December 30, 2004

Health Care & Big Pharma III: Imports and Price Controls

Marc Comtois
PROEM: This is a continuation of a series on Health Care & Big Pharmaceutical companies. For more, see the Introduction, Part 1 and Part 2.

According to a study by the Rhode Island Public Interest Research Group (RIPIRG), uninsured Rhode Islanders pay 79% more for prescription drugs than do insured individuals. RIPIRG puts the blame squarely on drug companies. The first charge is that drug companies inflate R&D costs to justify their high prices. The second charge is that drug companies have agreed to charge lower prices for drugs sold to both foreign countries and the U.S. Government because they agreed to institute price controls. RIPIRG recommends that, in the short term, U.S. citizens should be allowed to purchase Canadian or other foreign drugs. A longer term solution would be to create a statewide buying pool in which smaller entities could combine to negotiate lower-priced drugs. For now, at least according to the Providence Journal, it is the short-term recommendation, Canadian drug importation, that is generating the most noise.

However, I find I do agree with one thing Froma Harrop stated in her aforementioned and most recent column, "forget about importing drugs from Canada. All this talk is a sideshow..." Harrop believes the answer lay in negotiated price controls. Using the recent negotiations over the new prescription drug provision in Medicare, Harrop points out
Americans had a golden opportunity to extend this practice to the new Medicare prescription-drug benefit. But the bill that passed forbids any haggling on price. As a result, a fabulously expensive entitlement will cost taxpayers tons more money than it had to.

This shameful piece of legislation was the handiwork of Billy Tauzin, Republican of Louisiana. Tauzin is leaving Congress for a $2-million-a-year job heading the Pharmaceutical Research and Manufacturers of America, the drug-industry trade group. Given what Tauzin has done for drug makers, he would have been cheap at twice the price.

Tommy Thompson, meanwhile, is on his way out as secretary of health and human services. As a parting shot, Thompson said that the Medicare drug bill should have let the government negotiate prices on behalf of the beneficiaries. How nice of him to speak up, now that it no longer matters.
While I agree with Harrop in the acute example she has given, and I also think that Tauzin's actions do appear unseemly and Thompson's as disingenuous, I'm not sure how price controls negotiated for this specific program could translate into more "universal" drug price reductions, as Harrop seems to imply.

There are two problems with implementing price controls on a widespread basis. The first was illustrated by Don's recent post, "Government Meddling Creates Marketplace Distortions, Increasing Long-Term Costs." The second is that price controls remove incentive. These two usually go hand-in-hand as was illustrated by the recent shortage of flu vaccine. According to Dr. Gilbert Ross, Medical/Executive Director of the American Council on Science and Health
when the government gets involved in pharmaceutical pricing, consumers should expect disastrous consequences. Recent shortages in children's vaccines can be traced directly to the government's power, as sole purchaser, to dictate below-market prices. This "negative subsidy" has a chilling effect on manufacturers' incentive to produce and market vaccines, which explains why so few continue to make these vaccines. (Unfounded but attention-getting lawsuits against vaccine makers have similar effects.)
According to a May 2001 Wired Magazine article, Dr. J. Leighton Read, former CEO and founder of Aviron and Edward Penhoet, (who was recently named as Vice-Chairman of California's Stem Cell Research Board by California Governor Arnold Schwarzenegger), agreed that
drug companies will be less willing to take the substantial risks involved in developing drugs for diseases such as AIDS that are rampant in the Third World, if they are eventually required to give their product away for free.

It costs about $500 million to bring a drug to market -- about the same amount it takes to build a power plant.

Read, who also founded Affymax, suggested that consumers rethink "anything assumed to be an entitlement."

"We need to feel some of the pain," he said.
Even though I applaud Read for his candor, I don't believe the general public will be amenable to this line of thought. Within the same article, Dr. Alan Garber, a professor of medicine and director of the Center for Health Policy at Stanford University, stated, "I think we have been too timid about looking at models other than controlled pricing." He believe that one possible solution "would be fixed prices for insurance companies to purchase an unlimited amount of drugs." Finally, while I previously linked to his piece, Robert Goldberg's observation bears repeating (in shortened form)
there is only a limited amount of drugs that can be supplied at price-controlled levels worldwide. . . Europeans and Canadians are able to get quality drugs at lower prices only because Americans pay free-market prices that fuel research and development. . . the high level of pharmaceutical R&D ultimately depends on revenues: Cut drug-company revenues, and you necessarily cut R&D. . . applying relatively moderate price limits just to purchases under the new Medicare drug benefit . . . would reduce new drug investment by over $300 billion over the next two decades. This drop would consequently deprive many millions of ailing people of potential cures. . . Gvernment price controls are already shortchanging Europeans and Canadians. They have led to a decline in investment, with venture capitalists investing 15 times more in biotech companies in America than they do in the same number of European firms. Health systems and consumers must also spend more to treat chronic illness there because they dont get new medicines as quickly or as widely as we do. German and British patients, for example, are less likely to receive new cancer drugs than Americans. . . If we import price-controlled drugs, we will import these shortage-created side effects too.
If drug importation is only a stop--gap and price controls and greater government intervention haven't worked elsewhere, what will work in the United States?

I will attempt to come up with some solutions in my next post.