Drug Pricing Lab 07/26/2017

Baseball Illuminates the Problem with U.S. Drug Pricing

Dana Goldman and Darius Lakdawalla look to Major League baseball to explain the drug pricing problem.

In the Wall Street Journal article, Dana Goldman and Darius Lakdawalla march out astronomical baseball salaries to justify high drug prices, stating that just as salaries entice the best baseball talent, sky high prices are necessary for innovation. Dr. Peter Bach and Dr. Kent Sepkowitz explain that the analogy is probative, because the authors are wrong about baseball.

Dr. Peter Bach and Dr. Kent Sepkowitz’s commentary

Starting in the 1970s, free agency allowed baseball players to act as monopolists, extracting higher and higher compensation. David Price today earns $9,000 a pitch; Sandy Koufax made about $260 in 1965 in today’s dollars. Taxpayers help finance these higher salaries through stadium bonds and tax credits. Ticket holders pick up a large share: watching Koufax from the bleachers cost $2; in 2017 going to a game is an event for which funds need to be set aside.

So baseball is indeed a pretty good way of understanding pharmaceutical pricing in the US. Pharmaceutical companies, like pro baseball players, are monopolists supported by taxes and taxpayers. The cost of Medicare’s Part D prescription drug program has risen faster than any other part of the benefit in recent years. More than any other western country, patients in the US stop taking their medications because they cannot afford them.

Another parallel: over time both baseball salaries and drug prices have risen out of proportion to the value of the product. David Price has a jawdrop of a slider, but he is just no better a pitcher than Sandy Koufax was at more than 30 times the price. In fact since 1967 the average salary rose 30 fold in today’s dollars, while batting averages have remained essentially flat, and runs per game are up a meager 13%, seen in the figure below. Same for drugs: prices of cancer drugs have risen five times as fast as the benefits those drugs deliver.

Yep, Goldman and Lakdawalla are on to something. If you want to understand pharmaceutical pricing, take a trip out to the ballpark.

Trends in runs per game, mean salaries and batting average

*Average salaries are adjusted for inflation. Batting averages are times ten, so a .230 batting average is displayed as 2.3.


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