the "monopsony==inefficient market" argument is a fig leaf for the shibboleth that state economic actors are somehow "tainted" because they're not "private" enterprises. If a pharmaceutical firm were "negotiated" (tortured?) below their break-even somehow by state actors, they would simply fold. The entire concept of "below efficiency levels" is questionable here.

"below efficiency levels" isn't some sort of moral statement, it's a mathematical one. It's not a question of moving sellers below their break-even point (you're correct that would obviously never happen). It's about transferring producer surplus to consumer surplus and introducing deadweight loss into the system.

https://en.wikipedia.org/wiki/Monopsony#Welfare_implications explains it pretty clearly for the example of labor.

"A mathematical one" in a simplified analysis which assumes a rational actor model which doesn't model what people actually do.

Or if you want to use the model, the deadweight loss in your evaluation can instead be interpreted as the price that people are willing to pay for the good feelings of knowing that everyone in the country has accessible and affordable basic health care.

> assumes a rational actor model which doesn't model what people actually do

Sure, but in the case of drug prices in countries with national health systems we don't really have any reason to think that the model doesn't reflect reality.

> the deadweight loss in your evaluation can instead be interpreted

Yes, this is exactly my point! The science of economics makes no judgement about the relative moral values at play here. That may very well be a tradeoff people want to make. Or it might not. Economics doesn't comment on that question one way or another, it nearly provides data on the practical outcome of the decision.

Which is why I wrote: Hence the questions of what "efficient" and "abuse" means, which go into the pricing negotiations.

People don't consume health care as a typical commodity. Choices you make around health care are existential. It's not just a cost calculation. So without a state actor you would still not have the behavior of an efficient market.

Besides. Even if companies are forced below their break even point by strong consumers so that they need to stop selling to some market and even if they die because of it then it's still ok.

Companies unlike people should be allowed to die. That's one of the ways market evolves. One of the way market avoids local optima. Companies dying because they cannot provide the market at the prices market expects is the normal thing.

People dying because cartel prices essential good above what consumers can afford is not.

Better yet become monopoly an monopsony at the same time. You don't even need to be government for that. Isn't US beautiful: http://www.beckershospitalreview.com/hospital-management-adm...

I was a member of a very large public sector health plan that was extremely aggressive about negotiations, to the point that for awhile any maintenance medication had to be shipped from Canada. They get good prices, but not that good -- iirc my blood pressure medication total cost was 10-15% less than the shitty small business HMO that I had previously.

Generally speaking, the US government demands most favored pricing and gets it. No way we would pay more than France.

Europe does better because they have the ability to prevent sale of a drug and the drug company can just raise the price in the US. If the US gets in the game, I would expect European prices to spike, especially in smaller countries.

> Generally speaking, the US government demands most favored pricing and gets it. No way we would pay more than France.

I though the US government, except for the VA, was "not permitted to negotiate prices of drugs with the drug companies" due to Medicare Part D. (Quoting https://en.wikipedia.org/wiki/Medicare_Part_D#Criticisms .) Was that prohibition removed?

If it's still there, then wouldn't that prevent the US government from demanding most favored pricing, as that would be a negotiation.

I was referring to the hypothetical cases where the Federal government does negotiate.

My guess is they do not because hey would put companies out of business and impact many countries.

Probably depends on the cost of medication to begin with. My HBP medication is like 25 cents a pill even without insurance. I figure it can't really go much lower than that given that all those folks at the pharmacy need to be paid. Now if something is $25 a pill, there's definitely more room for negotiation.

If we just put someone else in charge of the market, things will be better? Maybe I can vote them out if they mismanage the market, eh?

Or, rather, I can vote out the people who delegated the appointment of top-level bureaucrats to their senior staff, who suggested industry insiders intent on regulatory capture?

I can vote out those people after the fact? Gee, that'll fix it.

If you're concerned with insulin prices, tear down the bureaucracy that prevents some Indian manufacturer from undercutting the pricing regime with product that costs 3 cents on the dollar.

they should just list it under preventive care and make it free to those who need insulin and then cap payments to providers of it.