In September, it was reported that one of Martin Shkreli’s companies had acquired the rights to Daraprim, a drug for AIDS sufferers. Upon acquisition, he immediately raised the price from $13 per pill to a whopping $750 per pill. The news quickly went viral via social media, and Shkreli became America’s most despised entrepreneur.
He swiftly received death threats and hate mail, and many used the news as an example of one of the evils of capitalism and the free market. Demands for a single payer health care system referenced this news as evidence for their cause.
One reporter, matched with Shkreli on Tinder, grilled him on his decision and called it an example of the failures of capitalism. He responded by stating that the price raise would actually encourage competition, improvement in the drug, and not negatively affect anyone who needed the drug. Nobody bought that story; instead, he was labeled as a greedy, money hungry, unethical, uncaring capitalist asshole.
However, that’s exactly what happened.
Is Shkreli indeed a greedy capitalist asshole who preys on the least fortunate? Perhaps. I have no knowledge into the intent of his actions – to claim that I did would be either a great work of psychic ability, or a predetermined judgment, and I care to do neither. I also have no opinion over the intent of the previous owner of the patent, who sold it to Turing Pharmaceuticals for $55 million.
All I do know is that everyone – those who care for the sick and AIDS patients alike, owe Shkreli a big thank you.
Before I explain why, let us all agree that it is a good desire for everyone to have access to the health care that they need, and at the best price. From this place, we can have a reasonable discussion. We all desire for the sick to have care and for those least fortunate to have the best opportunities to grow, and we seek the best solutions to achieve this goal. Much of the outcry against the price hike was due to a deep desire for justice, equality, and the well-being of those who were dependent upon the drug, and this is a good desire.
Since Americans are forced to carry health insurance, companies have little incentive to ever lower their prices, because the government guarantees that they will have customers at any price. In this way, the health care industry is similar to the student loan industry; the government guarantees the prices, prices go up as a result, and people suffer. Worse, there are extreme costs associated with staying in line with new regulations, which pushes out would-be competitors from entering the marketplace. In other words, new companies have a very hard time coming up with the capital necessary to even introduce a solution into the marketplace.
If you invented the best solution for any health ailment, you’d have to pass through years of red tape and have millions in funding to get into the marketplace. For this reason, many false monopolies become established. When one company does make it through the expensive legal hurdles, it can completely corner the market and even set its own price.
Such was the case with Daraprim, which owned the market with an artificial monopoly for decades.
When prices stay the same, or quality does not improve, you can usually point to government intervention as the reason.
However, market signals are powerful and resilient, just like the human body. Even when given less-than-ideal conditions, the market does its best to compensate. So when Shkreli purchased the rights to market Daraprim, his price hike paved the way for the market to correct for the first time in decades.
Within weeks of the $750 price hike, new competitors entered the market, opening up new options for AIDS sufferers, and at better prices. Imprimis Pharmaceuticals quickly introduced an alternative at $1 a pill, a more than 90% discount on the original price of Daraprim.
This is the beauty of the market – when things are overpriced, new competitors swiftly enter the market to produce a better product at a better price. That is, of course, unless the government prevents it, as is often the case with healthcare.
Had Shkreli never raised the price, the awareness necessary to encourage new competition would have likely never materialized. Therefore, those using the drug would have been forced to pay the previously-monopolized price for many more decades, and they likely would not have seen any improvement in the drug.
What would have happened had the government been involved? Many claim that a single payer system would give the government better negotiating power over prices. However, no government can negotiate prices as well as the market can. No government can predict the demands of consumers, and they certainly cannot act swiftly enough to satisfy new needs and wants. Only the market can do this.
Had the government fixed the price at $13 per pill, no one would have complained. However, had the price not changed, then no one would have benefitted or improved. In an industry as critical as health care, we cannot afford to discourage as much improvement as possible. More government involvement would distort pricing signals that much more, stifling innovation and discouraging price reduction.
In the healthcare related areas that have the least amount of regulation – LASIK surgery, cosmetic surgery, 3D printing of organs, and natural remedies – improvement occurs at an exponential pace, and prices are falling just as quickly.
Shkreli made a bold decision to raise the price on Daraprim. He paid dearly for it, losing market share and drawing an unbelievable amount of negative attention toward him. However, the end result is an improvement in quality and pricing in a niche that had not been improved upon for decades. While Shrkeli likely experienced a financial and personal loss, consumers won, and we have him to thank.
Markets are not always perfect. Sometimes, there are temporary adjustment periods where prices change, jobs are eliminated, or investments are lost. However, the end result is always the most options at the price that consumers are willing to pay. The alternative – increased government involvement – only distorts pricing signals, reducing the number of choices, and increasing the amount that consumers will pay.
Once again, as always, the market has provided a win for consumers, and in this case, it is a big win for consumers that needed it the most. They have Shkreli to thank.