Friday, February 3, 2012


There are many things wrong with Rick Santorum's latest foray into healthcare economics analysis:
“People have no problem paying $900 for an iPad,” Santorum said, “but paying $900 for a drug they have a problem with — it keeps you alive. Why? Because you’ve been conditioned to think health care is something you can get without having to pay for it.”
Well, iPad's are luxury consumer electronics with a very high elasticity of demand and numerous substitute options, whereas "health care" as a whole is a product of which we are all consumers at some point in our lives, most notably at birth and death. To whit:
The mother said the boy was on the drug Abilify, used to treat schizophrenia, and that, on paper, its costs would exceed $1 million each year.
Because when your child has an incapacitating mental illness like schizophrenia (my condolences for the poor woman), your elasticity of demand for treatment is very very low. This allows companies to change very high prices, and enjoy healthy profit margins on their product. Part of this is used re-coup R&D costs, but it is not a particularly big secret that a large part of the healthcare industry's business model is based on their consumers inability to alter their demand based on price.

Apple's business model is also profitable, but for very different reasons. Mostly, they've created brand that breeds consumer loyalty, which in turn has a similar inelasticity-of-demand effect. Also, the company has aggressively worked at maintainting a self-contained development and manufacturing/retail ecosystems, which prevents competitors from cutting into their margins with low-price/high-volume gambits.

I would like to also state that market specifics aside, the fact that Mr. Santorum seems more concerned with the balance sheets of Bristol-Myers Squibb rather than a mother and her sick child, is uniquely abhorrent coming from a man with a sick child of his own.

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