Tuesday, August 07, 2007

Never Underestimate the Power of the Market

Last year, Wal-Mart started offering hundreds of prescription drugs of all different kinds for only $4, saving customers about $300 million. Available nationwide since November 2006, the $4 prescriptions now account for more than 35% of all prescriptions filled at Wal-Mart and nearly 30% of the $4 prescriptions are filled without insurance.

Last month, Kmart began offering a 90-day supply of generic drugs for $15, and that program now includes more than 300 drugs.

Publix supermarket chain announced it will make seven common prescription antibiotics (amoxicillin, cephalexin, penicillin VK, erythromycin, sulfamethoxazole/trimethoprim, ampicillin and ciprofoxacin) available for free, joining other major retailers in trying to lure customers to their stores with cheap medications.

The oral antibiotics, representing the most commonly filled at the chain's pharmacies, will be available at no cost to anyone with a prescription as often as they need them. Fourteen-day supplies of the seven drugs will be available at all 684 of the chain's pharmacies in five Southern states.


At 8/07/2007 12:29 PM, Anonymous Walt G. said...

If a store offers medicine for free and the medicine costs the store money, isn't the cost of the drugs just shifted to the store's other products? This sounds altruistic, but how does this really differ from a transfer of wealth taxation system? The person who might not be able to afford the drugs gets free drugs; however, the paying customer who can afford the products pays the price. Can it possibly work any other way?

At 8/07/2007 4:28 PM, Anonymous bob wright said...

Couldn't one reasonably assume that the drug stores are merely shifting their loss leader from milk to drugs?

At 8/07/2007 4:56 PM, Anonymous Walt G. said...

Loss leader--Cost shift--Transfer Payment--same things. Nothing's really free unless the store is giving stuff away. I don't see much long-run profitability in that. Do drug stores get free publicity for selling milk for less than they pay for it?

As far as the "invisible hand," isn't free the same as a price cap in a supply and demand equation? If drug stores can give away medicine, why can't gasoline be priced at $1.00-per-gallon retail price regardless of the wholesale cost? Economic theory teaches us that would lead to shortages.

Don't get me wrong here. I like "free," but I don't see free drugs as a workable model of a free-enterprise system. It seems to fit the socialist economic model much better. Although it’s cool to talk about it, I don't see "free" drugs as a panacea for solving our health-care-cost crisis unless we consider socialized medicine the cure to the problem.

At 8/07/2007 5:14 PM, Blogger Marciaq said...

So the Republicans applaud cheap drugs when sold by Walmart and other corporations. We can assume that those companies bargain with the drug companies for lower prices because of their huge volume buying.

But the Republicans then say that Medicare must not be allowed to do the same thing, ie get cheaper drugs based on the huge volumes of drugs it buys.

Does that make any sense? Only to a rightwinger.

At 8/07/2007 5:18 PM, Blogger Marciaq said...

By the way, the article says the drugs are CHEAPER not free except for oral antibiotics.

As for giving away antibiotics for free, that's not a good idea, given how far too many antibiotics are used already, which means bacteria are more likely to become immune to the drugs, and the infections thus become harder to cure.

At 8/07/2007 11:31 PM, Blogger Gregory said...

A store giving one product away for free is, as guessed, trying to draw customers into the store. If it works, then the costs associated with the free drugs falls under the advertising budget. So the question is: is advertising a cost effective idea? Is it not just shifting costs away from customers to pay TV stations or free-drug seekers?

The answer is often no. Big box stores are seeking economies of scale. As the store it set up, the fixed costs are huge and already paid. As such, the more customers you have the lower per-unit costs are going to be.

As such, it is quite possible that by giving drugs away, the increased foot traffic could allow them to cut prices on everything else AND collect higher profits all at the same time.

Economies-of-scale rock!

At 8/08/2007 5:55 AM, Anonymous Walt G. said...

Gregory: Great explanation.

Wouldn't economies-of-scale be a good argument for socialized medicine using Medicare as a model?

At 8/08/2007 8:29 AM, Blogger Gregory said...

No, not at all.

I have read studies that a WalMart shopping center has already breached the highest attainable economy of scale (efficiency derived from size). So, forcing the company to get even bigger would drive up dis-economies of scale (inefficiency derived from size), destroying productivity, and driving prices up and profits down.

The nice thing about a free market is that a firm attaining economies of scale prospers, but if they begin suffering from dis-economies of scale they will start shrinking. As such, the system as it is naturally drives firms towards the optimal size.

Replacing this system with government mandated conglomeration destroys this natural finding-out process and replaces it with a single large firm free of competition. Consumers would have no way of knowing why prices went up and their government was going broke.

At 8/08/2007 9:52 AM, Anonymous Walt G. said...

Gregory: That makes sense.

So, I guess the answer to decreasing health care costs is for the consumer/patient to be a partner in the decision for the most cost-effective treatments. Isn't that how a free market operates? That's sort of difficult with the health care field using price discrimination.

I've had discussions with folks in graduate programs in the health-care field. They unanimously state that price transparency is impossible because prices cannot be set the same for everyone. How can a consumer/patient determine the most cost-effective treatment if he or she cannot find out how much a treatment or service costs?

At 8/08/2007 10:54 PM, Blogger Gregory said...

It is more than difficult, it is almost impossible.

But this is not how markets have to work. Back in the day, when the banking industry was heavily regulated and hospitals were not, you needed to take out a mortgage if you wanted to know what an individual bank's interest rate was, but all hospitals had published charges for procedures (fix a leg? $50). Now, thanks to several trends, most banks have a sign in the lobby with their basic rates on them, while you need to get your leg fixed if you ever hope to find out what it costs.

What changed? Back in the day, the system was designed to keep out new banks for fear of competitive speculation induced instability. As such rules have been relaxed,it has allowed customers to refuse a loan without finding out the rates first. Some of it was truth in lending regulation. For the hospitals, most of it was simply loss of competition thanks to regulation and empowerment of the AMAA.

As it is, hospitals have no interest in making their services more transparent, just as the banks did not. You want medical care, just as your grandfather wanted a loan, but the respective markets are in chronic shortage. You are not going to leave a perfectly good Emergency room, fully knowing that the nearest other one is 30 miles away to pay the same hidden price, just as your grandfather did not bother going to another bank, with equally secretive rates.

At 8/09/2007 6:47 AM, Blogger juandos said...

Hey Marciaq, don't you think a fraudulent program that waste billions of dollars since its inception should be one away with?

Oh wait! Liberals like spending other people's money...

At 8/10/2007 2:38 AM, Blogger Will said...

Don't you guys get told by the medical and dental professionals that slugging down antibiotics whenever you want to diminishes their effectiveness in the long term? So you can only get them on prescription (and don't forget to finish the course, else there will be more residual bugs who can withstand antibiotics left in you)

I'm not disrespecting the professionals, but it just goes to show the relativity of things.

A Limey


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