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This is an example of an arbitrage opportunity. It's a necessary evil of capitalism, and unfortunately, our government has decided that free market capitalism i

by exelius 12y ago

This is an example of an arbitrage opportunity. It's a necessary evil of capitalism, and unfortunately, our government has decided that free market capitalism is an appropriate system to use for health care. Arbitrage can be explained as thus: you have an opportunity to buy $1 for $0.75. How many dollars do you buy? The correct answer is "all of them". In this case, a drug had a sale price of $3 and a market value of $150 per pill (established by its competitor), so an investor basically purchased "all of them" and resold them at a higher price. If your goal is maximum economic efficiency, arbitrage is necessary. It allows companies to make decisions with the goal of maximizing profit (i.e. maximum economic efficiency) in moral hazard situations: if something is legal but morally dubious, if they don't do it, someone else will force them to. This is necessary because every individual has a slightly different idea of what is "right" and what is "wrong". Businesses don't have morals because they're not people. They are amoral, and arbitrage is the means by which that amorality is maintained. If a person wishes to exercise their moral calculus, they are free to do so when making investment decisions. I don't believe that to be the case with healthcare. In my opinion, healthcare is a sector that really shouldn't operate along capitalist principles because the goal of a national healthcare system should not be to maximize economic efficiency: it should be to maximize the health and well-being of its citizens. I know that's hard to quantify, but it's certainly not quantified by the dollars spent on health care. IMO government price controls on healthcare are the only solution to the problem. I don't know how that gets implemented, but I do know that the pendulum needs to swing towards socialized medicine if we expect things to get better.

refurb 12y ago
What needs to happen is a better connection between drug prices and the outcomes they produce. The EU does not have price controls on their drugs (only in limited circumstances). What the EU does (particularly the UK and DE) is evaluate drugs based on their own metrics to determine what a reasonable price is. If a drug is priced too high, they don't cover it. Right now the system for determining how much value a drug brings is broken (understandably since it's not easy to do). The best example I can provide is Sovaldi (used to treat hepatitis C). The manufacturer priced the drugs at $84K for a course of therapy. Insurance companies in the US screamed blood murder. The UK, which has a system to evaluate the utility offered by drugs (called QUALY - quality-adjusted life year) approved Sovaldi without any complaints. The drug is cheaper in the UK, but not by much.
- Fuxy 12y ago
  It makes more economic sense to cure HepC than to treat it so I would argue they made the right choice. The american insurance companies were screaming murder because they have no way of recovering their upfront cost with people changing insurance companies all the time in the US that's not a issue for the UK and the EU.
  - refurb 12y ago
    American insurance companies were screaming blood murder not because they can't recoup the upfront costs (all insurance companies benefit if HCV is eliminated), but because the cost were all upfront, not spread out over time. US insurance companies live and die by their yearly budgets since premiums are collected upfront. If some high cost drug comes along that they didn't plan for, they could end up in the red really quick.
- throwaway5752 12y ago
  To be fair, Solvaldi actually is cost effective from the perspective that chronic hep C results in liver transplants or death, and a course of Solvaldi knocks out hep C entirely. It was also developed in house by Gilead AFAIK (and they bore the risk of r&d, trials, etc). edit: thanks for the correction refurb! I has actually looked at sofosbuvir on wikipedia prior to looking because I thought it was through an acquired company. I think it's still a different nature of acquisition & development vs Valeant or the putrid behavior described in this thread's link.
  - refurb 12y ago
    Sovaldi was acquired by Gilead when they purchased Pharmasset for ~$11B. As for Sovaldi's cost effectiveness, it's more complicated that looking at liver transplants. Of the millions who have HCV, only a few percent will ever need a liver transplant. That being said, if you look at what it costs to cure a patient of HCV, Gilead's drug is much more efficacious, so the "cost per cure" is much lower than with older drugs.
- exelius 12y ago
tedks 12y ago
> In my opinion, healthcare is a sector that really shouldn't operate along capitalist principles because the goal of a national healthcare system should not be to maximize economic efficiency: it should be to maximize the health and well-being of its citizens Why should we stop at healthcare if we're deciding that health and well-being is more important than economic efficiency? Energy, transportation, and service are all industries that have huge health effects. Agriculture obviously has huge health effects. Why not socialize all of them in the name of health?
- mikeash 12y ago
  We do socialize all of those, to lesser or greater extents.
  - toomuchtodo 12y ago
    I regret having only one upvote for you.
    - mikeash 12y ago
      If only HN were a true free market, then you could buy more!
      - tedks 12y ago
        Why stop at upvotes? If hacker news were a truly free market, you should be able to buy any action the site supports over its database, and for a higher price, any operation the database itself supports. If Hacker News really cared about economic efficiency more than things like "insight" and "good discussion," we could buy shadowbans, changes to vote weights, and edits to comments or post titles.
        toomuchtodo 12y ago
        Your post reminded me of "Citizens United".
  - 12y ago
crusso 12y ago
You're ranting against free market capitalism when the problem in the article is the result of government interference in the free market. Retrophin is using legal (government made the laws) maneuvering to prevent competitors from creating generic equivalents of the drug. So we should throw out all of the benefits of free market capitalism: increased innovation, competition, efficiency, etc. because of cases like this that are usually caused by something distinctly apart from free market capitalism? If anything, this is an example of misguided government regulation.
- exelius 12y ago
  I'm ranting against free market capitalism because the whole point of free market capitalism is to ensure the price of a product is as close to its "free market value" as possible. For health care products, the calculation of value is inherently inaccurate because an individual places a much higher value on his/her own life than the market would. I do agree that this is an example of misguided government regulation. The problem is that the government tried to use a capitalist solution to a societal value problem (i.e. the orphan drug laws). This created additional arbitrage opportunities. What I'm saying is that we need a serious discussion at a national level about the goals of our health care system, and the optimal means for achieving those goals. We don't need new government regulation of health care; we need an entirely new systemic approach to health care. We've recently had a national awakening that the approach we've taken to drug abuse doesn't work, and that we were maybe trying to solve the wrong problem in the first place. We need a similar awakening on health care, though I'm doubtful it will happen until health care is out of reach to all but the wealthiest in society.
  - drchaos 12y ago
    > the whole point of free market capitalism is to ensure the price of a product is as close to its "free market value" as possible You forgot competition. In a healthy market, a big difference between manufacturing cost and final price is a strong incentive for competitors to enter the market and undercut prices. You can see this in practise in unregulated markets like electronics, leading to a flood of really cheap devices, for example you can get a Galaxy S4 clone on Alibaba for about $200, whereas an original S4 goes for $400 right now. You can bet the Chinese would also do cheap generics, if the FDA would let them.
mikeash 12y ago
Isn't arbitrage where a third party buys a product in one place and sells it in another, pocketing the difference? Here, we have a company just buying up competitors to stifle competition. Arbitrage would be buying the drug where it's available at $1.50 and then selling it at $30 where the $1.50 price can't be obtained. Such opportunities are generally fleeting, because the very action of arbitrage pushes the prices towards equality. This is also not really an example of free market capitalism, unless you take an extremely laissez-faire definition of it. This is a monopoly, with a captive audience and government regulations providing a barrier to new competitors. In true free market capitalism, this would never happen because if the original company could make a profit at $1.50, then the new company's $30 price would be immediately undercut by other companies who see that they can make a profit at, say, $20, and the price will naturally fall back to something around the costs of production. Of course, you'd also probably get a lot of companies undercutting it even further by selling dangerous products, thus why these regulations are there in the first place.
millstone 12y ago
This isn't arbitrage (there's only one market in play). It's just a straightforward instance of an Econ 101 monopoly: if a good has inelastic demand with a single seller, the seller can make more money by raising the price above its equilibrium value. And monopolies are not economically efficient: they impose a deadweight loss. Say the drug costs $1 per pill to manufacture. There are people who would like to buy it at $20 per pill, but not any higher. This transaction is profitable, but will not take place because the price has been artificially set at $30. That's the inefficiency.

by exelius 12y ago

refurb 12y ago

What needs to happen is a better connection between drug prices and the outcomes they produce. The EU does not have price controls on their drugs (only in limited circumstances). What the EU does (particularly the UK and DE) is evaluate drugs based on their own metrics to determine what a reasonable price is. If a drug is priced too high, they don't cover it. Right now the system for determining how much value a drug brings is broken (understandably since it's not easy to do). The best example I can provide is Sovaldi (used to treat hepatitis C). The manufacturer priced the drugs at $84K for a course of therapy. Insurance companies in the US screamed blood murder. The UK, which has a system to evaluate the utility offered by drugs (called QUALY - quality-adjusted life year) approved Sovaldi without any complaints. The drug is cheaper in the UK, but not by much.

Fuxy 12y ago
It makes more economic sense to cure HepC than to treat it so I would argue they made the right choice. The american insurance companies were screaming murder because they have no way of recovering their upfront cost with people changing insurance companies all the time in the US that's not a issue for the UK and the EU.
- refurb 12y ago
  American insurance companies were screaming blood murder not because they can't recoup the upfront costs (all insurance companies benefit if HCV is eliminated), but because the cost were all upfront, not spread out over time. US insurance companies live and die by their yearly budgets since premiums are collected upfront. If some high cost drug comes along that they didn't plan for, they could end up in the red really quick.
throwaway5752 12y ago
To be fair, Solvaldi actually is cost effective from the perspective that chronic hep C results in liver transplants or death, and a course of Solvaldi knocks out hep C entirely. It was also developed in house by Gilead AFAIK (and they bore the risk of r&d, trials, etc). edit: thanks for the correction refurb! I has actually looked at sofosbuvir on wikipedia prior to looking because I thought it was through an acquired company. I think it's still a different nature of acquisition & development vs Valeant or the putrid behavior described in this thread's link.
- refurb 12y ago
  Sovaldi was acquired by Gilead when they purchased Pharmasset for ~$11B. As for Sovaldi's cost effectiveness, it's more complicated that looking at liver transplants. Of the millions who have HCV, only a few percent will ever need a liver transplant. That being said, if you look at what it costs to cure a patient of HCV, Gilead's drug is much more efficacious, so the "cost per cure" is much lower than with older drugs.
exelius 12y ago

tedks 12y ago

> In my opinion, healthcare is a sector that really shouldn't operate along capitalist principles because the goal of a national healthcare system should not be to maximize economic efficiency: it should be to maximize the health and well-being of its citizens Why should we stop at healthcare if we're deciding that health and well-being is more important than economic efficiency? Energy, transportation, and service are all industries that have huge health effects. Agriculture obviously has huge health effects. Why not socialize all of them in the name of health?

mikeash 12y ago
We do socialize all of those, to lesser or greater extents.
- toomuchtodo 12y ago
  I regret having only one upvote for you.
  - mikeash 12y ago
    If only HN were a true free market, then you could buy more!
    - tedks 12y ago
      Why stop at upvotes? If hacker news were a truly free market, you should be able to buy any action the site supports over its database, and for a higher price, any operation the database itself supports. If Hacker News really cared about economic efficiency more than things like "insight" and "good discussion," we could buy shadowbans, changes to vote weights, and edits to comments or post titles.
      - toomuchtodo 12y ago
        Your post reminded me of "Citizens United".
- 12y ago

crusso 12y ago

You're ranting against free market capitalism when the problem in the article is the result of government interference in the free market. Retrophin is using legal (government made the laws) maneuvering to prevent competitors from creating generic equivalents of the drug. So we should throw out all of the benefits of free market capitalism: increased innovation, competition, efficiency, etc. because of cases like this that are usually caused by something distinctly apart from free market capitalism? If anything, this is an example of misguided government regulation.

exelius 12y ago
I'm ranting against free market capitalism because the whole point of free market capitalism is to ensure the price of a product is as close to its "free market value" as possible. For health care products, the calculation of value is inherently inaccurate because an individual places a much higher value on his/her own life than the market would. I do agree that this is an example of misguided government regulation. The problem is that the government tried to use a capitalist solution to a societal value problem (i.e. the orphan drug laws). This created additional arbitrage opportunities. What I'm saying is that we need a serious discussion at a national level about the goals of our health care system, and the optimal means for achieving those goals. We don't need new government regulation of health care; we need an entirely new systemic approach to health care. We've recently had a national awakening that the approach we've taken to drug abuse doesn't work, and that we were maybe trying to solve the wrong problem in the first place. We need a similar awakening on health care, though I'm doubtful it will happen until health care is out of reach to all but the wealthiest in society.
- drchaos 12y ago
  > the whole point of free market capitalism is to ensure the price of a product is as close to its "free market value" as possible You forgot competition. In a healthy market, a big difference between manufacturing cost and final price is a strong incentive for competitors to enter the market and undercut prices. You can see this in practise in unregulated markets like electronics, leading to a flood of really cheap devices, for example you can get a Galaxy S4 clone on Alibaba for about $200, whereas an original S4 goes for $400 right now. You can bet the Chinese would also do cheap generics, if the FDA would let them.

mikeash 12y ago

Isn't arbitrage where a third party buys a product in one place and sells it in another, pocketing the difference? Here, we have a company just buying up competitors to stifle competition. Arbitrage would be buying the drug where it's available at $1.50 and then selling it at $30 where the $1.50 price can't be obtained. Such opportunities are generally fleeting, because the very action of arbitrage pushes the prices towards equality. This is also not really an example of free market capitalism, unless you take an extremely laissez-faire definition of it. This is a monopoly, with a captive audience and government regulations providing a barrier to new competitors. In true free market capitalism, this would never happen because if the original company could make a profit at $1.50, then the new company's $30 price would be immediately undercut by other companies who see that they can make a profit at, say, $20, and the price will naturally fall back to something around the costs of production. Of course, you'd also probably get a lot of companies undercutting it even further by selling dangerous products, thus why these regulations are there in the first place.

millstone 12y ago

This isn't arbitrage (there's only one market in play). It's just a straightforward instance of an Econ 101 monopoly: if a good has inelastic demand with a single seller, the seller can make more money by raising the price above its equilibrium value. And monopolies are not economically efficient: they impose a deadweight loss. Say the drug costs $1 per pill to manufacture. There are people who would like to buy it at $20 per pill, but not any higher. This transaction is profitable, but will not take place because the price has been artificially set at $30. That's the inefficiency.