Risk Markets And Politics

Thursday, June 02, 2005

Drugs and Risk Markets

Why not let markets take-over some of the functions of the FDA? As long as drug manufacturers publish accurate tables of known risks involved with drugs, why not let the market specify prices for these drugs in accordance with these risk premia? Part of the reason is political and has to do with, as Victor Niederhoffer points-out, "what is seen and what is not seen", i.e. in the media one hears of the 100s of cases of people killed by some side-effect, but what is not seen are the 1000s of individuals dying from known conditions while potential life-saving drugs linger in the pipelines of drug companies. The other main obstacle is the focused liability that drug makers will take-on after publishing quantified risk tables. The possibility that a risk factor published as being, for example, a 4 standard-deviation side-effect, is actually only 3 SDs because a subset of the population with certain risk-factors was not included in the trials must be insured against so that the manufacturer is not unduly crippled by such an incident. Of course, the insurance would be void if the probabilities were knowingly published at fraudulently low levels. Exactly who is to act as this underwriter will be a topic of subsequent posts here. Some of the most interesting current political problems involve risk-sharing structures such as healthcare and social security.

The public nature of information is central to other aspects of healthcare, such as the illegality of genetic screening in providing healthcare insurance. Which personal details, from genetic predispositions to behavoural risk-factors such as unhealthy eating habits should be kept private from insurers? In any case, this freedom of individual privacy becomes, at least implicitly, a social risk-sharing arrangement. The situation need not remain binary though; life insurance prices can be broken-down by cause of mortality e.g. (20% heart disease, 10% cancer X, 5%, cancer Y, 1% accident, etc), so if an individual has a likelihood of contracting a certain form of cancer at 200% the average rate, their insurance premium will increase by 2 * the weight of that risk factor. It would be inefficient to deny them coverage entirely, and eople who are less likely than average to suffer that cancer will see their premia decline, and not be compelled to take-on someone else's specific risk. Like drug-makers insuring their risk tables, insurance companies could re-insure their risk tables, although this is the information insurers would like to keep private!

Likewise, regarding illegal drugs, legalization will have to wait until risk, especially health insurance, markets mature. Almost inevitably, the increased availability and reduced price of legalized drugs would lead to wider and greater usage. While there are valid debates concerning whether or not the current legal order accurately ranks the deleterious effects of legal and illegal drugs, it is indisputable that drugs such as alcohol or anything that involves smoking pose serious risk-factors. Therefore, health problems and healthcare costs will tend to escalate if there is significant drug legalization. This would be mitigated by a reduction in the implicit social risk-sharing of health insurance caused by an increase of public information. Unhealthy activities would then have a discouraging, additional "tax" put on them.


  • A couple thoughts.

    I don't think the drug market in the US works by typical economics. The drug companies have so much political influence, and so much cash greasing all the wheels - from doctors to the committees that select which drugs an HMO will use (usually the latest, most expensive and unproven drugs...), to the politicians, the whole thing is a rigged game.

    I would argue that it is a more "free market" situation in Canada and Western Europe, where the governments can purchase drugs as a big buyer, just like Walmart can purchase DVDs as a big buyer and get a low price that they pass to the consumer. Drug prices are rigged. The US government (except for the VA) is forbidden from buying drugs as a big buyer, because of the influence of drug companies getting their ideal legislation passed. From a taxpayer point of view, or a patient's point of view, well, we got fucked by high powered lobbyists for the drug companies.

    Somehow the truth is unable to penetrate through the thick wall of propaganda in the US that keeps drug prices high here. US citizens finance the low cost of drugs in other countries. If the US simply did what Canada and Europe are doing, then they would pay a bit more and then we would pay a lot less. But since corporations rule in the US, I don't see the situation changing anytime soon.

    By Anonymous bejammin075, at 4:15 PM  

  • You’re saying that politics trumps economics in the pharma markets, but then acknowledge that capital often determines political outcomes. In a way, I'm just pointing-out some inefficiencies in the current markets and changes that the drug lobbyists would be no means resist. Mitigating FDA risk in the way I outlined would remove one of the main justifications for these companies charging “high” prices. They should be able to sell a greater variety of drugs, which should reduce prices. One of the other major price justifications is competition from non-research generic manufacturers, which the Canadian situation aggravates.

    Of course there are problems and inefficiencies in these markets that I didn’t address in my post, but if the goal is providing the greatest possible number of inexpensive, safe drugs, I don't think that reducing prices paid to research companies right now, in itself, helps the situation in the long-term.

    Lastly, the new kind of risk market I’m envisioning may be helpful in overcoming the “special interest”/lobbying problem in politics, so stay tuned.

    By Blogger Jason Ruspini, at 9:50 AM  

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