Product X Revealed

In earlier posts, I have claimed that the existence of a Product X represents strong evidence that the high prices of prescription drugs are NOT the result of a monopoly supply of patented drugs, but are rather the perverse result of the market dominance of the buying agents of prescription drug benefit plans.

The following describes Product X --

There happens to be a good illustration of the fact that supplier monopoly is not the major cause of high prescription drug prices. If you go into any major drugstore, you can find a section devoted to blood glucose meters and the associated consumable testing strips. These are used by diabetics to aid in controlling blood sugar levels by regulating the intake of food and the use of oral diabetes medications and/or insulin injections in response to the results of the tests.

Both the blood glucose meters and the test strips are available over the counter without a prescription, but since they are so effective when actually used in treating diabetes that they are often legally prescribed as well.

As many as ten test strips could be used per day, and although this is on the high side, it is realistic in many cases. This represents a monthly demand for 300 test strips.

If you go into a drug store and buy 300 test strips at retail, with or without a prescription, but without a drug benefit plan, the cost will be about $240.

With a drug benefit plan, you may pay only a $25 co-pay for a month's supply. This large discrepancy in consumer cost is typical of prescription drugs, and it is a near certainty that the plan provider doesn't pay anything close to $240.

However, the key point is that the market for blood glucose meters and test strips is EXTREMELY competitive, and nothing close to a monopoly exists even though the pricing environment looks much like that for prescription drugs supplied by actual monopolists.

It would be rare to go into a drugstore and not be presented with a choice of at least six different manufacturers of BGMs and test strips, and it would be a different choice of six in different drugstores. It is true that the test strips are not compatible across different meters, but the cost of the meters is insignificant compared to the cost of the test strips and the meters are often available for free from one source or another. The environment is very much like that for razor blades, but with far more suppliers and larger levels of demand per individual. It at the very least can be said that the BGM test strip market is far less monopolistic than the razor blade market.

This is simply one more case in which what you read in the newspapers or hear on TV about drugs and drug pricing is both wrong and counterproductive. In the end, if everyone gets a discount, this is equivalent to no-one getting a discount. The net cost of trying to provide everyone with a free lunch cannot be afforded.

To summarize previous discussions, the following items are NOT primary causes of the high drug prices that actually appear --

1. Monopoly suppliers
2. High development costs (these affect availability, not prices)
3. Advertising
4. Foreign export markets
5. Foreign price fixing and controls

What we are left with are a combination of the market dominance of insurance buying groups and the third party payer syndrome in which individuals have little incentive to restrain their demand as they do not directly face market prices.

What will work out in practice is that government employees, including state workers, among others, will see their drug purchases subsidized by uninsured seniors until the point is reached at which no further uninsured demand exists and the discounts achieved are off the base of unlimited list prices of no market reality. This will be the worst of all worlds, a completely price controlled and rationed market, with little new development.



Previous posts:

What is Product X?
More on Product X

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