By 2030, one in every three Californians will be over the age of 50, an unprecedented demographic shift that will transform almost every dimension of our society.
Today, we are already witnessing one such transformation in the legislative arena as organizations like the AARP take an increasingly active role in the shaping of our nation's Medicare and prescription drug policies.
But just how much can the government do about the cost of medicines, now and in the future?
For a thorough and, at times, contentious debate on this question, we turn to Jack Calfee of the American Enterprise Institute for Public Policy Research, an influential, conservative "think tank," and Merrill Goozner, director of the Integrity in Science Project at the Center for Science in the Public Interest, a consumer advocacy organization.
California Connected (moderator)
In a report titled "The Future Costs of Health Care in Aging Societies," the authors begin by stating: "There is great concern that modern rich nations will not be able to afford the future health care costs of aging societies."
At the heart of this issue, possibly one of the defining issues for America in the 21st century, is the complex role of pharmaceuticals.
A quick look at this Q&A page on the Pfizer web site, suggests that of the many questions being asked of the pharmaceutical industry, many are related to the rights--or privileges--of the elderly, today and tomorrow.
I'd like to begin our conversation by asking you to predict just how significant the cost of medicine will be in the coming years.
John E. Calfee
Yes, drug costs will be a very significant issue for the foreseeable future.
New pharmaceuticals--drugs we don't have yet--could do a lot. When you look at our biggest health problems, like diabetes, heart disease, cancer, or schizophrenia, it is obvious that our tools are inadequate. Of course, you say, or these things wouldn't be problems in the first place. But diabetes and so on are a lot more treatable now than they were 20 years ago, and there is every reason to hope that the next generation of drugs will improve things as much as past generations have.
Merrill knows where to look for these prospects about as well as anyone does. Targeted cancer drugs are a good example, because things are already moving in a rush. Maybe we'll get that diabetes drug that works for almost everyone, and maybe we'll get a schizophrenia drug that patients don't hate to take (although the newest ones are much better than the old ones). Some of the new drugs will cut costs, just like the modern anti-ulcer drugs (which are now sold over-the-counter and are very cheap) drastically reduced ulcer surgery. But a lot of the drugs will increase costs.
We--that is, individual consumers, our health care systems, and our government health care programs like Medicare--will be at the financial margin, wondering exactly what is worth the cost. That is as it should be. Health economists have been looking at these things for decades. They have found that health care is a "wealth good," that is, something we want to spend an increasing share of our income on as incomes go up. They also found that new medical technology in the past two decades or so (including drugs) has been extremely valuable, worth literally trillions of dollars.
If the private sector is doing its job, it should be providing a steady supply of yet more opportunities to spend our money to make ourselves healthier and let us live longer.
By the way, there is an excellent new book that covers exactly this topic (among others). It is Your Money or Your Life: Strong Medicine for America's Health Care System (Oxford University Press, 2004). It was written by David Cutler, a health economist at Harvard. The book is very short and an easy read even though the reasoning is quite sophisticated. Most of the book is not about pharmaceuticals, but it does goes through the essential economics of health care and it includes some excellent sections on pharmaceuticals.
Chapter 4 ("The Power of the Pill: Prozac and the Revolution in Mental Health Care") is the best brief discussion I have ever seen of how pharmaceuticals can improve health care. One point Cutler makes over and over again is how the appearance of a revolutionary treatment (not necessarily a drug, of course) will motivate the medical community to invent new diagnoses just so they will know who can be treated and how. The separate diagnosis and treatment of depression is an example (although that began before Prozac and its sister pills like Zoloft) arrived.
Could drug costs conceivably not be an issue? Yes, but only if one of two unlikely things happen. If R&D simply dries up--if the genomics and proteomics revolutions generate mainly dry holes in the pharmaceutical business--there won't be very many good new drugs demanding high prices. Pretty soon, drug therapy would be mainly generic drug therapy, and the costs would be just an irritant. Or if the health care system became so heavily socialized that patient preferences (which in normal markets are revealed by willingness to pay) have no impact, then the payoff for real innovation would dry up and so would the new drug pipeline. No one would know or care very much except for frustrated scientists who knew what they could probably do if they just had a market. This kind of thing is very unlikely to happen in this nation, but it is not simply impossible. The old U.S.S.R. and its Eastern European satellites worked pretty much this way. There was no innovation and no health care cost crisis. Patient suffering was immense, however.
A friend of mine who escaped from East Germany not long before the wall went up has told me of elderly cancer patients who could not obtain even basic pain relief from the East German clinics, whose main goal was apparently to keep workers working rather than ease the life of retired workers.
Center for Science in the Public Interest
How significant an issue will the cost of medicine be in the coming years?
Overall spending on healthcare is rising twice as fast as the overall economy and now approaches 15 percent of GDP. It threatens to become the whale that ate the economy, crowding out other activities an aging society might engage in such as leisure, travel and dining.
Rising expenditures on drugs is the single largest driver behind rising health care costs. Between 1990 and 2000, personal expenditures on drugs rose 190 percent compared to 84 percent for physician services and 64 percent for hospitals.
Despite the political uproar over rising drug costs, no one projects a shift in these trends. The liberal Kaiser Family Foundation estimates drug spending among Medicare recipients will triple between 2001 and 2011. IMS Health, which closely monitors drug spending trends for the industry, claims overall U.S. spending on drugs will rise by 2013 to $510 billion, up from $184 billion in 2003. These are essentially straight line projections of current trends.
Even if we factor in the $580 billion that the government will spend on drugs for Medicare recipients over the next decade (let's assume $100 billion per year in the out years), out-of-pocket expenditures for seniors will nearly double.
By Congress refusing to rein in drug costs in the Medicare drug benefit, it didn't just leave a donut hole. It opened a loophole for the drug industry to continue the development, pricing and marketing practices that are needlessly driving drug expenditures to unprecedented heights.
If we follow Jack's reasoning, as the benefits of pharmaceuticals increase, so, too, does our willingness to pay for them and their further development.
Thus, if drugs are expensive, it's because they are difficult to produce and we, as a society, have deemed it important that we produce new treatments--whether to cure diseases or, simply, to live longer.
In this scenario, the cost of new drugs may float just beyond the means of many but not all Americans. Furthermore, because it is a market driven enterprise, Jack suggests that regulation of same would cause more harm than good. If regulation stifles the development of new drugs, it would reduce the number of people for whom these treatments are initially available from a sizable number to none at all.
But, in Merrill's response, we learn that Congress has recently passed on an opportunity to set price caps on such drugs. It is certainly not unheard of the U.S. government to set price caps on all manner of important commodities--as it does the price of petroleum via diplomacy and a myriad of other means.
Were the government to set price caps on new drugs, it would affirm the claim that we, as a society, value their benefit. It would also go a step further to claim that because they are so vital to our society's welfare, the government will--somehow--ensure they are affordable to all.
Is this a fair assessment of your arguments and, more importantly, how would you respond to each other's initial comments?
The question posed for today's discussion appears to agree with Jack Calfee's twin claims that all new drugs provide incremental health benefits and there is a free market in health care. Neither assumption is true.
Let me begin by saying that there's a half-truth in each of Jack Calfee's assumptions. Some new medicines do provide extraordinary gains, both in extending life and providing economic returns to society. But the reality is that the health care gains from drug therapy (and from the U.S.'s outsized devotion of GDP to health care, five or more percentage points greater than other advanced industrial nations) are exaggerated by industry spokespersons and economists.
By every standard measure of health outcomes--life expectancy, infant mortality, access to health care--the U.S. lags behind its economic equals. Yes, life expectancy is creeping up, but in the past decade it increased at half the rate of the previous 30 years. And according to demographers who have looked at the numbers, public health measures are more responsible for recent gains than medical technology.
From the outcomes vantage point, the war on smoking has provided far more health benefits than the drug-oriented war on cancer. I agree that some people treat health care and drugs like a free market "wealth good." How else can we explain Botox and Viagra? But the reality is that the market-oriented health care economy in the U.S. is missing a vital component of any market if it is going to operate efficiently: Price signals. As a 54-year-old male, I don't "buy" my health care. My employer (or, in my case, my wife's employer) buys most of my health care. I don't "demand" certain care. I seek care when it is needed. I don't respond to price signals when I need that care. I pay whatever it costs to get it; and if I were uninsured, I'd throw myself on the mercy of the local emergency room, which is where about 43 million uninsured Americans get their care.
This paradigm works in the drug marketplace, too. I don't "demand" drugs and respond to their price signals. My doctor prescribes drugs when I need them. And unless one is conversant with the latest guidelines issued by the National Institutes of Health, reads the New England Journal of Medicine or surfs good medical reference sources on the Internet (has WebMD reached a 1 percent penetration rate yet?), we pay for and take what we're prescribed. As Sen. Estes Kefauver complained over 40 years ago when he conducted antitrust investigations into the "antibiotic cartel," the problem is that "he who prescribes does not buy, and he who buys does not prescribe." As he recognized then and is still true now, this is a prescription for price gouging.
Why? At least half of all new medications coming on the market add nothing to physicians' armamentarium for fighting disease. They were conceived, developed and marketed as minor variations of drugs that are coming off patent. Or, they were developed to give a drug company an entry in a market for which there are already numerous alternatives with the same mechanism of action.
So why do they get prescribed in such huge numbers? Perhaps it has something to do with the 30 percent or more of all drug industry expenditures that are devoted to marketing. Legitimate medical innovation doesn't require marketing. Doctors will beat a path to your door if you truly have a miracle cure for their desperately ill patients. But me-too drugs need marketing--lots of it--because the last thing companies want consumers and physicians to know is that a cheap generic might work just as well.
Drug industry spokespersons justify this wasteful expenditure of health care dollars by claiming these me-too drugs offer alternatives to people who may not respond to the other medications in that class. Yet, as Marcia Angell, the former editor of the New England Journal of Medicine points out in her forthcoming book, The Truth About the Drug Companies, (Random House, August 2004), this claim is always based on anecdotes offered by the drug companies or physicians who are on their payrolls. It has never been scientifically tested in clinical trials. If they want to keep making this claim, they ought to at least test the proposition.
Let me conclude by saying that regulation will not choke off innovation in this dysfunctional marketplace. Jack's references to Eastern Europe and the U.S.S.R. are a red herring. If the government negotiates on behalf of seniors (not the price caps suggested in Jose's query), it will simply be joining the rest of the advanced industrial world as well as the Veterans Administration and most of the insurance companies who provide a drug benefit.
The facts are that the two great regulatory reforms that affected the drug industry in the 20th century forced--yes, forced--the industry to adopt scientific practices. In 1937, in response to a tragedy that killed two dozen children in Tennessee, the industry for the first time was required to test its drugs for safety. In 1962, again forced by a near-tragedy, this time involving thalidomide, the government imposed an efficacy requirement on industry, which led to the modern system of systematic clinical trials for scientifically testing the worth of new medicine.
Today, the out-of-control marketing practices of the modern drug industry require a new set of rules to once again save the industry from its current self-destructive path. By setting up a government-funded agency to contract with independent researchers to conduct comparative clinical trials, physicians could get objective information about the best and most cost-effective medications. This single reform would send vital information to the marketplace (three economists recently won the Nobel Prize for showing how imperfect information distorts markets) and would create incentives for the industry to channel its extraordinary skills into the search for significant new breakthroughs.
Don't forget the inverse of what I said at the top--if half of industry efforts are wasted, then the other half are not just legitimate, but vital to the drug development process. By strategically shrinking this industry through prudent regulation that would wean out wasteful marketing and drug development expenses, we would not only get a more affordable health care system, but a more innovative one.
John E. Calfee
Perhaps Merrill and I should conspire to establish a ceiling on effort and length. (In other words, a conspiracy on price, broadly construed.) I apologize for going on so long:
Merrill and I seem to share a few basic opinions. Many newer drugs are extremely valuable. If the drug development environment is properly maintained, even more valuable drugs will arrive. The dominant role of third-party payments distorts incentives so that patients cannot easily reveal their true trade-offs between paying for new drugs and paying for something else.
And if I read Merrill's last email correctly, the private sector has the talent, resources, and incentives to generate breakthrough innovations (although I gather from his book that Merrill gives NIH a lot more credit than I do for creating new drugs and proving that the drugs are ready for large investments in clinical trials).
But that still leaves a lot of room for disagreement. So much room, in fact, that I can only do some nitpicking and then take a shot at some of the most important points.
The industry's marketing expenditures are consistently exaggerated in the popular press. The usual numbers include free samples, which account for roughly half of all marketing and promotion. Free drugs are hardly a burden on the health care system (most are apparently given by doctors to their uninsured patients).
Moreover, samples are valued at wholesale prices, not manufacturers' costs, which are much less. So samples are not a significant cost burden on the pharmaceutical enterprise. They should probably be excluded from the debate over marketing costs. Take out samples, and you find that perhaps 7-10% of industry revenues are devoted to marketing and promotion. Most of that pays for detailers who visit doctors and give them information, mainly about new drugs.
We can argue about whether that represents pure waste (I think most of the information is useful, although I will concede that doctors don't see much promotion for old, generic drugs). But by any reasonable measure, the industry spends a lot more on R&D (running from 10% to maybe 18% of revenues depending on who measures it) than it does on promotion. No other large industry spends nearly as much.
Where do health advances come from? Sure, most of the historical gains came from classic public health measures such as clean water. But as Cutler points out in his book, technology has taken over in the last half-century. Antibiotics and vaccines deserve a lot of credit. In the later decades of the twentieth, more sophisticated technology began to play a role. People are not only living longer but disability rates are dropping. My favorite statistic (I don't have the numbers in front of me, however) are the simultaneous increases in the over-70 population and decreases in nursing home populations. This involves a lot more than better water and hygiene, and the decline in smoking doesn't count for much, either. Nor is the population eating better and losing weight.
Medical technology, including all those new drugs and especially those notorious me-too cholesterol and hypertension drugs, have to get a lot of the credit for recent progress in health and longevity.
Merrill's "me-too" drug argument goes straight to the heart of our debate. In other markets, innovative products--even patented ones--invite competition. That competition always proceeds along two basic lines: first, better products, often providing a better fit with the needs of consumer segments; and second, price competition, even when the products are not exactly the same.
No one thinks that Toyota caused luxury car prices to increase when it launched a direct attack on BMW and Mercedes. They all competed even though the three nameplates involved very different cars. Move on to hotels, magazines, MP3 players, you name it, and competition is essentially an unalloyed good thing for consumers. The dismantling of constraints on competition is now a hallmark of all advanced economies. Even the Europeans have been deregulating with remarkable energy and determination.
Now one can concede that incentives are distorted in the pharmaceutical market when neither patients nor doctors have to pay for the new drugs that get prescribed. But that is very far from an argument that creating new products to challenge a successful innovation is on balance a bad thing.
I have always felt disappointed by the details supplied by Marcia Angell and others when they argue that me-too drugs cost more than they are worth, and that me-too's should be discouraged through regulations or other means. Most critics of me-too drugs cite things like Nexium, the successor to the anti-ulcer drug Prilosec. But what about antidepressants, cholesterol drugs, diabetes treatments, anti-psychotics, and other therapeutic categories that have seen both blockbuster sales and rapid innovation?
I suggest Merrill propose a list of me-too drugs that we would better off without. (And maybe Angell has done that in her forthcoming book, which I will devour just like I did Merrill's book.)
When the list of me-too drugs is ready, we can go to the next steps. Some of these are easy, at least conceptually. One is figuring out whether doctors would generally agree with the list. Would they say, yes, my patients would do just as well with Prozac as with Zoloft or Effexor, and schizophrenia patients don't really get much of value from the newer anti-psychotics, and Zocor was the only synthetic statin we really needed, and so on?
Another relatively easy step is figuring out whether these me-too drugs have really made health care more expensive. It is well known that me-too's almost always undercut the prices of the pioneer drugs, so the argument is really about whether me-too's simply shift the market from drugs about to go off patent to new ones that aren't worth the extra cost, and whether they do so sufficiently to offset the savings from price competition among branded drugs.
I'd like to see more concrete examples the harms that are routinely ascribed to me-too drugs . As it is, the me-too critics usually talk in general principles while the defenders of me-too's usually cite things like the SSRI class of antidepressants, where it is obvious that different brands work better for different patients.
And then we can get to the tough questions for the me-too drug critics. I can think of two. First, we have to remember that when a new drug challenges a pioneer, more than price competition and physician detailing is involved. Challengers often perform new research (mainly clinical trials) after the drug is approved. They can gain a competitive advantage by advancing the science. The classic example is the statin class of cholesterol drugs. It was BMS's long-term trials for Pravachol that finally nailed down the long-disputed hypothesis that reducing cholesterol would prevent hearts attacks and deaths.
Additional trials for these drugs, and then for their formidable challenger, Lipitor, demonstrated that serum cholesterol is far more important than almost anyone thought. We still don't know where this research will lead, but it has take medical research far beyond what anyone envisioned when Zocor hit the market.
So one tough question is, how much do you lose when you block or impede these me-too drugs? I think we would lose a lot. As drugs become more tightly targeted, employing more specific mechanisms, their uses actually become more diverse. That is another finding that is pretty basic but is emerging partly from post-approval research on competing blockbuster drugs.
One relevant therapeutic categories here is the SSRI antidepressants. A recent Science article on the diverse and unexpected applications of drugs that fiddle with serotonin reuptake concluded that the very term "antidepressant" is misleading because treating depression is just one use of this drug class. Another example is the cox-2 inhibitors like Celebrex and Vioxx. One of them has been demonstrated to prevent colon cancer, and I believe more cancer trials are underway. This is because the cox-2 enzyme turns out to be important in the growth of certain cancers.
The other tough question about me-too's occurred to me when Merrill asserted that half of new drugs are not worth their cost because they are me-too's instead of true innovations. that reminded me of the old advertiser's complaint (credited to an old Philadelphia department store, as I recall): "I know half my advertising is wasted, but I don't know which half."
When drug manufacturers allocate their billions of dollars of laboratories, talent, and financial capital, how will they know whether entering into a therapeutic category with just one pioneer brand is a good thing or a bad thing? Should they always target only brand-new mechanisms? That is a very expensive business model indeed. Would it not make sense to work on marginal improvements, exploit opportunities to make drug therapy better, provide some price competition, and, just maybe, open the door to really radical improvements that happen to lie more or less next door, scientifically speaking?
I almost forgot about price controls. I think the me-too dilemmas I just described are a symptom of a deeper problem. Even if price controllers were sincere and reliable, and extraordinarily wise, I don't see how they could control prices in a way that would keep drug development moving in the right directions.
There is no rational basis for deciding what a new drug price should be. The price can't be based on the value of the drug because that is what you would get from completely free markets. It would have to be something less. How much less? That would be decided after the manufacturer has spent millions or tens of millions or even billions on development. And the decision will be made by a bureaucrat under pressure to control health care costs (Merrill did an excellent job of describing why this would be true.)
There is an obvious bias toward low prices, too low to generate future research. I don't think price controls work well anywhere. The only time they make sense is when you have to deal with an insurmountable pre-existing distortion such as a government-mandated monopoly. Advanced economies have been moving aggressively away from price controls the past few decades, with obvious benefits and few if any costs. Unfortunately, it makes little sense to argue that putting the pharmaceutical market into the hands of a single buyer is not price controls. In both cases, the manufacturer has to negotiate a price ceiling just as it does in purely price controlled nations like France.
Clearly, I have gone on too long, but let me touch on one last point: the notorious fact that patients don't pay directly for their drugs and therefore have no reason to worry about what their drugs cost. Like a lot of free-market economists, I would like to fix that. But that requires fixing the tax code so that health insurance premiums are not excluded from taxable income. As long as getting health care is cheaper when you push it through insurance paid for with tax-excluded premiums, people will be paying for each other's drugs instead of their own. A lot of what Merrill doesn't like would probably disappear if we paid for most of our own drugs like we did 30 years ago.
I should add that a lot of my friends in the pharma industry would respectively disagree with me here. They think the public health scholars are right when they claim that at least some people will fail to take care of themselves if they have to pay anything at all for their drugs. I want to leave choices up to the individual as much as possible, leaving only a safety net to take care of very high expenses.
Let Pfizer sell Celebrex directly to arthritis patients and then we will find out whether Celebrex is worth its price. No debate, no industry-sponsored cost-effectiveness studies, no price controls, no single-payer negotiations. Just old-fashioned markets.
[ed. note: The authors debate the correct and just boundaries between the public and private sectors for health care and pharmaceuticals.
If you have any studies that show that recent increases in longevity can be tied to drugs, please do share. Every demographer and public health expert I've interviewed says there is almost no link.
Marketing is just 7 to 10 percent of industry expenditures? All I can say is: open the books. Right now, industry documents submitted to the Securities and Exchange Commission bury these expenses in a catch-all category: Sales, marketing, administration and overhead." That's usually anywhere from 40 to 55 percent of sales. Profits are around 25 to 30 percent; R&D is around 15 to 20 percent; manufacturing (cost of goods sold) is around 10 percent. And this breakdown doesn't account for all the R&D that might properly be construed as marketing--like the seeding trials where doctors sign up their patients in a post-Federal Drug Administration approval trial that is a thinly disguised effort to encourage more physicians and patients to begin prescribing or taking a drug. A very conservative estimate for marketing expenses is 30 percent.
Free samples are a boon to the system because they go to the uninsured? Puh-lease. Free samples' main purpose is to skew physicians' prescribing patterns. I personally had the experience of a doctor throwing a free sample at me with a prescription. I changed doctors.
Jack fails to persuade with his arguments for me-too drugs, which parrot industry claims. If the latest version is better than the last one, why not test the proposition? The industry never does. Moreover, they fight against anyone who tries. The history of the government-funded ALLHAT study on competing blood pressure control medicines shows that. Researchers involved in that study published findings that patented calcium-channel blockers were associated with a 60 percent increase in the chance of heart attacks compared to generic diuretics. They had their universities come under pressure from drug manufacturers. They had their research notes subjected to Freedom of Information Act requests from drug company officials. They had their integrity questioned at scientific meetings by researchers who were consultants to the drug industry.
Not only does the industry fight researchers seeking out objective information on me-too drugs, they will fight any government effort to fund those researchers. Last year's Medicare prescription drug benefit could have contained a reasonable appropriation for such trials--it would have saved the government billions. Industry lobbyists worked overtime to ensure that the appropriation was less than a pittance. Jack asks for a list of drugs I'd eliminate as wasteful. That's what comparative trials would establish--scientifically.
His last defense of me-too drugs is price competition. Where is it? In an industry with 30 percent profit margins, a reduction of 5 percent in price (the one study on me-too price competition I've seen used this as a benchmark) hardly qualifies as price competition. Years ago, the Federal Trade Commission decided that the color of pills or frequency of dosing were adequate substitutes for price competition in the drug industry. An administration serious about the nation's antitrust laws would revisit that question. The drug industry persistently engages in cartel-like behavior, especially in the marketing of me-too drugs. Jack, you're the economist. You above all should recognize the damage that cartels do to other economic actors.
Finally, I think that this will be my final post on this subject because our arguments are irreconcilable. We have fundamental differences on the nature of health care. Jack sees health care and drugs as market goods that people consume. I see them as social goods that people need. Moreover, unlike many social goods like air, water, food and housing, it is impossible to know who will need health care and when. The only solution to providing social goods whose consumption is driven (for the most part) by sporadic need is through social insurance. The divorce between payor and consumer is inevitable. Every market mechanism in this arena leads to lack of access, underconsumption by those with the most need and price gouging by suppliers. It is a classic case of market failure.
I'm the real conservative in this discussion. I have admitted the benefits that innovation can bring. I've celebrated the limited though real role that the private sector plays in innovation (you'll note that in this discussion, I've completely ignored my own discussion about the role that public sector research plays in discovering the causes and cures of disease; I'll get back to that in second). I've outlined reforms that would preserve the private sector's role in providing legitimate innovation.
Jack's insistance on pure markets will not reduce the role of health care spending in this economy, which is driving out other spending without a commensurate return in value in terms of better health. It will accelerate the decline in access to health care. It will not even foster meaningful innovation because it will provide even mroe incentives for drug companies to further engage in the destructive behavior of pursuing drugs that add little new to physicians' armamentarium for fighting disease.
In my book, I quote the former head of research and development at Hoffmann-LaRoche. Jurgen Drews, after decades in the industry, sadly concluded that industry was no longer needed to foster medical innovation. He admitted that most insights into the biology and mechanisms of disease that led to new drugs came out of the public sector; he recognized that the public sector because of its recent experiences in the wars on cancer, AIDS and rare diseases had developed the skills of developing therapeutic agents and developing them; he knew from personal experience that the public sector has a well-honed machine for conducting clinical trials. He compared his former industry to the dinosaurs because market departments now had so much control over what R&D gets pursued. By definition, he said, that was non-innovative because they always looked at markets that already existed, not ones that might exist. He predicted that in the not-too-distant future, drug development would largely be done by the public sector or through non-profit institutes.
If Jack truly wants to preserve the private sector's limited role in coming up with the next generation of cures, he'd be working overtime alongside me and other critics to end its self-destructive practices.
Clearly, we cannot begin to define the correct and just boundaries between the public and private sectors in this exchange.
But I hope that we've explored some of the fundamental differences in outlook that frame this issue--particularly for federal policy-makers and their various advisors or lobbyists.
Jack, if you would like to respond to Merrill's requests for specific data--which our readers will certainly find useful--or address some of his specific proposals for reforming the status quo, that would be a fitting close to the discussion.
I will only add that it appears unlikely that Americans will experience a "free market" for health care anytime in the near future. Likewise, the political clout of the pharmaceutical industry is not likely to dissipate in the face of growing public demand for more affordable drugs.
Thus, I welcome any thoughts you may have on what if any compromises are possible to advance this debate from an ideological stalemate to a practical, political process that seeks to improve the quality of life of all Americans.
John E. Calfee
As Merrill did in his last email, I'll start with smaller issues and end with the largest.
How much does the industry spend on promotion? SEC data (which Merrill cites) are useless partly because (as Merrill recognizes) the relevant expense category is too large. It includes administrative costs and so, leaving no reliable guidance about the costs of promotion. This obscurity is typical of standard accounting reports. In virtually every industry I've looked at, firms keep advertising and promotional expenditures secret out of fear of tipping of competitors. The most reliable data always come from independent market research firms. In this case, the sources are IMS Health and (for direct-to-consumer advertising only) Competitive Media Reporting (whose data are reported by IMS).
IMS data show that promotional pharmaceutical spending in the U.S. increased from $15.7 billion in 2000 to $25.3 billion in 2003, while retail drug sales increased from about $97 billion to $162 billion (all in current dollars, ignoring inflation). But as I noted in my last email, the promotional data include free samples, which are valued at retail, not at cost. In 2000, sampling accounted for half of promotional expenditures: $8.0 billion of the $15.7 billion. The rest was physician detailing ($4.0 billion), DTC ($2.5), hospital promotion ($0.8 billion), and journal advertising ($0.5 billion). Since then, sampling has actually increased faster than the other categories. In 2003, it accounted for a startling $16.3 billion of total promotional expenditures of $25.3 billion, leaving just $9 billion for the activities that most people think of as promotion: advertising, detailing, and so on.
Compare that $9 billion to the $162 billion in total sales, and you can see that promotion accounts for nothing like the 30%-plus share that journalists and others toss around without recourse to any marketing data at all.
Now to me-too drugs, a topic that as I noted last time gets to the heart of the debate. Merrill mentioned the ALLHAT study, an NIH-sponsored trial of alternative drug treatments for hypertension. The ALLHAT study concluded that old-fashioned diuretics generally worked as well as popular new drugs and could be safer. Those results certainly had an impact in the editorial and news pages of the popular press and even medical journals, partly because of industry attacks on the study. But ALLHAT's influence on physician prescribing remains to be demonstrated.
Not long after the basic ALLHAT results were published, the New England Journal of Medicine published results from another study that partly contradicted the ALLHAT study and, more important, illustrated crucial difficulties in relying upon the ALLHAT results as a guide for treating hypertension. A substantial dispute over both prescribing and drug industry influence has since been aired in the literature. My sense is that even if ALLHAT's basic results were undisputed, those results would have substantially changed medical practice only if physicians had mainly been using mono-therapy, i.e., treating hypertension with just one drug.
But it turns out that monotherapy is pretty rare, and physicians want to use calcium-channel blockers and ACE inhibitors along with diuretics. Sales of the leading calcium-channel blocker actually increased 13% in the year after the ALLHAT study appeared, even though NIH instituted its own drug detailing to promote diuretics.
The larger question is which me-too's represent waste and which ones are actually useful in the sense of being worth their costs. After Merrill asserted that half the new drugs in recent decades are a waste of R&D resources, I asked him for a list of wasteful me-too drugs so we could inquire whether his list is supported by physician practices or medical research Instead of offering a list, he suggested that we would have to wait for the results of comparative trials.
That raises three questions. First, how does he know, today, that half the new drugs are a waste? Second, would it make sense for drug developers to engage in comparative clinical trials to make sure a new drug is worth more than existing ones before it is approved for marketing? The FDA has repeatedly pointed out that a comparative trial requires much larger samples than a traditional drug approval trial does. Moreover, comparative trials would typically have to be run against several competing drugs, not just one. Merrill's approach would substantially increase the costs of bringing new drugs to market.
I think one also has to concede the possibility that in many cases (the SSRI's are still the classic example), these expensive comparative trials would not prevent any of the newer drugs from being approved. They would simply show that the new drugs involve significant therapeutic differences. Of course, all these comparative trials would presumably improve prescribing practices, but one has to balance that benefit against the costs of the trials.
There is a third and especially difficult issue in Merrill's plan to require proof of superiority in order to prevent me-too's from getting to market and capturing health care dollars. Exactly when we would find out whether a new drug is simply a me-too or something of genuine benefit? The fact that comparative trials can take years is only part of the problem, and not necessarily the biggest part. Medical practice and the underlying research base are constantly changing.
Drug effects that seem me-too-ish today may turn out to be important tomorrow. A statin drug that reduces LDL by 50% instead of 30% may provide no extra benefit until additional research and clinical experience shows that drastic reductions in LDL can prevent more heart attacks and even prevent strokes. A cancer drug that replicates an old drug may turn out to be better for other cancers, perhaps for cancers that are rarer or that involve mechanisms no one had expected the new drug to address because the old ones didn't. I think it's better to get those drugs onto the market than to wait for proof that they will be not one effective, but better.
Do me-too's make health care more expensive or will they cut costs by increasing price competition? Let's assume with Merrill that new entrants typically come in at only a 5% discount from the pioneer brand. He concludes that me-too's can't push prices down very much from their normal levels (which in his view, of course, are excessive). What counts, however, is not the list price of a new drug but what happens to the prices negotiated between manufacturers and buyers such as pharmaceutical benefit managers (PBMs) and health care organizations.
Everyone who has looked at this seems to agree that price-cutting is rampant by the time the PBMs and health care organizations finish their secret dealings with the manufacturers of competing brands within therapeutic categories. Discounting on the order 25% seems typical, and sometimes it gets much deeper. Those discounts are a benefit from the existence of competing me-too drugs. Like the Federal Trade Commission and the Department of Justice, I don't see an antitrust problem here, and I certainly don't see a cartel. Of course, some of the competition among me-too's is in the form of non-price competition (once a day instead of three times, and so on), but there is nothing wrong with that.
This leaves two big issues. One is how health care markets should operate. I want them to be true markets, with consumers paying for their own care up to fairly high limits and then having a safety net kick in. I think that approach would cut drug costs because it would eliminate a lot of what the pharmaceutical industry's critics complain about the most: unnecessary prescribing and unnecessarily expensive choice of drugs.
Merrill thinks this is wrong as a matter of principle. In his view, health care including drug therapy should be social goods, not market goods. And there you have the debate in a nutshell. Which is better for people's health, market-based medicine or socialized medicine in which we pay for each other's drugs instead of our own? I think the answer is obvious. Paying for each other's drugs would be like paying for each other's dinner every night.
If we billed the government for our evening meals, we would have a flood of delicious, creative food services accompanied by skyrocketing costs, endless studies to sort out the waste from the improvements, and incessant bickering over exactly what should be funded and how much it should cost. The pooling of individual choices and expenditures should be a last resort, not the preferred policy.
The final question is how to get new drugs. Can the public sector give us what we need? I hope Merrill is right in thinking that the tens of billions of public monies devoted to drug research in the U.S. and elsewhere will generate a stunning series of breakthrough drugs comparable to the drugs that have come to dominate medical practice in the past two decades. But I fear his hopes are not well founded.
No laws, regulations, or traditions have prevented this from happening already. Publicly funded drug research would presumably run all the way to FDA approval and would be conducted at reasonable costs including reasonable amounts lost in drilling dry holes. If this were really a reliable enterprise, we should have seen its fruits by now in the areas where that kind of research is most valuable: the testing of off-patent drugs with great potential, and the creation of new drugs where profit incentives are inherently weak because intellectual property is weak. We should have seen clinical demonstrations of aspirin for heart disease and cancer much faster than actually occurred; no manufacturer of a patented drug would have taken decades to test the much-discussed hypothesis that aspirin could prevent heart attacks.
Or look at HDL, the so-called good cholesterol. If HDL were a new, patentable molecule, we would be reading about all sorts of clinical trial results, perhaps showing that boosting HDL is even better than reducing LDL, which is what the typical statin drug does. But the most prominent (and perhaps only) clinical trial of HDL reported so far involves a very odd HDL variant that, yes, happens to be patentable and has in fact been patented.
Or look at antibiotics. This class of drugs faces a natural form of market failure. The problem is not a complete market failure, but it is very serious one nonetheless. Physicians are, for the best of reasons, very reluctant to prescribe a new antibiotic. There is no reason to incubate pathogens resistant to a new drugs. Best to leave the drug on the shelf except in extreme situations where everything else fails. In the best of all possible antibiotic worlds, a new drug could go for a decade or more with very little usage until older drugs have finally met their comeuppance in the form of drug resistance, leaving the new one to be the mainstay. By then, of course, patent life would be practically gone even though most of the prescriptions have yet to be written. As long as antibiotics have the same patent life as other drugs, we can expect to face dire shortages of entirely new drug classes. This is the perfect environment for public research. The medical establishment including NIH, the World Health Organization, and other non-governmental organizations around the world understand these dynamics and constraints as well as anyone. They have published dozens of books and reports on the topic. But we still wait for private firms to bring new antibiotics to market. Again, no law or regulation prevented the public sector from solving this problem.
One has to doubt whether the public sector is capable of creating breakthrough new drugs. If the social good approach were superior to private enterprise, the opportunity to demonstrate that superior has been available in the economically advanced nations with largely collectivized health care systems. If their governments had applied but a fraction of their public works or farm subsidy expenditures to drug development, such masters of applied technology as the Germans and the Japanese should already have given the world a raft of innovative drugs. Nothing like that has happened anywhere. Almost all new drugs continue to come from private firms. Public-private partnerships can be extremely valuable--Merrill made that point very well in his book--but that is very different from a fully public enterprise.
Jose, you asked about compromises. I am not sure I can offer very much. I think the march away from competitive markets is counterproductive. The more important the product, the greater the harm from impeding private enterprise (although again, I favor safety nets for health services including drug therapy even though safety nets raise difficult practical and political questions).
I think that moving toward a compromise on such matters as price controls and intellectual property will foster or accelerate a decline in new drug research and impede new drug usage. Such compromises, which I greatly fear will arrive soon because Merrill and his allies have the public's ear much more than I do, can only do harm.
That does not mean that nothing should change. The benefits of publicly funded basic research in molecular biology and in certain applied areas, including a fair measure of clinical research and even clinical trials, can be very large. I support increase in those activities (at the taxpayer's expense) despite the fact that doing so while maintaining reasonable levels of efficiency is extremely difficult. The transfer of intellectual property between the private and public sectors can probably be improved. The Bayh-Dole Act has done a lot of good but it appears to be generating some glaring inefficiencies.
Perhaps it is time to consider a more direct process of auctioning off the practical fruits of NIH-funded research. I recall that Merrill broached a somewhat similar idea (or perhaps that came from the fertile brain of Jamie Love). And it would be nice if we could find a way to discourage other rich nations from using price controls as a tool for free-riding on American-funded R&D. I'm not sure many of those nations began with such goals when they started to control prices a couple of decades or so ago, but I fear they are stumbling onto the opportunity get innovative drugs at prices that will not sustain a reasonably efficient level of R&D in the long run.
The exchange with Merrill has been fun. I think everyone should read his book. I think he gets some of the economic arguments wrong, but he always provides genuine arguments instead of hand-waving, and he knows an awful lot about the nuts and bolts of pharma research.