President Obama is pushing for a last-minute change in the final health care bill that would shorten the time that expensive biotechnology drugs would be shielded from generic competition, pharmaceutical industry officials said Thursday.

Any White House intervention would be welcome news to generic pharmaceutical companies, as well as to some consumer groups, insurers and big employers, which have complained that the proposed House and Senate bills would not allow for robust competition.

If you’ve read my previous posts on pharma and research, you know I think this is a good thing.  It also has the side benefit of reducing the cost of health care significantly.

Expect pharma to release the hounds over this.

Over the last week, there’s been a surprising amount of debate in the Senate over an amendment to allow us to import cheaper drugs from Canada.  Although many oppose it, there are a fair number of Republicans who don’t.

One of the reasons drugs cost so much in the US is that we can’t collectively bargain to reduce prices.  In Canada, the country can negotiate as one huge purchaser, and can therefore get a good deal.  In the US, on the other hand, Medicare is expressly forbidden by law from doing so.  That was part of the deal when Medicare Part D was passed.  So no bargaining.

That was a pretty bad deal as agreements go.  We committed massive federal funds to purchase drugs from pharmaceutical companies and then also barred the government from trying to get a good rate.  Not only has that significantly increased the deficit, but it seems bizarre from an economic standpoint.  Are there other industries where it’s illegal for the government to try and negotiate for a good deal?

It’s crazy, though, to support those same bans and then support importing from countries with no such bans.  Huh?  Either you like collective bargaining or you don’t.  It seems very inefficient not to bargain with our very large Medicare system and then pay Canada overhead to allow them to do lesser bargaining for us.  Why not just let our government get better prices?  Why go to other countries instead?  Why is that logically consistent?

I’m not kidding.  Someone please explain it to me!

I am 55, and disabled. Although I am eligible for Medicare (disabled for 24+ mth.), I chose to stay on my wife’s medical plan until I could take enough time to understand my options and costs. Today I received the information that although we pay >$7000 / year – JUST FOR MY PORTION OF HER PLAN! – it will still cost more than that amount for me to switch over to either a) Part”B” + Medigap + Part”D”, or b) Part”B” + Medicare Advantage.

Why? Primarily, it is because of the quantity, and types, of medication that I take for my condition, (Diffuse Systemic Scleroderma). When my local senior assistance program plugged my info into thee Medicare calculator, it spit out that I will required to pay more than the $7000 – primarily because of the “doughnut hole”.

My question is this – do any of the plans being discussed, by The House and/or Senate, address this issue?

I wish everyone who says that a public plan or Medicare is “free” would read your question.

First of all, let’s explain to everyone what the doughnut hole is:

Medicare mavens and readers of a certain age will already be familiar with the hole — the gap in coverage that leaves beneficiaries on the hook for the cost of prescription drugs when the cost of their prescription drugs passes $2,700 in a year. Coverage kicks back in when a beneficiary’s annual drug cost passes $6,154 in a year, according to the WSJ’s story on the deal.

So once you go over a certain amount (which isn’t hard) you have to shell out thousands of dollars before any coverage kicks back in.

The good news is that reform (so far) does have provisions to close this up, at least a bit.  It was part of the big deal the White House made with pharma.  Until the bill is passed, we won’t know for sure, but I suspect things will get better in terms of your out-of-pocket costs for drugs.

But the deal looks mostly good for the drug companies. They stand to gain tens of millions of newly insured customers who will be able to buy medicines. And the discounts the companies will provide to Medicare beneficiaries who reach a gap in their drug coverage, known as the doughnut hole, will apply only to brand-name drugs, helping the manufacturers to lock in customers that might otherwise turn to cheaper generics.

This deal is problematic for a number of reasons, some of which the NYT is finally realizing.  By preferentially lowering prices on some non-generics, pharma may actually come out ahead.  They do this all the time.  It’s why samples are always for more expensive brand-name drugs.

Now come the price increases. As Duff Wilson reported in The Times on Monday, the industry has raised the wholesale prices of prescription drugs by about 9 percent in the past year. That appears to be the highest annual increase since 1992.

There goes that $8 billion.

The industry contends that it must raise prices to finance research on new drugs, and that may hold some truth given the dearth of promising new drugs in the pipelines of major manufacturers. But the increases also look designed to establish a higher price base before reform bills, if passed, try to reduce drug spending.

Yes, it’s always for research and development?  Right?  No.  But here’s where the NYT argument gets lost:

The government needs every penny it can get to help cover the uninsured. Given the industry’s last-minute price increases, it seems prudent to ignore the supposed deal and demand a greater contribution.

We don’t just need that money because we need to cover the uninsured.  We need it because even the cost to the insured is too high.  I don’t know how many times I can say $2.5 trillion before people become numb.  Taking away our ability to negotiate lower costs in almost any sector of health care spending is foolish, and will prevent our solving the real probem.  We need to stop focusing only on the uninsured.

Basically, the reader points out that price reductions will be less than hoped for because the bill will not allow Medicare to create a national formulary.  You see, pharmaceutical companies will give rebates in order to get their drugs on formulary.  Moreover, formularies allow insurance plans to move demand from one drug to another.  He points out the the economic literature argues that it’s this ability to shift demand that actually gives a plan (like Medicare) leverage while negotiating.  Therefore, since their is no formulary, Medicare’s ability to negotiate rebates is essentially toothless.

He makes a lot of sense.  I didn’t mean to overstate the amount of savings, but he’s convinced me that even my lesser estimation may have been too optimistic.

I can’t tell you how happy that makes me.  Too rarely people who do the actual research get to be the ones to talk about it.  As I (and others) have said, it’s important for the people who do the work to be able to defend it.  It’s also good because it’s only by hearing opposing arguments that I (and you) learn.

Here’s the truth about research: none of it is perfect.  All research has limitations, even the best.  And we have to judge how much those limitations can bias or affect the outcomes of our research.  The importance of peer-reviewed research isn’t just that it’s been graded adequate by others; that has its own flaws.  Even more critical is the importance of transparent methods so that we all can see how the study was done.

Yesterday, I channeled Dr. Angell and Public Citizen to critique Dr. DiMasi’s work.  Dr. DiMasi today directed me to some published defense of his work.  I offered him the chance to respond directly, but he is going to let me take a crack at it first and then respond again if he wants to.

Understand: this is my interpretation of his work.  You should go read it for yourself.  Assessing Claims About the Cost of New Drug Development: A Critique of the Public Citizen and TB Alliance Reports.

Since I stuck to the Public Citizen critique, that’s what we’ll discuss here.  Here are the top points from the Executive Summary.

1) Pharmaceutical R&D is an investment with expenditures made years before any potential returns are earned. Based on standard principles in economics and finance, these investments have opportunity costs that are real and highly relevant. The time costs associated with new drug development are inappropriately ignored in their entirety in the Public Citizen report.

Dr. DiMasi maintains that the opportunity costs are improperly removed by Public Citizen.  We’re not going to resolve this one.  I understand Dr. DiMasi’s argument, which is that since there is delayed time until the drug yields any reward it is inherently less valuable than an investment with immediate returns.  Perhaps my auto industry quip was to cute.  I still maintain that since research is not a choice – they have to do it – this is not an especially compelling argument.  However, people do come down on both sides of this.  I think I side with Public Citizen more on this point.  Even if that’s how economists do it in ledgers, it’s not convincing to me that we should double the actual cost of investment because pharmaceutical companies decided to research drugs, and it takes a long time.

2) The Public Citizen report, noting that R&D expenditures are deductible under the corporate income tax, maintains that R&D cost estimates should be reduced in percentage terms according to the corporate income tax rate. The estimates in our studies were meant to examine trends in private sector resource costs, and changing tax structures mean that after- tax costs can mask such trends. The Public Citizen perspective, however, also reflects a fundamental misunderstanding of the nature of the corporate income tax. Profits (i.e., net income) are the target of the tax, not gross income. Deducting business costs is just the mechanism by which the targeted tax base (profits) is determined.

Dr. DiMasi claims that public citizen, by adding 35% to all costs, simplifies the pre/post tax argument.  I think that’s fair.  It is likely that not all of the costs, if the were not research, would have gone to profits.  However, given the vast amounts they already spend on marketing, it’s likely that some of those costs would have become profits and not gross income.  Overall, though, this feels like Public Citizen is using an argument not totally dissimilar to what Dr. DiMasi was in his first point.  They are assuming pharmaceutical companies have a choice to do research or make money.  If we say they must do research, then we can’t say they’re getting a tax break for choosing to do so.  I side with Dr. DiMasi on this one.

3) Public Citizen used published annual data on industry R&D expenditures from the industry’s U.S. trade association and FDA data on the number of new drug application (NDA) approvals to measure pre-tax out-of-pocket R&D costs. However, they used incomplete and mismatched data to derive the ratios that resulted in their cost estimates. The numerators of their ratios exclude much relevant expenditure and the denominators are inflated by including approvals of firms that did not contribute expenditure data to their numerators. For these reasons, their estimates using published data are deeply flawed and substantially understate R&D costs.

This is actually a valid point by Dr. DiMasi, but I’m not sure it changes things as much as he says.  He is correctly pointing out that some of the drugs approved by the FDA were not made by PHRMA companies; not all companies belong to the trade association.  Therefore, since Public Citizen used PHRMA R&D numbers, the amount invested is underestimated for the number of drugs approved by the FDA.  However, most big companies making the major investments do belong to PHRMA.  He claims that 29% of drugs approved from 1994 to 2000 were non-PHRMA companies.  I’d need to see compelling data for 2000-2003, which I presented.  And even then, I’d want to see how much was spent on research by the non-PHRMA companies.  However, I concede the point.  Public Citizen’s numbers are biased towards a lower cost-per-drug.

4) Public Citizen also used the NDA as its unit of observation, as opposed to a new drug (i.e., a new active ingredient). This is both technically and conceptually inappropriate. Many of the NDA approvals are not for new molecular entities (NMEs). However, many of these approvals are also not for new product presentations and/or are obtained by firms that have no relationship with respect to the drug in question to the sponsor of the original NME approval. On a conceptual level, the costs of obtaining non-NME NDA approvals on line extensions are intimately related to the costs of the associated NME NDA approvals. The most appropriate perspective to take on the R&D process is to use a new drug (active ingredient) as the unit of observation and examine costs over the lifecycle of the drug.

Dr. DiMasi is arguing (correctly) that not all new approvals by the FDA are for new active ingredients.  I could not agree more.  As I previously discussed, too much of the time they are for me-too drugs.  Sometimes, they are for new indications of drugs, which require less research comparatively.  Dr. DiMasi argues that we shouldn’t count these drugs in the calculation since they aren’t really new drugs and lower the apparent cost-per-drug.

I’d be more sympathetic to this argument if the commercials said, “it costs $800 million to develop a completely new drug that does something no drug before it has done.”  But they don’t.  They say “it costs $800 million to develop a drug.”  Since they want the public to believe that every slight change to an old drug is a new and important drug that you “must discuss with your doctor”, then those drugs count too.  Some new indications for drugs even result in new names for drugs and different colored pills.  The companies pass these off as new drugs, and report sales on them differently, so I’m not totally disinclined to count them as separate in the denominator.

So where does this leave us?  I have to make a decision as to how to judge these different arguments.  Since I think most people think about the cost of  R&D as how much money companies have to shell out to make drugs, I’m not persuaded that opportunity costs should be fully counted.  I’m swayed, however, that adding 35% to it for avoided income tax is not warranted.  I believe that Public Citizen did underestimate the cost by including drugs from non-PHRMA members.  I’m not entirely convinced that we should ignore new formulations or new indications, though.  You can reach your own conclusion.

So Dr. DiMasi’s study said $802 million.  Public Citizen said $110 million.  I bet the real number is somewhere in between.

The truth of the matter is that this ignores the larger argument.  I have no problem believing that pharmaceutical companies spend a lot of money when they invest in novel research to lead to NME that do new things.  But that’s not the majority of their business.  Nor is it a majority expense.  So talking about only those types of drugs and talking about only that expense ignores the real issues.  If – tomorrow – pharmaceutical companies announced that they would no longer focus on me-too drugs and would invest massive money into the development of NME only, I’d be the first in line to defend them and argue for big breaks for them.  But they aren’t.

Moreover, if they want people to know the true average cost for development of a new drug, they could open their books, allow researchers to randomly select a number of drugs from them, and be transparent about the whole process.  They aren’t going to do that.  If they won’t, they can’t be surprised when people are skeptical of their claims.

P.S.  Evidently I said that Dr. DiMasi had a medical degree.  We can argue whether that is a compliment or an insult, but I was mistaken.  He has a PhD.  My apologies!

Although this does not seem like a fact that most people would commit to memory, somehow the average American has come to know that, not only is it insanely expensive to create a new drug and bring it to market, but it is expensive to the tune of $800 million dollars. Why is this important?  It is the reason most often cited for why medications are so expensive in the United States.  And no one can doubt that they are expensive; we spent over $950 per person on drugs in 2007, and that number is going up every year. Many drug company executives claim that if we didn’t pay so much, then the $800 million dollars needed to create each new drug would prevent us getting any new scientific advances.  Even if you didn’t remember this number, it is reinforced repeatedly in advertisements, news reports, and campaign speeches.  It is so widely accepted that few people challenge the figure, at least not in public.  The truth, however, is a different story.

In order to understand why this is a myth, we must first understand how this number came to be.  In 2001, a group known as the Tufts Center for the Study of Drug Development released the results of a landmark study performed by Joseph DiMasi, MD and colleagues.  They claimed that, after exhaustive work and unprecedented access to company data, the average cost of developing a new drug was $802 million. Unfortunately, the methods of that study were not released until sometime after that, so no one could analyze their figures for over a year. When the paper describing the work was finally released, the $800 million number had already become branded into the American psyche.  So much so that a number of subsequent books and studies attacking the findings not yet been able to change the public consciousness.

So what is wrong with the figure?  A number of things.  First, let’s just approach the study from an economic standpoint.  The actual out of pocket costs for developing a drug in the Tufts study were about $400 million, half of the final number.  How did it get to $800 million then? Through a fancy piece of economic sleight of hand known as “opportunity costs of capital.” You see, when a business chooses to invest money in one area instead of another, it takes a gamble.  The drug industry could spend $400 million on research or, for instance, put it in the bank.  If they put money in the bank instead, they would have earned interest on it.  That interest income was sort of “lost” since they didn’t get to put it in the bank.  Perhaps they could have made even more money if they had invested that $400 million in the stock market.  Or in baseball cards.  The Tufts authors calculated that the drug industry “lost” another $400 million in potential money that they could have earned if they had done something different with the money.  So, they added that up and arrived at $800 million.

The problem with this line of thinking is that research and development is not an investment option for the pharmaceutical industry.  It is a necessary expense — at least it is if they want to stay profitable.  If they want to take their money and invest it in cars that’s fine, but then they are in the auto industry, not the drug industry.  Ironically, when they do their taxes, research is categorized as an expense, not an investment, so any argument about capitalizing costs is rendered moot by the actions of the drug companies themselves.  Research is not a cost to be capitalized.

Which brings us to the other economic trick.  Research is an expense; it is listed as such on tax forms and is, therefore, tax deductible.  This means that the $400 million bill found in the Tufts study was in pre-tax dollars.  Since it is tax-deductible, and the corporate tax rate was about 35%, the actual after-tax cost would be less than $270 million.

While that’s still a lot of money, it is far less than $800 million.  But there are even more problems with the Tufts study.  When drugs go in for approval from the U.S. Food and Drug Administration (FDA), they are classified according to their perceived importance and novelty.  A small percentage of the drugs seeking approval are what are known as “New Molecular Entities” (NMEs.)  Most of the drugs the FDA reviews are just slightly different versions of drugs that already exist on the market.  It makes intuitive sense that it would cost more to make an NME than to merely change an existing drug into a slightly different molecule.  Not only did the Tufts study only look at NMEs, it only included NMEs where the entire cost of development was born by the drug company itself.

As I discussed yesterday, the government, not the drug companies, supports many of the costs of developing drugs. A very, very small number of drugs are developed entirely by industry.  So by taking only NMEs and taking only NMEs that were entirely and solely paid for by companies, the study selected the most expensive drugs for analysis.  This does not yield an “average” cost, no matter what the New York Times says. It provides a cost for the most expensive and rarest types of drugs around — NMEs developed entirely in house.

Even that result is suspect, however.  To this day, no one outside of the study has been permitted to examine the data that the drug companies provided secretly to the Tufts group.  And while we would like to believe the best about everyone, we would be naive to ignore the desire of the pharmaceutical industry to make the costs of research and development seem as high as possible.

Are there any other studies out there to help us arrive at the true cost?  Of course there are.  In 2001, Public Citizen, a consumer safety group known best for its founder Ralph Nader, published a detailed analysis attacking the findings of the Tufts group.  They made a compellingly simple argument: to calculate the average research and development costs to bring a drug to market, you only need to know the total amount spent on research and development and the total number of drugs that obtained FDA approval. Dividing the costs by the number of drugs yields the average cost per drug.

Since total costs are available through publicly available data, and drug approvals are available through the FDA, the group was able to analyze data from 1994 to 2000. They found that the average cost to develop a drug all the way through FDA approval was $161 million pre-tax, and $110 million in after tax dollars. Again, not chump change, but not $800 million.

Even if you think Ralph Nader should not be trusted any more than the drug companies, anyone can reproduce this experiment using more recent data.  According to the 2005 Pharmaceutical Research and Manufacturers in America (PHRMA) Industry Profile, drug companies spent about $121 billion on research and development in 2000-2003. In that same time period, 314 drugs obtained FDA approval. This comes to about $385 million per drug in pre-tax dollars, and assuming a corporate tax rate of 35%, a total of $250 million per drug.

All of this information may leave you with a spinning head. After all, we want the drug companies to spend more time developing NMEs because odds are that most breakthroughs in healthcare will come from these types of drugs.  Far too many new drugs are just copies of drugs that already exist and are really no better than the originals.  It is also likely that NMEs cost more to create than copycat drugs.  However, since NMEs represent such a small percentage of new drugs, it is unfair and dishonest to represent the costs of these drugs as the average costs of new drug development.

Is $250 million a more accurate, and up-to-date, average cost for bringing a drug all the way to market?  Likely, yes.  Some will argue with this.  In fact, Bain & Company, a consulting firm, made headlines by claiming that the cost per drug is really $1.7 billion. However, they argue that the costs of marketing and advertising, which are 2 to 3 times higher than research and development costs, should be included in the cost of creating a new drug.  That’s ridiculous; truly amazing new drugs need no marketing or advertising, only copycat drugs do.

Ultimately, the truth will never be known until the drug companies open up their books and allow us to examine their data ourselves.  That’s not likely to occur soon.

I learned so much of this from Marcia Angell’s The Truth About the Drug Companies: How They Deceive Us and What to Do About It that I’m going to plug it again.  Go buy it.

In the last part of my previous post, I explained how FDA data shows that the vast majority of newly approved drugs are not real improvements over what we already have.  How much work do pharmaceutical companies devote to those drugs in terms of research, however?

In 2001, Darren Zinner published a study in Health Affairs that addressed this very question.  Here’s what he did in plain English.  He looked at all clinical patent applications in 1998, and carefully examined all the scientific research cited in those applications.  It’s important to remember that this would include all research, not just those for approved drugs, so it even includes the research for drugs not getting to market.  He then classified where that research was done.  Here’s what he found:

The majority of research cited in patent applications was done in academic centers.  Some more was done in other non-profit or government research centers.  Only 15% of the research was done by industry.  That’s not a very compelling argument for the indispensable contribution of industry to research.

This work has been repeated in slightly different ways.  In 2001, Public Citizen got their hands on an internal study done by the NIH, where they had looked at the top five selling drugs from 1995.  For completeness sake, these included Zantac, Zovirax, Capoten, Vasotec, and Prozac.  Please note – I’m not disputing the importance of those drugs.  The NIH then looked at the relevant published research for the development of those drugs (and their sources).  Can you guess what they found?

NIH found that “NIH-funded research played a critical role in drug discovery in each of these cases.” In all, U.S. taxpayer-funded researchers conducted 55 percent of the published research projects leading to the discovery and development of these drugs (and foreign academic institutions 30 percent). “Researchers at U.S. universities and at NIH contributed by discovering basic phenomena and concepts, developing new techniques and assays, and participating in clinical applications of the drugs.”

In the case of the hypertension drugs captopril and enalapril, the NIH concluded that the drugs were developed thanks to public U.S. research projects and five foreign academic studies. Only three significant studies were conducted by the drugs’ patent holders, Squibb and Merck.

Furthermore, four of the taxpayer-funded studies were deemed “key” and six of the studies were referenced in the industry’s work. The studies sponsored by the patent holders for these two drugs were of less consequence – none were considered “key” by the NIH. In fact, for the five drugs it studied, the NIH deemed only one industry study “key.” (Public Citizen acknowledges the fact that academics generally have greater incentive to publish research than industry scientists.)

The similarities from the two studies are convincing.  About 15% of research comes from industry.  Over half was from NIH-funded labs.  If you drill down even more, and look only at key papers for discovery or development, only one of the seventeen papers in this category came from industry.  Again, it’s hard to make an argument that the industry contribution is so terribly important that it justifies never reducing the amount we’re spending on drugs at all.

Please not that I am not asking for us to abolish drug companies, nor minimizing their potential importance in certain areas.  As infrastructure for bringing research from the lab to the real world, they do reasonably well.  They also obviously make and transport the drugs well.  But let’s not over-emphasize their importance in research and development – which is always what they do to justify the expense of drugs.

Medical R&D at the turn of the millennium.  Zinner DE. Health Affairs. 2001 Sep-Oct;20(5):202-9.

Rx R&D Myths: The Case Against The Drug Industry’s R&D “Scare Card” by Public Citizen (2001).

Dr. Angell was, of course, talking about the pharmaceutical industry in the context of health care reform.  She updated some of the data in her book for the talk, and I’m going to present two important points.  The original work and methodology is explained in more detail in her book, but I’m going to give you updated information.

The first bit of data has to do with the amount of money the pharmaceutical industry spends on research.  You will often hear that the real reason that drugs cost so much is that companies need to spend so much on research.  Compelling argument.  After all, think of all the lifesaving drugs we get, right?  We have to fund that research.  But it’s just not that clear.

According to Fortune Magazine, the top ten pharmaceutical companies earned about $269 billion in sales in 2008.  That’s just the top ten.  You can also look up their public annual reports.  This is how they spent that enourmous sum:

Here’s what we’ve got.  Those companies spent a whopping $41 billion on research and development.  That’s a lot of money.  But it’s significantly less than the $49 billion in profit they made.  Just so you know, the average Fortune 500 company in 2008 made 0.9% of sales in profits.  So in a recession, pharma did very, very well.  See that blue wedge, though?  Those pharmaceutical companies spent $83 billion on marketing and administration. That’s more than twice as much as they spent on research and development.  That’s an insane amount.

So it’s a little disingenuous to claim that Americans must continue to spend so much to fund R&D when you could make cuts to either profits (which are big) or to marketing and administration (which is gargantuan).  R&D just isn’t that big a piece of the pie.  There’s plenty of fat to trim in there before research and development.

Why do they need to spend so much on marketing?  I’m glad you asked.  Let’s enjoy more of Dr. Angell’s investigative skills and turn to FDA approval data:

The pie represents all new drugs approved by the FDA from 2000-2007.  The first thing to note is the difference between New Molecular Entities (Blue wedges) and non-New Molecular Entities (Green wedges).  See, the FDA will classify a drug as a totally new molecule (NME) or a copy/tiny change from an old molecule (non-NME).  New molecular entities need more research and development.  It takes much less money and work to make a slight change to an already existing compound.

The FDA further classifies a drug by the type of review it necessitates:

Priority Review – Significant improvement compared to marketed products in the treatment, diagnosis, or prevention of a disease.

Standard Review – The drug appears to have therapeutic qualities similar to those of one or more already marketed drugs.

In other words, priority review drugs are much better than what we already have. Standard review drugs are similar to what we’ve got.

From 2000-2007, 667 new drugs were approved by the FDA.  Of those, only 75 (11%) were new molecules that were much better than what we already had.  In fact, over 80% of all drugs approved were no better than what we already had.  Those are “me-too” drugs.

Why do the pharmaceutical companies spend so much on marketing?  Because you have to really promote drugs that really have no benefit over others that already exist.  You have to convince people to buy those.

You know what needs no promotion?  Awesome new drugs that save lives.  When was the last time you saw a commercial for chemotherapy?  For epinephrine?  For steroids?  Those drugs need no promotion – doctors just know to use them.  But I bet all of you know about Nexium.  Or Cialis.

You only need to market drugs which aren’t obviously better.  If drug companies really committed to research and development of new molecular entities that were deserving of priority review, they could really reduce their marketing and administration budgets and cut the prices of drugs dramatically.  They need a better argument against charging less for drugs.

More on where research gets done (Part 2) tomorrow.

The Truth About the Drug Companies: How They Deceive Us and What to Do About It, by Marcia Angell.

Our costs are higher because we foot the bill for everyone else across the board. If everyone was paying their fair share than our costs would be reduced. But if we did that Europe and Canada would scream. Why do you think drugs manufactured by US companies are so much cheaper everywhere else?

This is a favorite talking point of those who oppose reform.  But it’s odd, for so many reasons. So many others have answered this question, I’m going to let them speak for me.  First up is Jim Henly:

The argument is that if we further nationalize health-care financing it will mean reducing expenditures which will mean squeezing the profits of Pharma which will reduce innovation and more people will die and that’s bad. How is this not also an argument against any course of action which reduces health-care spending? For instance, favored right-wing programs are tort reform and increasing the share of health-care costs borne directly by the consumer. The argument is always that these changes reduce “unnecessary procedures” and – ta-da – control costs. But this would also, then, reduce the incentive for innovation in the health-care sector. Lower profits; less capital attracted.

I think y’all are proving too much.

Smart!  If we buy the reader’s argument, then we can never contain costs because it would be bad for innovation.  So no tort reform, no Medicare reform, no Medicaid reform, nothing!  But for some reason, we only make this argument when we try to contain costs through government intervention in insurance.  That’s hypocritical.

Next up, Ezra Klein:

The problem with that objection is that it’s all theory. I’ve never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you’d also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to “innovation” (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They’ll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn’t we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you’d imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

Smart!  If we need to spend to innovate, why doesn’t anyone ever argue we need to spend more?  No?  If not, then how do we know that this is the set point for optimal innovation?

Last up is Ben Domenech.  You should know that Ben is a conservative blogger who co-founded Red State.  He also used to work for the US Department of Health and Human Services.  If I had the room, I’d post his entire piece:

While I consider myself a pro-market and pro-consumer conservative, specialized medical research is one area where government funding is still needed. And to be honest, I see no inconsistency between holding that view and also holding the view that a government takeover of our health insurance system is a bad idea… talking about government-funded advanced medical research is an entirely different arena, and it just doesn’t have anything to do with how our health insurance system is run. It’s a red herring, and what’s more, it’s one still slick from the water.

Smart! While I likely disagree with Ben about the need for and methods to achieve health care reform, on this point we agree.  You should go read the whole thing.  It’s fantastic.