A Drug Price Jumped 5,000 Percent Overnight. Blame the Government, Not the Free Market
Acton Institute Powerblog

A Drug Price Jumped 5,000 Percent Overnight. Blame the Government, Not the Free Market

daraprim-price-hike-892x600In the early 1950s, the Nobel Prize-winning scientist Gertrude Elion developed the drug Daraprim to combat malaria. Daraprim is now also used to fight toxoplasmosis, which infects people whose immune systems have been weakened by AIDS, chemotherapy and pregnancy. It’s such an important drug that it’s on the World Health Organization’s List of Essential Medicines, among the most important medications needed in a basic health system.

A single pill used to sell for $1, but the price was raised around 2010 to $13.50. Last week the price jumped 5,000 percent to $750 a tablet.

There was no shortage or other supply and demand factors that would justify the rapid price increase. Turing Pharmaceuticals had bought the drug from Impax Laboratories in August for $55 million and raised the price to cover their costs. Turing’s CEO Martin Shkreli said, “This isn’t the greedy drug company trying to gouge patients, it is us trying to stay in business.”

The Infectious Diseases Society of America and the HIV Medicine Association disagree, saying “this cost is unjustifiable for the medically vulnerable patient population in need of this medication.”

Some people believe this incident is an example of the failures of free market capitalism, and claim this is why we need more government intervention. But the exact opposite is true: This is an example of government failure which the free market could solve.

The price system is one of God’s most under-appreciated creational norms. Prices provide an ingenious way for humans to distribute both knowledge and resources in a way that, on the whole, tends to increase human flourishing. This is why, generally speaking, we want to avoid distortions in the price system that come with government intervention. In a free market that is free of distortions, the prices of products and services will shift as people clarify what values and priorities should take precedence in distributing resources.

But Daraprim is not sold in a free market. The pharmaceutical industry is largely a non-contestable market where a few large firms exist because of high barriers to entry, such as onerous government regulation. Added to this is the fact that Shkreli has a coercive monopoly on Daraprim, not because of patents (the patent on Daraprim expired long ago) but because few other firms want to make the drug since the government-imposed costs make it less than profitable.

What this means is that the prices of pharmaceuticals like Daraprim are not set by the free market. The free market isn’t the reason Shkreli was able to raise the price. In fact, if he had to sell his product in a truly free market environment the price would likely remain low. And even now, if he continued to keep the price high, some enterprising pharmaceutical company would start making Daraprim themselves, increasing the supply and lowering the cost.

But having other firms make the product is at best a long-term solution. What can be done about this situation now? Moral suasion appears to be the most effective solution. Public shaming can be a very effective tool, and it appears to have already caused Shkreli to agree to lower the price. He told NBC News his decision was a reaction to the public outrage:

“Yes it is absolutely a reaction — there were mistakes made with respect to helping people understand why we took this action, I think that it makes sense to lower the price in response to the anger that was felt by people,” Shkreli, 32, said.

Turing Pharmaceuticals of New York bought the drug from Impax Laboratories in August for $55 million and raised the price. Shkreli said Tuesday the price would be lowered to allow the company to break even or make a smaller profit.

Shkreli has the right to sell his product at a price that allows him to cover his costs and make a profit. But because he currently has a coercive monopoly in a non-free market, Shkreli also has a higher ethical duty to his customers. Additionally, he has an increased responsibility to correct for the price distortions that are caused by his holding a monopoly on the product.

Politicians and pundits will use this as an excuse to claim that the government needs to get more involved in correcting the price system—and in some ways they are right. In the long-term, if the federal government wants to lower the cost of pharmaceuticals it should reduce regulations that prevent companies from creating drugs whose patents have already expired. But any short-term government action to “make sure this never happens again” will only result in harmful unintended consequences, such as further decreasing the creation of life-saving drugs.

In this situation, the government doesn’t need to step in at all. Even in the absence of free market pricing mechanisms the public square has found a way to distribute information and use moral persuasion to force Shkreli to lower the price of the drug.

To prevent these kinds of problems in the future, though, we need to increase access to free markets—not blame them for problems caused by the government.

Joe Carter

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).