In a free market businesses are free to set prices, customers are free to buy or not, and competitors are free to compete by offering an alternative product at a better prices. But sometimes customers don’t really have a choice whether to buy a product, and sometimes there’s no competition, and in that case the market breaks down because it isn’t really free.
An obvious current example of what that can lead to is the EpiPen, an epinephrine auto-injector used by people with life-threatening allergies, including quite a few children. A few years ago a package of two EpiPens cost under a hundred dollars and made a respectable product. Now the company has cranked the price up to more than $600. There’s no reason to think that the company’s costs to make them are higher (unless you count the sharp jump in salary for the CEO), so pretty much all the additional money is profit. Congress is looking into this (see for example this), but it’s doubtful that it will do anything, especially if the House remains in Republican control.
Customers can’t just refuse to buy the product, because doing so might cost their own lives or the lies of their children. And other companies can’t just just in with a competing product, because it takes time to perfect one and prove that it’s safe and effective so it can be marketed. (Of course, we could let people sell competing products without approval, but that’s gambling with people’s lives.)
There’s more detailed information in this video by pediatrician, author, and medical school professor Aaron Carroll. The second one is a brief update on the first, and if you’re pressed for time you may want to watch it by itself.
(Click on the URLs below the videos to see the YouTube page with links to related videos and other sources of information.)
As Dr Carroll mentions, EpiPen’s manufacturer has started offering coupons to offset some or even all of the customer’s co-pay, but the cost to insurance companies will not gone down, and their higher spending will of course by passed on to individuals and businesses in the form of higher insurance premiums. Moreover, it appears that the coupon only counts against the amount of one’s copay — the fixed amount of money based on the drug’s category that’s paid by people with prescription drug coverage. Those without insurance, or who pay a percentage of the price (“coinsurance”) won’t be able to use the coupon as I understand it. The company also says that it is planning to introduce a generic, non-name-brand version of their own product that will cost half as much, but that generic EpiPen is not yet on the market, and it will apparently still cost three times what the EpiPen sold for before the price was hiked.
In the meantime there are plans for competing, cheaper products (such as this one), but it takes time to get them approved and onto the market. Until that happens (if it happens) many people will have to spend a lot of money out of pocket, and the overall cost of U.S. healthcare is that much higher.
Here’s a cynical comedic look at drug companies from the people at Cracked (warning: contains a bit of indelicate language):
(Updated 2016 Sep 12 to add the first of the two Aaron Carroll videos.)