Tuesday, February 28, 2012

Addictionist Perspective: Prescription Drug Economics 101

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. 

1 comment:

  1. Excellent way to put it, David. Very enlightening when you look at it this way.