I’m still reading and thinking about Tobbell’s Pills, Power, and Policy, and Chapter 4 really sucked me in. It covers Estes Kefauver’s bid to reform the pharmaceutical industry from 1959 to 1962, culminating in the Kefauver-Harris Act.
Kefauver, a Democratic from Tennessee and recent presidential candidate, was also chair of the Senate Subcommittee on Antitrust and Monopoly. His core concern was why drug prices—particularly antibiotics, corticosteroids, tranquilizers, and oral antidiabetics—were so high, and whether manufacturers were actually competing to lower them.
His subcommittee launched an investigation, as they had for the auto, steel, and bread industries, and asked three still-familiar questions: How did manufacturers determine prices? Why could drugs be purchased more cheaply abroad? And why did the industry have such high profits?
They identified three mechanisms they saw as contributing. First, they argued that product patents lasting seventeen years were too long, and contributing to high prices. Second, they pointed to the expense of intensive advertising and sales, in the form of “detail men” doing physician “education.” Finally, they saw drug companies’ efforts to persuade physicians to use brand names, rather than generics, as part of the problem.
Kefauver introduced a bill that would have limited these practices in several ways—notably, by granting only three (!) years of market exclusivity followed by required licensing for 8% royalties, and by awarding patents only to drugs with “significantly greater therapeutic effect than other drugs already on the market” (p. 93).
Long story short, although the bill got some traction, the drug company successfully mobilized against it, in part by getting physicians—sold on the idea that this could open the door to socialized medicine—on their side. It was almost dead, then was revived in the face of the thalidomide scandal in the summer of 1962.
In the fall of ’62, a much revised version—the Kefauver-Harris Act—passed both houses unanimously and became law. But the final version addressed none of the pricing and competition issues that had motivated Kefauver’s original efforts. Instead, the core provisions were about safety and efficacy—important issues on their own, and newly salient in light of thalidomide. But those provisions strengthened, rather than weakened, the hand of dominant firms. Kefauver’s effort to control prices was largely abandoned, and his approach would not be revived.
Drug Companies, Antitrust, and How We Think about Prices
This story is weirdly compelling to me. I came to it because I wanted to know how drugs were priced prior to the value-based era. Because there is so much controversy around six-figure drug prices today, and because that controversy seems tied to value-based pricing, I imagined the era of (much lower) cost-plus pricing to have been somehow less controversial, at least on the price dimension. I was not expecting to find pitched battles over the high price of antibiotics, and I was certainly not expecting to find an antitrust story.
I am taking two big things away from this. One is that it actually expands my sense the importance of the consumer welfare revolution was in antitrust. In my new book, I write about how the incorporation of industrial organization economics into antitrust policy, and the eventual writing of its policy priority (allocative efficiency) into case law, limited the issues that antitrust could potentially address.
The drug story is consistent with my account. Yet it highlights how seeing prices as more than an issue of market power leads to conversations that are not only about mergers and concentration, but that reach into all sorts of adjoining policy areas—about patent policy, for instance, or the regulation of advertising. Part of the big question that interests me is how the playing field in the U.S. was tilted away from workers and consumers and toward business interests, and how that tilt was naturalized by changing how policymakers thought about regulatory decisions. This is a part of that bigger story that is new to me.
The other takeaway is that there is both continuity and change in how policymakers think and talk about prices. On the one hand, the grounds on which Kefauver challenges pricing seem very foreign. The idea of only allowing three years of patent protection is sort of mindblowing, it’s so far from where we are today. And even the idea that marketing to physicians (let alone consumers) might be an inappropriate activity driving prices up, rather than a form of protected speech providing information, feels unfamiliar from the present.
But on the other hand, the world of value-based pricing feels like it moves back to the era of explicit moral judgments in some ways: that the ideal, or at least best realistic option, is not some sort market that is as close to competitive as possible, in which prices are the result of free competition among multiple buyers and sellers after a reasonable period of IP protection to encourage innovation, with advertising a form of information—but one in which someone (pharmaceutical companies? government? insurance plans?) is calculating the dollar value of additional (quality of) life, and using that to decide what prices are “fair.”
It’s different, of course. But there’s a shift toward advocating for market competition as the way to set prices—and then one back away from it. And it’s the mechanics of that shift—in the “natural” way to think about pricing—that really fascinates me. Who advocates for each approach, and why? How do they justify it, and marshal support for it? And through what pathways does it become taken for granted? These dynamics—through which interests get interpreted, converted into frameworks for thinking about the world, and then put into practice—are the ones I want to understand.
Leave a Reply