The Ethics of Investment Recovery

With the ongoing controversy surrounding health insurance, we’ve been hearing more and more about how costs within the industry are out of control and how the insurance companies and pharmaceutical firms are colluding to rob us all blind. Whether or not any of this is actually true depends very much on your point of view – and party affiliation – but it’s hard to deny that the companies involved don’t appear to be paying enough attention to public opinion when we read about cases like the 7,500% price markup instituted by K-V Pharmaceuticals last month. If you’re a Liberal – or even a progressive – it would be tempting to take such a case as a confirmation of everything you believe is wrong with our nation, the healthcare industry or our system of government in general; if you’re a hard-core free-market capitalist, you’re more apt to take this as the system working exactly the way it’s supposed to. But in either case, it’s still worth asking why these shenanigans go on, and what the companies behind them think they’re doing. So let’s take a closer look…

The first thing to keep in mind is that pharmaceutical patents have one of the shortest lives of any such protection, and the companies that earn them will generally spend at least half of that period just trying to get the FDA to permit them to market the product. A second point to consider is that most biomedical research is absurdly expensive, and even when successful will require vast numbers of computer, animal and human lab trials before you have any chance of actually selling any. Even worse, though, is that the majority of all such projects don’t produce a viable product; some industry sources claim that the failures outnumber the successes as much as ten to one. As a result, every successful drug has to make back the cost of its own development and that of several other (failed) drugs during the few years it can still be made and marketed exclusively by the inventor. Asking the stockholders who own the company not to recover those loses or not to try to make a profit is absurd; as we’ve discussed in this space, the stockholders are collective investors who have pooled their money in order to make a joint profit. If they don’t get to make a profit there would be no point in owning shares in the first place…

Unfortunately, non-profit ownership and state ownership (e.g. nationalizing the industry) have not proven effective in running enterprises of this type, and extending the period during which the patent is in effect doesn’t appear to be practical under the present system (e.g. too many people have an interest in being able to make generic versions as quickly as possible). Certainly neither approach has much chance of lowering drug prices. But more to the point, none of these prices were ever intended to be paid by the consumer directly; in nearly all cases those outrageous prices are supposed to be picked up by the insurance companies, who can get bulk pricing discounts on most drugs and can afford to pay the premium on the others. Where all of this breaks down is when we consider poor folks who can’t get medical insurance. There are assistance programs in place that can take up some of the slack, but here again, there are way too many people who fall through the cracks. All of which sets up some of the most difficult ethical questions I’ve ever encountered:

Do the drug companies have an ethical responsibility to bankrupt themselves and their stockholders in order to provide products at a net loss? Or does their fiduciary responsibility to their owners require them to try to recover their operating costs and turn a profit? For that matter, do insurance companies have an ethical responsibility to provide coverage for people on whom they can’t ever show a profit, or do their fiduciary responsibilities to their owners take precedence? Does our government have an ethical responsibility to provide health coverage to everyone who needs and can not afford it, and if so, does that responsibility supersede their responsibility to allow people to earn a living and make a profit (the workers and owners of the drug companies, respectively)? The political and ideological answers to this question are all perfectly clear; they depend mainly on your political and economic positions. The business ethics, however, are rather murkier. Is there actually an ethical choice that doesn’t involve the economic ruin of one or more groups of people?

It’s worth thinking about…