Drug prices

A big part of the 6 for ’06 agenda that Nancy Pelosi proposed as the agenda for the incoming Congress was allowing Medicare to negotiate drug prices. Forbidding that simple expedient was by far the most foolish thing (among many foolish things) in the Bush prescription drug plan. The VA negotiates drug prices as does every other prescription drug plan. But Bush had too many friends in Big Pharma, so they get to charge the taxpayer whatever they want. Huzzah!

The argument advanced against negotiating those prices is something like this (from Kevin Drum): “If the feds negotiate prices, then prices will go down. And if prices go down, pharmaceutical companies might make less money. And if pharmaceutical companies make less money, they’ll do less basic research and churn out fewer lifesaving drugs.”

Drum quotes the New Republic explaining why this won’t happen:

The most important basic medical and scientific research that leads to major medical breakthroughs usually takes place under government auspices ? typically, through grants from the National Institutes of Health. In other words, taxpayers ? not drug companies ? are the ones financing the most important drug research today.

But the answer is actually even simpler. “To promote the progress of science and useful arts,” you see, Congress has the power to “secur[e] for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Patents are government granted monopolies with limited lifetimes.

Giving them limited lifetimes promotes the progress of science because it runs out. After a drug patent runs out, anyone can make the same drug, and sell it for cheaper.

That leaves drug companies in a simple situation. They must invest in R&D because only by inventing and patenting new drugs can they continue to have anything of any value. Pharmaceutical companies don’t get ginormous market capitalization because of the cost of the factories, they get those market caps from the value of their R&D. If you doubt that, look at what happens to a stock price when a drug fails to get FDA approval, or when a company loses a patent fight.

Before the big drugmakers would cut R&D, they’d sell off factories and boil their marketing teams into soap. Without the revenue from their patented drugs, they would be nothing.

And government has used that knowledge to promote very good ends. Orphan drugs are those for which the market is very small (less than 200,000 patients in the US). Normally, the absence of a market would be a disincentive to invest massive amounts of time and effort in bringing drugs into that market, but patents have been used as a tool to change that.

Drugs that are classified as orphan drugs get longer patents (strictly longer exclusive marketing rights, but it’s the same concept), as well as tax breaks and other special deals. Since creating this system, the number of drugs falling into this category increased more than ten-fold. The range of patent and related rights that the government grants to new drugs is essential to the survival of the industry.

Thus, even if industry were the only ones funding drug research, and even if negotiating drug prices forced drug companies to cut spending, they would not choose to cut R&D, doing so would be suicide. They would surrender the only leverage that they have in negotiating drug prices.


  1. #1 UndergradChemist
    November 29, 2006

    The point made in the New Republic quote you stated seems to be disingenuous, and indicative of an ignorance as to how pharmaceuticals actually get made. Just because a lot of basic science and medical research gets financed by government grants doesn’t mean that price-limits on drugs won’t hurt innovation. The amount of money spent on each drug to develop it, test it, and take it to market is enormous, and mostly it fails.

    As for your latter point, I think, ignores the fact that, in general, fluctuations in the amount of R&D spending in an industry can come also from entry and exit from a market. Sure, existing companies might spend more, but they’ll move funds to more profitable drugs (like, say, “lifestyle” drugs). Biotech makes a huge proportion of the pharmaceuticals and drug industry, and by having governments dictate down prices, you’re essentially removing incentives for new innovators to enter the market.

    The whole point of patents — the incentive — is that by having a monopoly, the company can dictate monopoly prices. Limiting that ability naturally limits the incentive of patents. Thus, even with patents, price fixing will still reduce entry into drug discovery.

    Of course, you might have an argument that such a cost is worth the benefits of price fixing for the consumer, but I don’t think most people realize the long-term costs of the short-term gain. Most drug research is done in the US precisely because of the free market system, as opposed to Europe and especially places like Asia or Africa, where governments are even likely to seize company research and nationalize it.

  2. #2 Daniel Haszard
    November 30, 2006

    Investors watch Eli Lilly shares drop $2.80 post election.

    My issue is Zyprexa which is only FDA approved for schizophrenia (.5-1% of pop) and some bipolar (2% pop) and then an even smaller percentage of theses two groups.

    So how does Zyprexa get to be the 7th largest drug sale in the world?

    Eli Lilly is in deep trouble for using their drug reps to ‘encourage’ doctors to write zyprexa for non-FDA approved ‘off label’ uses.

    The drug causes increased diabetes risk,and medicare picks up all the expensive fallout.There are now 7 states (and counting) going after Lilly for fraud and restitution.-

    Daniel Haszard

  3. #3 Gina
    May 12, 2009

    Generic medications are a great way to keep your prescription drug costs down. What really gets my goat is these new drugs where they put two generics together and then charge an arm and a leg for it! I’ve seen ads on TV for Caduet. It has two ingredients. One is Amlodipine and the other is Atorvastatin. With my RxDrugCard I can get 30 tablets of Amlodipine for $9 and 30 tablets of Simvastatin for $9. I’ll bet they are charging more than $18 for this! The unthinking public is going to pressure their doctors into giving them something just because it’s new, when something old or generic would do the job for cheaper.