So Why is Naloxone Getting So Expensive?

Last week, I posted a piece on the public health debate around naloxone.  Since then, I've received a stream of new and interesting data to share.  

First, a report showing that naloxone scripts led to fewer ED visits... of the 2,000 patients in this study focused in safety-net clinics around San Francisco, those receiving naloxone along with long-term opioid prescriptions had 47% fewer visits to the emergency department.  That appears to be compelling evidence to suggest co-prescribing naloxone makes sense (though the focus on the safety net clinic population begs the question of how translatable the conclusions might be to other populations).

We also saw the release of a white paper from Fair Health that suggests diagnosis of opioid dependence is skyrocketing.  Fair Health is a non-profit organization dedicated to transparency in health care costs.  They analyzed their database of 20 billion privately insured healthcare claims and found a 3,203% rise in opioid dependence diagnosis between 2007 and 2014.  So maybe we need to focus more on the underlying issue of opioid dependence after all?   

Third, the price of naloxone is rising... this excellent an in-depth piece from Business Insider details the controversy surrounding the price increases.  Out there in social media land, I've seen several comments regarding the price increase that indicate a basic understanding of microeconomics, but that lack the depth necessary to understand what's happening here.  "Demand has gone up," read many of these comments, "so price goes up, right?"

Not necessarily.  A personal story to illustrate the point:     

Some of you have heard me tell one of my favorite “Will stories".  Will is my 10 year old and the kid is a natural entrepreneur.  Back when he was in 1st grade, his school had an activity called Economics Day.  Each of the six 1st grade classrooms in Will's school had to make a simple product and then sell it to their peers in an open “marketplace” (which, in this case, was a series of tables in the school gym).  One class made puppets out of brown paper bags.  Another class made pet rocks.  One class did the classic lemonade stand.  Will’s class made “S’more packs” (two graham crackers, a marshmallow, and a small Hershey’s chocolate bar all in a small plastic sandwich bag).  Each kid had earned “money” to spend through good behavior and acts of service to others over the course of the semester. 

All the first graders gathered in the gym and awaited the signal from one of the teachers.  When she blew her whistle, nearly all of the children would begin freely “shopping” the various tables of merchandise around the gym.  Only a small group of students from each class would remain at their respective “cash registers” to do the actual selling.  William volunteered for this duty first.  While everyone else shopped, Will would be in charge of selling his class’s S'more Packets.  I stood behind him and made sure order was maintained.  Easy duty… or so I thought.

The whistle blows.  Nearly every kid in the gym makes a run for Will’s table.  There’s chocolate there, right?  The kids who don’t run for the chocolate instead go for the lemonade.  The Pet Rock and hand puppet kids are immediately bored.

Suddenly, Will finds himself in the middle of an old fashioned Wall Street trading pit.   He’s surrounded by kids, each holding out $5 of play money and shouting for chocolate.  Initially, Will is collecting money and handing out ‘Smore Packets just as he’s supposed to do. He’s happy his class’s product is popular and he’s clearly grateful for the business.  But as the crowd thickens and the kids grow louder, I begin to notice what Alan Greenspan once called “irrational exuberance.”  The kids are frantic.  Markets are psychological and this one is getting crazy.  Kids are elbowing for position.  They’re screaming Will’s name in an attempt to get his head to swivel in their direction, potentially increasing the probability they’ll be the next to walk away with chocolate.  He’s getting bumped, jostled, and hit.  I’m getting worried about him and I wonder if he’s going to lose it under the pressure.  Should I step in?  Be an adult?  Organize this chaos?  It’s getting out of control…

And at that moment, Will did something both courageous and, to him, completely logical.  Without permission from his teacher, without encouragement from me, without any warning at all…

He raised the price.

“These aren’t $5 anymore,” he yelled over the din, “they’re $10!”  Only a few kids drop out of the crowd.  The rest simply reach into their pockets and pull another $5 of play money out to add to the $5 they’ve already been waving in Will’s face.  He sells a few packets at $10 and realizes he can go higher.  “Now they’re $15!” he yells.  I glance over at his teacher, Ms. Foster, who takes one step toward Will.  I can see she’s a little unsure of what to make of this scene and I have a moment of panic that she’s going to shut down the most perfect example of an efficient market I’ve seen in my life.  Then she pauses, steps back, looks at me, and smiles.  Thank goodness, I think, she gets what’s happening.  This is Economics Day… and these kids are learning economics!

Little did anyone know that the laws of supply and demand would be as intuitive to Will as eating, sleeping, and breathing are to you and me.

By the time I turn my attention back to Will, he’s at $30 and the flow of ‘Smore Packets into the greedy hands of first graders is starting to ebb.  He senses he’s neared the market price, the equilibrium between supply and demand.  This is what economists call it, economists who have studied this phenomenon and only this phenomenon, for longer than Will’s been alive.  To Will, though, there are no fancy terms or theories.  There’s just a point, he says later, that “felt right.”

So how do pharma companies justify jacking up the price of naloxone?  It’s just supply and demand, right?  What’s the big deal? 

Here’s the key difference: Will had a finite supply of chocolate.  Once it was gone, it was gone.  When supply is fixed and demand rises, price increases.  But that’s not true of naloxone.  This stuff is easy to make and has been around for 40 years.  When demand rises (and it certainly has), supply should increase commensurately and price should remain relatively stable over the long term.  That’s how economics works.  Anticipating objections from the "econ major" crowd who will argue we're experiencing a "shift in the demand curve" for naloxone (which is different than a simple increase in demand), I would argue that a commensurate shift in the supply curve is not only possible, but easily achievable given the nature of the underlying molecule.  

"We're not talking about a limited commodity. Naloxone is a medicine that is almost as cheap as sterile sodium chloride — salt water," said Dan Bigg, the executive director of the Chicago Recovery Alliance.

Unless you’re a pharma company.  Then you get to smile and smile... and be a villain.  You get to exploit the average American's lack of understanding of microeconomic theory and suggest that a rise in demand logically leads to an increase in price. 

Supply and demand, right?   

Michael
On Twitter @PRIUM1