In the Spotlight
Robert Goldberg, Ph.D., 10-22-04
America's flu vaccine shortage has become a campaign issue, with Sen, John Kerry blaming President Bush for failing to take steps to assure a reliable supply of shots this year. That's a typical Kerry tactic: Blame the president for a problem he's been trying to solve - and which Kerry and other politicians created.
The fact is, this is the fourth year in a row we have had shortages of flu or pediatric vaccines. This year's shortage came when British health authorities closed a U.S.-owned plant that makes half our nation's flu shots. But that begs the question of why the entire United States is served by only two manufacturers of flu vaccines.
Continue reading . . .
Shortage Was PredictedThis year’s flu vaccine shortage has taken the average person by surprise, but as this article notes, experts have long seen this coming. This article nicely summarizes the problem and notes that one reason we have the shortage is that companies have not had the proper incentives to enter the flu vaccine market. ‘We have to be willing to pay more for the wonderful protection we get from vaccines,” the article quotes Dr. William Schaffner as saying. “When there is more profit, it will be an incentive for companies to enter the market.” For an analysis of where government vaccine policy has gone wrong and what can be done to correct the problem, see this week’s spotlight article by CMP Director Robert Goldberg.
The New York Times, 10-7-04
Health Costs - Decisions, Decisions: Health Savings Account Give Consumers More Incentive to Manage Their Health Care and Costs; But Will They Have the Knowledge?Health Savings Accounts, or HSAs for short, are a centerpiece of President Bush’s health care agenda, and as such are attracting attention from the health care policy community. This article uses the personal story of the first person in the country to buy an HSA, Pam Wimbish, to get into the pros and cons of HSAs.
So far in Pam’s life, HSAs are an unambiguous plus. As the article notes, when she needed foot surgery to re-insert a screw from a previous surgery, “she did exactly what the proponents of HSAs intended: She took charge of her situation and thought twice before buying suggested treatment and medication.” The article goes on to note in detail how she reduced her total bill by about 50% through careful forethought and negotiations with her providers.
HSA opponents ask whether everyone would be so conscientious and determined as Ms. Wimbish, but that standard of evaluation makes the perfect the enemy of the good. Every market offers people the opportunity to become as knowledgeable as they want, and not everyone takes up the challenge. But those who do - the car fanatics who know their overhead cams from their McPherson struts, the computer people who know about all about the hardware and software each machine carries – have a beneficial effect for all of us. Suppliers adjust their products for everyone on the basis of the actions of the knowledgeable minority, who shift their purchases on the basis of suppliers meeting their needs. And in order to attract these people, suppliers make information about their products readily available, allowing people with less-intense desires to control their purchases more information than they would otherwise have acquired. The result: a few geeks make a market produce better goods at a lower price.
Why wouldn’t this happen in health care, if moves toward first-party-payer systems took hold? The key to successful markets is the people who benefit from a purchase also finance it, making them keenly interested in the outcome and the price paid for it. And HSAs, which make people solely responsible for the first couple of thousand dollars for annual health care purchases, are the best way to bring these market benefits to a system that has been far too insulated for far too long.
Wall Street Journal, 10-11-04
Brain-Imaging Study is Launched for Alzheimer’sWhile political discourse is focused on how to redistribute existing medical technology, the quest for future cures goes on. This article notes that a long-awaited $60 million study of the brains of people with Alzheimer’s disease is being started. Alzheimer’s afflicts 4.5 million people, and is expected to surge to between 11.5 and 16 million people by 2050. Pharmaceutical companies will contribute one-third, or $20 million, of the cost in the expectation that the data will help provide information that will spur research into prospective Alzheimer’s cures.
Wall Street Journal, 10-14-04
Importing Less Expensive Drugs Not Seen as Cure for U.S. WoesThe hullabaloo over importing prescription drugs from Canada has always had an unreal quality about it. Canada in public discourse has become some sort of pharmaceutical El Dorado, where everything is always available at half the price. It’s kind of like a diet that promises you can lose weight by eating two quarts of ice cream each day – you want it to be true so badly that you may not look too closely at the facts.
But facts have an ugly way of reasserting themselves. You’ll gain weight if you replace broccoli with Ben & Jerry’s, and Canada is not the solution for high American drug prices. As this article points out, “there are not enough Canadians, or drugs in Canada, to make much of a dent in the United States. There are 16 million Americans on Lipitor, for instance – more than half the entire Canadian population.” So why does the importation myth persist?
The article goes on to state that it’s a political stalking horse for the real agenda, currently a non-starter in the U.S.: Canadian-style, governmentally imposed price controls. Canada’s drugs are cheaper because its government tells drug makers that they must offer a lower price or the Canadian federal and provincial governments, who buy the drugs in that country, “determine how much the drug maker can charge.”
So, are price controls a good idea? No, they aren’t. A good’s price always reflects the cost of developing it, the cost of producing it, and the wealth of the people buying it. In an efficient market, where competing suppliers are free to offer their products, the price of a good will tend to stabilize at the marginal cost of production and development, with enough of a profit margin to allow the producers to attract capital. Price controls can distort the nominal price, but since they cannot change human nature, firms with products subject to price controls will react in other, undesirable ways. Drug companies subject to price controls will cut costs, by outsourcing research to cheaper localities like India (which has a burgeoning pharmaceutical industry just waiting to become the back office to America’s pharma giants) or by reducing their research into less potentially profitable avenues. That’s what happened in Europe in the past decade as those nations have tightened price controls on drugs,and that will happen here if we import their policies.
The New York Times, 10-16-04
A.M.A. Says Government Should Negotiate on DrugsPrice controls can come in many guises. They can be imposed directly by legislation, they can be imported indirectly through the approach discussed above, or they can come about de facto through direct government negotiation. Ultimately it doesn’t matter what clothes price controls are dressed up in: if government tries to set how much it pays for drugs, it will end up paying less than the market would pay and thereby reduce the amount of research and development that takes place.
The desire to repeal the laws of economics brings to mind the story of King Canute, whose courtiers in a frenzy of flattery told him his very word could command the tides to stop. It didn’t work for the King - as he knew; he had his throne brought to the sea to test their theory, and when the tides did not stop, he proclaimed, “Let all the world know that the power of monarchs is in vain.” If Americans want cheaper drugs, they can have them through price controls. But they cannot have cheaper drugs through this way AND have the level of medical progress they have come to expect AND have the growth in high-paying jobs which medical progress has created. Economic laws are grounded in human nature, and policymakers should not forget that they cannot repeal human nature, no matter how well the notion polls.
The New York Times, 10-17-04
US’ Snow Says Rest of World Should Pay More for DrugsWhich is not to say that there are not ways to lower drug prices in America. Encouraging competition among pharmacies, as the recent Medicare-sponsored efforts to highlight the different prices nearby pharmacies charge for the same drug, will help. So, too, will efforts to push other countries with price controls to pay more of the share of drugs developed in the United States.
Again, basic economics is at work. A drug costs a certain amount to develop and a certain amount to produce. Like with software, CDs, and other knowledge-based products the development cost is far greater than the production cost. As long as a firm can recoup all its costs plus a reasonable profit, it ought to be indifferent as to how they recoup their costs.
In concrete terms, that means that drug companies can engage in differential pricing so long as the price in some nations is greater than the marginal cost of production and the price in other countries covers the costs of development. The U.S., with its free-market approach to drug pricing, has increasingly been the venue in which to recoup development costs as other nations use their government price controls to push prices closer to the marginal cost of production.
Treasury Secretary Snow knows that strategy is no longer viable: Americans are tired of bankrolling the rest of the world’s drug consumption. If he or his successors are successful in raising this issue in trade talks, price increases in the U.S. should moderate as citizens of other nations start to pay the true cost of their drugs.
Reuters News, 10-19-04
Buying Health Insurance, Cafeteria Style – Some Employers Offer a Menu of Deductibles, Co-Payments, Networks and Prescription PlansThis article emphasizes the increasing role competition is playing in American health care. Employers are now giving employees multiple options when it comes to health insurance, allowing them to tailor deductibles, co-insurance levels, provider networks and prescription-drug options to meet their needs. This is a welcome development, as many of America’s health care woes can be attributed to habits that treat health care differently than other parts of the economy. Bottom line: health care is like other goods; if you make consumption free or subsidized to the user, the user will demand more of it than he or she would if the user pays for it with his or her own money. Practices like this force everyone to start thinking about what they really need, and what they are really willing to pay for, and that can only help make American health care more efficient and more effective.
Wall Street Journal, 10-19-04
Taking Aim at Ads for the Purple PillIs it possible to exaggerate the chutzpah of the trial lawyers’ bar? This article describes a lawsuit alleging that AstraZeneca’s direct-to-consumer advertising on behalf of Nexium is deceptive and caused consumers to shun the cheaper generic drug, Prilosec in favor of the patented Nexium. The result: “billions of dollars being spent unnecessarily by consumers.” Note that there are no claims that anyone was actually harmed by taking Nexium: the only harm alleged is the supposedly unnecessary expenditure of money.
As MPT noted last week, complaints about direct-to-consumer advertising are not new, nor are they limited to the prescription drug world. But all complaints about advertising, no matter what their object, share one common theme: we are victims of images which bombard us, causing us to do things against our will and our better judgment. With this in mind, this lawsuit makes sense, as it is merely an extension of the theme that pervades much mass litigation in this country. This litigation often assumes that there is a powerful interest which forces some injury upon people who are helpless victims in the face of the interest.
The helpless victim mindset, though, ignores the role individual choice and free will play in human life. People can ignore advertising that does not fill a need, and ignore products they purchase with information gleaned from advertising if those products don’t satisfy, but by the logic of the complaint these people either don’t exist or are irrelevant. Even if the complaint’s claims about the relative benefits of Nexium and Prilosec were true – and it is far from clear that they are – people who choose to consume the higher priced drug do so for some reason. The complaint’s line of thinking would apply to every sort of economic decision, from people who choose SUVs when smaller cars would do just as well, to those who choose luxury clothes when cheaper duds would work, and so forth and so on. Do we really want to place the law into decisions of this sort? Would we be willing to live with the consequences if we did?
The New York Times, 10-19-04
Canadian Groups Seek Ban on Cross-Border Drug ShoppingEver read the famous Winnie The Pooh story about when Pooh gets stuck in Rabbit’s hole? He gets stuck because (now I’m spoiling the story for the rest of you) he invites himself over to Rabbit’s house for lunch, Rabbit is too polite to resist, and Pooh finishes off every last drop of honey in the place.
Canadians have woken up to the fact that U.S. importation of drugs is just like Pooh’s self-invitation, and they have no intention of ending up like Rabbit with no drugs for their own. That’s why groups claiming to represent 10 million Canadians – one-third of the country, but fewer people than used Lipitor in the United States – have called for Canada’s federal government to ban drug EXPORTS from Canadian pharmacies. They know that their low prices are due to government price controls, and they know that if the U.S. gets into the act one of two things will happen – either drugs will run out in Canada as pharmacies rush to send drugs to the U.S. (whose wealthier citizens can afford high “shipping fees” and “handling charges”, or prices will have to rise in Canada to entice those pharmacies to keep supplies at home. The bottom line to Americans: we’ll have to solve our drug problems at home, since other nations are not likely to let us crash their parties.
Associated Press Newswires, 10-19-04
The Informed Patient: Does Disease Management Pay Off?“Disease management” is one of the hottest items in medical policy, as third-party payers struggle to reduce payments for chronic conditions. As the article notes, “people with chronic conditions account for more than two-thirds of the nation’s $1.6 trillion medical bill. . . . The aim of disease management . . . is to educate patients about their disease and help them manage it symptoms, such as controlling blood sugar in diabetics to stave off blindness, kidney failure and amputations.” The article goes on to state that there is as yet little evidence showing these efforts reduce expenditures, although it is still too early to know for sure.
It is difficult to live with chronic conditions, and many things, some outside of people’s control, cause them. But many chronic conditions are brought about at least in part by lifestyle choices people engage in for many years, and in these instances one must ask whether our current health care payment system is contributing to the problem. Most people pay only a small part of their total health care bill each year; the bulk of the payments are made by the third parties who insure them and the third parties, like employers, who pay for the insurance. These people do not, as a matter of course, adjust the amount paid by each individual for the true risk they bring, and in many cases are forbidden by law from doing so. That means people are effectively subsidized when they engage in detrimental behaviors like smoking, drinking or overeating. Perhaps it’s time to re-think these policies and encourage companies to price their products on a risk-adjusted basis. If people had to pay a few hundred dollars a year more each year if they were obese or smokers – as they often must with their life insurance policies – perhaps they would change their ways before their chronic conditions even develop.
Wall Street Journal, 10-20-04
Vaccine Development Needs a Booster Shot
Washington Times, 10-10-04 Former FDA official Henry Miller offers a cogent analysis of what’s wrong with our vaccine development policies. His recommendations mirror those Dr. Goldberg offers in this week’s Spotlight, but adds a couple of good ones, such as the FDA recognizing the vaccine safety approvals of European countries’ FDA counterparts.
The Reimportation Blues
Wall Street Journal, 10-11-04 The CATO Institute’s Roger Pilon made a splash earlier this year by releasing a report arguing in favor of reimportation on free trade grounds. In this op-ed, he modifies that argument slightly by noting the lead reimportation bill – the Dorgan-Snowe proposal – would prevent free trade by barring companies from limiting supplies to countries that impose price controls. He notes that this bill would effectively import foreign price controls rather than let the market decide what the world price of drugs ought to be, and as such is a bad idea.
Big Pharma? Think Again
Wall Street Journal, 10-12-04 The author of this piece, the CEO of a small, publicly traded biotech company, argues that biotech companies are spending billions of dollars in R & D each year and that these sums will not be supplied by the investors who are currently footing the bill if they are afraid they cannot make their money back from drug profits. He cautions policy makers to “first do no harm” when they think about intervening in the drug markets.
What Ails John Kerry’s Drug Plan?
The Globe and Mail, 10-24-04 Perhaps quoting the article, from Canada’s leading daily paper, says it best. “Hypocrisy aside, does the Senator really believe Canada’s tiny pharmaceutical-production industry could supply the U.S. market? The bulk of our prescription drugs come from the same U.S.-owned Puerto Rico factories that supply most of the U.S. market. Why does he think it’s called “reimportation”? And does he really believe drugs would remain cheap if large-scale reimportation were permitted?”
Booming Internet Drug Sales to Americans are a Prescription for Disaster in Canada
The Globe and Mail, 10-14-04 This article echoes the concern of the author above that reimportation is bad for Canada, but from the left’s perspective that price controls are good. The author notes that Canadians are already seeing shortages of some drugs, and that government budgets would increase if Americans were permitted to compete for scarce supplies of Canadian drugs. The author says that if Americans want Canadian prices, they should adopt Canada’s state-controlled system.
Wall Street Journal, 10-14-04 This well-written, unsigned editorial lays out the argument that we have a flu crisis because vaccine manufacturers have to “run an obstacle course of price controls, regulations and tort lawyers.” It also provides details of how the federal government’s Vaccines for Children program underpays for vaccines and has not increased the level of vaccinations, its ostensible goal.
Intellectual Property and Its Discontents
Washington Times, 10-14-04 This article argues that recent efforts to weaken intellectual property protections for drugs used heavily in the Third World, like those fighting HIV/AIDS, are wrongheaded. He contends that strong intellectual property rights spur innovation which leads the wide dissemination of new discoveries.
Imports Can’t Cure Drug Prices
Detroit Free Press, 10-15-04 This article continues the anti-importation refrain, with a twist: it emphasizes the potential job losses for countries that place price controls on drug companies. It notes that Michigan has 12,000 pharmaceutical industry jobs that pay $70,000 on average, and observes that when Germany last year required a 16-percent rebate on all prescription drugs, companies cancelled plans for new plants and pulled jobs to other countries. Bottom line: markets cannot be eliminated, and if revenues are limited in one place companies will avoid the places that limit them.
Angels Needed in America
Forbes, 10-18-04 The author argues that AIDS research is so vital, and pressures for limiting patent protections for AIDS drugs are so strong, that companies will lack the incentive to continue research unless governments come up with innovative programs. The author’s suggestion: extend patent life on already profitable patented drugs, like Viagra, and guarantee markets by purchasing existing AIDS drugs for the Third World only from companies that invest a certain amount in original AIDS drugs research.
How to Get Vaccines, Not Just Viagra
Los Angeles Times, 10-19-04 This article is noteworthy for who wrote it. Katharine Greider, author of “The Big Fix: How the Pharmaceutical Industry Rips Off American Consumers,” argues that even if we don’t like it, drug companies “are in it for the dough” and hence can be motivated financially to produce needed vaccines. It’s nice to see even an industry critic recognize that human nature is what it is, that incentives matter, and that the public cannot be expected to finance and control every last aspect of drug development.
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