Economics of the Opioid Crisis
Section 1: 1990s
The mid to late 1990s provides the optimal window into the roots of the modern opioid crisis and laid the foundations of overuse and overdose that are visible in present-day society. Specifically, within the United States, the five-year time period from 1995-2000, the favorable economic conditions and presence of a few select corporations combined to serve as an incubator for opioid use-rate growth and ultimately the modern opioid crisis.
Beginning with the economic conditions of the ’90s that serve as a background to all of the pharmaceutical activity, the most notable trends are that this was a period of “strong economic performance” with “the best economic performance of the past three decades” (Frankel 2001) occurring between 1993-2000. What caused this growth lies primarily in short-term price drops in technology and healthcare, low inflation and an appreciating dollar, price stability amidst “high employment and growth” (Frankel 2001), and deregulation and innovation. While opioids were never the primary agent of change in the economy when looking at them markets from a holistic perspective, movements in the markets led to a series of changes that made an opioid crisis ripe to happen. First, short-term price drops in technology and healthcare were vital to pharmaceuticals.
Figure 1: KFF analysis (Bureau of Economic Analysis Data 4)
This is immediately obvious when looking at metrics like the price and quantity indexes of pharmaceutical and other medical products. Looking at data from the Bureau of Economic Analysis and National Health Expenditure data from the Centers for Medicare and Medicaid Services, it is immediately obvious the sharp downwards trend in the price index in the early to mid-1990s (Kamal 2020). Since the price index is a normalized average of the price of all goods, this sharp downwards trend in the % change in the price index means that drug prices stabilized, encouraged consumer spending in the space. This coupled with a surge in the % change in quantity, suggests that businesses saw the opportunity for a big disruptor, dramatically increasing supply.
Furthermore, inflation rates stabilized in the 90s from the previously volatile 70s and 80s. A period of healthy and stable inflation promotes higher investment for businesses and allows consumers to spend less money defending their wealth from the effects of inflation. This coupled with a reduction in uncertainty nurtures economic investment and higher consumer spending. This fostered a pro-technological development mindset amongst both firms and consumers as firms saw large windows of opportunity to invest and innovate. This furthermore pushed consumers to expect and accept new innovations more heartily both thanks to increased ability to spend and adoption of this new culture of innovation.
Figure 2: Inflation rate from 1970 to 2000 (Bureau of Economic Analysis Data 3)
These two macroeconomic factors of inverse prices to supply relationship and favorable economic conditions combined to make for heavy technological development and Purdue Pharma’s penetration into the pharmaceutical market with OxyContin was the obvious and logical choice for the business as a lucrative business venture that could easily capitalize on consumer interests and availability of willing customers.
Section 2: Present Day
Upon realizing the economic conditions that led to the inception of the opioid crisis, the impact only magnified over time. Simply looking at stats about the drug usage in America, the number of drug overdose deaths has quadrupled since 1999 wich 70% of those deaths involving opioids of some form (“Understanding the Epidemic” 2021). What is interesting is the type of opioid in question as well as the causes for this unprecedented rise.
Figure 3: Death Rates for Opioid Overdose from National Vital Statistics System Mortality File (National Vital Statistics System 5)
Looking at data from the National Vital Statistics System Mortality File, there are three distinct waves of opioid classification that happened one after another. Starting with wave 1, prescription opioid overdose deaths were on steady rise however leveld out in the early 2000s at about 5 deaths per 100,000 people. Around this time, heroin and then synthetic opioid overdose deaths began to skyrocket, especially synthetic opioids like fentanyl, reaching a height of 12 deaths per 100,000 people in 2019, still rising from there.
These numbers are alarming and are at base, caused by a rise of illicit opioid production and trade. As of 2019, only 28% of opioid overdoses involved prescription opioids. Similarly, a there was a decrease in prescription opioid overdose by 71% from 2018 to 2019 (“Prescription Opioid Overdose Death Map” 2021) and general decline since 2016. These numbers are cause for concern, especially when looking at the economic causes and impacts. For starters, fentanyl is inexpensive. At a simple price comparison with heroin, fentanyl only costs $3,000 per kilo compared to $50,000 for a kilo of heroin. Not only this, the drug is 50-100 times for potent (“Why is fentanyl so dangerous compared to other drugs” 2020). Combined, to get the same effect as heroin requires significantly less capital investment. Basic economic principles suggest that a decrease in price results in an increase in the quantity demanded of the product. Additionally, previous and current addictiveness of the drug makes the product inelastic: the product is viewed as a necessity that must be purchased regardless of discretionary spending and general economic trends. This is especially dangerous for a drug that is so affordable and addictive.
Looking forward, the COVID-19 pandemic has and will continue to exacerbate the effects of the opioid crisis. Not only are peoples’ discretionary spending amounts increasing as a result of the pandemic thanks to decreased spending on services, government stimulus measures and aid have also boosted the amount of cash Americans have (Barua 2021). All of this extra spending power has led to an uptick in the previously mentioned synthetic opioids.