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POLICY/POLITICS/PHARMA: PhRMA sends the D out on the field

Even thought the White House will likely veto any change to Part D, the WSJ has started playing desperate defense on behalf of PhRMA.

Apparently if we impose government price controls, it’ll cripple R&D and no new drug will ever be developed. On the other hand, they also trot out the “fact” that Part D as constructed now means that the private sector has the ability to lower prices below those that the government could get. Of course we’ve heard all this before, and we all know who wrote Part D and in whose interests it was written.

But what I wonder is how can the WSJ’s Jane Zhang hold those two contradictory thoughts in her head without smoke coming out of her ears?

Meanwhile, here’s the NY Times on big Pharma’s attempts to buy its way out of the problem. It’ll certainly make some former Democratic staffers much richer!

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  1. As a current employee of a small PBM that is able to act nimbly, attack the big three for their indiscretions, and acquire new business because of it, I see our market still working, albeit imperfectly. We are the future of the PBM market. Full transparency and pass-through of ALL information to our clients. We simply charge transaction fees for all services. We believe that we provide a valuable service that most employers do not wish to try to even start comprehending. We have the luxury of not having the operational cost burden that the big guys have after years of living high on rebates and data sales. Years and years of the American model show that the successful get fat and lazy and the small nimble innovators come in and seize the next cycle. Fortunately for some of the big lazy ones, they find the small ones and eat ’em up on a consistent basis…. GE, we bring good things to life 🙂 Finally, I give thanks that I am able to post my thoughts with no fear of government retribution…. I think 🙂

  2. My suggestion, Jim, is that your wife consider becoming a VA physician. They are salaried and enjoy the highest patient satisfaction, even over the private system. She is not going to like the direction the corporations are going to force the system (to managed-care-for-all). Physicians would be far better off with an exclusive Medicare-for-all system that treats physicians fairly. Admittedly, that’s not always the case now, but if it were an exclusive single-payer system that would change. It would have to.

  3. Such righteous arrogance. And anonymous to. Great to have you join us.
    And PS: I have done my research, I do read my posts, I stand by every one of them, and I sign my real name.

  4. More of Jack E’s greatest hits:
    “For all the things that are apparently wrong with single-payer plans, I am terribly surprised that over 80% of Canadians prefer their system to ours.”
    First of all, great sarcasm. But could you have cited a more absurd poll? I bet 100 percent of those 80 percent have never lived in the U.S. and have no idea what our system is like. And depending on how the pollster worded the underlying question, I might not be “terribly surprised” that Canadians prefer their system — after all, if the pollster said that Americans are dying in hospital hallways, so you do you like Canadian or American care better, guess what most people would say?
    Jack, read your posts before you hit the “post” button, unless you’re intentionally trying to seem silly, in which case you’re succeeding.

  5. There’s something about Jack:
    “But every time Medicare tries to do that (cut payments) the medical and hospital associations run to their congressman for help. I know, because I’ve done it myself (though legitimately trying to save a valuable procedure).”
    Did you blink at all when you typed that? That’s right, everyone else is running to Congress to save overpayment for their illegitimate procedures, except you. Yours is the only one worth saving.
    Self-awareness — try it sometime.

  6. Any one of those countries would be better than what we have, Barry. France is listed as the best according the WHO. CMS already does consider cost with its national fees schedule which, I might add, is not all that bad. The problem with both Medicare and private insurers is that neither does a good job monitoring over-ordering by physicians. But I believe the national EMR database will help highlight the abusers. But I disagree that they are a big dumb payer. I’ve seen far more abuses under the private payer system because the penalties for abuse are almost nonexistent. And I agree with the strong Medigap need.

  7. Jack,
    Believe it or not, I agree that we will probably transition to a taxpayer funded healthcare system sometime in the next 4-10 years, though I think it is more likely to resemble the system in France, Germany, Switzerland, etc. and not the one in the UK or Canada. I think the following factors will drive us in that direction:
    1. The corporate sector will seek relief from a very large cost item that grows persistently faster than all of its other costs and the price of its own products.
    2. Workers will see their wages grow no faster and probably slower than inflation because their employer has to pay so much to provide health coverage.
    3. The public will come to accept the idea of explicit rationing, especially with regard to end of life care, as a necessary cost control strategy.
    If CMS, thinks Medicare for all is a good idea, it could advance its cause by doing the following:
    1. Convince the Congress to allow it to explicitly consider cost in determining what to pay for and not pay for, especially with respect to the very expensive specialty drugs that are coming to market.
    2. Convince the Congress to require a living will and/or advance medical directive as a condition of insurance.
    3. Convince the Congress to fund a nationwide system of interoperable electronic medical records starting with hospitals, and establish a system, comparable to acquiring a passport, to allow citizens to purchase military style ID / health records the size of a credit card that also includes a picture and fingerprint or biometric identifier.
    4. Provide leadership in identifying the best and most cost-effective practitioners and reward them with more patients by publicizing who they are, how good their quality is and how much they are paid for various services, tests and procedures.
    5. Provide leadership in closing the geographical variance between the best practicers and the high utilizers.
    6. Do a better job of combating fraud.
    7. Prove that they’ve shed their big dumb payer image.
    If they do all that, even I would sign on to taxpayer financing, but for a premium support / voucher model. Competition among health plans is, in my opinion, the best way to assure continuous improvement even if administrative costs are slightly higher. There should also be a robust market for Medigap and supplemental insurance that covers services that Medicare doesn’t and costs above some reasonable out of pocket maximum.

  8. So it seems that GMs’ moving north will not eliminate the two-thirds of health care costs that are retirees. So why are they moving to Canada?
    For all the things that are apparently wrong with single-payer plans, I am terribly surprised that over 80% of Canadians prefer their system to ours. In time, and it may yet take ten years, we will have a single-payer system. All of the hypothesizing aside, I think those in opposition today will come around to believing that simple is better and all of this posturing is for naught.

  9. Jack,
    Approximately two-thirds of GM’s current healthcare bill is attributable to retirees, not active workers. For Ford, it may be slightly less but not much. Very few companies offer employer paid healthcare to retirees, and most that used to discontinued it or sharply increased the cost to the retiree.
    Value added benefits provided by insurers now include disease management and prevention programs and new transparency tools that help insureds identify the most cost-effective providers including imaging centers and hospitals. I don’t see Medicare doing much in either of these areas.
    If employers were suddenly relived of the burden of paying for healthcare in favor of a new payroll tax to be paid by employees, there is no way that the savings would flow to profits, especially at a time when corporate profits overall as a percentage of GDP are as high as they have ever been in the post World War II period. If health benefits were an important tool for attracting good people in the past, benefits would likely be replaced by bidding up wages to cover all or most of the new payroll tax, especially during a buoyant economic period with an historically low unemployment rate. At the very least, I would bet a lot of money that legislation establishing a healthcare system funded by a payroll tax would include a requirement that employers use their newfound savings to raise wages to offset as much of the new tax as possible. Besides, it is hard to envision a taxpayer funded system as a replacement for the current system being acceptable to either private or public sector unions without the wage increase offset as a quid pro quo.

  10. Having spent 25 years in the health care field, I do indeed believe that insurers only add cost and complexity that consumes resources. Insurers add no value over the services Medicare administrators already provide, and probably less so because they have to coddle their customers.
    Having dealt with Medicare for 28 years (the last three as a patient) I see the wisdom of leaving one payor per state in charge, rather than having to support the employees of 450 insurers in my state alone. You and I will obviously never come to agreement on that.

    >>> “most respected economists will tell you that the employee is actually paying for healthcare in the form of lower wages than he or she would have been paid if the employer were not paying for healthcare.”

    Try telling that to GM and Ford, who now make more cars in Canada than in the US. And all of the other companies that are moving offshore. And the gobs of corporations that have recently lined up in Washington demanding government intervention.

    >>> “If we replaced employer provided healthcare with a system funded by a payroll tax (paid by the employee), wages would likely rise enough to cover the payroll tax on average ….”

    Barry, you and I live in two different worlds. That is simply not going to happen.

  11. Jack,
    I think the fundamental disagreement I have with you (and probably Peter) is that you don’t think insurers add any value, and I do. I see Medicare as basically a big dumb payer, and you think it can do a splendid job of controlling costs, perhaps, with help from a Board modeled after the Federal Reserve.
    As for the burden on employers, while most of the cost of premiums for employee healthcare may flow through the employer’s bank account, most respected economists will tell you that the employee is actually paying for healthcare in the form of lower wages than he or she would have been paid if the employer were not paying for healthcare. If we replaced employer provided healthcare with a system funded by a payroll tax (paid by the employee), wages would likely rise enough to cover the payroll tax on average while no longer having to fund healthcare directly would leave employers in essentially the same position from a cost standpoint as they were before. No matter how a payroll tax is nominally split between the employee and the employer, the employee ultimately pays it all, just as he or she does in the case of the current payroll tax that funds Social Security and Medicare Part A.

  12. Employers, at least those who have not stopped providing insurance, and the wealthier among us, could certainly afford that kind of insurance. But the lower end finds it necessary to spend their money on food and clothing for their families.
    But Barry, we keep coming back to this same thing: How can we improve the system while keeping the for-profit insurance industry in the loop. That’s where you and I will always disagree. We don’t need them to make this system serve the public appropriately. All they do is drain resources.
    Here’s a summary of what I believe will get us started in the right direction:
    http://www.madison.com/tct/opinion/column/index.php?ntid=107656&ntpid=0
    As well, the last people in the world that should be funding this system is employers. It already represents 15% of payroll and is driving jobs out of the country. This should be a taxpayer burden as it is in Canada.

  13. Jack,
    My suggestion of a taxpayer funded catastrophic coverage tier to cover costs above $50K would work in conjunction with employer and/or individually purchased insurance to cover costs between a reasonable deductible and $50K. The top half of the income distribution could afford to buy high deductible plans while the lower half could receive more comprehensive coverage at far lower cost to employers and individuals than under the current system. The catastrophic coverage tier (for those not eligible for Medicare or Medicaid) could be funded by the combination of a payroll tax (with a reasonable cap) and the elimination of the tax preference currently afforded to employer provided healthcare. Payroll taxes (both existing and new) would need to be deducted from gross income for determining the income that would be subject to federal and state income taxes in order to avoid double taxation.

  14. Barry, Medicare D is the exact opposite of what you’d see in a single-payer system whether they negotiate or not. Congress took a very simple system and reworked it so the health care corporations could participate where they were not previously participating, and gave the pharmaceutical industry a $780 billion gift in the process.

    >>> “It should go one step further and establish its own stand alone drug plan in competition with all the private plans.”

    What? Have the government compete with the free market? You know what Eric would say about that!
    The truth is if they did that and offered back the simple program we once had, the others would go out of business overnight. Follow the money and you’ll see that is not an option.
    I agree with you on the patients’ insensitivity to cost of services, and would support reasonable co-pays to help draw that in. But deterring patients from early care can be more expensive in the long run. And you’ve made me a believer on the issue of “price and quality transparency,” though knowing how much money Medicare is spending is not going to be a big detractor.

    >>> “The second area is practice efficiency. We keep reading that Medicare costs per beneficiary are three times higher in Miami than in Minneapolis with no difference in outcomes, but Medicare does little or nothing to narrow the gap in practice patterns. It just pays and pays and pays.”

    I also agree here. Physicians get away with overcharging and that must be reigned in. But every time Medicare tries to do that the medical and hospital associations run to their congressman for help. I know, because I’ve done it myself (though legitimately trying to save a valuable procedure). But if a single payer system were appropriately governed by a health care board (like the Federal Reserve Board, immune from congressional pressure) oversight would be a lot more effective.
    As well, complain as we do about Medicare overcharges, that problem is two to four times more serious with the private insurers because infractions are not met with the same penalties.

    >>> “I think taxpayer funding, at least for a catastrophic tier covering expenses above, say, $50K in a year may be part of the long term answer.”

    Well, you and I might be rich enough to handle that, but the average Joe will simply declare bankruptcy and the public will pay in other ways.

    >>> “If we go to full taxpayer funding, my preference is for a premium support / voucher model.”

    Whatever the mechanism we must eliminate the administrative/profit costs that do not cover medical care, and I doubt a voucher system would be as effective as just providing a Medicare-for-all system with co-pays to slow down entry into the system.

    >>> “…. early experience with Medicare Part D … has produced generally high levels of satisfaction among beneficiaries and lower premiums that Congressional budget analysts initially estimated.”

    I disagree, but readers can decide for themselves.

    >>> “The key risks of a single payer system, of course, relate to wait times and explicit rationing and, to a lesser extent, the adequacy of reimbursement rates.”

    Wait times and so-called rationing are a direct result of under-funding, and that does not have to be under a properly run system.

  15. Peter, I think you’re far too cynical. Companies in all industries (as well as managers, sales people, etc.) try to manage results to some extent in order to smooth out wild fluctuations. While there is some room in accounting rules for determining how financial results are calculated (depreciation, warranty reserves, returns and allowances, product liability reserves, etc.), I don’t think the drug industry understates earnings relative to other industries. Besides, they have to get a clean bill of health from their auditors which is now a more rigorous process under Sarbanes-Oxley. That said, there are some who suggest that drug industry profits are above average in “quality” because they are after expensing R&D even though the results of successful R&D (patentable products) are, in effect, long lived assets.
    Investing in the stocks of large drug companies has not been particularly rewarding over the last 3-5 years because numerous blockbusters are going off patent and quite a few more will do so over the next three years, while the flow of new products has been disappointing overall.
    Of course, if the government is so good at R&D, why doesn’t it just go into the drug business itself? It could even buy one of the established players and have a ready made infrastructure. The NIH could be a division of the government drug company, and all NIH sponsored research would belong to it (taxpayers). It could make some of its research available to others for a price that adequately reflects its value. Any promising new discoveries could be commercialized by the drug company it now owns. The huge profits it then earns could be used to offset part of the cost of providing national health insurance. If this is such a great business, taxpayers should get in on the action.

  16. Barry, it’s easy to hide profits so that the drug industry looks good compared to other industries. I think they would not want the attention afforded the oil industry with the last round oil price hikes. People forget oil companies make profits (being vertically integrated) through the entire supply chain. Simply put, buy from yourself at a profit but claim an expense. When I was in sales, a common tactic for most salesmen, was to regulate performance throughout the year so that that great year was not used to measure you the next. Better to be a consistant salesman than a star one year and a goat the next. Companies do the same thing, management wants to met targets not exceed them, at least not by much. Profits are much easier to control and hide than sales performance by sales people. I think the drug industry is far more profitable than it tells the public and its investors. Canada seems to negotiate drugs pretty well, but I think any system here to allow CMS to negotiate will be rigged to fail from the start.

  17. Jack,
    I think the new Medicare prescription drug program provides a good opportunity to test the cost-effectiveness of the single payer model. With the change in Congressional leadership, Congress may well give Medicare the power to negotiate directly with drug companies. It should go one step further and establish its own stand alone drug plan in competition with all the private plans. If it can buy enough drugs cheaper than insurers and PBM’s to offer a satisfactory formulary and fill in the donut hole for a reasonable premium, more power to it.
    With respect to the single payer approach more generally, you and other advocates keep emphasizing the potential for large savings in administrative costs by getting rid of the hundreds of confusing insurance plans. I actually agree that a single payer system would achieve savings from what I call administrative efficiency.
    However, there are two other major cost drivers where the existing experience with Medicare and Medicaid have not fared very well. The first is utilization efficiency. This has to do with patients’ total insensitivity to cost of services. The lack of price and quality transparency is certainly a factor, though Medicare and Medicaid, until recently, have done nothing to bring about any improvement.
    The second area is practice efficiency. We keep reading that Medicare costs per beneficiary are three times higher in Miami than in Minneapolis with no difference in outcomes, but Medicare does little or nothing to narrow the gap in practice patterns. It just pays and pays and pays.
    I think taxpayer funding, at least for a catastrophic tier covering expenses above, say, $50K in a year may be part of the long term answer. If we go to full taxpayer funding, my preference is for a premium support / voucher model. I think the early experience with Medicare Part D, despite the initial confusion, has produced generally high levels of satisfaction among beneficiaries and lower premiums that Congressional budget analysts initially estimated. The key risks of a single payer system, of course, relate to wait times and explicit rationing and, to a lesser extent, the adequacy of reimbursement rates.

  18. Of course, Barry, I agree more with Peter and JD on these issues and so they must be correct 🙂
    But you and I have discussed this before; just because it is logical and the right thing to do does not mean the politicians are going to snap to it and correct the problem. They must first consider the $100 million in campaign contributions coming from the health care industry, whose sole intent is to block what is logical and right if it cuts into their profits. So no, I disagree that we would have changed the system 20 or more years ago. You are giving far too much credit to the politicians.

  19. Jack,
    With all due respect, JD and Peter are not “correct,” and neither am I. Rather, their opinion as to how healthcare should be financed (by taxpayers) and how healthcare prices should be determined (dictated by government) happen to agree with yours. If it were so obvious that we could all have the great healthcare we all want without the despised explicit rationing and for much less than we are currently spending, we would have changed the system 20 or more years ago.

  20. I support the excellent remarks by Peter and JD.
    Can you imagine what the system would look like if political bribes were not taking place? We wouldn’t have 500 different insurance companies offering 1500 different drug plans (or whatever the ridiculous number is), we’d instead have Medicare patients going to the drug store and paying a co-pay and walking away with their drugs, then the drugstore submitting its claim to Medicare.
    Too simple? That capability is already in place and was once used, but it bypasses the moneyed corporate interests so Medicare D was created to pad the pockets of the campaign contributors.
    Barry, the drug industry is the most profitable in the world, at 20-25%, even after deducting for its R&D, high marketing costs, high executive salaries, high shareholder dividends and high political contributions, all of which are passed on to the patient. (I, too, am one of those shareholders, and Peter and JD may have mutual funds that include them as well.)
    Peter and JD are correct. The NIH is funding 1/3 of R&D already. It should fund 100% of all R&D and own the patents itself. Then they can license the manufacturing to multiple pharmaceutical companies and let them compete with each other (or maybe this is not the type of free market they support?).
    As well, this would wipe out the costly and duplicative developmental and FDA costs of the me-too drugs that are created by the originating company after their original patent runs out. Me-too dugs, incidentally, that may not even be as effective as the original because they are tested against placebos instead of the original.
    >>> Barry: If drug industry margins were driven far below current levels, access to outside capital would dry up.
    Under the scenario I propose we would not rely on the profiteers to decide which drug gets developed.
    But guys, get this: All of this discussion is moot. All of the logic in the world is not going to overcome the flow of political cash. Only when we have full public funding of political campaigns will politicians be free to pass laws that are in the best interest of the public and the patient. Until then the taxpayers and patients must survive in Rip-Off City.

  21. Barry,
    I would add on to your point that a comparison of pharma to most other industries is misleading since accounting profits do not reflect the cost of capital, which for pharma companies is a very real cost that reflects the time lag between the development and commercialization phases of a product. Perhaps a few industries are relevant comparators, in particular, some of the oil exploration and production companies since there are significant costs in securing licenses, drilling test wells, and putting a field into production while the marginal cost of production is quite low. Also, an amusing point from Panos Kanavos is that the Federal Supply Schedule, which is drug prices net of discounts/rebates, is very close to the prices in the UK.
    Martin

  22. JD and Peter,
    I’ve commented on this before, but I apparently need to do so again. Profit as a percentage of sales is not the correct way to compare the profitability of companies in different industries because of very large differences in capital intensity (sales / assets). The drug industry, along with oil, chemicals, utilities, water, etc. are quite high in capital intensity while supermarkets and retailing generally are low. The proper measure for comparison is EBIT ROA or earnings before interest and taxes as a percentage of assets. On this measure, the pharmaceutical industry has achieved profitability somewhat above the average for the S&P 500 over the long term, but more in line with the overall corporate average in the last few years.
    Before investors will commit capital to any industry, they must perceive the likelihood of earning an adequate risk adjusted return on their capital. If drug industry margins were driven far below current levels, access to outside capital would dry up. Furthermore, P/E ratios have nothing to do with risk. They are driven by perceived longer term growth in earnings, cash flow, and dividends compared to other stock market alternatives as well as returns available on less risky alternatives such as bonds. After a 35 year career in the money management business, I can speak with some authority on this subject.
    With respect to R&D by foreign based drug companies, the profits potentially available in the large and uncontrolled U.S. market have a large impact on the willingness of these companies to commit resources. Several of them are also expanding their R&D infrastructure within the U.S.
    As for the government negotiating directly with drug companies, state Medicaid programs have been doing this for years. If the federal government would like to negotiate on the same basis, including demanding the best price offered to any other buyer, I have no problem with that. My problem is with any attempt to dictate or control prices. For those who point to the VA as a model, a recent article in Health Affairs says that the VA formulary only includes 19% of the drugs that have been approved by the FDA since 2000. It is a highly restrictive formulary, and a similar approach would most likely be met with widespread dissatisfaction if CMS tries to implement it for Medicare beneficiaries.
    Finally, with respect to the government already contributing significantly to drug R&D, I would like to understand more about both the dollars committed and the nature of the R&D. It is probably perfectly fine and appropriate for the NIH to contract with universities and do work in house on so-called “blue sky” projects that are attempting to expand the frontiers of knowledge, identify promising areas of inquiry but are not geared toward commercialization. To the extent that promising areas of inquiry are identified, the private sector, I think, is better suited to pursue commercialization. If government funding leads to any patentable discoveries, the feds should be able to earn licensing fees or royalties on their discoveries.
    In the interest of full disclosure, I own a modest amount of stock in Pfizer and Johnson and Johnson.

  23. December 2005,
    “In any debate over the utility of patent systems, IP-maximalists will almost always fall back to the example of the pharmaceutical industry. If this industry didn’t have the incentive of monopoly on new drugs, they would never invest the millions of dollars that are necessary to perform new drug research and development, so the argument goes. Without new drug research, no new drugs would be produced. And if new drugs aren’t produced, we all suffer from sickness and death. Therefore, they claim, patents are not only good, but directly vital to our well-being.
    At first glance, this argument seems quite compelling. Those who put forth this argument choose it carefully — no other industry, it seems, spends so much money on research and development, and is in such need of protection from cheap knockoffs. Or so it seems.
    The truth is, these arguments are so poorly-founded and so misleading that we shouldn’t feel bad about calling them, simply, “lies.” Here are 6 reasons why:….”
    http://righttocreate.blogspot.com/2005/12/why-drug-companies-dont-need-patents.html
    A larger discussion is here:
    http://www.dklevine.com/papers/ip.ch.9.m1004.pdf
    I guess I’m right, things haven’t changed since 1994.

  24. This from a 1994 presentation to congress. I don’t think much has changed.
    “Of these 30 “important” new drugs approved by the FDA, 15 benefited from significant funding by the U.S. government. When one considers the country where the drug was first discovered the government’s role is even more important. 17 of the “important” new drugs were discovered in the U.S. Of these drugs, 12 were developed with significant government funding – that is, 71 percent were developed with significant government funding.
    The U.S. government spends an enormous amount of money on health care research, and this investment has been very productive. On the basis of our research, we have concluded that while the private sector’s R&D investments are also large, they tend to be directed at the lower risk ventures, and often are directed at the development of so called “me too” drugs, which do not represent significant improvements in therapy, but rather are marginally different methods of treating illnesses which represent large markets, measured by the companies in the number of dollars they will receive from consumers.
    One of the more interesting findings of our research was the fact that the drugs developed with government funds were much more expensive than the drugs developed with only private funding. For the 30 drugs in our study, the median cost of the NMEs developed with government funding was $4,854, while those drugs developed without government funding cost $1,626.(4) That is to say, the drugs developed with government funding were about 3 times more expensive than the drugs developed with private funding. Clearly the drug companies were not “passing” on the benefits of government funding to the U.S. consumers, who pay for the research.
    We have found that the federal government’s role in the development of new drugs is much larger than is generally recognized, particularly for the most important new drugs.”
    Add this is the cost of lobbying and political bribery as well as the 30% cost added on when pharma was allowed to advertise to the public. I think the line that the entire world is waiting for the R&D and drug development of U.S. drug companies is hogwash and another fear factor attempt by a dishonest and morally bankrupt industry. How many drugs shares do you own Barry? Yes, a different system would affect you.

  25. Barry,
    There is indeed a “large school of thought” that believes that other countries can “get away with” price controls on drugs because they are “free riding” on the U.S. market that pays for all the pharmaceutical R&D. However, this school of thought consists entirely of free-marketeers and Pharma representatives. In short, it consists only of those driven by ideology or self-interest to deny not just one but several large holes in that argument:
    1. the pharmaceutical industry makes an enormous pile of money. Net margins have consistently approached 20%, which only investment banking and energy extraction have matched, and then not consistently. Operating margins are obviously far higher. Thus, drug prices could in aggregate be reduced by 25% and the only people this would hurt are investors in drug companies. If the companies chose to accept margins in line with other industries, they could do exactly the same R&D as they do today. Of course, investors will pressure them to cut corners in order to retain their absurd margins, but that is despite the govt, not because of it. You can’t say the govt is at fault for an insistence that this industry have profit margins twice as high as the average. And don’t tell me it’s due to higher risk: PE ratios for Big Pharma are only slightly higher than average.
    2. US Pharma companies do not pay for all the R&D. American universities, supported by federal dollars, pay for an enormous amount of it. European companies and govts pay for a large share also, even if it isn’t quite as high as the US. Does anyone have a stat on the % of global drug R&D that comes directly (not subsidized) from US drug companies? Is it 25%? More? Less? Taking 25% for the sake of argument, if Pharma margins were lowered so far that the drug companies *had* to reduce R&D, global spending would still be reduced by a small fraction of the total, unless the government tried to deny drug companies any profit at all. But we’re all talking about reducing profit, not eliminating it.
    3. Moreover, I don’t think you fully appreciated Peter’s point that current R&D dollars are massively misallocated from a public interest standpoint. We get meaningless tweaks to old drugs going off prescription, which are then advertised to the hilt as the new “it” drug that costs many times the old drug that does about as well. I understand wanting to change an insurance system which takes a drug that costs 10x as much as a substitute and gives it a copay that is the same or only trivially higher, thus eliminating an incentive to discriminate based on price or value. You implied that you agree that current R&D is misallocated to some extent, but you seem to think that the profit motive is the only or best way to allocate research investments. That is a strange thing to say when there is an obvious alternative goal: maximum health benefit at minimum cost. This is the sort of thing national health systems that operate on a budget aim for all the time, and they are more efficient than our system as a result.
    4. Despite all the rhetoric, there is no moral difference between a government negotiating drug prices as a purchaser and an insurance company or other organization negotiating prices as a purchaser. Drug companies engage in negotiations with France with the same interest they always have–maximizing their profits. Purchasers engage in those negotiations with the same desire regardless of whether they are private or public insurer–minimize costs given a set of health benefits. So long as drug companies are not compelled by the government to offer products, the government is simply a very large payer…sort of like Wal-Mart. If you choose to make a deal with Wal-Mart you are making a trade-off of huge volume for low margins. That is, and should be, the same trade-off when governments negotiate prices. It is not in Wal-Mart’s interest, nor is it in governments’ interest, to drive companies out of business. Now, if you are willing to argue that Wal-Mart is driving companies out of business or is preventing innovation, then at least you would be consistent. Is that where you want to go?

  26. Peter – I think you should be careful what you wish for. There is a large school of thought that believes that other countries can get away with price controls on drugs because they are, in effect, free riding on the U.S. market that pays for all the pharmaceutical R&D. If the U.S. tried to impose price controls in our market as well, it would likely run afoul of what economists call the a fallacy of composition.
    If profitability were driven down sharply through price controls (dictated prices), it would probably have a significant adverse intermediate to long term impact on innovation. If you think the NIH can take over the R&D function, the results are likely to be disappointing. With no profit motive, how is NIH supposed to rationally allocate its R&D resources to the most promising projects? What mechanism will it have to pull the plug on expensive projects that are not working out?
    Prescription drugs, even including the very expensive biotech medicines, account for only 12%-15% of total healthcare spending in the U.S. They are not a huge contributor to rising healthcare costs in the U.S., in my opinion. That said, I would have no objection to banning or at least significantly curtailing DTC advertising by drug companies. At the same time, I want to see them stay sufficiently profitable to keep innovating. As for “me too” drugs that are more expensive but no more effective than older drugs in the same category, consumers can easily be encouraged to buy the cheaper alternatives through plan design (differential co-pays and formulary restrictions). For example, United Healthcare will no longer pay for Nexium because Prilosec and generics are as effective at far lower cost.

  27. “If Medicare thinks it can provide drugs to seniors for less than private insurers charge without just dictating prices”
    I’m for just dictating prices as other industrialized countries do. Better than having the drug companies dictate prices.

  28. So pass legislation to allow Medicare to offer its own prescription drug plan in competition with private insurers, but require the feds to cover the same 25% of costs from beneficiary premiums that the private insurers have to. And while we’re at it, demand that the drug companies give Medicare the same “best price” that it gives the VA for the restricted number of drugs on the VA formulary.
    Let’s see how well Medicare can do at maximizing generic utilization. Let’s see if they can do any better than the PBM’s in negotiating for drugs not on the VA formulary. If Medicare thinks it can provide drugs to seniors for less than private insurers charge without just dictating prices, by all means, let them have a go at it. If they can do it, hooray for them, and seniors will benefit. If they can’t, let’s find out definitively. Bottom line: enable Medicare to put up or shut up.

  29. We’d be better off letting the NIH and the universities do the drug research anyway – more spent on real drug needs than just lifestyle drugs and me to clones, even safer drugs – had your four hour erection yet? :>)
    We’ll see if all those bribery checks now simply get diverted to the Democrats. How come accepting bribes in corporate America is illegal, but accepting bribes in political America is just free speech? No wonder we can’t get Iraq politics in order, the example we’re showing is flawed. It’s amazing that if our court system used bribes to get favourable decisions Americans would be outraged, but it’s OK to bribe politicians – who make the laws. But hey, we can all still shop at Walmart, so there’s no crisis yet.

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