Sunday, August 23, 2009

Prescription Drugs


As a follow on to my previous post, where I stipulated that a restructuring of government health care spending must be accompanied by health care reform which results in substantial savings, in this post I'm going to take up prescription drugs.

Here are the relevant goals we are starting with, and your comments:

9. Provide universal access to low cost, generic medicines.
"- Sound bite. You cannot FORCE a business to supply any product to government at a lower cost than is available to private (FAIRNESS). Also - Cannot mandate/ dictate price (value) of a product, especially when FDA makes it so hard to approve a new drug. see #10."

10. Allow the federal government to shop - and bargain for - the lowest cost prescription treatments.
"- same as #9, They already can, and do. But price controls DO NOT WORK. Remember how market forces operate in the Real World (e.g., Adam Smith)."

Begging your pardon but these are not sound bites.

Most people don't understand the hows and whys of price differences between proprietary and generic drugs. Here's a short primer:

When a pharmaceutical company develops a new drug they obtain a patent which allows them to market the drug exclusively for 20 years, basically at whatever price they want. Following the issuance of a patent, clinical trials are conducted according to a fairly rigorous set of guidelines designed to insure safety and effectiveness. At the close of the clinical trials and assuming they are positive, the FDA then approves the drug for sale.

Because the trials can take a rather long time, this limits the time drug companies have to recover expenses and earn profits before the patent expires. Some estimates put the average interval at around 7 years (later on in this post however I'm going to talk about "Singulair", approved by the FDA in 2000 and the patent for which does not expire until 2012). After the expiration of the patent, other companies can market generic equivalents at greatly reduced prices. Drug companies have long argued that because the clinical trials absorb so much of the 20 year patent there remains insufficient time to recover costs. Frankly, this is baloney. U.S. Drug companies have always been among the most reliably profitable companies in the world and have remained so even during this recession.

Let's look at the impact this process has in the real world.

The World Health Organization rates the comparative effectiveness of health care in different countries. Some critics of the WHO rating system claim that the U.S. is the unquestioned leader in the development of new medicines, precisely because pharmaceutical companies in this country have greater incentives to invest in R&D than they do elsewhere. Other countries which do not have the pharmaceutical establishments we have here "piggyback" on the costly initiatives of U.S. companies and only pay for generic equivalents when they come available. For example, critics point to England's National Institute for Health and Clinical Excellence (NICE), which limits British NHS (health care) spending on certain drugs deemed to be less cost effective, i.e.: drugs which may be effective, but are still in the patent "window" and therefore available only at extremely high prices. Is this criticism accurate?

No, no it isn't. And demonstrably so by measure of pure common sense. Sometimes I wish all the horror stories about rationing of health care in other countries were subjected to simple, easily accessible, God given common sense. In a recent, and rather stupid Wall Street Journal opinion piece, NICE was savaged for refusing to pay for, among other things, the drug "Sutent", which does not cure cancer but may prolong the life of some cancer sufferers. "Sutent" is one of the world's most costly drugs, and chastising NICE for not paying for it is not only disingenuous, but against common sense. Stay with me here. Any system which proposes to provide health care for all citizens is going to have to make difficult choices on how health care resources are allocated. But here's the kicker: in the U.S., private insurance providers commonly refuse to pay for Sutent also. Furthermore, there is no law in England, or anywhere else for that matter, which prevents those in need of Sudent from buying it with their own money, just as they can and perhaps sometimes do here in the U.S. So all this bulls**t about rationing usually breaks down when you ask the mere question: "Compared to what?" Moving on...

In 2003, a Republican dominated congress passed along party lines one of the most fiscally irresponsible pieces of legislation ever. It was a bill which, by fiat, unnecessarily transferred billions of our tax dollars to private companies. How exactly does that square with your elementary tenet that citizens of this country are tyrannized when they are forced, by law, to pay for benefits which they themselves are not allowed to chose? Let me say this again: Republicans voted for the bill, Democrats voted against it.

The bill was The Medicare Prescription Drug, Improvement and Modernization Act (MMA), passed and signed into law by George Bush on December 8th, 2003. If you ever wanted a story about how not to pursue health care reform, just take a moment to read about this act. And, if only because the passage of this act was such a monumental tribute to government waste, I can't resist adding that if Republicans today are going to posture their opposition to health care reform as fiscally responsible, how are they to explain their own party's disastrous record? A brief summary:

As you probably know by now, the MMA added a generous new prescription drug entitlement (don't you hate that word?) for recipients of Medicare. The original ten year cost estimate submitted by the White House was around 400 billion dollars. Immediately after passage, the estimate was raised to 532 billion. By 2005, the figure had climbed to a whopping 1.2 trillion dollars. Steve, that's 120 billion dollar a year, which comes to about 20 billion more than the entire annual budget for the U.S. Department of Education. And remember, it was a benefit manufactured out of whole cloth as a brand new entitlement. How could the original estimates have been so far off base? Well, we are learning today that the estimate of 400 billion was known by the White House to be far short of the actual cost, and was deliberately shaved to insure the support of conservative voters in Congress.

Now back to points 9 and 10, and your comments:

"They already can, and do (negotiate prescription drug prices)". No they don't. The MMA specifically prohibits Medicare from negotiating for discounts on prescription drugs.

"But price controls DO NOT WORK. Remember how market forces operate in the Real World (e.g., Adam Smith)". Possibly. But we're not talking about price controls here. In the real world you are referring to, consumer choice and competition drive prices down. Fair enough. But in this case, the MMA specifically bars government from making the same kind of choices on prescription drugs which you yourself advocate are crucial to the proper functioning of a free market.

So, according to points 9 and 10, how much money can government actually save by amending the MMA to allow for (fair) price negotiation? Well, other federal agencies, like the VA, the Department of Defense and the Bureau of Prisons to name a few, are allowed to negotiate discounts. Accordingly it has been estimated that these agencies buy prescription drugs at an average of 48% less than Medicare does.

Now for some simple math. If we keep Medicare's prescription drug benefit, but allow for price negotiation at a savings of 48%, this would result in reducing the 10 year estimated cost of the program from 1.2 trillion to 624 billion, or a savings of around 57 billion one-spots a year. Hardly peanuts...

Now let's tie some of this together.

Two of the most common talking points we are hearing today, starting with Republicans in Congress and proceeding to the so called "Tea Baggers", is that the public option is too expensive and government is particularly unfit to run it. Let's bask for a moment in the amazing irony of this. In 2003, Republicans thought so little of government's ability to run a health care program that they gave 1.2 trillion dollars to Medicare: a government run health care program! Steve, these are the same clowns who today are complaining that government (their's) ought not to be entrusted with so much as a bottle of Advil. And: too expensive? Lord preserve us from these idiots. They are the very same ones who help make it too expensive! Heck, with my dinky little computer and a smidge of common sense, I just managed to save government 57 billion dollars a year. Suddenly it occurs to me why these nut jobs are so scared of death panels, since by any reasonable measure such a panel would have no choice but to declare them officially brain dead. By the way that popping sound in the background is my chutzpah detector blowing a fuse. Here's a personal anecdote:

Recently while Jane was between teaching jobs, she found herself out of "Singulair" and not covered by either her previous or future employer's health insurance. But when she tried to buy it on her own at the pharmacy, she found a month's supply would cost $400.00. Bear in mind, this was the same drug she had been accustomed to paying for with only $50.00 out of pocket to cover the co-pay. So I got on line, did a little snooping and found a drug company - in Canada of all places - which would ship us a month's supply of Montelukast, a generic version of Singulair, for about $75.00. I asked myself, is Montelukast really the same thing as Singulair? You bet it is. As a matter of fact, another way of looking at it is that Singulair is actually the generic version of Montelukast.

Now Singulair is a pretty big deal for Merck, it's patent holder, since it accounts for one sixth of Merck's annual revenue. But why is it so much cheaper to buy in Canada? Well maybe part of the answer lies in the fact that the "Mont" in Montelukast stands for "Montreal" - where this highly popular drug was originally developed. Now unless they have moved it recently, Montreal is in Canada - that is, the very same country which people are supposed to be streaming out of (as the critics tell us) and into this one, presumably so they can pay $400.00 here for the same drug they can buy back home for $75.00.

If you have time, go here for an interactive list of the world's 20 largest pharmaceutical companies. Among other factors, you can prioritize the list by revenue, R&D expenses and net income. Try as you might, you aren't going to find any consistant correlation between these numbers. Do American based pharmaceutical companies generally invest more in R&D than the international average? Nope.

In due course we will return to Big PhRMA to see if we can squeeze out a little more savings than the paltry 57 bil we bagged on this first turkey shoot. In the process we will probably find as many liberal political hands in the cookie jar as we do conservatives. You can mince up the Libs while I bang away at the Baggers... Deal?



  1. "Suddenly it occurs to me why these nut jobs are so scared of death panels, since by any reasonable measure such a panel would have no choice but to declare them officially brain dead."

    Sir, you have won the Internets this week. Though I am tempted to ask what common sense has to do with hands in the cookie jar. The very essence of cookie-jar raiding is a denial of cookie justice.

  2. I would encourage you to look at a new site called RX Mole. The web address is It is a site that confidentially networks people together looking for competitive prices on local prescription drugs. It is in beta, but growing like wildfire with all the recent discussion on healthcare and people realizing how different prices can be a local pharmacies.