Word of the Day – Opportunity Costs – Pricing Drugs

Definition: Opportunity cost is the cost of choosing one option, i.e. accepting a job, planting one type of crop, or traveling to one country rather than another) when choosing a different option could’ve turned out to be more profitable.

Pricing Drugs by Using Opportunity Cost Theory

Did you know that U.S. Government Health Agencies are the chief funders of pharmaceutical Research and Development (R&D) in this country?

And! Private Equity firms and Publicly-held firms on NASDAQ buy into pharmaceutical R&D only during the final phase of research?

Our government gets nothing from these corporations for all of the free R&D research our taxes pay for on our behalfs.

Recently in the news, a small company was complaining that they had to turn over their patent rights to the CDC (Centers for Disease Control).

The company, expressing outrage, refused to share its patents. They wanted all the profits from their drug. Even though our government was funding them! (This, by the way, is what libertarian Public Choice economists call “rent-seeking”.)

This attitude is outrageous and absolutely antithetical to the way that copyrights and patents are supposed to work to promote creativity and innovative new products (or new uses of old products).

Academics once shared their knowledge freely with each other through many publications.

But now, our monoplistic Military, Industrial, and Academic Complex has taken over workers’ “intellectual property rights” in the name of defending profits that the “Complex” paid hardly any of the costs for.

Why This is an Outrage

You may have read my recent post, “Are Vaccines the Answer?” and seen the egregious prices that Gilead charged years ago for Sovaldi, its Hepatitis C cure, and its advanced version of Harvoni.

Gilead sold Solvaldi for $1,000 a pill, with three months treatment costing $84,000, and Harvoni, $94,000.

How could they do this? Gilead costs were peanuts!

Gilead’s costs were $68 for Solvaldi and $136 for Harvoni for a three month treatment per patient. Really! Only in the hundreds of dollars per customer!

(Source: The Value of Everything: Making and Taking in the Global Ecoonomy, Mariana Mazzucato, 2018, pp 207-213)

AND NOW this year Gilead is pricing its Covid-19 vaccine, Remdesiver at $2,340 for governments and $3,120 for private health care patients.

So who can Gilead charge two to over three thousand dollars for Remdeciver? Certainly not as they used to argue – costs.

Gilead’s rational is “opportunity cost” for their buyers, i.e. governments with health care systems and private health insurers.

You see, drug companies calculate costs they think health care payers would incur if their buyers did not have Gilead’s drug for patients.

Drug companies collect data and predict costs of an alternative treatment. These estimated costs are the opportunity costs which justify Gilead’s pricing.

The horror is that with the huge number of Covid cases rising, Gilead’s prices could skyrocket even more. There could be even higher “opportunity costs” charged by Gilead.

But here’e the rub. Why should governments pay $2,340 dollars a patient for a treatment that our Gilead paid our government nothing for and got grants to research, and freedom to use our government’s R&D data to develop Gilead’s drug for Covid-19 use?

An Example of Opportunity Cost Gone Bad

Decades ago when I worked in a University Library, a professor of economics, educated at Cambridge University in England, asked the government documents librarian and me, the economics bibliographer and reference desk librarian, to help him choose resources for his syballus course outline for his classes.

The other librarian and I both gave library orientation for his classes, so we were happy to oblige. The professor offered us each $25 and hour to help him put together his syllabus.

As I talked with this professor about our project one day, he let slip that he was paying a professor of English $50 for proofreading his syllabus.

I was incensed. Proofreading was a job many people on campus, including me with a Masters’ degree in English, could have done.

In fact, even students could be hired for that job! Competition should have made the English professor’s compensation much less than ours!

I told my library colleague that we should be paid more than or as much as  this English professor. She agreed with my argument, and we went over to talk with the Econ professor.

The Econ professor rationalized his misuse of economic theory by saying he had to pay the English professor an “opportunity cost” because that professor could find other clients to proofread for easily.

The Econ professor from Cambridge added that we professional librarians couldn’t get work on someone else’s syllabus. But he had no way to know that!

Given that this was a one-time project only and the Econ professor had no idea whether the English professor could get a higher payment from another client or clients, this was an utterly specious argument.

Outraged by his demeaning of our expertise (and possibly gender discrimination), we told him to put together his own library readings syllabus.

Mind you, this was in an era back when economists used to claim that value was due solely to scarcity!

This Econ professor’s argument was perverse because it applied “opportunity cost” to the English professor, whose expertise had abundant competitors who could have bid down that professor’s charge for his services.

The Econ professor disregarded the scarcity of professional librarian’s expertise on a campus. That expertise  consisted solely of the two of us librarians who were the experts in where Economics materials could be found in the library, and had been willing to work for this professor.

Why This Matters

This Econ professor’s perversion of “opportunity cost” theory is exactly what Gilead is doing with its pricing—only now we’re talking in terms of thousands of dollars as well as the numbers of lives that will be lost this year.

Gilead has estimated how much doctors and hospitals would need to pay for saving a life if doctors didn’t have Gilead’s vaccine. Gilead has put prices on a single human life, just as Russians have agreed to pay a price for any American soldier’s death.

In this century, price in terms of dollars is whatever the seller can extract from the buyer.

We are now so used to betting on future events that we cannot know for certain the outcome of that our wealthy people gamble huge sums of money to make more money every day.

Gilead is typical of what’s to come in this century. This company hasn’t even proven whether its vaccine will work over the long run.

Moreover, Gilead’s perversion in pricing is far worse because the U.S. Government was the source of millions of R&D funds for Gilead (and other companies) to hang its hat on!

The GOVERNMENT, we the U.S. TAXPAYERs, the workers in the U.S. should be the ones paid by Giliad for use of our money to fund its research!

Instead, millions of people will die while these cutthroat companies will get filthy rich by forecasting some huge “opportunity costs” for their drugs’ prices.

This is disgusting.That’s why it should matter to all of us! Because disease and death can happen to any one of us.