Real Health Care Reform-Part 5: The Suppliers

Among the fourth actor, suppliers, the biggest culprit is the pharmaceutical industry. To illustrate the nonsense of Obamacare, it is rather hypocritical that medical supply companies were hit with taxes while the drug companies were left alone in exchange for a promise to keep prices in check. Part of the problem with drug prices is the cost in developing new drugs. The FDA is charged with approving new drugs for market. The FDA needs to consider not only the safety of the drug, but its effectiveness. Even after approval, the FDA continues to monitor the drug for safety and effectiveness. The most prescribed drug- Vicodin- has been on the market for over 40 years. Yet, there is a campaign under way now to take the drug off the market for safety reasons. The process can take up to 9 years to get a drug to market and is believed that for every 7,500 compounds discovered, only one makes it to market. That is why only about 26 new drugs are introduced yearly. In 1993, from initial testing to approval, the cost was $393 million. Today it is $500 million. Lost in the equation is the amounts spent only to have a drug disapproved by the FDA.

In terms of dollar figures, Pfizer’s Lipitor ranks #1. Assuming it costs $500 million to develop the drug, it would take 66 years for Pfizer to recoup their investment. Naturally, foreign sales also add to the bottom line and cut down the recoup period. Once approved, the maker is granted a patent for 10-14 years. Some have touted generics over brand name drugs, but generics are available only after the patent expires. In the interim, Pfizer may have a monopoly on Lipitor, but other companies are developing competitors. Likewise, today’s generic antidepressants nowhere approach the effectiveness of today’s antidepressants. Certainly steering patients to generics makes sense for chronic illness where the situation does not warrant the newer class of drugs. However, Obamacare makes that choice for the doctor and patient. Therefore, generics may be the answer for decreasing costs in certain select cases, but they are not the panacea.

The other suggestion is the importation of drugs from foreign countries. Generally speaking, they are 30-50% cheaper than domestic drugs whether generic or brand name. Since 2005, Congress has actually allowed this practice, but the FDA has refused to certify it citing safety reasons. The FDA not only approves drugs for market, but they also oversee the manufacture process at every stage. That is not true of all foreign countries. If safety is the real issue, then there is a compromise. As long as a foreign country complies with rules akin to those here in the US, then it would make sense to import drugs. But Obamacare has closed even that option.

The reason drugs are cheaper in other countries- even those that are sold there by American companies- is because of price controls. Although they cannot charge anywhere near what they charge domestically, it is still a multibillion dollar industry. Even these deflated prices help defray the costs of development and research. The lower per capita incomes in foreign countries, including industrialized ones, dictates the lower prices. Americans pay more for prescription drugs because we can “afford” to pay the higher price.

Government regulation also increases prices. For example, companies are required to get separate FDA approvals to sell a drug in capsule versus tablet form. They need separate approvals for time-released versus immediate release forms. A drug like Cialis comes in tablet or capsule form and can delayed or time released. In this case and many others, Cialis cures the same problem equally safely and effectively, yet Eli Lilly needed four separate approvals for essentially the same drug.

Regarding importation, we disallow it while the European Union allows it. One alleged drawback is the exporting country may limit exports out of fear of domestic shortages thus creating inflationary pressures. However, the EU analysis revealed the rate of diversion never exceeded 6% of the supply, did not create any shortages, and there was no domestic price inflation. In fact, side industries developed to facilitate the importation of drugs. As an aside, this sounds like a job-creating enterprise. A CBO analysis of the 2005 law indicated that overall, prescription drugs would decrease about 5%, but that the figure could be as high as 15% for certain drugs. Those 30-50% cheaper drugs will not translate into 30-50% savings here. Even still, a 5-15% decrease is a lot better than ANY increase, assuming the CBO estimates are correct. That can only be achieved through price controls. The case of Maryland having price controls on drugs in hospitals is the closest we get in the US.

Obviously, it would make no sense for the federal government to institute price controls on drugs. As past experiments proved when we dabbled in price controls, it creates shortages nationally. There may be a greater need for heart drugs in one section of the country over another section. Obviously, market forces dictate the cost of the drug with respect to specific geographical markets. However, it may make perfect sense for states to institute price controls. The efforts in Maryland have certainly kept at least hospital costs lower than national averages. Again, what may be good policy in Maryland may not be good policy in Minnesota or elsewhere. But, states should definitely be offered the opportunity to at least experiment in this area. In fact, most of the innovation in health care reform has occurred at the state level whether it is Romneycare in Massachusetts or the interchange of medical information for best predicted outcomes in Washington, the innovation is at the state level.

The bottom line here is that as concerns Obamacare, the aspect that deals with Big Pharma were mainly backdoor deals that were hardly transparent beyond the photo opportunities as Obama sat there surrounded by pharmaceutical executives. In exchange for a one shot ten year commitment and some money, they were left alone. Nowhere in Obamacare or any other piece of legislation is there regulatory relief in bringing drugs to market. Why it should cost a company $500 million to introduce a product to market boggles the imagination. The FDA’s role should be safety first. Perhaps it should be the role of the FTC to monitor effectiveness after the FDA certifies some minimal standard of effectiveness.

Of course, a lot of this begs the question as to why drugs are over-prescribed in the first place. Sometimes, the better solution is a simple lifestyle change, but these simpler, but sometimes more difficult interventions are by-passed in favor of a pill. Simply, Americans are over-dependent on prescription drugs to cure a plethora of ailments. Many of them are necessary at times, but no one can deny there are instances of unnecessary medication.

However, simply introducing more drugs that are equally safe and equally effective at a quicker rate will bring overall costs down. It is called competition and it is a market-based solution, not a bureaucratic dictate from “experts” in Washington. Again, Obamacare says little, if any, on this subject. That is yet another nail in its long overdue coffin.

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