In this episode, I explore the following questions: What are claimed market failures? Do they exist? Can government intervention correct them? Is there such thing as government failure? It's important to ask these questions to determine whether or not market failure or government failure are the bigger problem in society. Much of this has do with the differences between Mainline Economics (my preference) and Mainstream Economics.
This enters controversial territory in economics and politics by discussing the myths of "market failure." Supposed market failures usually include problems with markets because of asymmetric information (occupational licensing and healthcare), monopolies (utilities and EpiPen), and externalities (pollutants) that can theoretically be corrected by government intervention.
However, I make the case that these issues in markets are generated by government intervention, not unhampered markets, and the introduction of government intrusion to attempt to correct these potential issues only expand government and make the problem worse.
Moreover, there are no free-market government solutions, which is why toxic pollutants should be dealt with by letting markets sufficiently price them or alternatively, though not recommended, by regulation. Policy solutions such as a carbon tax indirectly price externalities and the price will always be wrong because of the "knowledge problem" taught by economist Friedrich Hayek and the poor modeling that's done by so-called experts (see William Easterly's book The Tyranny of Experts). In general, the institutional structure of an economy should be supported by the government through upholding contracts, protecting people, and providing very few public goods.
Instead of resorting to government intervention to solve supposed market failures, we should first understand that the government is likely the problem and Let People Prosper by promoting institutions with strong private property rights and fewer barriers to entry and exit markets.
This commentary originally appeared in the Washington Examiner on September 15, 2016.
Hidden amidst all the sanctimonious verbal attacks and political over-promises to save people from Big Pharma's greedy clutches is a simple but painful truth, confirmed by the Epipen debacle. Though Washington decries Mylan's monopoly power and price gouging, it is Washington that created and protects Mylan's monopoly.
Epinephrine (Epi) is our naturally occurring "Fight or Flight" hormone, intended to protect us in high stress situations. One of its manifold effects is to open the airways so more air can get in and out. This allows us to run away from an enemy (flight) or win a conflict we can't avoid (fight.) In patients with asthma and in those with allergies that suddenly close down the air tubes, called anaphylaxis, the immediate administration of Epi can be the difference between life and death.
Meridian Medical Technologies introduced the first autoinjectors of Epi for public use in 1997. Mylan acquired the patent for EpiPen in 2007, becoming the sole seller and marketer of this life-saving medication. In 2007, a two-pack of EpiPen autoinjectors was priced at less than $100. Today, Mylan charges $600, and gets it … or people must do without.
Epinephrine as a synthetic medication has been around since 1904. Therefore, it should be available in generic forms and subject to competitive market forces. It is Mylan's specific autoinjector technology, originally developed by the military, which they can sell exclusively because it is under patent protection. Mylan does not have a monopoly on the sale of the medicine epinephrine (adrenaline). Rather, they have a monopoly on the EpiPen autoinjection device, which is mechanically different from the various other autoinjectors available to the public such as for insulin.
Over the same period that Mylan increased the price of EpiPen 500 percent (2007-2016), the annual compensation of Mylan CEO, Heather Bresch, rose 670 percent.
Such increases in price and CEO paychecks meet anyone's definition of price gouging and exorbitant compensation. Isn't Mylan effectively holding asthmatics and people with allergies hostage to their corporate greed? One would think this is illegal. However, this extortion is perfectly legal.
Mylan has a government-created and government-protected monopoly, one that is maintained by "the federal government's own regulatory scheme," a scheme that actually encouraged "a billion-dollar market [to be] cornered by one supplier."
Adamis, Sanofi, and Teva are three pharmaceutical companies that want to compete with Mylan. They are prevented from entering the market by the federal government, specifically the FDA, which has repeatedly denied them approval to sell.
Another barrier to entry of market competitors is the fact that "the FDA maintains no clear and consistent principles for generic drug-delivery devices like auto injectors or asthma inhalers." How can anyone comply with the rules if there are no rules and the rules that do exist keep changing?
The government has another way of protecting Mylan's monopoly: cost. The average price for a company to get FDA approval is $2.56 billion (in 2013 dollars.) This cost of acquiring regulatory approval is, of course, reflected in the prices we must pay for drugs.
Federal patent laws add another barrier to potential competitors. Companies like Mylan can protect their monopoly position through extending nearly expired patents with very minor changes to existing products.
The Obama administration mandated that public schools must purchase EpiPens. With Mylan already having more than 90 percent market share for Epi, Washington actively facilitates Mylan's market dominance and control.
Like any good monopoly, Mylan can use its market control to gouge the public. This is not the fault of the free market—it is the fault of a federally controlled, "non-free" market.
If there were a free market, competitors would "keep Mylan honest." In a free market, Mylan could not simply dictate the price of a two-pack of EpiPen at $600 because market competition would create a bidding war that would drop the price closer to the cost of producing each one, which is certainly less than $20. This competition would create a situation where no one would buy Mylan's product at $600 if they could an effective alternative for, say, $25.
Condemnations of Mylan by Washington politicos are self-serving. The politicians want to distract the public from the government's complicity, through the FDA, in Mylan's price gouging.
Ironically, protection of commercial monopolies is actually not Washington's primary purpose. Nonetheless, monopoly is a predictable (and repeatedly predicted) consequence of the feds' real strategic goal: control. Most federal laws and executive orders, with their subsequent "necessary" rules and regulations, expand federal control and extend federal reach.
There are numerous examples of Washington's disdain for the free market in the Beltway's quest for control. Obamacare is a paradigm. As a result of Obama's namesake law, Washington mandates (controls) insurance benefits; dictates (controls) payment schedules; and even tells us (controls) what we must spend our money on: government-approved health insurance.
Hypocrisy is thick on the ground. Washington's authoritarianism gives Mylan a monopoly. Mylan uses its control of the market to gouge the public. What does the architect of Obamacare, Dr. Ezekiel Emmanuel, recommend to protect us from pharmaceutical monopolies and their market control? Tighter control of the market in the form of government monopoly, called price controls!
Every good psychiatrist will tell you the first steps to cure are recognizing that there is a problem and accepting that you have it. If Americans want to regain the liberties penned by our Founding Fathers, we must start by recognizing why we lost them: A progressive federal drive to concentrate power in the hands of Washington, D.C.
This commentary originally appeared in Forbes on September 14th, 2016
Aphorisms like “the pot calling the kettle black” persist because they keep being proven relevant. Such is the case with politicians’ outrage over Mylan Pharmaceuticals’ price gouging for its life-saving EpiPen: their price has risen from less than $100 for a two-pack in 2007 to $600 today.
The government (“pot”) is loudly and very publicly calling Mylan (“the kettle”) “black”—at fault—for something the government itself did.
Epinephrine (Epi) is a naturally occurring hormone our bodies use for Fight or Flight. Epi makes our hearts pump harder, it heightens the senses, strengthens our muscles, and opens up the airways. In patients with sudden constriction of the airways, such as in asthma or respiratory allergies with anaphylaxis, Epi can be lifesaving.
Meridian Medical Technologies introduced the first autoinjectors of Epi for sale to the public in 1997. Mylan Pharmaceuticals became the sole seller and marketer in 2007. After multiple denials by the FDA of competing Epi devices and President Obama’s 2013 legislation forcing public schools to purchase EpiPens, Mylan gained market share to reach its present level of 90 percent.
Why can Mylan get away with a 500% price increase? Because it has a monopoly, one that is maintained by “the federal government’s own regulatory scheme” which allowed, in fact encouraged, “a billion-dollar market [to be] cornered by one supplier.” Government officials decry Mylan’s behavior to distract the public from government complicity.
Sanofi , Teva, and Adamis are three pharmaceutical companies that would like to compete with Mylan; however, they cannot sell Epi because they do not have the FDA’s okay. The feds keep changing their administrative rules and regulations. In fact, “the FDA maintains no clear and consistent principles for generic drug-delivery devices like auto injectors or asthma inhalers.”
Another barrier to competition is a patent process that allows companies to make minor changes to products with nearly expired patents so they can restore patent protection and protect monopoly.
Finally, cost raises the barrier to market competitors to unscalable heights. The cost to obtain FDA approval is $2.56 billion (in 2013 dollars). This expense will be passed on to consumers.
Collectively, the federal regulatory apparatus has allowed Mylan to preserve its monopoly. Mylan can charge whatever it wants for its product and earn obscene profits at the expense of price-gouged consumers. At the same time that the price of EpiPen increased 500 percent, Mylan CEO Heather Bresch’s annual compensation rose from $2,453,456 to $18,931,068.The consumer doesn’t pay for pharmaceuticals—insurance does, usually the government. So where is the incentive to economize? Economists call this “moral hazard,” where the person who spends has no reason to save money or demand value because he or she is spending other people’s money. If you wonder why the spending curve for healthcare keeps rising, look no further than the moral hazard.
Dr. Ezekiel Emmanuel, one of the architects of Obamacare, admits that a free—“uncontrolled”—market would bring down prices. Yet, his solution is more government control, specifically price controls.
What does history teach us about price controls?
The U.S.S.R., Cuba, Korea, Spain, and Venezuela amongst others have all used strict government price controls. The results were: shortages of everything, viz., long lines of Russians standing in the snow waiting for government-issued shoes or toilet paper; poor worker productivity; very low standards of living; and no innovation. This is precisely what we don’t want.
The solution to the exorbitant price of EpiPen is not public shaming, such as claiming that Mylan is “just the latest troubling example of a company taking advantage of its consumers.” The solution is not Mylan’s proposed coupon program or its introduction of a “generic.” Most definitely, the solution is not more government controls through regulation.
The answer lies in releasing market forces from government suppression. If government bureaucratic barriers were eliminated, sellers could compete, and the supply of goods would increase. If the government were not the third party payer for health care, that is, if consumers controlled their healthcare dollars, spending would drop. Prices would plummet from these market forces.
In a free market, Mylan might charge $600 for EpiPen but they would sell no units because people could buy a competitor’s medication for, say, $15. If politicians really want to help save Americans by making life-saving drugs readily available, they should get the government out of healthcare and unshackle the free market.
Don't miss this video where I present the Foundation's Medicaid reforms that saves taxpayer dollars and provides better access to quality care and outcomes for recipients.
A supplemental spending bill passed by the 84th Legislature caused total state spending on health and human services (Article II) to exceed education spending (Article III) for the first time in Texas history. As the state’s Medicaid rolls continue to grow (even without the ACA Medicaid expansion), hospitals face looming federal funding cuts, and the state grapples with unprecedented healthcare costs, how can we stabilize the growth of state healthcare spending while improving access to and quality of care?
Rep. Garnet Coleman, Texas House of Representatives
Dr. Vance Ginn, Economist, Center for Fiscal Policy, Texas Public Policy Foundation | Presentation
Camille Miller, President & CEO, Texas Health Institute | Presentation
Moderated by John Davidson, Director, Center for Health Care Policy, Texas Public Policy Foundation
This commentary originally appreared in Forbes on October 15, 2015.
Most across the political spectrum agree that the government should provide some degree of access to healthcare for the poor and disabled. Disagreements tend to be over to what extent that access should be provided and whether people should be forced to purchase health insurance, as is the ongoing conversation at the heart of Obamacare.
To increase the number of insured people, Obamacare mandated that everyone have some form of health insurance or pay a $95 penalty the first year, increasing steeply thereafter. While this “individual mandate” clearly imposes costs on an individual’s budget and liberty, the U.S. Supreme Court did give states the option to expand Medicaid—the federal-state healthcare program for the poor and disabled.
Obamacare also introduced online federal insurance exchanges that include subsidies to help lower-income people purchase private health insurance and has drastically increased the eligibility criteria for those qualifying for Medicaid.
The Census Bureau recently reported that one year after Obamacare began the number of uninsured fell by 8.8 million to 33 million. This reduction seems rather minimal when individuals are forced to purchase health insurance or pay a penalty along with a decade cost of at least $1 trillion.
Critics blame the less than impressive decline on the 20 states that have not expanded Medicaid. However, these states are actually better equipped to care for those most in need because the states that have expanded Medicaid have seen much higher costs than projected. For example, Ohio’s expansion cost of $4 billion has been $1.5 billion greater than initially projected because per-member costs and enrollment were substantially higher than first thought.
The federal government has held a large carrot in front of states to pressure them to expand Medicaid by paying 100% of the increase in costs for the first three years through 2016. That share will gradually decline to 90% of the costs by 2020 and likely lower thereafter, leaving less of a stick to fall back on later.
This carrot and stick approach gives critics ammunition to claim that states that haven’t expanded are costing them dollars. The Kansas Hospital Association, which is in favor of Medicaid expansion, has a ticker on its website showing that the state’s choice not to expand has cost Kansas almost $750 million since January 1, 2014. This completely overlooks the fact that the state will face a growing share of the long-term costs, putting many Kansans’ on the program at risk.
Federal payments for Medicaid are based on matching state dollars depending on the state’s average per capita income. These payments range from 50% of the cost in Wyoming, to 57.13% in Texas, to 74.17% in Mississippi. The National Association of State Budget Officers recently noted that for the first time Medicaid represented a majority of federal funds to states in 2014.
In general, healthcare spending under Medicaid is rising at an unsustainable pace. Unless other budget priorities are forfeited, taxpayers may soon have to pay higher taxes. This has been the case in Texas.
While Texas didn’t expand Medicaid, the costs continue to skyrocket and during the last budget cycle increased healthcare spending to more than education spending for the first time in Texas history. The states’ share of General Revenue appropriations to Medicaid has increased by 42% to 23% in just over a decade.
Texas is now faced with how to best meet the needs of those on Medicaid and patients on the program are not receiving adequate care. Research shows that Medicaid patients have poor access to care and poor health outcomes. On the other hand, patients with private health insurance top both categories.
Considering these costs, the Texas Public Policy Foundation devised the Texas Medicaid Reform Model that first requires a federal block grant for Medicaid instead of matching funds. This would allow the state to allocate federal and state funds to assist non-disabled risk groups (i.e. kids, pregnant women, and adults eligible for TANF) purchase private health insurance based on a sliding scale determined by the federal poverty level (FPL).
As an enrollee’s income falls into a lower FPL category, the subsidy amount for monthly private health insurance premiums would increase until the subsidy covered 100% of the premium for the zero to 50% FPL range. At higher income levels for each risk group up to their maximum FPL under the current Medicaid program, enrollees would be required to contribute to the cost of their private coverage.
We based the coverage cost on gold or silver plans under the federal exchange. Enrollee contributions would be no more than 5% of their income on healthcare in most cases, which is substantially lower than the 8% maximum under Obamacare.
Using data from the Texas Health and Human Services Commission (HHSC) from 2013 to 2023, our cost estimates from our reform model compared with HHSC’s data show that Texas could save at least $4 billion per year, increasing to around $6 billion by 2023. Cost-savings will likely be much higher as more competition in the private health insurance market bid down prices and patients have more control over their future healthcare needs.
This patient-centered, market-based model should be a path forward for other states to follow so patients will be in the driver’s seat when it comes to controlling their healthcare costs. For the poor and disabled insured through Medicaid but who receive fewer positive outcomes and limited access to care and all taxpayers who pay more for this program than private coverage under our proposal, the time for reform is now.
Vance Ginn, Ph.D.
Free market economist with leanings towards Chicago/Austrian schools of economics. Hard rock drummer. Classical liberal. First generation college graduate at Texas Tech University. Hometown: Houston. Recovering academic. Work at the Texas Public Policy Foundation in Austin to research ways to #LetPeopleProsper. Live the dad life in Round Rock, TX. Views=mine.