Market Failure and Medications: The Consequences of Healthcare Economics

I have a friend who happens to be an economist.  He's a really (really) smart guy and I value his views on everything from parenting to high finance.  So when he struck up a conversation about a recent blog post of mine that covered the intersection of drug prices and basic economic principles, I was all ears.  

"You haven't identified the market failure," he said.  

I was caught a little off guard.  I needed a moment to recall the specific definition of "market failure." It's not what most people think.  If the average person hears the term "market failure," they're likely to believe the S&P 500 dropped precipitously that day.  But when an economist uses the term, he means that the supply and demand dynamics of any given market have failed to reach a market clearing price.  The market could be for guns, butter, iPhones, or medications.  Doesn't matter. Buyers are unwilling to buy, sellers are unwilling to sell.  The market isn't working.  It has failed to produce transactions of any kind.     

My friend's point was that the market for naloxone was still functioning.  Buyers were complaining vociferously (in the press, to Congress, to manufacturers, etc.) but naloxone was still being bought and sold.  Howls of protest are one thing, he was saying, but the market still looks like it's working - albeit at a significantly higher market clearing price than a few years ago.  

From a purely economic perspective, he's exactly right.  But this isn't "pure" economics.  This is healthcare economics.  And the difference isn't that we in healthcare don't get it, it's that we have to get it sooner... because the stakes are much higher.  

In my original blog post, I told the story of my son Will and his experience with the supply and demand of chocolate.  I pointed out some of the differences between his experience selling Hershey bars to 1st graders and the pharmaceutical companies raising prices of medications like naloxone.  But there's one difference I did not identify in that original post and it's critical to understanding the current public discourse around naloxone and EpiPens and other medications whose price has risen substantially as of late.  

If Will's market for chocolate fails, then kids neither buy nor sell chocolate.

If the market for EpiPens fails, a kid dies.  

Overly dramatic?  Not in the least.  If access to potentially live saving medications is inhibited by market failure, then preventable death is not only a possible consequence, it's a probable one.  Those of us who work in this space have to anticipate market failures and prevent them from happening. We cannot sit back and wait for the market to fail and then act to correct it.    

Economics is different in healthcare for lots of reasons (government participation in price setting, employer-based health coverage, third party payers, just to name a few), but ultimately, what makes the domain of healthcare economics so unique is that it carries life and death consequences at every turn.  What's past is prologue... and we have to get it right.    

Michael 

On Twitter @PRIUM1