The national drug problem in the United States perplexes
many people. Reports of media stars
with drug problems highlight the societal pervasiveness of addiction. ER visits for narcotic abuse and overdoses
continue their rise; the Center for Disease Control (CDC) publishes chilling reports
on the escalation of drug overdoses (http://1.usa.gov/vzU1V3). Within a stone’s throw, a person in the U.S.
can obtain prescription narcotics anywhere in the country. Why is this?
If the economics are examined, the answer starts to
unfold. Money as defined by Wikipedia
is:
“any object or record that is generally accepted as payment
for goods and services and repayment of debts in a given country or
socio-economic context” (http://en.wikipedia.org/wiki/Money)
Because of the deep supply chain of narcotics, high demand
from end users, and abundant liquidity of the black market for prescription
drugs, Vicodin, Xanax, and Oxycontin and other controlled substances have
become a form of money. These tablets
are portable, divisible, store value, and are used to buy, sell, and trade
goods.
It is amazing to see the economics of controlled substances
described in real dollars. It takes only
pennies to manufacture opiate medications like Vicodin. On the street, Vicodin can go from $3.50 to
$5.00 per pill. In essence, Vicodin is a
$5 bill. On the street, Oxycontin is
often priced for around $1 per milligram making a single tablet of Oxycontin
80mg around $80 to $100 in value. So a
script written for 120 tablets of Vicodin is authorizing someone to obtain 120
individual $5 bills or around $600 dollars.
Prescribing 60 tablets of Oxycontin 80mg is like handing someone $4,800
in a 2 inch bottle! Prescriptions of
60 tablets of Oxycontin enable one to enter the middle class. Medications are diverted into the black
market for more than one reason, but the economic reason is easy to see when
tablets are converted into dollars.
Think about the spread between the cost of obtaining
narcotics and the price one could sell them for in the black market. A $10 copay for 120 Vicodin equals around 60x
levered return ($600/$10). A $40 dollar
copay for Oxycontin equals a 120x levered return ($4,800/$40). Hedge fund managers can only dream of making
these types of spreads so reliably.
In summary, narcotic
medications are a form of money. The
quicker this is realized by policy makers, insurers and physicians, the faster
solutions can be formulated. Until
narcotics are appropriately priced in the prescription market, the entire pricing system of medicine is
distorted.
In the next post, the
rabbit hole gets deeper.