Generic Drug Price Increases and Medicaid

                                                           Comments due by Oct 2, 2015

Following prodding from Congressional lawmakers, the Office of the Inspector General of the U.S. Department of Health & Human Services says it will conduct a new review of generic drug price increases on the Medicaid drug rebate program.
The agency plans to review price increases between 2005 and 2014 in order to determine the extent to which generic drug prices exceeded the inflation rate, according to a letter the OIG sent to U.S. Sen. Bernie Sanders (I-Vt.) and U.S. Rep. Elijah Cummings (D-Md.).
The move comes amid growing debate over the cost of prescription drugs, and the budgetary strain placed on payers, both private and public. Generally, the issue had been confined to brand-name medicines, but last year, there were reports that prices for some generic drugs were also rising. This came as a surprise, given that generics are traditionally seen as a low-cost alternative for patients.
Last November, the lawmakers held hearings to examine soaring prices for some generic drugs. At the time, they cited data showing prices for generics sold through retail pharmacies increased 37% from the previous quarter and that prices for certain generic drugs had risen over the past year by as much as 1,000% or more. In February, Sanders and Cummings asked OIG to run a review.
“It is unacceptable that Americans pay, by far, the highest prices in the world for prescription drugs. Generic drugs were meant to help make medications affordable for millions of Americans who rely on prescriptions to manage their health needs. We’ve got to get to the bottom of these enormous price increases,” Sanders says in a statement. “It is outrageous that skyrocketing prices of generic drugs are preventing patients from getting the medications they need,” says Cummings in the statement.
As part of their investigation, Sanders and Cummings had asked 14 generic drug makers to provide pricing data, but the companies did not do so. As a result, the lawmakers turned to the OIG, since federal law requires drug makers to provide price data to HHS. A congressional aide says the investigation is still under way.
The lawmakers, meanwhile, have also introduced identical bills in the House and Senate that would require generic drug makers to pay additional rebates to state Medicaid programs for any medicine that increases in price faster than the inflation rate. Under current law, brand-name drug makers are required to pay an additional rebate to Medicaid, but generic drug makers are not required to do so.
The lawmakers want that same rebate provision to cover generic drugs as well. They cite an estimate from the Congressional Budget Office that such a change would save taxpayers $500 million over 10 years. In its letter, the OIG says it will examine the extent to which Medicaid would have received additional rebates for any drug prices that exceeded inflation rates.
Several reasons have been cited for price increases for generic drugs. These include manufacturing problems that prompted some companies to discontinue production, making it possible for rivals to boost prices. We asked the trade group for generic drug makers for a response and will update you accordingly.
At the time of the hearings last fall, the Generic Pharmaceutical Association argued that the lawmakers relied, in part, on numbers with “limited usefulness in drawing conclusions about the costs to government purchasers.” That’s because the lawmakers cited retail pharmacy costs, which the trade group maintained did not reflect costs negotiated by government health care programs.
It is not clear when the OIG review will be completed, though. An OIG spokeswoman writes us that a start date has not yet been set.

Uber Pricing

                                      Comments due by Sept. 25, 2015

I do not have the deepest understanding of economics. I have an A-level—rather like a US AP—in the subject, but I haven’t opened an economics textbook in a decade. But I do remember something: The price of a good is determined by how many of them are available, and how many people want them. When the supply is low and demand is high, the price is going to be higher.

Uber today (Sept. 17) published a University of Chicago study it commissioned in which two economics doctorates explain that this is, amazingly, how Uber’s surge pricing structure works. The study shows, in intricate detail, that surge pricing allows for Uber to function, as suppliers (drivers) are enticed by the potential for higher fares, and demanders (riders) will decide if they really want to pay higher prices right that minute. When prices drop back down—as supply increases, or demand falls—the surge ends.

Or, as Uber explained:

When demand for rides outstrips the supply of cars, surge pricing kicks in, increasing the price. You’ll automatically see a “surge” icon next to the products (uberX, UberBLACK, etc.) that are surging. If you still want a ride, Uber shows the surge multiplier and then asks for your consent to that higher price.

Surge pricing has two effects: people who can wait for a ride often decide to wait until the price falls; and drivers who are nearby go to that neighborhood to get the higher fares. As a result, the number of people wanting a ride and the number of available drivers come closer together, bringing wait times back down.

The economists made some great charts to illustrate this point, like this one:

(The Effects of Uber’s Surge Pricing: A Case Study/Hall, et al.)

But in reality, this one probably would’ve done the job too:

I commissioned no one to make this chart.

In 2014, Uber commissioned a study that showed, as Slate put it, that “Driving for Uber is great,” although that didn’t turn out to be quite so accurate. In this case, however, the study does seem to accurately confirm that Uber’s business does, in fact, marry up with the laws of economics.

(Quartz)

No, Microeconomics is not the "good" economics

                                             

                                                           Comments due Sept. 18, 2015


If asked to compile a list of economists’ mistakes over the last decade, I would not know where to start. Somewhere near the top would be failure to predict the global financial crisis. Even higher on the list would be failure to agree, five years later, on its cause. Is this fair? Not according to Noah Smith: these, he says, were not errors of economics but of macroeconomics. Microeconomics is the good economics, where economists by and large agree, conduct controlled experiments that confirm or modify established theory and lead to all sorts of welfare-enhancing outcomes.

To which I respond with two words: minimum wage.

One of the first things we learn in microeconomics is that demand curves slope down: raising the price of something reduces the quantity demanded. A minimum wage should reduce the demand for low-skilled workers as surely as a price floor on milk will reduce the amount bought.
Yet ask any two economists – macro, micro, whatever – whether raising the minimum wage will reduce employment for the low skilled, and odds are you will get two answers. Sometimes more. (By contrast, ask them if raising interest rates will reduce output within a year or two, and almost all – that is, excepting real-business cycle purists – will say yes.)
Are there reasons a higher minimum wage will not have the textbook effect? Of course. And a great deal of research has gone into trying to determine them: perhaps the demand for low-skilled labour is highly inelastic in certain circumstances. Perhaps employers have monopsonistic power and set both wages and the level of employment below equilibrium levels. Perhaps there are offsetting general equilibrium effects, e.g. if low-wage workers spend more of their income than their employers or customers, then shifting income from the latter to the former raises aggregate demand. And so on.
But microeconomists are kidding themselves if they think this plethora of plausible explanations makes their branch of economics any more scientific or respectable than standard macroeconomics. Microeconomists and macroeconomists working in good faith approach their problems with open minds, trying to develop models then figure out why they do, or don’t, yield the predicted results. There may be instances where macroeconomists build models that are mutually exclusive, and then win Nobel prizes for them (again, see Noah Smith). That is the exception; generally, what we see over time is macroeconomists building on each others’ work; rational expectations, sticky wages and financial frictions have all been used to refine, rather than supplant, basic macro models. Still, in both macro and micro, economists develop views and pursue research that tends to confirm those views.
What is true of all economics is that as soon as you wander into policy, you find the debate hijacked by policy advocates who write, report and promote research that reinforces their side of the debate while ignoring or disparaging the other. Do higher capital requirements reduce lending? (Yes: it raises the cost of capital! No: Modigliani-Miller tells us firms are indifferent to capital structure! Yes: banks aren’t like other firms!) Do higher marginal tax rates reduce the work effort and tax paid by the rich? (No: their labour supply is inelastic! Yes: They reclassify their income to avoid taxes!) Does Obamacare hurt part time employment? Does it lower labour supply? Do tougher emissions requirements cost jobs? Does net neutrality lead to more investment in technology? Or less?
It is fair to say that when it comes to the minimum wage, Barack Obama is a policy advocate, not an economist. Tonight in his State of the Union Address, he will repeat his call to raise the federal minimum wage. Today he has announced he will use his executive authority to entitle employees of federal contractors to a higher minimum wage. In its release the White House says:

A range of economic studies show that modestly raising the minimum wage increases earnings and reduces poverty without jeopardizing employment.

Well, “range” is a pretty imprecise word. There’s also a range of studies that shows raising the minimum wage doesn’t reduce poverty and does jeopardize employment.
The White House also says:

Low wages are also bad for business, as paying low wages lowers employee morale, encourages low productivity, and leads to frequent employee turnover—all of which impose costs.

Here the White House violates another axiom of microeconomics: it has argued that compelling someone to do something they wouldn’t do voluntarily makes them better off. Under what assumptions can forcing a business to pay a higher wage be good for its business? The White House press release, which also cites the example of retailer Costco which pays well above the minimum wage, seems to invoke efficiency wage theory. This theory, which incoming Federal Reserve chairwoman Janet Yellen helped develop, suggests firms may pay above the market-clearing wage because to pay less would damage morale and productivity and raise turnover. This theory can certainly explain why some firms, such as Costco, sometimes choose to pay above the market wage. But it cannot justify forcing all firms to do so all the time. This would presume that numerous firms are systematically hurting themselves through their small-minded refusal to pay more. Sure, there are situations where people can be forced into doing something that makes them better off (wearing a seatbelt, getting vaccinated) but is it plausible that WalMart or McDonald’s know their own business so poorly that they are systematically hurting themselves by paying too little? Isn’t it more likely that they have weighed the tradeoff between low wages and poor morale and chosen the combination that maximizes profits?
Microeconomics tells us that it is far more efficient to abolish the minimum wage and address poverty directly through the earned income tax credit or wage subsidies. This would imply that McDonald’s is actually enhancing social welfare by encouraging its employees to take advantage of food stamps and other safety net programmes. Economists know this, yet many advocate a higher minimum wage and disparage McDonald’s anyway. Why? As Noah Smith points out in a different post, “Probably because "earned" income gives people a feeling of dignity, while "handouts" reduce dignity.” (In some cases, it’s because Congress won’t offer up more money for the working poor, so a higher minimum wage is a second best solution; but as Republicans get behind wage subsidies, that may change.) In this case, economists are not acting as economists, but as philosophers.
They are doing the same in the debate over income inequality. Economists can offer explanations for why inequality has risen and what might reverse it, but they cannot advance positive reasons for what the right level of inequality is; this is function of social preferences outside the realm of empirical or even theoretical economics. (At least, they can’t make the case on microeconomic grounds. There are macroeconomic reasons to fret over higher inequality because shifting income from the high consuming poor to the high saving rich reduces aggregate demand.) Fundamentally, economists are troubled by inequality for the same reason non-economists are: it doesn’t seem right.(The Economist)

Black Unemployment falls below 10%

                         Comments due by Sept.11, 2015

We know that the economic recovery’s effects have been unevenly felt. The recovery has been kind to those who invested in certain stocks or whose title begins with the word “chief.” It’s been less charitable to certain groups, like African-American workers, whose unemployment rates have lingered in the double-digits for most of the past eight years.

For the first time since 2007, the national unemployment rate for African-Americans dipped below 10% in the second quarter of 2015,  according to the Labor Department. Despite that improvement, at 9.5%, it’s still nearly twice the national average of 5.3%, and more than double the 4.6% rate for whites.

Overall, only 11 states had African-American unemployment rates below 10%, according to an analysis by Valerie Wilson, director of the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy. Only eight states have seen unemployment rates for black workers fall below prerecession levels. In Alabama, the African-American unemployment rate is more than twice what it was prerecession: 10.9%, compared with less than 5% throughout 2007.

The nationwide average masks wide variations between states and between races. For example, Tennessee has the lowest unemployment rate for black workers, at 6.9%. But that’s about the same rate as the state with the highest unemployment rate for whites, West Virginia, where unemployment stood at around 7% for the quarter.

Similarly, the ratio of unemployment rates for black and white workers swings from the low end in Tennessee, where the black unemployment is 1.2 times that of whites, to a ratio of 5.1 in Washington, D.C. Dr. Wilson attributes the especially high rate of black unemployment to the District’s concentrated urban population, which she said is not entirely comparable to state populations.

Why the gap? Dr. Wilson points to education and work experience as two major factors. Twenty-two percent of blacks had completed four years of college in 2014, versus 32% of whites, according to the Census Bureau.

However, as researchers at the Center for Economic Policy Research have pointed out, that piece of paper is no hedge against unemployment. A 2014 analysis found that 12.4% of black college graduates aged 22 to 27 were unemployed, compared with 5.6% of all college graduates in the same age group.

So what else explains the gap? Unsurprisingly, discrimination appears to be at play. Using what are known as “audit surveys,” researchers have found that black job applicants are less likely to get called back for job interviews or hired, compared with white and Hispanic applicants with identical credentials. One well-known 2009 study byDevah Pager, Bruce Western and Bark Bonikowski used trios of actors, one black, one white, and one Hispanic, to apply for low-wage jobs like sales associate or waiter around New York City. The study found that blacks without a criminal record fared about as well as whites with a stated criminal record (i.e., who listed their parole officers as a reference).  “The findings suggest that a black applicant has to search twice as long as an equally qualified white applicant before receiving a callback or job offer from an employer,” the authors wrote.

William Spriggs, chief economist with the AFL-CIO and the former chair of Howard University’s economics department, points to the large variations by state as evidence that local labor market dynamics play a role, specifically, the informal flow of information about job opportunities within a racial group.

“Tennessee isn’t five steps ahead of South Carolina,” a state with 12.8% black unemployment, he said. “The labor market is highly segregated by race, in terms of information flows.”

Labor market cycles may also be a factor. A 2012 paper, “Who Suffers During Recessions?” by Hilary Hoynes, Douglas Miller and Jessamyn Schaller, found that “men, blacks, Hispanics, youth, and those with lower education levels experience more employment declines” relative to women, whites and the more educated, due the more highly cyclical nature of the industries in which they were concentrated, such as construction or manufacturing, which are particularly sensitive to economic booms and busts.

African-Americans took one of the hardest hits during the financial crisis, losing one-third of their aggregate household wealth between 2010 and 2013, a Pew Research Center analysis found. Even in a recovery, with so many still looking for work, it’s hard to envision how those families can begin to rebuild. A.L. Sussman (WSJ)