Market distortions and failures for public health: The other drug war

From an economic perspective, the health sector is plagued by market distortions and failures, characteristics that can profoundly impact public health, especially for those goods and services that are a “merit” good. The multiple barriers to market entry, and the inability of consumers to make adequately informed decisions in the health market, combine to give suppliers significant control over consumer demand.  This is not always beneficial.  These market failures and distortions are more pronounced in the pharmaceutical sub-sector where: 1) there is little incentive for R&D focused on the major health problems of the most disenfranchised segments of the world’s populations, since such investments are unlikely to result in profitable business initiatives; 2) a lack of neutrality and transparency in providing scientific information means that, not only can consumers not make well-informed decisions, but physicians’ prescribing decisions are also not adequately informed; 3) the cost of obtaining patent rights and the market muscle of patents in an era of globalization (along with capital investment issues) can reinforce barriers to market entry; and, 4) the barriers to market entry combined with the inability of both consumes and physicians to make informed decisions give suppliers tremendous influence over demand.  Based on a literature review and a session of the World Bank’s Flagship Course on Health Sector Reform and Sustainable Financing, this presentation parallels a classic article, Abnormal Economics in the Health Sector, in examining pharmaceutical market dynamics.  Policy implications call for national and international regulatory interventions and the provision of appropriate incentives for industry, including public sector financing.