Government negotiations in drug prices are dangerous

July 16, 2009

Peter Pitts — Peter J. Pitts is president of the Center for Medicine in the Public Interest and a former FDA associate commissioner. The views expressed are his own. —

On Tuesday, House Democrats released the Affordable Health Choices Act of 2009, their comprehensive health reform package. As expected, the proposal to create a brand new government insurance program designed to directly compete with private plans is getting a great deal of attention.

An important power of this “public option” has yet to receive much scrutiny, though. The secretary of Health and Human Services will be given the authority to “negotiate” prescription drug prices for the public option.

This is a big deal. Government “negotiations” with private vendors almost always mean public officials simply dictating below-market prices. If that holds true in the public option, drug companies that want to participate in the program will be forced to deeply discount their meds.

These negotiations might translate into cost-savings for patients up front. But the long term effect would be a stifling of pharmaceutical innovation, leading to fewer new breakthrough medicines and compromised patient care.

How so? Developing a new pharmaceutical drug is incredibly expensive. The whole process –including the initial research stages, the countless in-lab experiments required to turn a promising chemical into a usable drug, and the slow, grinding navigation through the FDA’s notoriously difficult safety approval pathway — costs over a billion dollars and takes over a decade for the average drug.

Forcing pharmaceutical makers to sell at artificially low prices for a substantial slice of their customer base would drastically reduce their revenues, and leave an increasingly small amount for financing the discovery of new drugs.

It’s also likely that many drug producers simply won’t be able to afford to sell at government-demanded rates. They won’t participate in the public option, and beneficiaries will be stuck with fewer drugs choices.

As Stanford economists Alain Enthoven and Kyna Fong have explained, when discussing Medicare Part D, “Government price negotiation could leave people without drugs that manufacturers decide aren’t sufficiently profitable under the plan.”

That’s exactly what has happened under the health insurance program run by the Department of Veterans Affairs, which is already empowered to directly negotiate prices with drug producers.

Of the 300 most prescribed drugs among Americans 65 and older, the VA only covers 65 percent of them, according to a study from the Lewin Group. By contrast, the two most popular plans in the Medicare Part D drug benefit — where private insurers compete for customers — each cover 94 percent of those medicines.

In fact, over a third of retired veterans supplement their VA coverage by enrolling in Part D

The Part D model hasn’t sacrificed cost-savings for choice, either. The competitive pressures among participating insurers have lead to a 17 percent drop in out-of-pocket spending for seniors who enrolled in the program in 2006 — that’s equivalent to 14 extra days of medicine a year.

Moreover, Part D’s total expenses over the next decade are expected to be nearly $120 billion less than originally estimated when the program was created.

Senate Democrats could unveil their healthcare bill by as soon as the end of the week. Legislators from both chambers will then have to hammer out compromise legislation. Hopefully, when it comes time to vote, the final bill will eschew the government-heavy approach typified by direct negotiating powers. Instead, officials should take a cue from Part D and enable market competition to bring down health costs while expanding patient access to vital pharmaceutical treatments.

12 comments

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Mr. Pitts, that is precisely what Cananda requires of all pharmaceuticals. I don’t see any of them pulling out of the Canadian market. Pharmaceuticals spend billions on advertising for prescription drugs. This practice should be illegal. The savings then could be passed on to the cost of drugs.

Universities through federal grants provide most of the basic research and development of new medicines. Merck and Lilly don’t have a good track record at conducting trials. This has cost them terribly in lawsuits. We the consumer bear the brunt of these costs.

I could rant all day but clearly a new system for providing health care and pharmaceutical products must emerge. The present system will soon cater only to the rich.

Posted by Anubis | Report as abusive

The pricese for critiacal heart disease is high because of cost of Lipitor.
Do you realize that there are only three medicines prescribed for heart problems -Lipitor a blood pressure reducer pill and aspirin. Amazing the statin will not extend life.

Posted by james klink | Report as abusive

THIS IS IT!

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The house healthcare bill should be viewed as the minimum GOLD STANDARD by which all other proposed healthcare legislation should be judged. All supporters of true high quality healthcare reform should now place all your support behind this healthcare reform bill released by the United States House Of Representatives, as the minimum Gold standard for healthcare reform in America.

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SPREAD THE WORD

(http://www.youtube.com/watch?v=RSM8t_cL Zgk&feature=player_embedded)

God Bless You

Jack Smith — Working Class

Posted by jacksmith | Report as abusive

Have you seen this research that basically shows that what you are saying isn’t true?

Foreign free riders and the high price of US medicines
BMJ. (British Medical Journal)
2005 October 22; 331(7522): 958–960.

Donald W Light, professor and Joel Lexchin, associate professor

The US government, backed by the pharmaceutical industry, wants to convince Americans that they’re paying more for drugs because they’re contributing more than their fair share of the costs of research and development. Not so, argue two researchers who have looked at the evidence.
Top
Abstract
Origins of the campaign
The free rider myth
Lower prices do not lead to less research
Europe no less innovative than the US
Misusing economic theory
Conclusions
References

The United States government is engaged in a campaign to characterise other industrialised countries as free riding on high US pharmaceutical prices and innovation in new drugs.1 This campaign is based on the argument that lower prices imposed by price controls in other affluent countries do not pay for research and development costs, so that Americans have to pay the research costs through higher prices in order to keep supplying the world with new drugs.1,2 Supporters of the campaign have characterised the situation as a foreign rip-off.3 We can find no evidence to support these and related claims, and we present evidence to the contrary. Furthermore, we explain why the claims themselves contradict the economic nature of the pharmaceutical industry.

http://www.pubmedcentral.nih.gov/article render.fcgi?tool=pubmed&pubmedid=1623969 5

Summary points
Prices of patented drugs are substantially higher in the US than in other affluent countries
Published reports indicate that pharmaceutical companies in affluent countries recover research and development costs from domestic sales with substantial profits
Discovery of innovative new drugs in Europe is proportionately equal to that in the US
US pharmaceutical companies invest just 1.3% of net sales in basic research
The idea that the US is subsidising other rich countries contradicts basic economics and the global nature of pharmaceutical markets

Posted by Soren A | Report as abusive

“If that holds true in the public option, drug companies that want to participate in the program will be forced to deeply discount their meds.”

and

“These negotiations might translate into cost-savings for patients up front. But the long term effect would be a stifling of pharmaceutical innovation, leading to fewer new breakthrough medicines and compromised patient care.”

Forced to “deeply discount” their meds? Huh? Meaning they will not be priced 3x more for Americans than the rest of the free world?
No, the “long-term effects” would translate into more patient health care and reduced corporate executive bonus’ and shareholder profits.

Posted by Petunia McIntyre | Report as abusive

Well, when I consider that my inhalant for COPD (caused by an oil-spill in Buzzard’s Bay, MA.) costs me a fraction of what it amounts to in the USA – I would really question the reasoning of writer of this particular article. Portugal, where we live as expatriates, negotiates with BIG PHARMA and it is amazing to realize after living in the USA for 38 years how much the American consumer is being ripped off and has been for decades.
Drugs are even less expensive in Spain which is difficult to fathom for any American but BIG PHARMA has not withdrawn from the European Markets – so it must be profitable still. The notion that research will be negatively affected is utter nonsense. The research is mostly funded by Government grants and by University grants (I know that to be factual) – BIG PHARMA is simply spending too much money on TV ads and print advertisement.

I would never ask a physician to prescribe a particular drug because I saw it advertised – I leave that up to my physician to determine what is appropriate for me. So stop the advertisement expenses (like for tobacco) which are huge and allocate the monies instead to research or bringing down cost. Now that would be a step in the right direction. In addition, stop your expensive lobbies from hounding and bribing legislators, more money available for research. Is BIG PHARMA responsible for profits or the health of people? It makes you wonder…………….

Folks might want to check out single payer health care movement.

Single payer is real health reform that’s affordable for everybody (we could make it free for everybody with what we would save)

Its far cheaper for all of us than what we have now, and far better. people end up a lot healthier. The best web site to find out more about single payer is Physicians for a National Health Plan

http://www.pnhp.org

Single Payer has been successful in making health care affordable in countries all around the world.

The pharmacy executives hate it, because it saves people a lot of money.

The current Democratic health care plan isn’t single payer, and they insist that even though its better, their plan won’t lead to it (!) but I think we will eventually end up with single payer because its obviously the ONLY way we can efficiently solve our health care mess. Why don’t we just get on with it and stop posturing.

Canadians have it and they love it. Even the right wingers.

Posted by Soren A | Report as abusive

You write:

“Government “negotiations” with private vendors almost always mean public officials simply dictating below-market prices. If that holds true in the public option, drug companies that want to participate in the program will be forced to deeply discount their meds.”

This is a complete perversion of what is really happening, in that Medicare is prohibited – by sleazy bipartisan fiat – from negotiating the price of pharmaceuticals with vendors, thereby lining said vendors’ pockets, ripping the taxpayer a new one daily and blowing your central argument right out of the water.

You really need a lesson in ethics instead of license to publish outright distortions. Or maybe just a new Truth Drug.

Posted by The Bell | Report as abusive

Negotiation is the American way – this article advocates the way of the managed economy – don’t ask the pharmaceutical companies for a better price – TRUST them. haha. Where are you from? Did you or will you be a consultant for big Pharm? Let’s pass a law that says accept any price they ask for their products – oh, and as a result they have the biggest profit margin of any American business. Hurt them? How about the older people who have to choose each month between medicine, rent and food. Do you sleep well at night thinking about their hurt? This article is a puff piece for the pharmaceutical companies – plain and simple.

Posted by Dan Burnstein | Report as abusive

We all know that USA Health Care system doesn’t work well. That includes hospitals, insurance companies, pharmaceutical companies etc. If they cannot serve out our need we will create alternative system. I don’t see why interests of pharmaceutical companies must be put ahead of interests of society. Why only US customers must subsidize their research while all other governments negotiate favorable prices?
Tell me about last big brake through by any of Big Pharama? For long time Big Pharama prey on small R&D companies. These small R&D carry all research risk without any subsidies.
In critical fields like health, infrastructure (Roads/Bridges etc), defense and education government must provide strong alternative to private companies otherwise country becomes hostage of greedy executives. Pharmaceutical companies and health insurers are a perfect example.

Posted by Serey | Report as abusive

This article is a crock. There is nothing wrong with negotiating drug prices, and it won’t kill research, so long as the government pays a premium for new treatments (and as pharma companies could rightly demand in negotiations).

If anything should be done for pharma companies, the drug approval process needs to be streamlined so that it is easier to encourage new players to enter the market, to encourage further competition and foster innovation.

Also pharma should be protected from lawsuits. If we want new and innovative drugs, we have to accept that some will have unintended consequences. Unless there was a willful attempt to suppress negative data about a drug, the company should not be able to be held liable.

Posted by JamesNYC | Report as abusive

This country is pretty much the only industrialized nation that DOESN’T negotiate prices.Phrma spends 3 times more on advertising and admin costs then they do research and development. So they already don’t have our best interests in mind. Phrma does business in all of Europe and Canada and is doing fine.The tax payers fund lots of new drugs in our public universities only to have the drug companies buy up those patents and market it back to the people who funded it in the first place.

Just the fact you praise MediGap D only proves you are a shill for the industry. MediGap was nothing but a government subsidy for drug companies that was written by drug companies.

As an American i would gladly pay more taxes and would have no problems authorizing spending more money then Phrma spends on advertising and RnD. Which in turn throws out the argument of not having money to make new drugs. They spend about 75 billion a year on Ads and admin. We are currently funding a war that far outpaces that amount.

Posted by Corners | Report as abusive