Market Failures-Pharmaceutical Example

Washington Post, via the nc links:

Doctors, hospitals and federal regulators are struggling to cope with an unprecedented surge in drug shortages in the United States that is endangering cancer patients, heart attack victims, accident survivors and a host of other ill people.
A record 211 medications became scarce in 2010 — triple the number in 2006 — and at least 89 new shortages have been recorded through the end of March, putting the nation on track for far more scarcities.
The paucities are forcing some medical centers to ration drugs — including one urgently needed by leukemia patients — postpone surgeries and other care, and scramble for substitutes, often resorting to alternatives that may be less effective, have more side effects and boost the risk for overdoses and other sometimes-fatal errors.
“It’s a crisis,” said Erin R. Fox, manager of the drug information service at the University of Utah, who monitors drug shortages for the American Society of Health-System Pharmacists. “Patients are at risk.”
The causes vary from drug to drug, but experts cite a confluence of factors: Consolidation in the pharmaceutical industry has left only a few manufacturers for many older, less profitable products, meaning that when raw material runs short, equipment breaks down or government regulators crack down, the snags can quickly spiral into shortages.
“It seems like there were a lot of things happening with consolidations and quality issues and more things coming from overseas,” said Allen J. Vaida, executive director of the Institute for Safe Medicine Practices, a nonprofit group that helped organize a conference last fall to examine the issue. “It just reached a point where the number of shortages was slowly going up and up, and now we have a national crisis with this huge shortage of critical medications.”
While the dearth that has garnered the most public attention is — ironically — for a barbiturate that is hindering prisons trying to execute inmates, the scarcities are having a much broader impact on keeping people alive, especially in emergency rooms, oncology wards and intensive care units.

I think there are several things to note here.  These are lower-profit products, so the companies don't have much interest in manufacturing them.  It is much more profitable to make sure a 70-year-old can get a hard on than it is to provide a drug to treat for leukemia.  Secondly, reliance on overseas production is both an issue as far as quality control, and tax avoidance.  Pharmaceutical companies were among the biggest gainers from the last overseas profit corporate tax holiday, which caused them to increase overseas production in expectation that it would happen again.  Off the Charts blog was featured among nc's links yesterday explaining why another corporate tax holiday would be a bad idea:

A similar tax holiday enacted in 2004 proved to be a complete policy failure. Its backers claimed that firms would use the repatriated earnings to invest in U.S. jobs and economic growth.  Instead, they mostly used the money for purposes that the tax-holiday legislation had sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders.  Moreover, many firms actually laid off large numbers of U.S. workers even as they reaped multi-billion-dollar benefits from the tax holiday and passed them on to shareholders.  To cite just two examples, Pfizer — which repatriated around $37 billion in foreign profits, the most of any firm — eliminated around 10,000 American jobs in 2005, while Merck repatriated $15.9 billion and announced layoffs of 7,000 workers in 2005.  (These layoffs cannot be attributed to general economic weakness: they came at a time when the U.S. economy was growing significantly and adding jobs.)

Repeating the tax holiday would increase incentives to shift income overseas. Many companies responded to the 2004 holiday by shifting even more profits overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future.  That will make them even more inclined to invest abroad and less likely to invest in the United States.  That’s why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time-only event.  It’s hard to see how the 14 million Americans who are out of work would benefit from having their government provide another enticement for companies to invest overseas.

I would directly attribute the Pfizer and Merck cuts in the U.S. to taking advantage of overseas tax shelters in places such as Ireland, Bermuda and the Cayman Islands in anticipation of future opportunities to repatriate overseas profits in another tax holiday.  Shareholder "rights" have become too cherished in our economy versus the good of society.  This is just one further example.  A major reordering in our society is overdue.