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PHARMA/POLICY: A couple of views on single payer and reimportation, by Terry Nugent & Joe Crea

Today THCB gets turned over to some contributors who may not agree with me on much but do have sensible arguments. First off Terry Nugent wasn’t too impressed by the pleas of the Canadian businesses (reported by Paul Krugman) echoed by their US counterparts about getting health care off their banks onto that of the government. Terry writes:

This is yet another case where what’s good for GM may not be good for the country. Of course big business would like to unload its healthcare costs on the taxpayer. But one wonders why Canadian officials are forced to cite this benefit to big business to the supposed beneficiaries of Canadian monopsony–the proverbial little guy. It’s because like all politicians they’ve written checks they can’t cash.

What if there were only one car company or one grocery store or one clothing emporium? You would take what you get, like the old Soviet GUM store. That’s how it is with Canadian healthcare. If you done like it, lump it. The safety valve is the land of the free south of the border.

If we go single payer, you will see Medicaid-like rationing because gutless politicians will make Social Security like promises without raising taxes to pay the freight.

Nonetheless, the system is imperfect and needs to be improved. Kerry, Clinton, and Frist have some good ideas. Bush has some too. But what makes America different from the rest of the world is what makes her great–free enterprise and free speech. Let’s not forget that. Perhaps, as in Britain, the world ought to change to become more like us.

And then in response to my piece on the way out
for pharma companies
Terry writes this on reimportation:


Reimportation is just a straw man for price controls. Here in the State of Illinois, USA, our governor and his pal Rahm Emanuel (a Democratic Congressperson and once and future Clinton operative) are having great fun setting up a reimportation scheme that will allow intrepid residents to personally import drugs from Ireland and the UK. This plan has a few flaws–e.g., it’s limited to 100 drugs, it’s borderline illegal domestically and internationally, it’s subject to pharma supply constraints, there are labeling issues, etc.

But what’s nice about it is that it doesn’t cost the quasi-bankrupt state government a dime and it makes great political hay with the unsuspecting electorate. Meanwhile, the state is being sued for violating federal law by massively underfunding Medicaid, which actually does pay for prescription drugs for those who need them. The hypocrisy involved with this sophistry boggles the mind.

What the industry should do is publicize its own access programs for the uninsured and economically needy, and expose charlatans like our governor for the political opportunists that they are. Based on a recent FDA study of prescriptions ordered from sites linked to the State of Wisconsin Web site, I think there is more of a safety issue here than most informed observers suspected. As the companies squeeze Canadian supplies based on diversion, the Canadian outlets are reaching out internationally for supply. Who’s to say they won’t compromise their standards to take advantage of the windfall business they are getting from the US with the free promotion provided by the sovereign states? As time goes by, I believe safety will become more and more of an issue, and the states that promote this route will potentially assume more and more liability for adverse outcomes. Now those drugs don’t look so cheap, do they? Especially when you can in some cases get a better deal at Costco.

And then we get a new piece on the same topic from new contributor Joe Crea. Joe had a version of this letter published in the Moonie Washington Times, but it was so brutally edited that he asked me to give the unexpurgated version a forum.

The oft quoted examples of U.S. drug prices being several times higher than those in Canada is misleading. The reports that make this claim “cherry-pick” the top selling brand-name drugs only, and value them at AWP (full price) in order to suit their agendas. No doubt that if you choose the most demanded doses of the most demanded brand-name drugs and only look at AWP (which relatively few people pay), and compare them to controlled prices in Canada, this disparity indeed exists. However, this is analogous to comparing the price of cars, or any other product, based on “sticker price” rather than what is actually paid by consumers.

The more disturbing matter is that this demagoguery continues to go popularly unchallenged, and now has become lore. A study by Patricia Danzon at the University of Pennsylvania’s Wharton School compared a representative sample of all drugs in nine countries, and adjusted for pertinent variables including relative purchasing power (apples-to-apples); this true economic analysis showed, in particular, that Canada’s prices were generally 4% higher than those in the U.S.

Another issue, reimportation, or parallel trade, of pharmaceuticals is feasible and should be legal in a free market, but: 1) Even in Europe, where reimportation is legal, most countries get less than 10% of their drugs this way (of course, price and practice controls make it less efficient), 2) About 10% of the U.S. demand would exhaust Canada’s entire drug supply, 3) Not all drugs from Canada originate in the U.S., hence 4) We would have to legislate reciprocal licensing agreements with other countries as exist in the E.U. whereby foreign testing, manufacturing, and distribution standards would have to be equivalent to those in the U.S. Frequently, either theirs would have to be raised, ours lowered, or both.

Thirdly, regardless of whether pharmaceutical companies spend too much on marketing, the fact is, at least in part, that the refusal by other countries to help pay for research and development is what allows them to fix prices. The pharmaceutical sector does have larger profit margins than other industrial sectors; however, this is not prima facia evidence of price gouging, but an insurance policy against future costs in an increasingly hostile and unpredictable global regulatory environment. Like it or not, it is this subsidization of innovation and profit by U.S. and, frankly, Japanese consumers that allows for newer if not always better drugs to come to market. Only about 1 in 3 patented drugs ever recover their full investment, hence the reliance on “blockbuster drugs”. Granted about half of that investment is opportunity costs, which is legitimate, as in any other industry. As can be seen, to the extent that prices are high in the U.S., it is a function of more than just profit motive, despite what most wish to believe- and don’t even get me started on intellectual property rights (patents).

In economic terms, a major driver of these price differentials (apart from government interventions) is consumer demand. While policy and the markets continue to grapple, there are two easy ways to decrease drug expenditures: insist on generic drugs whenever feasible (which is most of the time), and when you receive a prescription or service, ask your physician, “Is this the most cost-effective treatment?” It is such consumerism and the adoption of evidence-based practices that will most affect health care costs, along with prudent lifestyle choices.

In the long run, it will be market demand vis-à-vis consumer behavior and revealed preferences that determine health care costs. Until we stop agreeing to more expensive drugs and services that provide little in return, and accept unaccountable tort and inefficient regulatory systems, we will continue to get what we pay for.

These arguments will run and run, but as with everything the truth is in a murky place in the middle. It is though a pity that big pharma’s advocates have to be individuals writing in THCB, while the head of PhRMA is writing letters about me-too drugs for his mother to the LA Times.

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