Pills and Price-Shifting

The world's tallest female econoblogger takes on cost-shifting at hospitals.

When asking whether hospitals engage in cost-shifting--subsidizing inadequate public reimbursement with private insurer fees--the question is partly one of framing. One way to look at it is that the private insurers pick up the slack for the public programs. Another way to look at it is that once private insurers have covered the hospitals' fixed costs for physical plant, and so forth, as long as the government programs cover a little more than the marginal cost of serving the patients, they're actually slightly subsidizing the private patients.

This looks strikingly similar to how Europe pays for its drugs. Drugmakers have a small marginal cost once all the R&D is sunk, so it makes sense to sell for $3 a pill they can make for $1 even if the amortized R&D cost over the expected number of pills they can sell under patent is $5 -- as long as they have one big market (i.e., us) where they can charge $10.

One perversity of this arrangement is that the better a price Europe gets, the worse our price must be.

Say R&D is $5M and expected sales are 1 million units, half in free market Region Y and half in socialized Region X. If Region X negotiates a $2 price, Region Y must pay $10 just for the company to break even (i.e. pay back its R&D):

(2-1) * 500K + (10-1) * 500K = $5M.

If Region X pays $5, the company could break even with a price of only $7 in Region Y :

(5-1) * 500K + (7-1) * 500K = $5M.

Of course, if we get pushed into single-payer too, then no one is paying for R&D. Guess what happens to things no one pays for?

posted by Dave on 10.16.09 at 02:39 PM





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Comments

"Of course, if we get pushed into single-payer too, then no one is paying for R&D. Guess what happens to things no one pays for?"

Obama will ride his unicorn and shoot rays of hope and change at the pharmaceutical researchers and they will produce fantastic, new and cheap remedies merely at the bidding of The One so as to remain in the glory of His goodness.

XWL   ·  October 16, 2009 04:02 PM

As in all socialist systems all are reducer to the lowest common denominator, poverty!!
No one can give more than others can spend/waste.

Hugh   ·  October 16, 2009 06:33 PM

"One way to look at it is that the private insurers pick up the slack for the public programs."

Here let me fix that for ya,
"One way to look at it is that the private CITIZENS PAY insurers HIGHER PREMIUMS TO pick up the slack for the PARASITES ON public programs."

It drives me crazy that no one talks about the fact that corporations do not pay THE CONSUMER DOES! Through higher prices for goods and services!

Oldcrow   ·  October 16, 2009 08:34 PM

Oldcrow, they don't just ignore, they actively deny it.

That's why politicians can talk about taxing those evil corporations.

I had a long go-round with one guy who absolutely refused to accept that corporations figured taxes in on the "debit" side of the ledger when pricing their product.
His understanding, and it's not that rare, was that they figured out the cost of making it (without adding taxes) and then decided how much to make and sold it for that price and then worried about taxes later.

It got to the point where I said, "I guess we're gonna have to disagree" and he got all indignant, "No, we're not gonna agree to disagree". I didn't mean that, I meant I was done trying to explain basic economics.
Which made me laugh because my understanding on economics is that you have to have more income than outgo and you can be overdrawn even if you still have checks.

Veeshir   ·  October 17, 2009 09:37 AM

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