Over the past couple of years, the news has reported several incidents of sudden and rapid price hikes in medicines bought by the NHS. Drugs are often patent protected, which, put simply, means that firms are legally protected from another firm reproducing their product. Patents are a barrier to entry that helps to increase monopoly power. They do, however, provide benefits, insofar that without legal protection firms are unlikely to conduct the highly expensive research and development process to develop new drugs if another firm can simply come along and copy their idea. Without the high R&D costs, the rival would be able to charge a lower price and so the ‘creator’ stands to make large losses. Consequently, firms would not invest in R&D and we, the consumers, would not benefit from the advances in medicines we have seen.
On the other hand, firms can exploit this legal protection and monopoly power by charging very high prices to earn abnormal profits. These profits can be reinvested to develop new drugs, as Big Pharma will point out, or returned to shareholders in the form of dividends. However, the consequence of high prices, is, of course, lower consumption, and given the nature of the product, this can have a significant impact on consumer’s health.
The NHS is a very large organisation, Britain’s largest employer, with an annual budget of approximately £122bn. This should give it monopsony power when it comes to buying drugs, approximately £15bn of the budget, countering the monopoly power of the large pharmaceutical firms, such as Pfizer. However, reports suggest that the NHS is not getting value for money and is a victim of ‘price gouging’ – the process of suddenly increasing prices to exploit market power and increase profits. Probably the most famous example of price gouging is when Martin Shrkeli bought a patented drug used to treat AIDS and then increased the price by 5500% overnight. The process of extracting a larger ‘slice’ of wealth without creating new wealth is called rent-seeking. He is not a very popular man.
The UK government can take action to deter firms from this practice, which often takes place when a patent expires and the firm can change the name and distribution chain, a process known as ‘debranding’. Recently, Flynn and Pfizer have been fined for their decision to increase the price of an epilepsy drug by 2000%, although this is being contested in the courts. Further regulation is being discussed by the government and may be processed in the near future.
Given the funding issues the NHS currently faces, an increasing medicines bill creates an unwanted opportunity cost and means that cuts in other areas have to be made. Big pharma does need to make a profit to recoup high R&D costs and fund new medicine development, but how much is enough?
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