The Pharmaceutical Industry: Is it a market for lemons?
Healthcare and pharmaceuticals is a multi-trillion industry sector with annual increases in market size in the billions. Naturally, one would think that this is a highly regulated field as it pertains to the lives and wellbeing of people. However, in an analysis paper of current practice in the pharmaceutical field, it is determined to be a market for lemons.
A lemon market occurs when there is unequal access to information about the product for sellers and buyers. Lemons are low-quality products that are barely worth anything. The buyers in our case, whether it be regular people or physicians, are mainly ignorant of the products. After all, the product of interest is drugs in the form of perhaps pills or tablets that tell absolutely nothing about their efficacy based on appearance. The drugs’ biochemical ingredients are also likely newly synthesized and have not seen the market, meaning there is no real data on how patients respond after receiving the treatment. On the other hand, the sellers, who develop and test their drugs, know exactly everything. The asymmetric access to information is evident.
The pharmaceutical market is designed to be a multi-layer system with the hope of supervising one another and preventing inappropriate use and distribution of drugs. First of all, drugs must be approved by the FDA and demonstrate their safety/usefulness by undergoing experiments carried out by medical journals. Secondly, the general public does not have full access to medicines and typically require a prescription from physicians. This seemingly ideal organization exposed its flaws when the study determined that the proportion of patients who experience adverse drug effects (ADR) is alarmingly high. To elaborate, based on a study, on average there are 9.8 ADRs out of 100 resident months, of which more than half are preventable. Furthermore, from 1998 to 2005, the number of serious ADRs increased by 2.6 folds, and for fatal ADRs, it is 2.7 folds. This number is far greater than the growth in patient flow and the rate of prescription over the years. It is believed that the culprit is the inappropriate use of drugs, which leads to adverse reactions that only worsen when more are prescribed. Pharma companies use their marketing networks and reputation to promote drug use when they might do more harm than good. This has major effects on raising the burden of our medical system with a heavier cost due to longer hospitalization and more extensive healthcare. The reason behind this is that for pharmaceutical companies, producing cheap quality drugs is more favorable and profitable.
As to why the government can not effectively restrict such behavior is because all drugs have more or less adverse effects. To release a new drug, pharma companies only need to demonstrate that it is better than an inert substance. In a lot of cases, the negative effects are overlooked. More commonly, when companies run drug tests, the subjects and results are manipulated to meet FDA standards. For example, individuals who are older or have comorbidities are filtered from the drug test to avoid undesirable results (such as ADR). A strategic ignorance is employed, suggesting that confidential information, such as potential side effects of the drug, is not visible from the outside. Overall, this environment encourages the production of “lemons” in the market and buyers have no clue. These lemons have small variations from previous versions and show a minimal clinical advantage. More often than not, with extensive advertising campaigns, the new lemons are sold at a higher, patented price than the old ones whose risks are known. This is known as the Inverse Benefit Law. Advertising is a good strategy for the company as this will raise the expected values of buyers for a subpar product. Such a phenomenon is in opposition to Akerlof’s theory, which speculates that such a market will spiral down and eventually collapse. Fundamentally, I believe it’s mostly due to that not only don’t the buyers know the quality of the drugs themselves, meaning they can’t gauge the value of good and bad drugs even when explicitly told, but they are entirely unaware of the existence of these “lemons”.
From a purely business perspective, developing highly effective, innovative drugs can be undesired. First, the cost would be higher, meaning the price would inevitably also have to rise. Secondly, the production rate would drop, which translates to less revenue. Eventually, the good companies that make good quality products will be price-undercut or out-competed by the lemon producers and driven out of the market. One can summarize that a lemon market favors the lemon producers at the cost of the benefit of high-quality producers. Worst of all is that this lemon market is sustainable: if people don’t get better quickly after taking a drug or if they develop adverse effects, they need more.
Medicine and treatments are a need for every person. Unlike a lemon market about second-hand vehicles or higher education, a choice to maintain good health is largely not optional. When one gets sick or has our health status at risk, there is nothing else to do than to pull out the credit cards in our wallet and pay whatever is needed for treatment. Hence, the market never collapses but stabilizes at a point that is unhealthy.
One key here is that although high-quality drugs are more expensive, in the long run, they might cost less for the buyer as they are more innovative and safe. Ineffective drugs, however cheap, will barely offer the treatment required and demands for consistent restock; the cost can add up quickly. Regardless, from the point of view of a buyer, there are no compelling reasons to spend the extra money as they don’t understand the difference in quality.
What most people choose to do is to put faith in those pharma manufacturers, which unsurprising can lead to serious problems. From my previous readings, I have learned numerous incidents of why blind faith is never a good idea, even in the field of medicine. For instance, the anti-inflammatory drug Vioxx, after being approved by the FDA and prescribed by trusted physicians in amounts over millions, was discovered to increase risks in cardiovascular disorders. There might be more lemons in the market than what most of us would comfortably live with. Regardless, most people do not have an alternative other than listening to these experts.
With a multicultural background, I have lived in the United States and Taiwan. One of the significant differences I have observed between the two areas is the difference in terms of attitudes towards seeking medical treatment. Known by many, Taiwan has a very popularized healthcare system with universal insurance. In Taiwan, the cost to see a physician is unbelievably trivial to that in the States. And in my opinion, the entanglement of large quantities of money in medicine in the States shifts the focus to be more revenue-oriented.
This is one of the reasons why private pharmaceutical corporations can lead to severe consequences. The high price that comes with healthcare is what drives investors and innovations. Money becomes the fuel that drives the wheel of research. Developing highly efficient medicines becomes a conflict of interest as the companies are primarily incentivized by maximizing profits and earnings. Moreover, with a lack of inspection from the government, the health of the public can be compromised.
This topic is relevant to everyone. Health and quality of medicine is something that all of us should put great attention to. After all, what can be more valuable than a life without illness and disease? To confront the matter requires the general public along with professionals to gain awareness in the matter so there will be more transparency. Speaking from my understanding of the US healthcare system and the network effect of the market, I would propose that governmental regulations of new drugs be revised to ensure the quality must be above some standards. Tests need to be performed by third parties. Risks as well as adverse effects should be thoroughly studied to eliminate those lemons from entering the market in the first place. Needless to say, there is already a strict set of laws and guidelines in which the pharmaceutical firms must abide and rights are protecting the patients as well as health practitioners. It is simply that there is room to get around. Of course, all that I proposed have assumed a model that is far too simple and the matter demands further analysis. I do not care for a market that weighs money over the importance of the lives of humans. Overall, this lemon market is one that must be tackled to reach a balance where private pharmaceutical companies are satisfied with their profits while quality treatment and drugs are delivered.
Reference: https://www.sciencedirect.com/science/article/pii/S0277953620305876