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This article has some shoddy logic. For the vast majority of drugs, the actual marginal manufacturing price per pill is essentially zero. That means that when

This article has some shoddy logic. For the vast majority of drugs, the actual marginal manufacturing price per pill is essentially zero. That means that when the expired pills are thrown away and new pills are manufactured, there is no true economic loss. Rather, all that potentially happens is a transfer between the consumer and the manufacturer. If pill prices were set by some external force, this could at least be an important society-wide transfer. But in fact, in equilibrium pill prices will be affected by the expected rate at which pills expire without being consumed. Even when manufactures have a monopoly, the manufacturer-surplus maximizing price is determined by the demand curve of the consumer which takes into account the expiry rate of pills. (If 10% of pills expire before I consume them, they are worth 10% less to me in expectation.) Yes, I'm sure there are market model where expiry dates create net economic drag, or a net value transfer between manufacturer and consumer, but it's not even clear which direction the transfer goes. Such an analysis depends on the details of the world and how they are reflected in your model, which are completely absent in this article. Most importantly, the intuition that "letting $100 pills expire for no good reason must cause $100 of damage" is completely false when the marginal cost of manufacturing is low. (There are exceptions where the marginal manufacturing process is expensive, but the article doesn't focus on these.)

nathancahill 9y ago
I had exactly that thought when listening to the NPR interview this morning. Unfortunately, the value was taken for granted (even extrapolated x4000 to estimate total value loss across all hospitals in the US).
learn_more 9y ago
The cost model is like a time limited software license. If there is some new trick to extend the license, the drug companies would likely just charge more up front.
- jessriedel 9y ago
  Exactly. The price is set by the willingness to pay (the demand curve), which accounts for the fraction of purchased pills that will actually be consumed.
  - jkern 9y ago
    It seems like this would be true if everything were working perfectly and there was a gradient of purchasing options across price/expiration. As it is consumers really don't have any choice wrt expiration date since as far as I'm aware the option to pay more for longer lasting drugs doesn't really exist.
    - jessriedel 9y ago
      It doesn't require a gradient. Suppose that, instead of expiry issues, half of all pills were inert duds for whatever manufacturing reason. (You look in the bottle and the duds are black.) This would make the pills half as valuable to consumers, and manufacturers would simply sell twice as many for half the price. It does not require that consumers have access to pills that have a higher or lower dud rate. And yes, it's possible to construct a model where there are frictional losses from duds (increased spending on pill bottles!), but to assert that you'd need to try to write down some numbers.
  - r00fus 9y ago
    Pharma companies get the benefit of near-perfect inelasticity in demand, i.e., if you don't get your meds means you die or have extreme pain, you will likely be willing to pay inordinate prices.
breischl 9y ago
>This article has some shoddy logic... all that potentially happens is a transfer between the consumer and the manufacturer. The point of the article is that this is an expensive mess for everyone except the manufacturer, which means approximately everyone. As a consumer, having the manufacturer "transfer" money from your pocket into their own sucks. Seems like the article's logic is actually pretty decent. Also, even if we accept that the marginal cost of producing a pill is near-zero, that's ignoring the entire rest of the supply chain. It's not like drugs are magically teleported. There are real costs in time, money, and resources for creating the packaging, transporting drugs, stocking/shelving them, unstocking them, sending them to a disposal location, and then disposing of them. All of that is a complete loss. Most of it generates various forms of pollution, waste, and other externalities. This also sucks for ~everyone. Basically, outside of theoretical econ-land, wasting perfectly good things is wasteful.
- jessriedel 9y ago
  > As a consumer, having the manufacturer "transfer" money from your pocket into their own sucks. Seems like the article's logic is actually pretty decent. As I addressed in my second paragraph, it is not actually a transfer unless you introduce new assumptions into the standard model of a monopoly. Please describe them. > There are real costs in time, money, and resources for creating the packaging, transporting drugs, stocking/shelving them, unstocking them, sending them to a disposal location, and then disposing of them. These are, in almost all cases, trivial compared to the development cost of the drug. You can group them under the marginal cost of the pill. > Basically, outside of theoretical econ-land, wasting perfectly good things is wasteful. Much worse than theoretical econ-land is non-quantitative land where all "waste" is bad and cost-benefit analyses are never done, not even at the order of magnitude level. Please, by all means, construct a more accurate model. But just criticizing the imperfections of a model, which always exist, and then making non-quantitative value judgements is how we get recycling programs that cost 10 times the value of the material they recover.
  - breischl 9y ago
    >Please, by all means, construct a more accurate model. Gee, you get to just hand-wave an entire manufacturing process and supply chain into insignificance, but I need a model, huh? Fine. Let's use a generic drug (ie, not paying patent/development costs) as a proxy for how much the entire supply side costs. How about loratidine. You can get that at Walmart (stocked on the shelf, since that's mostly what the article was discussing) for about 10 cents/pill.[1] Of course that's completely ignoring the disposal costs. I strongly doubt that disposing of hospital/pharmacy quantities of drugs is as easy as chucking them in the municipal landfill. Let's say it costs 10% of the purchase price. So 11 cents/pill just to run a pill through the supply chain and then dispose of it. Intensifying the napkin math... CDC says there were ~3.4 billion visits that resulted in drugs "provided or ordered". [2] Let's say that those were an average of 7 days worth of drugs ordered, so ~30 billion doses. Let's say that 10% of that much is either wasted by the consumer, or wasted while sitting on a shelf before anybody bought it - 3 billion pills. 3 billion pills/year * 0.11 cents/pill = $330 million/year. I dunno, seems potentially significant, at least to an order of magnitude level. Especially since the costs of the FDA program to extend the shelf life was around 1% of that much. Ref: [1] - https://www.walmart.com/ip/Equate-Loratadine-10-mg-300-ct/20629925 https://www.walmart.com/ip/Equate-Loratadine-10-mg-300-ct/20... [2] - https://www.cdc.gov/nchs/fastats/drug-use-therapeutic.htm https://www.cdc.gov/nchs/fastats/drug-use-therapeutic.htm
valuearb 9y ago
Your logic would be fine if manufacturers were required to replace expired pills with new ones. But they aren't, so early expiry dates impose enormous economic costs on consumers of drugs, while manufacturers get the massive benefits of selling drugs twice to same consumer.
- refurb 9y ago
  A lot of manufacturers accept expired drug. And even if they don't, distributors often do as well. And expired drugs comes down to inventory management. Don't buy more product than you can sell.
  - valuearb 9y ago
    If lots of manufacturers were all manufacturers, this article wouldn't have been written. In truth, the vast majority of expensive drugs aren't being replaced by distributors or manufacturers, or the Shelf Life Extension program for the government would not be saving $2B a year. And don't blame the victims, which is what your sentence on inventory management does. If a hospital over-estimates patients usage of a drug and gets stuck with expired drugs due to excessively shortened expiry dates, that's on the maker. The maker knows the real expiry dates, usage can never be anything but an estimate.
    - refurb 9y ago
      I would suggest you read up on the Shelf Life Extension Program. It's a specific program around either limited use products or products where the gov't hold such large stockpiles that companies won't take returns, it just wouldn't make sense. The most likely scenario is one where the products are never used. I had a friend who worked on the federal Tamiflu stockpiles. The gov't and the manufacturer have a deal where the gov't gets a significant rebate on unused product that is either put back into circulation or the manufacturer buys it back and destroys it. Remember, the gov't has companies competitively bid on manufacturing these products (particularly for generics which were most of the examples in the article). Is the company going to give a 100% money back guarantee if it's not used? Would you? I wouldn't. So yes, there are certain scenarios (stockpiling) where manufacturers don't take back product. That's not most scenarios. Most scenarios are hospitals holding 30-45 days on hand of product. If they screw up their inventory they should pay a penalty not the manufacturer.
jeremynixon 9y ago
Pfizer behaves very differently with an increase in marginal revenue than a patient (who is passed the cost from the distributor) would behave with a similar decrease in health care costs. Anticipating pill expiration and what will be excess supply is a difficult predictive modeling problem. At a practical level, it's difficult for pill expiration date to make it into the price, especially when the purchasers of the pill are different people than those who throw out the pill years down the line.

nathancahill 9y ago

I had exactly that thought when listening to the NPR interview this morning. Unfortunately, the value was taken for granted (even extrapolated x4000 to estimate total value loss across all hospitals in the US).

learn_more 9y ago

The cost model is like a time limited software license. If there is some new trick to extend the license, the drug companies would likely just charge more up front.

jessriedel 9y ago
Exactly. The price is set by the willingness to pay (the demand curve), which accounts for the fraction of purchased pills that will actually be consumed.
- jkern 9y ago
  It seems like this would be true if everything were working perfectly and there was a gradient of purchasing options across price/expiration. As it is consumers really don't have any choice wrt expiration date since as far as I'm aware the option to pay more for longer lasting drugs doesn't really exist.
  - jessriedel 9y ago
    It doesn't require a gradient. Suppose that, instead of expiry issues, half of all pills were inert duds for whatever manufacturing reason. (You look in the bottle and the duds are black.) This would make the pills half as valuable to consumers, and manufacturers would simply sell twice as many for half the price. It does not require that consumers have access to pills that have a higher or lower dud rate. And yes, it's possible to construct a model where there are frictional losses from duds (increased spending on pill bottles!), but to assert that you'd need to try to write down some numbers.
- r00fus 9y ago
  Pharma companies get the benefit of near-perfect inelasticity in demand, i.e., if you don't get your meds means you die or have extreme pain, you will likely be willing to pay inordinate prices.

breischl 9y ago

>This article has some shoddy logic... all that potentially happens is a transfer between the consumer and the manufacturer. The point of the article is that this is an expensive mess for everyone except the manufacturer, which means approximately everyone. As a consumer, having the manufacturer "transfer" money from your pocket into their own sucks. Seems like the article's logic is actually pretty decent. Also, even if we accept that the marginal cost of producing a pill is near-zero, that's ignoring the entire rest of the supply chain. It's not like drugs are magically teleported. There are real costs in time, money, and resources for creating the packaging, transporting drugs, stocking/shelving them, unstocking them, sending them to a disposal location, and then disposing of them. All of that is a complete loss. Most of it generates various forms of pollution, waste, and other externalities. This also sucks for ~everyone. Basically, outside of theoretical econ-land, wasting perfectly good things is wasteful.

jessriedel 9y ago
> As a consumer, having the manufacturer "transfer" money from your pocket into their own sucks. Seems like the article's logic is actually pretty decent. As I addressed in my second paragraph, it is not actually a transfer unless you introduce new assumptions into the standard model of a monopoly. Please describe them. > There are real costs in time, money, and resources for creating the packaging, transporting drugs, stocking/shelving them, unstocking them, sending them to a disposal location, and then disposing of them. These are, in almost all cases, trivial compared to the development cost of the drug. You can group them under the marginal cost of the pill. > Basically, outside of theoretical econ-land, wasting perfectly good things is wasteful. Much worse than theoretical econ-land is non-quantitative land where all "waste" is bad and cost-benefit analyses are never done, not even at the order of magnitude level. Please, by all means, construct a more accurate model. But just criticizing the imperfections of a model, which always exist, and then making non-quantitative value judgements is how we get recycling programs that cost 10 times the value of the material they recover.
- breischl 9y ago
  >Please, by all means, construct a more accurate model. Gee, you get to just hand-wave an entire manufacturing process and supply chain into insignificance, but I need a model, huh? Fine. Let's use a generic drug (ie, not paying patent/development costs) as a proxy for how much the entire supply side costs. How about loratidine. You can get that at Walmart (stocked on the shelf, since that's mostly what the article was discussing) for about 10 cents/pill.[1] Of course that's completely ignoring the disposal costs. I strongly doubt that disposing of hospital/pharmacy quantities of drugs is as easy as chucking them in the municipal landfill. Let's say it costs 10% of the purchase price. So 11 cents/pill just to run a pill through the supply chain and then dispose of it. Intensifying the napkin math... CDC says there were ~3.4 billion visits that resulted in drugs "provided or ordered". [2] Let's say that those were an average of 7 days worth of drugs ordered, so ~30 billion doses. Let's say that 10% of that much is either wasted by the consumer, or wasted while sitting on a shelf before anybody bought it - 3 billion pills. 3 billion pills/year * 0.11 cents/pill = $330 million/year. I dunno, seems potentially significant, at least to an order of magnitude level. Especially since the costs of the FDA program to extend the shelf life was around 1% of that much. Ref: [1] - https://www.walmart.com/ip/Equate-Loratadine-10-mg-300-ct/20629925 https://www.walmart.com/ip/Equate-Loratadine-10-mg-300-ct/20... [2] - https://www.cdc.gov/nchs/fastats/drug-use-therapeutic.htm https://www.cdc.gov/nchs/fastats/drug-use-therapeutic.htm

valuearb 9y ago

Your logic would be fine if manufacturers were required to replace expired pills with new ones. But they aren't, so early expiry dates impose enormous economic costs on consumers of drugs, while manufacturers get the massive benefits of selling drugs twice to same consumer.

refurb 9y ago
A lot of manufacturers accept expired drug. And even if they don't, distributors often do as well. And expired drugs comes down to inventory management. Don't buy more product than you can sell.
- valuearb 9y ago
  If lots of manufacturers were all manufacturers, this article wouldn't have been written. In truth, the vast majority of expensive drugs aren't being replaced by distributors or manufacturers, or the Shelf Life Extension program for the government would not be saving $2B a year. And don't blame the victims, which is what your sentence on inventory management does. If a hospital over-estimates patients usage of a drug and gets stuck with expired drugs due to excessively shortened expiry dates, that's on the maker. The maker knows the real expiry dates, usage can never be anything but an estimate.
  - refurb 9y ago
    I would suggest you read up on the Shelf Life Extension Program. It's a specific program around either limited use products or products where the gov't hold such large stockpiles that companies won't take returns, it just wouldn't make sense. The most likely scenario is one where the products are never used. I had a friend who worked on the federal Tamiflu stockpiles. The gov't and the manufacturer have a deal where the gov't gets a significant rebate on unused product that is either put back into circulation or the manufacturer buys it back and destroys it. Remember, the gov't has companies competitively bid on manufacturing these products (particularly for generics which were most of the examples in the article). Is the company going to give a 100% money back guarantee if it's not used? Would you? I wouldn't. So yes, there are certain scenarios (stockpiling) where manufacturers don't take back product. That's not most scenarios. Most scenarios are hospitals holding 30-45 days on hand of product. If they screw up their inventory they should pay a penalty not the manufacturer.

jeremynixon 9y ago

Pfizer behaves very differently with an increase in marginal revenue than a patient (who is passed the cost from the distributor) would behave with a similar decrease in health care costs. Anticipating pill expiration and what will be excess supply is a difficult predictive modeling problem. At a practical level, it's difficult for pill expiration date to make it into the price, especially when the purchasers of the pill are different people than those who throw out the pill years down the line.