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I think you kind of gloss over the core issue that most people have with drug prices. I don't think most people have a problem with pharmaceutical companies pricing drugs such that they pay for the R&D costs (or more generally the overhead) of the company plus some reasonable profit margin.

The problem is that with the inelastic demand inherent in life-or-death treatments, there is no incentive for pharmaceutical companies to stop there. If pricing a pill at $200 could cover costs and provide 30% profit margin, why not double the cost and make a 50% profit margin? Or triple the cost and make a 60% profit margin? With inelastic demand that is governed only by a person's ability to pay, rather than their willingness to pay or competition, the demand drops far slower relative to the increase in price compared to normal supply-and-demand economics. It's the tendency (or at least perceived tendency) of taking advantage of someone's desire to live to extract as much money from them as possible in order to increase profit margins that people tend to have a problem with. This is called exploitation.

I think it's a bit disingenuous to spin outcry over how expensive a drug is (in a relative sense) as being a simplistic outcry over a drug just being expensive (in an absolute sense).

That said, it's possible that some of it comes from the fact that R&D is so expensive, and a pharmaceutical company never really knows how long their drug will be bought before some other company discovers something that outperforms it. I am by no means an expert on pharmaceutical company economics.

EDIT: And the above argument is just one possible argument to make if you assume that drug development should be a function of capitalism in the first place. There's another viewpoint that drug development shouldn't be a responsibility of capitalism at all, in part because perverse incentives often times unavoidable in capitalism are especially unethical when applied to people's health.

>of taking advantage of someone's desire to live to extract as much money from them as possible in order to increase profit margins that people tend to have a problem with. This is called exploitation

It's not just about exploiting the people paying either, it's also about restricting access to people who can't afford it.

If you don't have an easy way to do price differentiation, inelastict demand encourages a situation where it's more profitable to charge $1million to 1 person than it is to charge $100k, to 10 people.

One way drug companies try to get around that is with price differentiation, but it's not very precise and effectively charging for a product as a percent of your income comes with it's own problems.

It kind of feels inevitable in America, but Goldman Sachs analysts questioned the wisdom of using gene therapy to cure people - because that cuts off pharmaceutical companies from a steady income stream keeping them alive through selling them drugs. https://www.cnbc.com/2018/04/11/goldman-asks-is-curing-patie...

Gilead bought Pharmasset for about $10B after clinical trials were complete on their $84k HepC drug. The R&D was priced in to that acquisition. Medicare and Medicaid spent $10B on that drug in 2015 alone (https://www.statnews.com/pharmalot/2016/11/14/medicare-medic...). Our current public health economics are very distorted and institutions are not set up to create affordable outcomes.

yes there is, and its called public finance

medicine, and health care, in my opinion, seem to fall nicely in that category

you as someone who is not infected with the hepatitis C virus, would benefit from others getting cured from it, to reduce the possibility of you catching it

and this is just one example

and to be clear, i am not saying, that all health care should be exclusively public

i am just saying that public finance of not for profit organization working on creating medicine, should be an option

> yes there is, and its called public finance > > medicine, and health care, in my opinion, seem to fall nicely in that category

Then get your government institutions to spend your taxes to do the legwork.

Meanwhile, don't hinder progress by barring everyone else from doing the job your state is incapable of doing or doesn't want to do.

We already put tax dollars into research. Huge amounts of tax dollars into research. Some quick Googling says in 2016 just the federal government -- not counting state/local grants -- dedicated $145 billion to R&D.

We just also let that research be locked up with patents and published in pay-to-read journals, because apparently "we pay for your R&D" is not enough "incentive" to get people to invent/develop new things, we also have to give them additional millions/billions of dollars in later sales.

> We just also let that research be locked up with patents and published in pay-to-read journals, because apparently "we pay for your R&D" is not enough "incentive" to get people to invent/develop new things, we also have to give them additional millions/billions of dollars in later sales.

In the R&D sector, the government is an investor like any other. Imagine a VC that offered you the following terms: we'll pay your salaries (which we'll heavily scrutinize) while you get your product a third of the way towards being commercial ready. After that, you can keep commercializing on your own dime, but we'll own anything you developed up to that point and give it away to your competitors for free.

Would anyone with other options take that offer? But that's exactly the offer the government would be making if research initially funded by government grants wasn't eligible for patent protection.

Flip your argument around: suppose a startup walked into a VC firm and said "we want you to fully fund us for our first couple years, which will be expensive, and in return we expect to give you nothing -- no equity of any sort, no shares of future profits, nothing".

Would anyone who had the ability to invest in something that actually provides a return take that offer?

But that's exactly the offer researchers -- many of whom work at publicly-funded universities -- are currently making.

Except you can’t flip it around because it’s not symmetric. From the point of view of the investee, the government is just another investor and can’t demand more onerous terms. From the point of view of the government, it’s not just another investor, because it can capture public benefits private investors cannot.

At most, you might be able to argue that the government should be able to seek an equity stake in return for funding R&D. That’s not enough to support your original point however, which was that government funded research should be in the public domain.

the government is just another investor and can’t demand more onerous terms

Companies with different classes of investors, who have different rights, are common.

can capture public benefits private investors cannot

And if that stops happening -- as it is, when government-granted monopolies are used to gouge -- then it's time to make the companies involved suffer a bit until they remember where their R&D money came from.

At most, you might be able to argue that the government should be able to seek an equity stake

This lacks imagination.

You could impose limits on the term and scope of patent for inventions resulting from public funding. You could prevent patenting of, say, modified formulations of a publicly-funded drug whose only purpose is to secure a new patent and another term of monopoly. Or you could make publicly-funded patents expire sooner. Or you could impose price caps on patented products derived from public funding, until the amount of "lost" profit from the caps equals the amount of public money put in. Or you could use tax penalties against companies who price-gouge -- say, if you acquire an unpatented drug, obtain a monopoly on its production and start jacking up the price, you immediately get taxed into bankruptcy.

There are all sorts of possible ways to do something here.

> Companies with different classes of investors, who have different rights, are common.

Sure. But simply funding costs for a few years of a project that’ll take a decade to bring to market isn’t really that attractive, and the government can’t expect to get a lot of rights in return.

> monopolies are used to gouge

“Gouging” is a nonsense concept. Many things that people consider “gouging” are actually economically efficient (surge pricing, raising prices during disasters, etc). So using perceptions of “gouging” as a metric for setting policy is a terrible idea. What you really care about is whether drug companies are seeing excessive ROI, which would mean the patent monopoly is creating greater incentives than necessary to attract investment relative to the other investment opportunities in the market. And drug company ROI is high, but not out of line with other high risk, high tech, capital-intensive industries.

This is orthogonal to the issue of who pays. I think the government should pay. It shouldn’t pay too much, of course, but that should be gauged by reference to ROI, not whether prices for specific drugs “feel” too high to lay people or politicians.

There are two orthogonal issues here: 1) how do you finance drug R&D? 2) how do you pay for people to get the resulting drugs?

Public finance is a reasonable option for (2). It is not a reasonable option for (1). If you made it so, for example, going into drug development meant a career stuck on the GS scale, you'd drive away huge numbers of highly capable people.

There is no link between technical competency and altruism. If there was, you wouldn't have huge numbers of people at HYPS jumping at the chance to go work at Wall Street and FANG companies instead of more altruistic pursuits.

What do you think about government-financed prizes for private-sector drug development, e.g., the government pledges $X billion if you develop an Alzheimer's cure and place it in the public domain? Bernie Sanders has a proposal like this: https://www.vox.com/2015/9/25/9397069/bernie-sanders-drug-pr....

It seems like that retains most of the advantages of the current system, incentivizes private-sector development, but also eliminates the problem of high prices at the point of delivery. (i.e., it correctly prices the marginal cost of treating someone at the marginal cost of producing the drug, which is generally low).

I think they would work if the government priced them appropriately. But the government is terrible at pricing things. E.g. how nearly every government under prices water/sewer and public transit, leaving those systems in a state of decay.

Government provided services are not necessarily meant to be profitable in the business sense. It is enough if their global benefits are worth the cost, even if those benefits cannot be captured as direct profits.

For example public transit is worth a lot more in external benefits than just the fares paid.

It’s not about making a profit versus not—these prizes would almost certainly not be profitable for example. But you have to set high enough prizes to create the right level of incentive. Likewise, your (prices + subsidy) for transit or water/sewage must be high enough support an efficient level of infrastructure spending. With transit, the government underpriced and undersubsidizes. With water/sewage, the government under prices and doesn’t subsidize at all.

The government underprices for the same reason it underfunds pensions and over promises pension benefits. It’s a way of pushing costs into future generations while buying votes in the short term.

The idea of a prize is interesting a first glance, but it also creates a lot of additional risk.

If you get $1B for creating the first drug that cures X, what does the person who creates the 2nd drug get? $0? What if it's better than the first? Who makes the judgement as to which is better drug?

> If you made it so, for example, going into drug development meant a career stuck on the GS scale, you'd drive away huge numbers of highly capable people.

How do you get from publicly financing drug R&D to everyone working on drug R&D must be a government employee?

The federal government also puts significant pressure on government contractors to not have employee salaries out of line with the federal scale.

You only have to look at a management salaries at any large defense contractor to find counter examples.

And even if this were a problem, there are so many easy fixes to this that it makes me think you weren't really thinking it through when you listed it as a reason to prevent public funding of R&D.

> You only have to look at a management salaries at any large defense contractor to find counter examples.

First, defense is by far the government-affiliated industry with the most leeway salary-wise. But even there, outside the C-suite, there's a $500k salary cap. That sounds like a lot, but many people in tech and finance make more than that, especially if they start their own business (even one that has a modest exit).

There are software engineers working for firms with government contracts making way more than the federal salary scale too. Take a look at large IT contractors, they have numerous employees making more than GS-15 and above. There are plenty of exceptions, and there is absolutely no reason drug R&D couldn't be another one.

>But even there, outside the C-suite, there's a $500k salary cap.

How many biotech researchers outside of their respective C-suites are making >$500k? There are plenty of people who have gotten wealthy on government contracts, there's no reason they couldn't do the same in biotech.

>especially if they start their own business (even one that has a modest exit).

And if you start your own business pursuing government contracts, you can make more than $500k too.

There are reasonable arguments to make against publicly funded R&D, but "the federal payscale is too low" just isn't one of them.

> In 2030, would we as a society rather have a generic, cheap, openly available HepC cure or not? That is the question you need to ask, and I don't think anyone would say no to that. The $84K drug will fall off patent by then, which means the system we currently have, flawed as it is, will produce that outcome.

I think if we look at the shenanigans around Avastin and Lucentis we'll see that patents and drug companies don't always work in the public interest.

http://www.bbc.co.uk/news/health-30138097