Point of View

Making a market for lifesaving drugs

March 23, 2014 

More than 15,000 people die each year in the United States by overdosing on prescription painkillers, “opioids” such as oxycontin, percocet and vicodin. This death toll far exceeds that of any previous drug-abuse epidemic and cuts across the fabric of American life, from our schools to our retirement homes and military bases.

What makes this tragedy even worse is that many of these deaths could have been avoided. Overdose death occurs when so many of the brain’s opioid receptors are occupied that the brain no longer directs the body to breathe. But there is another drug, naloxone, that can safely and quickly restore normal breathing by, essentially, kicking out the opioids and taking their place in the brain’s opioid receptors.

Despite its life-saving potential, naloxone is not widely available. In 2010, only 50 community-based programs in the country distributed the drug but, according to the Centers for Disease Control and Prevention, these programs saved about 10,000 lives from 1996 to 2010 by distributing about 50,000 naloxone kits.

Naloxone distribution is a shockingly cost-effective way to save lives. Indeed, according to a recent study in the Annals of Internal Medicine, the estimated cost per year of life saved is just $438, compared with the usual cost-effectiveness benchmark of $50,000 per year of life saved.


Recognizing this, Attorney General Eric Holder earlier this month called for all first-responders to carry naloxone kits, and U.S. Rep. Donna Edwards (D-Maryland) re-introduced the Stop Overdose Stat Act to fund overdose-prevention programs that encourage naloxone use. Eighteen states, including North Carolina, also now have laws on the books to increase naloxone access and protect “Good Samaritans” from legal liability.

In still more good news for naloxone advocates, generic-pharmaceutical giant Mylan on March 11 announced it would soon begin producing naloxone. This move will bring competition and lower prices to a market that has long had only one major supplier, Hospira, which has raised the price of naloxone more than 1,000 percent since 2006.

Unfortunately, competition by itself is not enough to guarantee a stable, adequate supply of this life-saving drug. Why? Suppose enough suppliers were to enter the market to easily meet demand. Competition among these firms would then naturally drive prices down to cost, giving them little incentive to invest in the business.

Firms would then leave the market or quality would suffer, until supply again became a problem.

This sort of pattern emerges in any competitive market where operation requires significant ongoing investment. Take electricity generation. As long as there is ample electricity supply, prices will be low and suppliers will have little incentive to invest in maintaining their capacity. Americans saw the end result, in 2000 and 2001, when strained supply led to price spikes and brownouts across the country.


In recent years, however, such supply disruptions have been much less of a problem. Why? One reason is the creation of a new market, the so-called “Forward Capacity Market,” administered by the Federal Energy Regulatory Commission. The way this market works, each electricity supplier bids in an auction how much it needs to be paid now to guarantee it will have reliable capacity up and running in the future. Those who bid the lowest win and, in doing so, guarantee a reliable electricity supply.

The public interest is well served by FERC’s Forward Capacity Market, as it helps ensure that the lights always stay on, at the lowest cost. In much the same way, a forward capacity market for naloxone would help ensure that this life-saving drug is always available when someone is about to die from opioid overdose.

Essential lifesaving drugs like naloxone ought to be viewed as “public utilities,” like electricity, and we should create new forward capacity markets to guarantee their reliable supply. Congress needs to act to make this happen. By doing so, we can save lives – and costs – by fostering a robust, competitive supply.

David McAdams is professor of economics at Duke University’s Fuqua School of Business and author of “Game-Changer: Game Theory and the Art of Transforming Strategic Situations.”

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