Thursday, March 18, 2010

In a truly free-market economy, complete with competition, prices are set by costs, not greed.

Unfortunately for the nation, most don't understand that simple fact.

Medicaid has underpaid doctors, hospitals, and pharmacies for years. I've heard from several doctors that it pays about 60-80% of their price, which even doesn't cover their overhead. According to Reader's Digest:
Anatomy of a Doctor's Bill

Just how much of the $100 your doctor charges for taking 30 minutes to investigate your stomach pain goes into his pocket? After paying the bills, he gets less than half. The breakdown, according to Robert Lowes, senior editor at Medical Economics:

$3.50 for malpractice insurance

$3.50 for equipment, repairs, and maintenance

$6 for supplies, including gowns, tongue depressors, and copy paper

$7 for rent and utilities

$11 for office expenses, such as telephones, accounting fees, advertising, medical journals, licenses, and taxes

$28 for secretary, office manager, and medical assistant salaries and benefits

$41 Amount that goes into the doctor's paycheck

Over the course of a year, that adds up to $155,000, the annual salary of the average family physician. That number rose just 3.3% between 2002 and 2006, while expenses increased nearly 25% over the same period.

Keep in mind: none of this counts how much of that annual salary goes toward paying back student loans over a decade or three.

Well, similar things happen in pharmaceuticals. There are at least three chains of pharmacies in Washington state that have stopped accepting new Medicaid patients. Medicaid is only reimbursing those pharmacies for around 80% of the estimated wholesale price for the drugs--which is far less than the pharmacies pay.

And this is a problem. The less the government pays, one of two things happens: either the rest of us have to pay more, or the pharmacy goes out of business.

It's not all the greedy pharmaceuticals companies' faults, either. Some fair estimates of what a new drug costs to take from concept to sale hover in the upper hundreds of millions of dollars. Why? Because, out of their apparently high 18% profit margin (according to this, Fortune 500 companies' profits hover around 3%, on average), most of that "profit" is actually sunk back into the pharmaceuticals companies in research and development costs.

A few years ago, I read an article that contained a rough breakdown. I can't find it now, but what I remember went something like this: ten possible drugs might start out as a possible treatment for any given condition. Six are weeded out in lab tests--before the rats ever become involved--via computer models, and that's about a hundred thousand down the drain. Maybe four go on to the next stage--about two years in rodent trials--at about a hundred thousand dollars per drug. Say two more are weeded out--one's too dangerous, and the other doesn't have any noticeable effect. That's another two hundred thousand dollars down the tube, on top of the hundred thousand dollars spent weeding out the first six in computer modeling.

If you count the costs of the failed projects, both of those possibilities remaining cost about $250,000. Each. Per year.

And the next stage is even more expensive: five years' worth of testing in primates, at another $150,000 per year. Which is likely to weed one drug out as a possible treatment for whatever disease in question, but might well find another use for it.

Then comes the last stage: tests in humans, at roughly double primate testing costs, for about three more years. Most expensive of all, and they already know it works--what they're looking for now is minimum effective dosage, maximum safe dosage, side effects, and all sorts of other unpleasantness. Which brings our grand total for one drug's development up to close to a billion dollars.

The government keeps saying "We'll cut the costs." What they mean is that they'll try to cut what consumers pay by setting price ceilings--which, in turn, means that pharmaceutical companies will spend less, if any at all, on developing new drugs to treat our aging population's health problems.



  1. Excellent 'itemization' of what it costs to run a doctors office!

    If we do the same thing with HOSPITALS the expense itemization will be just as scary.

    I have yet to hear these points in the health care 'war' (where the casualties will be us, the general population.)

  2. Of course you haven't heard them in the health care "war"--we can't have those charges sounding reasonable, can we?

    The government refutes the drug cost figures, too. They say that, since 2/3 of pharmaceutical employees work in marketing, there's no way 2/3 of the profits aren't spent there. Thing is, marketing people don't have to have PhDs, nor do they have to be paid nearly as much as the researchers. Nor are their costs as high. Thing is, that 2/3 of the employees probably take up 1/10 of the budget.


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