Benjamin Zycher, fellow at the Manhattan Institute, questions of the wisdom of allowing Medicare to negotiate prices with drug companies.
Actually what I don't like about this debate is that is called "negotiating" drug prices. There is no negotiation that is going to take place. What will happen is that Medicare is going to tell the drug companies how much they are willing to pay, their opinions be damned.
Anyway, he compares the formulary in the Medicare system with the formulary in the VA system (the VA system is allowed to negotiate prices). He finds that the VA system has significantly less choices. Further, by preventing the bottom-line of drug companies, he argues that it will substantially impede drug development -- which has additional and sometimes hidden costs. Money quote:
To understand why this is true, it is instructive to review the actual experience of the drug purchasing program administered by the Department of Veterans Affairs, cited by many as a "negotiating" model for Medicare Part D. In order to reduce budget costs, the VA excludes newer and more expensive medicines. The VA "formulary", a list of covered medicines, includes about 1400 drugs; virtually all of the existing Part D formularies, currently negotiated by private purchasers, have about 4300 drugs.
What is more striking is that drugs covered by the VA formulary are significantly older than those covered by Medicare Part D or by private health insurance plans. The VA formulary includes only 38 percent of the drugs approved by the FDA during the 1990s, only 19 percent of the drugs approved since 2000, and only 22 percent of the drugs given priority review approval since 1997. VA prescriptions systematically are for drugs older than those specified in non-VA prescriptions, and new drugs as a matter of VA policy are not considered for the VA formulary for three years, regardless of improved effectiveness or reduced side effects. A third of VA seniors prefers to switch to Part D, but cannot because they would lose other VA benefits....
Accordingly the most likely outcome we can expect from adopting the VA model for Medicare would be the following: substantially lower prices, smaller formularies, and reduced revenues from pharmaceutical sales. The capital market would view investment in pharmaceutical research and development less favorably, and fewer new medicines would be developed.
Based on a review of existing government purchasing programs, new research from the Manhattan Institute provides specific estimates of these effects: Prices would be driven down by over 35 percent by 2025. The cumulative decline in drug R&D for 2007-2025 would be about $196 billion in year 2005 dollars, or $10.3 billion per year. Because R&D costs for new medicines are about $1 billion, the loss would be about 196 new drugs. Other published research reports findings that each pharmaceutical R&D investment of roughly $2000 yields an expected gain of one life-year. Accordingly, an annual R&D decline of $10 billion would result in an expected loss of 5 million life-years each year. If we assume, again conservatively, the value of a life-year at $100,000, the economic cost of this effect would be about $500 billion per year, far in excess of total U.S. spending on pharmaceuticals.
Read the whole thing.
I sort of doubt that 100% of the profits going to drug companies will go to R&D. A lot of it will go to advertising and their bottom-line. However, I do agree with the argument that if you prevent drug companies from recouping on what are fundamentally very risky investments, they are going to be less likely to take such risks in the future.
Making drugs cheaper is a tough issue, and the government just saying what things should cost is a convenient but not particularly effective solution.
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I sort of doubt that 100% of the profits going to drug companies will go to R&D. A lot of it will go to advertising and their bottom-line. However, I do agree with the argument that if you prevent drug companies from recouping on what are fundamentally very risky investments, they are going to be less likely to take such risks in the future.
You know that the profits aren't all going there.
My opinion is that our very model for funding drug research is fundamentally flawed. The incentives it creates aren't the ones that we as a society really want. Profitable drugs are the most important. That means that if you can get a very-slightly-improved allergy drug patented, you win -- because you have such a large market. It means that the incentive is more for maintenance drugs than for cures. It means that research on erectile dysfunction is potentially more profitable than research on Alzheimers. And so forth.
There is incentive for drug companies to produce large numbers of "studies" that say what they want to say, in hopes that in the wash of stuides, doctors will see mostly the ones drug companies want them to see. Some of the studies are funded by those with a strong incentive to have the studies produce certain results; that can't be good, even if the scientists doing the studies behave in a purely ethical manner.
What's more, the fact that the funding of drug resaerch leaves us with drugs that are under a monpoly for 17 years allows drug companies to price-gouge (and that happens, as often as they talk about "needing to fund R&D"). We talk about the free market and so forth, but it doesn't really exist in this case. What we have is something more like (depending on which one you will view as a more negative term) contract socialism or contract fascism. The government contracts out the monopoly to private companies.
Drug research should be funded as scientific research, and there should be no pharmaceutical patents. Yes, that means a (potentially huge) increase in the amount of government funding that goes directly to drug research, but it's not obvious to me that it would be much of a cost increase overall. It would mean lots of mutual funds crashing, however, since the government-granted monopolies to the pharmaceutical companies have made them some of the most reliable stocks in recent decades.
-Rob
Read Marcia Angell's work on this.
Drug companies spend far more on marketing than R&D.
Drug companies are not responsible for research that leads to groundbreaking drugs, instead their research focuses on sibling or me-too drugs.
The majority of breakthrough drugs come from academia and small start-ups, not pharmaceutical companies. Yes, they will ultimately drop the dough to buy up one of these companies, but to say their basic research is a significant source of new drug discovery? No way.
Finally, I would disagree with this idea that less choice is necessarily a bad thing. There is this funny idea that choice is a universal good, when the actual research on consumer choice shows that when more options are offered, people often either refuse to make a choice or make even more irrational decisions. Further, if the choice is between an inexpensive drug that's been on the market for decades, and a fancy new drug that's unproven or of questionable efficacy, I'm all for saying to docs that they have to stop prescribing the new drugs just because they're new.
This reminds me of the whole problem with Cox-2 inhibitors, it was all exciting to have these new drugs on the market and doctors irrationally thought they'd be a revolutionary improvement over the standby NSAIDS. Well, 10 years later, aspirin is still the most effective Cox inhibitor, Cox-2 specific inhibitors have been shown to have all sorts of nasty side-effects, they were never proven to be more efficacious in treating pain, and ultimately they only provided a very modest decrease in the rate of ulcers, which was already an infrequent complication of NSAID therapy.
If the reduction of choice means medicare won't fund every new drug fad to hit the market, I may say that's a good thing. Oh, and case in point, any doctor that prescribes Nexium is an idiot. There's a choice that deserves to be forbidden by some evil paternalistic oversight board.
Eli Lilly zyprexa cost me $250.00 a month supply and has up to ten times the risk of causing diabetes and severe weight gain.
Nervous 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.
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Daniel Haszard
According to a recent report by the U.S. Government Accountability Office, the fastest growing part of our rising health care costs is prescription drugs. AARP has watched this trend and reported that the rising cost of prescription drugs is far outpacing the rate of inflation. These rising costs have resulted in huge profits for the drug companies. Fortune magazine has reported that for eight straight years (1995 to 2002), drug companies were the most profitable industry in the United States. Where do these profits come from? Right out of the pockets of consumers who pay overly high prices for their prescriptions, insurance premiums, and co-pays. Things have gotten so out of hand that in 2003 a national study showed that nearly one out of four Americans with a chronic medical condition did not fill all of their prescriptions because they could not afford to.
Drug companies claim they charge such high prices to fund research and development, but the companies' own financial reports tell a different story. For example, the drug company Pfizer had 2004 net income (profit) of $11.4 billion, even after paying research and development expenses. Anyone who watches the evening news knows where the drug companies really spend their money. Just count the number of drug commercials you see in half an hour. Families USA published a report showing that the major drug companies spend far more on marketing, advertising, and administration than on research and development.
Why the emphasis on advertising to consumers and marketing to doctors? Because the most expensive medications must be prescribed and purchased in order for the drug companies to reap their enormous profits. High prices can be charged for newer medications, because drug companies have patents on these drugs, eliminating competition from generic drug manufacturers. What the drug companies don?t want you to know is that there are almost always effective, less expensive, medication alternatives. Consumers and health professionals have had limited access to information comparing the effectiveness of various drugs used to treat the same condition. With the growing number of new drugs, it is difficult for consumers, and even for health professionals, to decide which medication best fits a particular need. This plays into the hands of the drug companies who are able to effectively promote the expensive medications. Meanwhile, no one is promoting the less expensive alternatives, which are easily forgotten.
To empower people with information about alternatives to specific medications, I have teamed up with another pharmacist and a physician to create lowermydrugbill.com - this site will begin offering completely FREE reports detailing specific cost saving prescription drug alternatives for specific drugs. These reports include the savings options for specific doses and include dose conversions. The reports will be FREE beginning Wednesday 1/31/07.