Does the free market recognize any forces other than supply and demand? Reality certainly does. The process of creating a Medicare drug benefit is a real world example. An article in the NY Times shows that even though Drug Makers Move Closer to Big Victory,
Still, the industry is not out of the woods, said Joe Antos, a health policy analyst at the American Enterprise Institute, a conservative research center in Washington.
"The pressure to do something about drug prices is still very high," Mr. Antos said yesterday. "This bill is the best the industry could get, but that's not very good."
Consideration of exactly
where this pressure comes from led to a minor epiphany because it is not one of the forces of the free market as I understand it.
The true free market way to address this would be to openly allow the Canadian imports, putting Big Pharma in competition with the only force on the planet powerful enough to give it pause—itself. But that won't happen for non-free market reasons. In fact, all the things that affect the environment the free market operates in create market "distortions" of one kind or another; the things that affect supply and demand are not subject to the laws of supply and demand. To my knowledge there has never been a market that was totally unaffected by non-market forces. This makes me question whether or not a thing such as The Free Market actually exists.
I've always thought of The Free Market much as I do The Economy. The Economy is apparently measurements of the supply of, and demand for, selected commodities. The Economy represents our activity about as well as sequential wire frame images of a building (with notes as copious as you have time to append between snapshots) represents the actual building, the substances it is made of, its contents and the processes that affect it taking place in and around it.
Similarly, The Free Market is a skeletal description of the activity of a skeletal description (The Economy). Actual market activity will only resemble The Free Market is it is coerced into doing so by disregarding the real events that are disregarded by this skeletal description. The Real Market can only become The Free Market by the application of force.
The article that sparked this tangent follows.
Drug Makers Move Closer to Big Victory
By GARDINER HARRIS
As Congress edged closer to passing a Medicare drug benefit that prohibits the government from using its buying clout to win discounts, one thing was clear: the drug industry appeared on the cusp of an enormous victory, gained in part by millions in political donations and an expensive lobbying campaign.
But like everyone else, drug executives flipped on their computers this morning and found a raft of unsolicited e-mail messages for discounted drugs from Canada — a sign that the industry's political and business troubles are far from solved.
Drug makers have pressed hard for the legislation, because most executives believe that a Medicare drug benefit will forestall efforts to legalize drug imports or control drug prices.
Still, the industry is not out of the woods, said Joe Antos, a health policy analyst at the American Enterprise Institute, a conservative research center in Washington.
"The pressure to do something about drug prices is still very high," Mr. Antos said yesterday. "This bill is the best the industry could get, but that's not very good."
Indeed, the Medicare legislation is better than the gloomiest pictures that investors imagined, and perhaps for that reason, shares of many of the largest drug companies rose on Monday.
President Bill Clinton had threatened price controls. Democrats had proposed having Medicare buy drugs in much the way that it pays for hospital care, which would have meant steep discounts across most of the companies' businesses.
Instead, "you're getting a drug benefit, and the two things we were most scared about — drug importation and price controls — aren't in the bill," said Richard Evans, an analyst for Bernstein Research.
But worries abound in the industry. Many drug executives predict that the additional volume of sales they will earn from Medicare beginning in 2006, when the benefit is scheduled to take effect, will be balanced by discounts they will have to provide to the health plans and insurers that will negotiate prices for Medicare beneficiaries.
"No one's seeing any kind of big windfall for this," said Ian D. Spatz, vice president for public policy at Merck & Company.
Some internal company analyses predict that drug makers' profits could rise or fall 5 percent. While not welcome, a 5 percent drop in profits is manageable, industry executives say. Their worry, they say, is that the plan will draw them into the vortex of a huge government program that will eventually run short of money and begin demanding much bigger discounts.
"Whatever the government says this thing costs, it's going to cost more," said Dr. William McGuire, chief executive and chairman of UnitedHealth Group, the nation's largest health insurer.
If the billions in subsidies that Congress has devised to discourage employers from eliminating drug benefits for retirees fail, and more people than expected enroll in the Medicare drug plan, costs could go up.
Mr. Evans, of Bernstein Research, predicts that more than half of the Medicare population — between 20 million and 30 million beneficiaries — will end up in the program and cost far more that the $400 billion that Congress estimated.
"That blows a hole in the budget," he said, adding, "That's when the government takes a chain saw to the industry."
Insurers will rely on pharmacy benefit managers — companies like Medco Health Solutions and AdvancePCS — to negotiate discounts from drug makers, as they do now on behalf of health maintenance organizations and other insurers. The benefit managers typically draw up preferred drug lists and demand discounts from drug makers whose products are included.
While the process has been criticized for lacking transparency, with doubts raised about whether enough of the discounts reach the employers and consumers who pay for drugs, many drug industry executives worry about the benefit managers' clout almost as much as they fear negotiating with government officials.
Drug industry executives say that the Medicare bill's endorsement of the pharmacy benefit managers' techniques is not good for them, but they add that the legislative process forced them to pick a less lethal poison than negotiating prices directly with the government.
"The water was getting pretty rough without a benefit, so we just traded one set of rough waters for another," a top drug industry executive said. "And when the issues of costs start coming in future years, we'll be back on Capitol Hill talking about the value of our medicines."
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