The health of a nation

Just got off the McCain campaign's conference call on its health care agenda. No earth shaking news, but it was interesting listening to the campaign defending its choices.

The plan's heart is mostly in the right place: break the link between employment and health care, make the plan revenue neutral (ish), change Medicare reimbursement so that we pay for results rather than procedures.

The problem is, it's heavier on theory than practice. Every health care economist in the country wants to pay for health rather than treatments. The problem is, health is very hard to measure--as David Cutler told me, "Health care and education are the two fields where output is hardest to measure. It's not surprising that costs in those areas are increasing much faster than inflation." When output can't be measured, input will be.

Medical care, like education, is also dependent on inputs from the clients. You will have a frantic political battle from doctors against any proposal that makes their income dependent on how many of their diabetics really give up the corn chips.

Likewise, the campaign didn't really have a good answer to the pooling problem: what happens to people with expensive pre-existing conditions when they have to buy insurance on their own? That's one of your primary lobbies for universal health care; I doubt the McCain plan will satisfy them.

The senator is proposing one thing that I think is a terrible idea, pharmaceutical reimportation. Naturally, this is the part of his health care plan with the highest probability of passage.

Comments

Wouldn't it be nice just to have real discussion on the value of patents in regards to pharmaceuticals, instead of all the yammering about government "negotiating" prices or reimportation?

Posted by Will Allen | April 29, 2008 1:14 PM

He's had months to think about the pooling/pre-existing condition issue (it was coming up in New Hampshire last Fall). Kinda pathetic that they still don't have an answer.

Posted by P O'Neill | April 29, 2008 1:16 PM

Barak Obama supports drug remiportation as well, along with price controls:

Pharmaceutical companies are selling the exact same drugs in Europe and Canada but charging Americans more than double the price. Obama will allow Americans to buy their medicines from other developed countries if the drugs are safe and prices are lower outside the U.S. Obama will also repeal the ban that prevents the government from negotiating with drug companies, which could result in savings as high as $30 billion. Finally, Obama will work to increase the use of generic drugs in Medicare, Medicaid, and FEHBP and prohibit big name drug companies from keeping generics out of markets.-Obama's Health Care Plan

So what Megan seems unaware of, or is unwilling to tell her readers, is that Obama supports the same dubious policies as McCain, and adds a few more of his own. Of the two candidates, Obama would do more to stifle innovation. That much is clear.

Posted by rwe | April 29, 2008 1:20 PM

Diabetics will give up their corn chips only if influential bloggers band together and set a good example.

We concerned citizens call on you, Ms. McArdle, to ditch the Fritos. You're hurting America.

Posted by Colin Fraizer | April 29, 2008 1:29 PM

RWE, I have blogged before about not liking Obama's healthcare plan, and I will again. McCain had a conference call today, that's all.

Posted by Megan McArdle | April 29, 2008 1:30 PM

rwe:
How would Obama's plan stifle innovation? I have yet to hear from someone other than the drug lobby tell me. Is it because they'd make 4 billion instead of 5?

Posted by Joe Klein's conscience | April 29, 2008 1:35 PM

Canadians and Europeans are free riders. Drug re-importation is merely a means of countering that.

Posted by Nelson | April 29, 2008 1:42 PM

Is it because they'd make 4 billion instead of 5?

Are you really that stupid?

A 20% reduction in potential returns will cause people to redirect resorces to projects with a higher ROI.

If a VC has the choice between funding a new social networking site or a new drug - if profits are limited on drugs, he's much more likely to fund the new Facebook.

How hard is that to understand?

Posted by jmo | April 29, 2008 1:45 PM

"How would Obama's plan stifle innovation? I have yet to hear from someone other than the drug lobby tell me. Is it because they'd make 4 billion instead of 5?"

Exactly. Lesser incentive to produce new drugs means the drug companies will go leaner on the R&D(Hence, less innovation). Although the incentive for anyone working in a medical related field should be the fact that they are helping people, many could care less and just want a bigger paycheck.

Posted by Steve | April 29, 2008 1:49 PM

Nothing in the pharmaceutical field is as important as eliminating the Canadian/Euro free rider problem. Drug reimportation is a weak first step. What we ought to be doing is prohibiting the pharma companies from selling drugs in the US at higher prices than they charge Canadians and the European Union. That's not price control by the US federal government - the companies can sell at whatever prices they can negotiate with the Canadians and the Europeans. And there's no reason to think that it would lead to lower overall levels of investment in new drugs - prices in the US would be lower but prices in Canada and the EU would be higher, leaving us in total with an equilibrium that should be just where it is today.

Posted by Al | April 29, 2008 1:50 PM

JKC, there are always trade-offs in economics. Price controls on drugs would reduce the return on investment in R&D for drug companies. So the drug companies would reduce their investment in R&D.

dI(r)/dr > 0

That is, investment is always a positive function or the expected return on investment. That's something all economists agree on, from Paul Krugman to Gary Becker. And that's why Megan was criticizing McCain for proposing reimportation of drugs.

But in itself that doesn't mean price controls or drug reimportation are a bad idea. One has to weigh the costs of reduced innovation and fewer drugs in the future against the benefits of more affordable drugs in the present.

Posted by rwe | April 29, 2008 1:58 PM

Prescription drug reimportation is not a terrible idea and has little chance of passing. Likewise, there is little chance Congress will allow the government to negotiate prescription drug prices. Big pharma ia powerful force on the Hill, with allies on both sides of the aisle.

The idea that pharmaceutical makers will do less R&D if margins decrease (which they won't, necessarily) is ludicrous. Regardless of margins, pharmaceutical makers must continue to do R&D to build revenue. No R&D, no revenue. In the face of declining margins, it is more likely that pharmaceutical companies would reorder R&D priorities rather than ceasing innovation.

Posted by wjc | April 29, 2008 2:00 PM

As always it depends on what the original amount is. What's the 20% a reduction from? Until you know those figures, you can't say, can you?

Posted by Joe Klein's conscience | April 29, 2008 2:01 PM

RWE – McCain unfortunately also supports allowing the government to “negotiate” with pharmaceutical companies and IIRC while he voted against Medicare Part D, he voted for an amendment (that thankfully failed) which would have allowed it. So at best it’s a wash between the three candidates.

The part of McCain’s plan that I like the most is allowing individuals to purchase health insurance across State lines similar to the proposal by Congressman John Shadegg. Right now mandated benefits make up between 10 and 20 percent of the cost of an insurance premium depending on the State you live in. Consumers should be able to purchase a health insurance plan that covers the benefits that they want (actually health insurance ideally would just be for major medical expenses rather than act as prepaid health care) rather that what provider lobbyists have convinced the State legislatures that insurance should cover. You can either have insurance that is affordable and protects people when they have an emergency but makes them responsible for their regular expenses or you have a gold-plated policy that covers anything and everything but is increasingly unaffordable and leaves people without protection in the case of an emergency. We’ve been moving increasingly in the latter direction and I’m glad to see McCain starting to make the case (albeit in a more roundabout way) for returning health insurance to actually acting as insurance.

Posted by Thorley Winston | April 29, 2008 2:02 PM

In the face of declining margins, it is more likely that pharmaceutical companies would reorder R&D priorities rather than ceasing innovation.

Or perhaps capital will leave the drug business altogether. It's true that a drug company must innovate or die, but there's no hard rule against dying, and nothing you can do to force investors to prop up a business with inadequate margins.

Posted by Rob Lyman | April 29, 2008 2:06 PM

I never hear the drug issue tied to trade: why aren't we demanding that rich countries stop free-riding on American drug consumers? How is it fair for Canada to pay cost + 10% or whatever for generic copies of drugs developed here while they sell us their oil for the full market price? If we can pay full price for their oil, they can pay full price for our drugs.

Posted by Fred | April 29, 2008 2:08 PM

But in itself that doesn't mean price controls or drug reimportation are a bad idea. One has to weigh the costs of reduced innovation and fewer drugs in the future against the benefits of more affordable drugs in the present.

Exactly and I would just point out something that gets ignored during the debate and that is that countries which have tied price controls to patent approval like Canada pay another price when it comes to the generic markets. By not allowing companies to fully recoup their fixed costs by imposing price controls on name-brand drugs, they have fewer companies – and hence less competition – when those same drugs become available in generic form (and since there is no patent protection involved, there’s no price controls). So they may be paying less in the short run with name-brand drugs but they end up paying more for generics in the long run.

Posted by Thorley Winston | April 29, 2008 2:19 PM

Likewise, the campaign didn't really have a good answer to the pooling problem: what happens to people with expensive pre-existing conditions when they have to buy insurance on their own? That's one of your primary lobbies for universal health care; I doubt the McCain plan will satisfy them.

From what I’ve read (and I’m waiting for the more detailed version to sink my teeth into), McCain is proposing something similar to the Medicaid program by granting a waiver for States to create their own risk pools to bring in more of the uninsured. How the pools would be set up and what criteria would be used to determine eligibility would be decided by working with the States. It looks like he’s planning to either enroll them in existing State plans or (similar to the Massachusetts plan without the mandate) subsidize their purchase of private insurance based on their income levels. I’m not surprised he doesn’t have many specific details forthcoming because one of the features (Obama and Clinton supporters might call it a “bug”) of taking a federalist approach is that you work with the States to come up with a solution rather than trying to impose a one-size fits all from Washington.

The other thing I’ve noticed about McCain’s approach to this issue is he’s looking at using existing State programs rather than creating a new one or (just as bad if not worse IMO) trying to monkey around with the coverage of people who already have health insurance. For some reason Obama and Clinton can’t leave well enough alone (or at least give people more options like McCain has proposed by allowing people to shop across State lines and form association health plans) and insist on creating a new federal bureaucracy in the form of their “exchange” to remake our individual health plans into what and who Clinton and Obama think should be covered.

McCain’s approach of letting people keep what they have or giving them the freedom to shop for something better while working with the States to figure out a way to figure out a way to enroll more of the uninsured into their already existing plans (or subsidize their purchase of private insurance) seems a more sensible approach.

Posted by Thorley Winston | April 29, 2008 2:30 PM

1) "RWE – McCain unfortunately also supports allowing the government to “negotiate” with pharmaceutical companies..."-Thorley Winston

Thorley, I hadn't heard McCain proposing price controls on drugs. Do you have a link? I'll be very disappointed in him if you are correct. I looked at his campign website and found that he supports reimportation and generics, but it said nothing about the government "negotiating" with (ie using its monopsony to beat up on) drug companies.

2)"The idea that pharmaceutical makers will do less R&D if margins decrease (which they won't, necessarily) is ludicrous."-wjc

WJC, your contenton is preposterous. Every economics textbook points out that investment is a positive function of the expected rate of return on investment. All the evidence (as well as simple common sense) shows that to be true.

If drug companies see fewer profitable uses for their funds, they will increase their dividends and reduce their R&D investment. They will also find it more difficult to raise funds from investors as their profitability declines.

You might well still support price controls or (preferably) subsidies, but you ought not to be under the delusion that you can cut into drug companies' profits without diminshing their incentives to produce new drugs.

Posted by rwe | April 29, 2008 2:39 PM

I have to agree with the people who have advocated allowing drug reimportation.

The pharmaceutical companies have allowed themselves to be pushed around by Canadian and European governments because they count on making up their marginal losses from price controls in those areas by charging US customers more. I really fail to see why our government should be enabling that sort of behavior. Wherever a grey market exists, it exists because one set of customers is being treated as chumps and milch cows.

If we stopped trying to compensate pharmaceutical companies for their cowardice overseas with a protected market here at home, maybe one or more of the companies would grow some stones and refuse to play ball and be intimidated by the Canadian government.

If the Canadian government starts stripping US companies of patents because those companies refuse to be extorted, we should defend those companies vigorously using trade policy. Retaliate against Canadian companies and products. Treat them we treat Chinese pirates of US IP. Hell, treat the executives of Canadian companies that profiteer off of stripped US patents the way we treat executives of overseas gambling websites. That would be outrageous and unfair, but it seems like outrageous unfairness is going to be the order of the day in this dispute, so let's get to it.

Posted by Brian | April 29, 2008 2:53 PM

Regardless of margins, pharmaceutical makers must continue to do R&D to build revenue. No R&D, no revenue.

Ever hear of generic pharmaceutical manufacturers? They generate revenue without doing any R&D to speak of.

Destroy the incentive to innovate (and the risks entailed in attempting to innovate), and all pharma companies will just manufacture generics. The result: cheap drugs, but no innovation.

Common sense, really.

Posted by Occam's Beard | April 29, 2008 2:54 PM

Put it in financial terms: would you invest in finding and drilling new oil fields if your return on investment were limited to that of a T-bill?

Of course not. You'd be crazy to do that.

Posted by Occam's Beard | April 29, 2008 2:56 PM

By the way, just to avoid confusion, when I wrote:

dI(r)/dr > 0

I was using r to represent the expected rate of return on investment for a particular firm. I really should have used a different letter, since r usually denotes the real interest rate, in which case:

dI(r)/dr

My apologies for the poor nomenclature, but the central point stands that the higher the expected return is, the greater investment will be. Using (ER) for expected return

dI(ER)/d(ER) > 0

Posted by rwe | April 29, 2008 3:10 PM

The pharmaceutical companies have allowed themselves to be pushed around by Canadian and European governments because they have no leverage: if they don't agree to the foreign governments' price controls, those governments will violate their patents and hire local generic manufacturers to make the drugs.

There, fixed that for you.

Posted by Fred | April 29, 2008 3:51 PM

Any health care reform proposal that doesn't include some sort of outcome-based rationing is just rearranging the deck chairs on the Titanic. Spending gargantuan amounts prolonging the lives of the dying for a few weeks or even days, when the chances of long-term survival and quality of life are both zero, is not just financially ruinous but barbaric. Other developed countries manage to take a more reasoned approach to this issue, and they haven't turned into heartless savages.

Oh, and whatever happened to the quaint concepts of "preventative medicine" and "medical research?"

Posted by Peter | April 29, 2008 4:17 PM

Steve - Although the incentive for anyone working in a medical related field should be the fact that they are helping people, many could care less and just want a bigger paycheck.

A friend of mine graduated with a medical degree when he was around 25 or so. He had over $150,000 in debt and was earning less than $50,000 a year starting off.

There's a good reason for the doctor shortage. Insurance can squeeze existing doctors, but those who would be doctors can see what's going on and move towards fields that compensate them more fairly.

Posted by Ryan W. | April 29, 2008 4:26 PM

Joe Klien's conscience - As always it depends on what the original amount is. What's the 20% a reduction from? Until you know those figures, you can't say, can you?

Try investing in a biotech startup sometime if you think it's the easy road to wealth. The failure rate is phenomenal. ROI requires a delay of nearly a decade.

Posted by Ryan W. | April 29, 2008 4:40 PM

Although the incentive for anyone working in a medical related field should be the fact that they are helping people, many could care less and just want a bigger paycheck.

Just like the incentive for janitors, car-wash workers, and garbage collectors should be the fact that they are making a cleaner world. It REALLY frosts me when those jerks actually want to be paid with money.

Posted by Jens Fiederer | April 29, 2008 4:40 PM

they have no leverage: if they don't agree to the foreign governments' price controls, those governments will violate their patents and hire local generic manufacturers to make the drugs.

They violate Merks patents then we revoke RIM's blackberry patents. Germany screws with Genyzme we revoke SAP's patents and copyrights. The UK f**ks with Pfizer we confiscate BP's texas city refinery and their off shore oil platforms.

I want Joan Crawford as chief trade negotiator: "Don't f**k with me boys!"

(note: this could also cause a massive trade war bringing on a monumental economic collapse - pesky details....)

Posted by jmo | April 29, 2008 4:44 PM

Problem with international patent breaking is that it is much easier to get away with it on pharmaceuticals because the innovators in the field are a ready made scapegoat for the demagogues, and the product in question does not have an obviously large material value. It has a nice Robin Hood air about it, even though the practical effect is to rob everyone blind in the long run.

So while Canada could easily break a Pfizer patent in order to manufacture a drug whose tangible mass-production cost is less than $0.10/pill in order to convince a 30 million person market that free health care is the bees' knees, the US could not so easily break a patent on Blackberry devices that cost $100+/unit in mass production in order to better serve the telecom needs of a 300 million person market. The former produces a flippant "Sucks for you" reaction, the latter generates "How dare you..."

Posted by aMouseforallSeasons | April 29, 2008 5:03 PM

I understand the urge, jmo, but doubt that that is the way to go. First, it's a slippery slope that could easily - perhaps inevitably - lead to trade wars and protectionism. Second, it punishes people who have nothing to do with the issue at hand. Third, it would clobber innovation-driven industries for a generation. (Who would risk the investment to innovate when a successful product might get caught up in a trade war years hence?) Fourth, many of the companies involved are multinationals, which blurs the situation considerably.

That having been said, the free-riding by the Europeans and others does irritate me. We're not talking about destitute Africans here. We're talking about wealthy Europeans cynically taking advantage of sick Americans, and that's just wrong. We are, in essence, picking up the tab for their six week vacations.

Posted by Occam's Beard | April 29, 2008 5:13 PM

RE: jmo @ 1:45 -- Sweet Jesus, I hate libertarians.

Yes, a 20% decrease in ROI will cut into R&D for Big Pharma and make them marginally less attractive to investors. However, the reduced drug prices as a result of negotiation will benefit a large number of people. There are trade-offs to consider. No one is "stupid" for suggesting that one of our most profitable industries can continue to survive and prosper without bilking US taxpayers to subsidize lower prices overseas.

I'll tell you what is stupid, though. What's stupid is your deployment of the same old boilerplate libertarian argument against every single tax, regulation, or economic policy shift: "Oh noes! We can't do that! It will reduce someone's profits somewhere! QED!"

Well, ok. That's bad. But that's only one side of the ledger. Tell us why you think it's better public policy for a pharmaceutical company to make $5 billion instead of $4 billion, than for the federal government and consumers to save a billion dollars. Bonus points if you give an answer that does not rely upon elves, leprechauns, a completely unregulated health care market with no entitlement programs, or other fantasy creatures.

Posted by LaFollette Progressive | April 29, 2008 5:39 PM

Couldn't the US insurers, since they represent lots of people, negotiate lower drug rates with the pharma companies? Buy in bulk, bundle, etc.

Also, what if there effectively was no pharma IP? Presumably R&D funding for drug development would be shifted to public (or perhaps charity) sponsorship to the point where manufacturing becomes profitable. Where would innovation occur instead? Medical equipment? Diagnosis? Services?

Posted by Tom | April 29, 2008 5:47 PM

I find it funny that I never hear anyone talk about two underlying facts that should keep pushing health care costs up. Americans are growing older and a large percentage if not an outright majority of Americans live unhealthy lifestyles.

Last time I checked getting older means more visits to the doctor and more meds. Nobody is going to address this.

Also, if people don't eat right and exercise should anyone listen to them complain about the cost of healthcare?

Posted by Mike G | April 29, 2008 5:48 PM

Of course reimportation goes on now. I suppose if it got bigger, the drug companies might do something like the mail order companies do now; tell the patient that they already got their Rx. Canada might be told that, according to Pfizer's calculation, 120% of the Lipitor need for their market had been shipped so, sorry; full price for the rest of the year. As far as breaking the patent, Abbott faced that with Thailand; there were various legal remedies but it being an AIDS drug involved and Thailand might be considered poor, Abbott blinked. Resistance might be fiercer to Canada or France.

Posted by Michael Brophy | April 29, 2008 6:03 PM

Also, what if there effectively was no pharma IP?

What if there were no titles on houses? What would that do to housing construction? "Build a house, you may even get to live in it, if you're the toughest guy in the area."

Presumably R&D funding for drug development would be shifted to public (or perhaps charity) sponsorship to the point where manufacturing becomes profitable.

So...pharma R&D would be kinda like Post Office and the DMV meets Jerry's Kids?

Seriously, think about the implementation. Who would decide what projects would be funded? Any opportunities for demagoguery or corruption there? Politicos would bring their experise in medicinal chemistry and molecular biology to bear on the problem and clear it up in a jiffy. Maybe Jeremiah Wright, who I understand is looking for a new gig, could head up AIDS research, since he's already expressed his views on the subject.

Where would innovation occur instead?

Why do you assume any would occur? Pharma innovation only takes place in the US, Europe, and Japan, and all are directed toward the American market. If that dried up, there would be no incentive to innovate. None.

Again, think about wildcatting. If the ROI were capped to be the same as a T bill, who would invest?

Posted by Occam's Beard | April 29, 2008 6:04 PM

I agree. We may make current drugs cheaper for everybody. Now tell me which drug that you will need twenty years from now will you give up development of? If you don't think that you will need any new drugs, what drugs would your parents or grandparents give up that weren't around 20 years ago? Would you give up the HPV vacine that will protect your little girl from cancer in thirty years? If we freeze medical innovation now, health care will get cheaper. You also won't live as long.

Posted by Johngalt47 | April 29, 2008 6:16 PM

Great Cthulthu, I hate progressives! :-D

With that out of the way... what IS "better public policy"? I think this is the cornerstone difference between the two mutually hating camps. Personally, I expect to benefit from pharma innovation more than from reduction of drug prices (a function of my age, income level, current and expected health state etc). This of course assumes small incremental changes thereof. How can you build a policy metrics to convince me otherwise? Or is [possibly] getting a marginal majority of voters on your side the only proxy you need?

For me, the primary cause of the libertarian knee-jerk reflex (yes, I admit to having, and even cultivating it) is this problem with axiomatics of public interest and public good. Kinda hard to establish, even harder to measure, when you think about it. The individual interest, on the other hand, is much more material.

Posted by ...Max... | April 29, 2008 6:24 PM

Hey, LaFollete Progessive, are you volunteering to be the guy who tells people 20 years from now, "Sorry, but you gotta croak. It just would have been too expensive to develop that new drug to cure your disease, so the better public policy was for you to die. Have a nice funeral."?

Posted by Will Allen | April 29, 2008 6:25 PM

Will: unfortunately, it is quite easy to volunteer to do something 20 years from now. Or 50 years -- especially if you don't expect to be alive at the time. In the (loosely quoted) words of Nasreddin: "Maybe I will die, maybe sultan will die, maybe the donkey will die..."

Posted by ...Max... | April 29, 2008 6:42 PM

"Spending gargantuan amounts prolonging the lives of the dying for a few weeks or even days, when the chances of long-term survival and quality of life are both zero, is not just financially ruinous but barbaric."

You may get a different perspective on this if you are unfortunate enough to get diagnosed (or have one of your parents diagnosed) with cancer. First, the chances of long-term survival for all of us are nil. Second, it's not always clear how much time a particular medical intervention will buy someone. Third, who are you to decide how much time someone's life is "worth" extending by? Fourth, quality of life is extremely relative and subjective. People often adapt to constrained circumstances and continue to find meaning and value in their lives. Fifth, sometimes treatments which may extend life are the same treatments that relieve pain.

Posted by Fred | April 29, 2008 6:53 PM

I think some liberals and some conservatives are playing the same old game they have played for years. Try to steal just enough from the other guy to get away with it, but not so much that it upsets things terribly.

There is a point at which they can maximize their theft to the greatest "good" (demagogory) while not screwing up the system entirely.

Posted by sam | April 29, 2008 6:53 PM

Tell us why you think it's better public policy for a pharmaceutical company to make $5 billion instead of $4 billion, than for the federal government and consumers to save a billion dollars.

Well, I could imagine a situation where a VC is sitting in his office and he has two business plans in front of him. Plan "A" is for what could be the next iPod. Plan "B" is for what could be a breakthrough new Alsimers therapy. Given equal chances of success and ROI you might tend to go for Plan "A" because you are confident that voters won't demand that your patents be broken to ensure the provision of cheap iPods.

In both investments you have risks - in each case a competitor could come out with a better, cheaper product. But, only Plan "B" carries that additional political risk.

So, long term investment in drug R&D will fall. The end result will be people now will be better off but people in the future will be much worse off.

Posted by jmo | April 29, 2008 7:13 PM

BTW: Kavon at the blog Race42008 has some lengthy citations from the blogger conference call:
http://race42008.com/2008/04/29/mccain-unveils-health-care-initiatives/

Posted by MarkG | April 29, 2008 7:30 PM

The usual suspects claiming that these sorts of programs will 'stifle innovation', I see. Isn't that kind of assuming the conclusion that Big Pharma is innovative?

Seems to me there's been very little innovation of late, and more money spent on protecting a franchise than on research.

Posted by ScentOfViolets | April 30, 2008 12:20 AM

This interview the WSJ published last year with Arthur D. Levinson, Ph.D. (in biochemistry), CEO of the big biopharma company Genentech is worth reading for those of you who don't understand the connection between return on investment and funding innovation. It's behind a subscription wall at the WSJ, but this blog posted it. Here is a relevant excerpt:

WSJ: How do you balance the high cost of innovation with the pressure to cut cancer-drug prices?

Dr. Levinson: Since 1976, when our company was founded, the biotech industry has lost $90 billion in aggregate. I think it's the biggest money-losing industry of all time. It is hemorrhaging. There are some exceptions: We are doing well, and Amgen is doing well. But for most of the 1,300 to 1,400 companies -- 300 or 400 of them public -- this is a money-losing enterprise.

You don't just crank these drugs out. My lab cloned a portion of the breast-cancer gene in 1982. And we started making antibodies to it in the mid-'80s. Then we got cell-culture results in the late '80s and by the early '90s we were getting animal results. And then approval was in December '98. So this goes back a long, long time. Unless these companies can get a return, we are not going to get the new medicines that are making such a difference to patients' lives right now.

There's another way to look at it -- look at how much society is investing in cancer. In the absence of better care, 42% of everybody out there is going to get cancer. And half of those 42% are going to die of cancer. It's the leading cause of death among Americans under age 85. So how much are we spending on drugs for cancer? We have a $12 trillion GDP [gross domestic product]. And we're spending $15 billion. If I do that math, 1/800th of GDP for the leading cause of death. And people say cancer drugs are bankrupting America! Give me a break.

WSJ: So what led you to cap the price of Avastin at $55,000 a year?

Dr. Levinson: That came out of a lot of feedback from payers and patients. We have patients on Avastin for a very long time. We have healthy margins on the drug. We have to have healthy margins because so few of the drugs make it....But at that point, we can afford to give the drug free. That was part of it.

Once or twice a year we will bring in payers...patients, people who are complaining strongly and understandably about the high price of drugs. We bring them in for a two-day symposium, and you can audit our books. Our margins are respectable, but not off the chart. They are not Microsoft margins; they are not Oracle's margins, even. At the end of the day, it's not that everybody applauds and says we're happy paying the price of your drug. But they understand what goes into the equation. And the vast majority of them say this was a revelation, now we understand it.

Posted by Fred | April 30, 2008 1:48 AM

Yes, a 20% decrease in ROI will cut into R&D for Big Pharma and make them marginally less attractive to investors.

"Marginally"? This is why some people, not you, are running big companies; while other people, like you and me, are griping on website blogs about the shortage of affordable flying unicorns.

As a random example, take Pfizer's 2007 10-K, which was just released at the end of February. For 2007, Pfizer reported:

- Revenues: $48,418M
- Net income: $8,144M

Try not to let the large magnitude of the numbers fool you: This means that nominally, before adjustments and other accounting wonkery, Pfizer spent $5 in order to make $6 (since someone mentioned iPods, that's about the same ratio as what Apple, Inc. reports in their quarterlies). If somebody dreamt that they could get a cheaper lunch by cutting Pfizer's money-making ability by 20%, they would actually wipe out Pfizer's entire profit. Capital, oddly enough, has a habit of fleeing markets where these things become common.

According to same statement, Pfizer's largest expenses for 2007 were:

- Cost of sales: $11,239M
- SI&A expenses: $15,626M
- R&D expenses: $8,089M

Of these, the Cost of Sales and the SI&A can only be dented so much before Pfizer effectively lose the ability to do business. No staff, no buildings, no warehouses, no manufacturing facilities, etc...no product and no ability to sell it.

Now, Pfizer does have existing product lines, so the quickest way to get closer to the profitability they had before your Mighty Morphing Profiteer Rangers showed up is to cut the R&D expenses down substantially, because for purposes of short-term gain, all of that R&D is deadweight loss. A large chunk of it will disappear into dead-end rabbit holes and another large portion of it will have a profitable run for perhaps five years at most before the patent expires.

However, the reduced drug prices as a result of negotiation will benefit a large number of people. There are trade-offs to consider. No one is "stupid" for suggesting that one of our most profitable industries can continue to survive and prosper without bilking US taxpayers to subsidize lower prices overseas.

No, rather they tend to appear stupid when they assume that you can lop profits off like cancer and end up with a healthier patient. Also, subsidies of international markets have already had some close calls in court, such as this one:

http://www.reuters.com/article/rbssHealthcareNews/idUSWEN463420080320

For perspective, again pulling from the Pfizer 10-K, Lipitor accounted for $12,700M of Pfizer revenues in 2007 (and something like 8% of that came from the Canadian market). It is already facing competition from generics in the US and will lose its Canadian patent protection in 2010, meaning that Pfizer needs new products from new R&D ventures in order to keep itslef going, and next year's big drug will have been in development for about 12 years already plus a couple more years to get through clinical and FDA approval.

Lipitor, its competitors, and more recently its generic equivalents, has been helping people with cholesterol problems. Moreover, every unique product is valuable because side effects are distributed randomly. For example, if one upsets your stomach intolerably, another drug seems to work okay (this happened to a couple of my older relatives). But the kicker is, if your profit-reduction schemes came to fruition, some or many of these drugs might have never existed at all.

Posted by aMouseforallSeasons | April 30, 2008 2:13 AM

LaFollette Progressive,

Like people noted above, reducing pharma revenue by 20% will eliminate their profits. Why would they spend money on new drugs then?

Sure, people who currently can't afford Avastin will benefit if we apply price controls. But by now you must realize that this will kill all future development. Won't more Americans be better off under a system where new drugs are expensive for 5 or 7 years and then, when generics appear, become cheap, rather than a system that lets people today have cheap medicine, but denies everyone in the future new drugs?

Posted by Joe | April 30, 2008 5:21 AM

The whole idea that pharmaceutical profits translate directly into pharmaceutical innovation is silly. There are all sorts of non-innovative (or at least not very useful) activities that drug companies can engage in to increase profits, defensive patenting, throwing junk science at the FDA, pressure sales to individual clinics, trying to extend patent protection with spurious research etc. And these aren't a small part of the budget.

Drug companies don't work in a vacuum - they're the important stage between the basic science done at universities and FDA approval of your wonderful new drug.

Like any business that closely integrated with government, you get massive rent-seeking and distortions. The trick is to design the patent, purchasing and regulatory system that gets the most innovation at the least cost.

So if the worry is that tinkering too much too fast with the system will damage it, that's one thing. But you can't just claim that high pharmaceutical profits always mean more (useful) innovation and expect to be taken seriously.

Also, I think we can imagine a place outside the patent system for important diseases with little effective demand - malaria etc. Prizes, government subsidy etc. are probably your best bet here. Good column on this by James Boyle in the FT:

http://www.ft.com/cms/s/0/5db93a80-1517-11dd-996c-0000779fd2ac.html

Posted by Pete | April 30, 2008 7:24 AM

Exactly right, Pete. I've had the same people who make the argument above also make that argument wrt fleet automotive mpg averages: They say that requiring the average to go to 32 mpg will 'cut profits' and 'reduce incentives' to the do R&D that will produce those higher mpg autos!

Making sure that the profit is not in generics or in genric clones, the 'me too' drugs, strikes me as a rather sensible way to Pharma to actually do some research.

Posted by ScentOfViolets | April 30, 2008 7:53 AM

"A friend of mine graduated with a medical degree when he was around 25 or so. He had over $150,000 in debt and was earning less than $50,000 a year starting off."

I'm not sure of the specifics of how the medical training system works but I do know that doctors go through a residency stage to get more in depth, hands on training. During that period it would be unreasonable to pay a "student" at all, let alone a salary capable of paying off their college loans.

"Just like the incentive for janitors, car-wash workers, and garbage collectors should be the fact that they are making a cleaner world. It REALLY frosts me when those jerks actually want to be paid with money."

Saving a life is worth much more than making the world cleaner. Those same "jerks" also get paid minimum wage. Where I live, it's impossible for one person to support themselves on minimum wage let alone a family. Find me a doctor who has to choose between diapers and food for their child.

My point is simply that doctors can be paid a reasonable salary and have the benefit of saving lives and helping people daily. There should be no monetary incentive when it comes to peoples lives. If Donald Trump and Bob the janitor walked into an emergency room who would get seen first?

Posted by Steve | April 30, 2008 9:07 AM

Megan,

I've never understood your problem with reimportation. The inability to reimport is the freedom resticting governmental interference, not the removal of the ban.

I realize Canadian pricing has an impact on the pharmas, but (1) it isn't the job of our government to change the rules for the betterment of others, and (2) why does the traditional analysis stop at the reimportation? If you take the process one extra step pharmas are forced to a decision. They can offer tiered pricing and hope to skim enough to make it worthwhile, or they can stop selling to Canada. In all probability they will choose the latter. They'll start selling again once Canada eliminates enough of the price differential that reimportation isn't worth the hassle & transportation cost.

It is our ban on reimportation which allows the Canadian government to free ride.

Posted by mj | April 30, 2008 9:47 AM

Steve -
There would be a lot fewer doctors if they didn't get paid what they did. If you're really that concerned, become a doctor and work because you can help people. As for me, I'll take a doctor with any motive so long as he or she keeps me alive.

Posted by Nelson | April 30, 2008 10:05 AM

"Making sure that the profit is not in generics or in genric clones, the 'me too' drugs, strikes me as a rather sensible way to Pharma to actually do some research."

First, drug companies are not raking in huge profits from generic drugs. They're the boring bread-and-butter products that pay the rent. Second, those "me too" drugs, as you so dismissively call them, are often useful drugs that also require research and testing.

A "me too" drug may only workaround for interactions with other drugs, avoid unpleasant side effects, or avoid existing preconditions. If we lived in a simple world of Standard Humans who only ever took one medication at a time then every drug would have the exact same effects and side effects in every person. That's obviously not the case, so if we're smart we'll encourage the creation of a variety of drugs with similar uses.

Posted by Bryan C | April 30, 2008 10:13 AM

My principled belief is that the socialised medicine world should not free-ride on American pharmaceutical buyers. If that means massive trade wars (something neither side wants), then so be it. If reimportation is the back door to put off such a confrontation, so be it.

I'm sick and tired of these ingrate countries not paying full price on these drugs, not contributing meaningfully to their own military defense, etc. And if that means cutting off our nose to spite our face, then let's whip out that knife and start slicing.

Posted by Dr. Kenneth Noisewater | April 30, 2008 10:15 AM

Drug reimportation is a bad idea.

To understand why, you have to understand that what the pharmas are doing is engaging in price discrimination - that is, setting an optimum price for different segregated markets. This happens in products all the time - currently in Canada, cars are 10-20% more expensive on average than they are in the U.S. Why? Because that's what the market supports.

If you allow drugs to be reimported on a large scale, just what do you think will happen? Currently, a pharmaceutical company might sell an AIDS drug to Africans for $1, and sell the same drug to Americans for $10. So, if you can just reimport from Africa, do you think you'll get $1 AIDS drugs? Not a chance. Because once those markets become homogenized, the response from Pharma will be to raise the price for Africans, not lower it for Americans.

In fact, drug reimportation could cause prices for Americans to RISE. Assuming that the price is set in various countries to maximize profit, then forcing drug companies to adopt a less efficient global pricing model will cut into their profits. This may well cause them to raise the price at home. And in the meantime, all those poor people in Africa lose access to life-saving drugs.

And this is the most offensive part - so-called 'progressives' advocating the elimination of PROGRESSIVE pricing for poorer peoples. Drug reimportation will set the price at some new global optimum, which will certainly be a higher price than the poorer countries are paying now. Isn't that humanitarian of you. And in the end, if you're lucky you'll save a little bit on drugs, and if you're unlucky you'll do serious damage to the pharmaceutical industry and make it less likely to get new drugs in the future because they can't be sold as efficiently, and therefore are worth enough to spend R&D money on.

BTW, these other countries are not 'free riders'. They are paying what the market will bear. They are paying an agreed-upon price with the owner of the property they wish to buy.

Let me ask you - if companies could come up with a way to sell the same product to rich people at twice the price as what they sell it to poor people for, and therefore could afford to sell better quality goods to the poor, would a 'progressive' be against that? That's exactly what's going on here.

Posted by Dan | April 30, 2008 12:14 PM

McCain's plan is dead out of the box. No congress will vote en mass to de-evolve the physical health of their constituencies.

My guess is that a 'survival of the fittest' free market-based health plan will send millions into the uninsured group as health insurers celebrate not having to insure job-based groups, many of which don't incur a lot of under-writing.

McCain's advisors know this too. This is the only explanation for his selling his plan as solving the (perceived) problem of choice over solving the real problem of cost.

Posted by Dr. Puck | April 30, 2008 12:58 PM

"The senator is proposing one thing that I think is a terrible idea, pharmaceutical reimportation. Naturally, this is the part of his health care plan with the highest probability of passage."

I'm somewhat tired of special deals being given to other western countries because of their threats to no longer recognize their patens. Reimportation may force the drug companies to fight this battle with them and change equal prices… which, in the end, would lower ours since we subsides them now…

As to poor counties, they can negotiate with them a no export deal under which they can continue to get a better than average price and/or get something in the law to exclude countries with donation rates / prices (re: we sell to X at a basically donation price to get people the drugs…).

Posted by thomass | April 30, 2008 2:42 PM

'I'm somewhat tired of special deals being given to other western countries because of their threats to no longer recognize their patens. Reimportation may force the drug companies to fight this battle with them and change equal prices… which, in the end, would lower ours since we subsides them now…"

No, you don't subsidize them. Think of it this way. Let's say you have a drug which costs 100 million dollars in R&D. Then, to market it to Americans you have to spend another 50 million dollars. So now you've got 150 million invested, which you have to recoup, plus profit. The pills themselves only cost 10 cents each.

Now, you know that Americans will pay $10/pill for these. Poor people in Africa might be able to pay $1.00 per pill. At those prices, you can sell 20 million pills in America, and 30 million pills in Africa. So, you make 200 million domestically, and another 30 million from sales to Africa.

If you were 'subsidizing' Africa, it stands to reason that if you just eliminated those sales to Africa, you could lower the price at home, right? Uh, no. Now the drug company is making 30 million less. Either it has to accept lower profit, or raise the price on Americans.

But what if you allow drug re-importation? Well now Americans will buy their pills for $1 from Africa. Oops. Now the company is only making 50 million dollars, and can't even recoup its development costs. So... It's not going to sell the drug to Africa for $1.00 any more. It's going to have to find a new optimal price that balances sales lost in America to sales gained in Africa. Maybe it'll be $8.00/pill in Africa. Of course, now they'll only sell a fraction as much, and there will still be some price scavenging out of the American market.

The other aspect is that the price to Americans may include a liability cost that doesn't exist in Africa. So if you let Americans buy back from Africa, you have to make poor Africans pay the same liability cost, even though they give them no value. Now it's the Americans who are the free riders.

The bottom line is that if companies are free to set prices differently in different isolated markets, they can come up with the optimal mix which maximizes their return on investment. Screw around with that, and they'll have to set a sub-optimal price for everyone. This costs them money, which eventually gets transferred to the consumer in the form of higher prices or fewer drugs.

Either way, you're not getting Africa prices for your drugs. The result of your reimportation policy would most likely manifest itself in less access to drugs in the third world and little change in pricing at home (or maybe even higher prices).

"Drug Reimportation" is a perfect example of a populist policy which appeals to people's nationalism and 'common sense', but which has pernicious economic effects that are opposite of what the proponents would have you believe, or horribly destructive to those poor brown people in other countries who never get considered in populist appeals.

Posted by Dan | April 30, 2008 4:07 PM

Wow. Just "wow." Possibly the most retarded, simplistic take on health insurance possible.

Even with every opportunity possible for Megan to learn on the job, she still gets things horribly, horribly wrong.

Posted by Jamey | April 30, 2008 5:11 PM

Second, those "me too" drugs, as you so dismissively call them, are often useful drugs that also require research and testing.

This is a standard term as a few seconds of googling shows. I'll even quote it:

Definition of Me-too drug

Me-too drug: A drug that is structurally very similar to already known drugs, with only minor differences. The term "me-too" carries a negative connotation. However, me-too products may create competition and drive prices down.

Note the operative word 'may' here. In fact, if this is the case it probably wasn't because the pharmaceutical specifically tested for this effect. Another quote:

The companies also make the case that there need to be several me-too drugs on the market because if one doesn’t work, maybe another one will. But until they test that, it’s just an assertion. They don’t test their me-too drugs in people who have not done well with an earlier drug of the same class. They have to do that in order to prove that assertion.

If you've got any evidence that drug companies are actively going after these sorts of conditions, please post it.

A "me too" drug may only workaround for interactions with other drugs, avoid unpleasant side effects, or avoid existing preconditions. If we lived in a simple world of Standard Humans who only ever took one medication at a time then every drug would have the exact same effects and side effects in every person. That's obviously not the case, so if we're smart we'll encourage the creation of a variety of drugs with similar uses.

Posted by Bryan C

Answered above. And it hardly goes to 'innovation', the original claim. Finally, yet another source, with the same take:

After casting a wide net for drug information, Sherman’s team has reached a few conclusions that many drug manufacturers would just as soon not hear.

In a comparative analysis of drugs approved for marketing between January 2006 and July 2007, a joint project between Regence and Blue Cross Blue Shield of Michigan found that 69 percent involved a different chemical entity and a separate mechanism of action, but offered no clinical improvement over other options already on the table. And while 44 percent offered some new convenience — such as a simpler dosing schedule or route of administration — only 13 percent offered greater efficacy in combating disease or confronted an unmet medical need.

Most of these pharmaceuticals were simply “me-too” drugs, said the Blues plans, offering no added value to members when compared to what was already available. In addition, the trend lines showed a dramatic increase in these therapeutic agents, jumping from 27 percent of the therapies reviewed in their 2004–2005 study.

“Even with the biotech drugs, there’s still a lack of innovation,” says Atheer Kaddis, who recently left his post as director of clinical pharmacy services for the Michigan Blues to take up a new post with a specialty pharmaceutical company.

“I think a lot of it has to do with just getting a drug on the market,” adds Kaddis. “They’re coming up with new products using the same science that is already understood, going after more indications for an existing drug, as opposed to spending money on R&D on a breakthrough drug, which can be very difficult.”

This taken from http://www.managedcaremag.com/archives/0801/0801.biologics.html

Tell me, what do you think about increasing fleet gas mileage for automobiles? Does that stifle competition too? If not, how is it different?

Posted by ScentOfViolets | April 30, 2008 6:18 PM

It's obviously far too late to discuss all the responses to me above, but here's my 2 cents:

"If somebody dreamt that they could get a cheaper lunch by cutting Pfizer's money-making ability by 20%, they would actually wipe out Pfizer's entire profit."

OK, sure. But I was responding to a comment that projected a 20% decrease in ROI. Now, I majored in biochemistry, not business, but in my universe Return on Investment is profit, not revenue. A 20% decrease in profits is not going to destroy R&D. Pharma companies will adapt and survive, and continue to perform R&D, just as automakers adapted to declining profits.

"Won't more Americans be better off under a system where new drugs are expensive for 5 or 7 years and then, when generics appear, become cheap, rather than a system that lets people today have cheap medicine, but denies everyone in the future new drugs?"

If I really believed drug reimportation would deny everyone in the future new drugs, I would oppose it. Since I think this is primarily a bunch of cock and bull scare-mongering by industry flacks and useful idiot libertarians, I'm not really all that fussed about it.

Posted by LaFollette Progressive | April 30, 2008 6:24 PM

They’re coming up with new products using the same science that is already understood, going after more indications for an existing drug, as opposed to spending money on R&D on a breakthrough drug, which can be very difficult

Let's assume for the moment that this is 100% true and correct. How does reducing profit margins on expensive new drugs by allowing reimportation solve the problem and drive new (difficult, expensive, risky) breakthroughs?

A 20% decrease in profits is not going to destroy R&D. Pharma companies will adapt and survive, and continue to perform R&D, just as automakers adapted to declining profits.

But something will change, right? You can't expect a big drop in profits to have no effect. What do you think will be different?

Posted by Rob Lyman | April 30, 2008 6:33 PM

Re: McCain's plan is dead out of the box. No congress will vote en mass to de-evolve the physical health of their constituencies.

It's possible that some near-future Congress may vote to allow individuals a full tax break on premiums they pay of of pocket (now available only to the self-employed). That would only be fair and would not imperil employer-provided insurance as few people would switch from workplace plans where they have at least some (often most) of the premium paid by their employer to a plan where they had pay the whole bill, plus the uncertainity of being cancelled or having their rates skyrocket if they ever needed to use the coverage. Even a tax break at the highest bracket would not make that an attractive deal.

Posted by JonF | April 30, 2008 7:03 PM

They’re coming up with new products using the same science that is already understood, going after more indications for an existing drug, as opposed to spending money on R&D on a breakthrough drug, which can be very difficult

Let's assume for the moment that this is 100% true and correct. How does reducing profit margins on expensive new drugs by allowing reimportation solve the problem and drive new (difficult, expensive, risky) breakthroughs?

This is a rather bizarre non sequitur. I'm merely pointing out that the supposed justification for high prices - research to produce 'innovative' drugs - simply isn't true. 'Expensive new drugs' are likely to be tweaked retreads to improve the bottom line and keep patents from devolving into the public domain, retreads, moreover, that aren't an improvement over the older, cheaper drugs. And if the pharmaceuticals aren't really doing the research, or really marketing genuinely new, improved drugs, they really can't claim that's what drive those high prices. So while reimportation may not cause more innovation, it certainly wouldn't worsen the problem, now, would it?

Now, if you look at one of my prior posts, I advocate cutting the profit margins on 'me too' drugs if they can't be shown to be more efficacious than their older cousins, and I advocate putting the older drugs into public domain (after a smaller time lapse) for generic production absent some _extremely_ compelling reason not to, and with the burden of proof entirely on the entity asking for an extension. Cutting the profit margins on those sorts of drugs would, imho, have the same effect as mandating improved gas economy standards for the automotive industry - more innovation.

But that's a separate point from noting that the justification Just Ain't So. It's as if some restaurant justifies it's high prices by saying all the ingredients are of top quality, USDA prime meat, for example, and then it's found out that they're actually serving USDA cutter. If there are editorials in the food section calling for the restaurant to lower it's prices, asking how that would help them serve USDA prime is, I repeat, something of a non sequitur.

Posted by ScentOfViolets | April 30, 2008 10:01 PM

If the nature of health and education are difficult to define in ways that satisfy many of us (as David Cutler says), maybe government should stay out of it and let people choose for themselves through some sort of free exchange system what they want for themselves in these areas.
After all; why should government embarass themselves where they have close to zero chance of making good decisions; will government involvement make things cheaper or delivery of these valuable items more efficient or is it just another case of power seeking and empire building by ambitious politicians?
We can quibble endlessly about details but why not let people use their own resources to their own satisfaction and leave them alone?

Posted by Mark Goodfellow | May 1, 2008 1:19 AM

Just in case people find "reducing R&D" too hypothetical a concept, it's useful to point out the usual mechanism: a merger/acquisition, followed by a round of "cost-cutting". Or, sometimes just the "cost-cutting" without the M/A. The green-eyeshade folks like to blather on condescendingly like "costs" are moral failings, but people who actually make money know that "costs" are the money you spend to make money. And "cost-cutting" is a way of partially going out of business in an orderly fashion -- sort of like bankruptcy, but for companies not in financial peril.

The last big round of M&A activity in the pharmaceutical sector was back in 93 when it looked like Hillarycare might have a chance of succeeding.

I like to point out that every single American has access to the "plan" which I call HillaryPharmaChoice. You see, it works like this... Suppose Hillarycare had passed in 1993 and ended all pharma research except for impotence and baldness cures. Sure, drugs in the last couple of years of development would still have been released, but anything further out than that would have been cancelled. Suppose you were a supporter of Hilarycare back in the day. Well, patents are only 17 years long, and 1993 was 15 years ago. So you can have your own personal HillaryPharmaChoice by you, personally, not using any drugs which are still in patent. Stick strictly to generics for yourself, and leave the rest of us alone. Since you won't be buying any patent medicines, then you should butt out of any discussions about their prices.

Posted by cathyf | May 1, 2008 11:05 PM

In the 19th century, America came to Europe to learn about health care and medicine, especially France and then Germany who were leaders at the time and then improve on them. It's time for us to go back and learn from them again since we now rank number 37th in the world in all measures whereas France is ranked number 1.

Check out this very information investigative report from FrontLine, "Sick Around The World."

http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/

"Universal health care" doesn't mean "socialized care. Germany's health system is as capitalist as the U.S.

Posted by Levan | May 2, 2008 2:51 AM

Did you see the Bunk study stating 2/3 of doctors in America want National Health Care. The doctors who did this study also conducted one in 2002 and found that the majority of doctors did not want national health care, the problem with this is that the 2 question surveys drastically differ in there 2nd question. I found this article, 60% of Physicians Surveyed Oppose Switching to a National Health Care Plan, It's worth a read.

Posted by Matt | May 2, 2008 4:05 AM