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Author makes the inadvertent case for insurance companies to buy pharmaceutical companies. The marginal cost of production of any medication is virtually nil, t

Author makes the inadvertent case for insurance companies to buy pharmaceutical companies. The marginal cost of production of any medication is virtually nil, the costs are nearly entirely due to R&D. If the treatment costs the insurance company $10,000 then the insurance company has an incentive to provide poor service, but if the treatment costs the insurance company pennies, then there is no need for such bureaucracy to incentivize patients to choose cheaper drugs. Indeed, purchasing the pharmaceutical companies would allow insurance companies to cut out unnecessary levels of administration and their associated costs, thus boosting profits. "Orgs have an incentive not to respond yes to every request they get" - not true. Orgs have an incentive to reduce the cost of saying yes, but saying yes is an important part of providing good customer service, keeping repeat business, and building a brand that enables bigger growth. Orgs that lose sight of this, deserve to be eaten by their competitors.

vinceguidry 8y ago
Nothing about vertical integration of those two industries would solve that problem. Paying out millions to billions to own drugs isn't going to make their unit economics any better. The $10,000 drug isn't going to magically only cost $100 just because it got bought by an insurance company. In fact it'll probably cost more, because the transaction costs involved in buying the drug will have to get added onto the R&D cost of developing the drug, which is the reason it costs $10,000 in the first place. It's also wrong to assume that just because a company gets acquired, that there's going to be 'unnecessary levels of administration and other associated costs' that are just begging for the ax. Pharma companies have finance people too that can provide that kind of oversight and recommendations. The market for drugs is complicated by two factors. First is that people who need drugs generally can't get that need met by any other product / service. So there's an incentive for price creep. Second is the patent system which forces companies to grab as much cash as they can until the patent expires. If longer patents were granted, or the patent system were more sane in that the patent period doesn't begin until after the drug is able to be made available to the market, then the costs of developing drugs would be a lot more legible, and therefore amortizable.
- jessaustin 8y ago
  There's no reason to assume that the drug division of the combined firm will continue to develop new drugs. In this imagining, they only need to continue to manufacture the drugs they've already developed. Also are you seriously arguing here for longer patent terms? You think that will get new products to market more quickly?

vinceguidry 8y ago

Nothing about vertical integration of those two industries would solve that problem. Paying out millions to billions to own drugs isn't going to make their unit economics any better. The $10,000 drug isn't going to magically only cost $100 just because it got bought by an insurance company. In fact it'll probably cost more, because the transaction costs involved in buying the drug will have to get added onto the R&D cost of developing the drug, which is the reason it costs $10,000 in the first place. It's also wrong to assume that just because a company gets acquired, that there's going to be 'unnecessary levels of administration and other associated costs' that are just begging for the ax. Pharma companies have finance people too that can provide that kind of oversight and recommendations. The market for drugs is complicated by two factors. First is that people who need drugs generally can't get that need met by any other product / service. So there's an incentive for price creep. Second is the patent system which forces companies to grab as much cash as they can until the patent expires. If longer patents were granted, or the patent system were more sane in that the patent period doesn't begin until after the drug is able to be made available to the market, then the costs of developing drugs would be a lot more legible, and therefore amortizable.

jessaustin 8y ago
There's no reason to assume that the drug division of the combined firm will continue to develop new drugs. In this imagining, they only need to continue to manufacture the drugs they've already developed. Also are you seriously arguing here for longer patent terms? You think that will get new products to market more quickly?