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'Erectile Pricing': Why Viagra's Cost Defies the Laws of Economics

June 23, 2019 in Economics

By Charles Silver, David A. Hyman

Charles Silver and David A. Hyman

Among economists, it is an article of faith that competition
lowers prices. But when it comes to prescription drugs, the
ordinary rules do not apply. According to a new study, competition
not only fails to reduce drug prices, it may drive them higher.

Using data supplied by Blue Cross Blue Shield, researchers
studied the prices of 49 widely used brand-name drugs over six
years. They then focused on 17 drugs that had direct therapeutic
equivalents—i.e., competing brand-name drugs that treat the
same medical condition. For example, Humalog, Humulin, and Novolog
are all forms of insulin used to treat diabetes. Competition should
have caused the prices of these 17 drugs to rise more slowly than
those of the remaining drugs.

Competition works to
lower prices in the rest of the economy, so why doesn’t it pressure
pharma companies to sell brand-name drugs for less?

In fact, the median prices of the 17 drugs with therapeutic
equivalents grew slightly faster than those of the 32 drugs that
did not face competition, although the difference was not
statistically significant. Not only that, but the price hikes for
the therapeutically equivalent drugs “were highly
synchronized” and were “some of the largest cost
increases” observed in the study.

We first noticed this phenomenon—synchronized price hikes
for competing drugs—when studying the prices of Viagra,
Cialis and Levitra, which are treatments for erectile dysfunction.
In theory, Viagra’s price should have fallen when Cialis hit
the market, and prices for both drugs should have declined further
when Levitra became available.

That did not happen. Instead, over many years, the prices of all
three drugs rose in lockstep. Instead of seeking to gain market
share by cutting prices, the pharma companies played “follow
the leader.” When one charged more, the others did too.
Because of the products involved, we named the phenomenon
“erectile pricing.” The new study shows that erectile
pricing is not limited to ED drugs.

Competition works to lower prices in the rest of the economy, so
why doesn’t it pressure pharma companies to sell brand-name
drugs for less? One reason is that the number of sellers is small,
making it easy for drug makers to coordinate. They need only mimic
each other’s price changes until they all learn to
“follow the leader.”

Insurance coverage compounds the problem by insulating consumers
from high prices and making enormous amounts of money available to
pay for drugs. When copays are fixed, consumers have no incentive
to use less expensive drugs, and manufacturers cannot gain market
share by charging less. And manufacturers can raise prices because
Medicare, Medicaid, and private insurers will pay pretty much
whatever they ask. …read more

Source: OP-EDS

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