— 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.

— 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 Thursday, as part of the Department of Homeland Security funding bill, the Senate voted to make us less secure by allowing Americans to purchase prescription drugs from Canada over the Internet. The measure is now headed to conference, where House and Senate lawmakers will hammer out a final piece of legislation.

When he introduced the measure to his fellow Senators, Louisiana Republican David Vitter described it as a “re-importation amendment.” And over the next few weeks, as lawmakers deliberate on this, you’re likely to hear that phrase quite a bit. Supporters of foreign drug importation believe that such wording makes this policy more palatable to the American public.

After all, the implication of the term “re-importation” is that once the ban is lifted, U.S. manufacturers will export their drugs to foreign distributors, which will, in turn, sell back those exact same drugs to us.

Brand-name pharmaceuticals found abroad tend to be significantly cheaper than they are in the States, largely because foreign governments impose stringent price controls on most drug sales.
Advocates claim that “re-importation” will allow American patients to benefit from this price disparity.

But “re-importation” doesn’t actually describe what will happen if foreign drug importation is legalized. Using the term is an act of linguistic misdirection — or outright chicanery, if you’ve got a cynical streak.

Importing drugs from Canada is exceedingly dangerous for a number of reasons. For starters, many Internet pharmacies based up North are stocked with drugs from the European Union. And while many wouldn’t hesitate to take medicines purchased from countries like France and Great Britain, there’s plenty of risk involved.

The EU currently operates under a system of “parallel trade,” which allows products to be freely imported between member countries. This means that any drugs exported from the U.K. to Canada could have originated in an EU country with significantly less rigorous safety regulations, like Greece, Portugal, Latvia, or Malta.

Just last year, EU officials seized over 34 million fake pills in just two months. And in May, Irish drug enforcers confiscated over 1.7 million pounds of counterfeit and illegal drug packages. So if American customers start buying drugs over the Internet from Canadian pharmacies, they could easily wind up with tainted medicines of unknown European origin.

It’s also important to note that drugs from anywhere in Europe aren’t even legal for sale in Canada. So, when politicians say we can get “the same drugs” that Canadians get, they’re just plain wrong.

Even more worrisome is outright fraud — many “Canadian” pharmacies are actually headquartered somewhere else.

A 2005 investigation by the Food and Drug Administration looked at 4,000 drug shipments coming into the United States. Almost half of them claimed to be from Canada. Of those, a full 85 percent were actually from countries such as India, Vanuatu, and Costa Rica.

As part of another investigation, FDA officials bought three popular drugs from two Internet pharmacies claiming to be “located in, and operated out of, Canada.” Both websites had Canadian flags on their websites. Yet neither the pharmacies nor the drugs were actually from Canada.

As an FDA official told Congress, “We determined there is no evidence that the dispensers of the drugs or the drugs themselves are Canadian. The registrants, technical contacts, and billing contacts for both web sites have addresses in China. The reordering website for both purchases and its registrant, technical contact, and billing contact have addresses in Belize. The drugs were shipped from Texas, with a customer service and return address in Florida.”

And in laboratory analysis, every pill failed basic purity and potency tests.

Right now, American patients that head online to buy drugs are motivated by the cut-rate prices they see on the web. Health insurers could help patients avoid this temptation by reducing co-pays for drug purchases, particularly for low-income patients. If drugs become more affordable in the States, patients won’t feel the urge to look for a bargain abroad.

Dropping drug co-pays would also help patients stick to their prescribed treatment regimes. All too often, people skip a dose, don’t get a refill, or stop taking their drugs prematurely in order to save money. In the long run, though, not adhering to a drug regimen leaves patients less healthy — and increases national medical expenses by an estimated $300 billion annually.

Calling foreign drug importation “re-importation” is a clever way to sell the idea to the American people. But the term simply doesn’t fit with the facts. In reality, Americans would end up jeopardizing their health by purchasing unsafe drugs made in foreign countries.

– James Saft is a Reuters columnist. The opinions expressed are his own. –

(Correcting name of academic to Peter Reuter on Feb 27)

Want to help fund the bank bailout, ease California’s budget crisis and shore up strained U.S. finances? Legalize drugs, tax the trade and save on interdiction, domestic enforcement and the prison and court system.

I’m only partly joking.

It won’t solve all of the U.S.’s problems and lord knows will cause some new ones, but the money is undeniably big enough to make a dent.

After all, it certainly helped Franklin Delano Roosevelt, who legalized alcohol in 1933 in the midst of the Depression and after more than a decade of prohibition, thus bringing a half a billion in 1933 dollars into public coffers in the form of tax revenue. By 1936, alcohol taxes were 13 percent of Federal revenue.

California Governor Arnold Schwarzenegger has a similar opportunity. He is facing a $42 billion budget deficit, his prisons are filled to bursting, in substantial part with people in on drug-related crime, and he will soon be forced by judicial edict to start freeing people. He also has an offer from a group call Let Us Pay Taxes, which claims to represent the marijuana industry and is willing to pay $1 billion annually in taxes if only he will legalize. No doubt they are low-balling.

The U.N. estimates the value of the U.S. cannabis market at $64 billion annually, while a paper by academics Jonathan Caulkins and Peter Reuter calculates that about half of the costs of drugs are in one way or another attributable by factors linked to interdiction and its perils (click here to read Render’s paper in pdf format).

But even if you cut the U.N. number in half and only tax it at 50 percent, a lower tax than many states and localities put on tobacco, you’d still get more than $15 billion nationwide. If California consumes its 13 percent share, in line with GDP, and I am betting it does, you are looking at something on the order of $2 billion even before you take account of lower costs. Harvard economics professor Jeffrey Miron has a lower estimate, at $7.7 billion annually nationally in lower spending and $6.2 billion in extra revenues.

Of course, these figures could fluctuate wildly depending on levels of compliance and market factors.
But why stop at cannabis? Just as Roosevelt decided that prohibition of alcohol was a failed policy the U.S. could no longer afford, perhaps the costs of re-building the U.S. banking system and lifting the country out of a severe recession will prompt another radical plans. I wouldn’t bet on it, but strange things are happening all over.

A BILLION HERE, A BILLION THERE

And if we start including other drugs the billions will only mount. There is another $100 billion in annual illegal drug sales in the U.S. outside of cannabis, which might produce another $25 billion annually in revenue by the same maths. The U.S. Federal government alone spent $13 billion on the drugs war in 2002, not counting prison costs.

Then there are other costs of the American drug interdiction efforts internationally, not least in Afghanistan, where opium revenue fuels the Taliban. The U.S. spends more than $1 billion a year there on anti-drug efforts, but opium money undoubtedly raises the total costs for the U.S. by much more.

The stream of income from all of this extending into the future is very valuable indeed and would go a way towards paying the price of fixing the banking system.

This brings us to another point of weakness for the U.S.; namely its ability to fund all of the costs it has already taken on and is likely to have to shoulder in the next several years. Moody’s credit rating agency did what everyone has pretty much taken for granted for a while not long ago, acknowledging that the U.S.’s AAA credit rating is being “tested” and falls into a category below those on the top shelf like Canada and Germany.

It’s not all wine and roses though. Cheaper legal drugs may lead to a spike in use, which might hit productivity and impose lots of costs, such as higher health and other welfare costs. All of those prison, military and law enforcement jobs are a huge source of stimulus, and the cut backs implied by legalization would raise transitional problems.

Moreover, drug legalisation, just like for alcohol, is essentially a moral and political decision about which reasonable people can disagree. It’s also, to put it mildly, not very likely.

Still the war on drugs rolls on, costing billions, creating huge incentives for violence and crime, imprisoning hundreds of thousands and seemingly never much closer to victory. The waste and misery involved must make it rival the sub-prime bubble as a misallocation of resources.

Perhaps one stone will end up killing two birds.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here. –

– Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. –

Last year, around 2,500 Mexicans died in the twin wars drug cartels are waging against each other and against the Mexican state, using weapons smuggled in from the United States. In the first 11 months of this year, the death toll was 5,367, according to the Mexican attorney general. Next year?

There is no end in sight. At least two of the lethal ingredients in the toxic brew that fuels Mexico’s ever-widening violence are unlikely to change: lax American gun laws and a Mexican border that barely controls north-south traffic. On many of the crossing points along the 2,000-mile frontier, travelers coming in from the United States, by car or on foot, are routinely waved through without even having to show identity papers.

Weak Mexican border controls rarely feature in official or academic reports on a problem that has prompted some experts and U.S. publications to wonder whether Mexico is a “failing state”. That’s the headline over a cover story on Mexico in the latest edition of the business magazine Forbes. Mexican officials reject the label.

But privately, they concede that Mexican authorities are doing a less-than-thorough job in searching and monitoring north-south traffic. They tend to point in the other direction, to the easy availability of guns in the United States, the armory of Mexico’s criminal mafias.

According to statistics from the U.S. Bureau of Alcohol, Tobacco and Firearms (ATF), the agency charged with regulating the firearms industries, there are 9,161 licensed arms dealers in the four states bordering Mexico — California, Texas, New Mexico and Arizona. Buyers from licensed establishments need to go through a background check and the serial numbers of their purchases can be traced.

No background checks and no paperwork is necessary for weapons traded between private citizens on the “secondary” market — gun shows, over the Internet, through classified advertisements. Around 40 percent of all gun sales in the United States, where private citizens own at least 200 million guns, are on the informal market, estimates the Violence Policy Center, a Washington-based group in favor of tougher gun controls.

How many guns are smuggled across the porous border? Nobody knows, and a frequently used figure of 2,000 every day appears to be more of an urban legend than an estimate based on evidence. It would amount to 730,000 smuggled guns a year.

Whatever the number, it is enough for the U.S. State Department, on its website, to advise citizens contemplating a visit to Mexico that “recent Mexican army and police confrontations with drug cartels have taken on the characteristics of small-unit combat, with cartels employing automatic weapons and, on occasion, grenades”.

AMONG WEAPONS OF CHOICE: COP KILLERS

Almost all the weapons seized inside Mexico or left at the scene of shootouts have been traced back to the United States through eTrace, an electronic system the ATF set up to trace illicit firearms. The cartel killers’ weapons of choice: AK-47 and AR-15 assault rifles. Favorite pistols: Colt .38 Super, Glock 9 millimeter, and the FN 5-7, nicknamed “cop killer” because it can pierce a flak jacket at a range of 300 meters.

All these can be legally (and easily) acquired in the United States by citizens and legal residents without a criminal record, after a background check with the Federal Bureau of Investigations that often takes less than 15 minutes. The ease with which Americans can get arms flares into public controversy at regular intervals, usually after a gun owner with a grudge commits a massacre in a school or other public place.

Attempts to introduce more restrictions have failed regularly, and this year the Supreme Court ended decades of legal argument by ruling that the second amendment of the U.S. constitution, written 219 years ago, does guarantee an individual’s right “to keep and bear arms”.

Even Eduardo Medina Mora, the outspoken Mexican attorney general who makes no secret of his frustration with the flow of weapons from the north, seems resigned to the prospect that the United States will not change its gun laws to keep Mexico from sliding into deeper trouble.

“Although … it may seem absurd to us that a (U.S.) citizen can buy an AK-47, an AR-15, or a Barrett .50, it’s the law of the land,” he told the Spanish newspaper El Pais in November. The last item on his list is a sniper rifle that costs $8,650, weighs 30 pounds and can punch through an armored vehicle from a mile away.

On the U.S. side of the border, the ATF has just launched an advertising campaign in Arizona to remind citizens that buying guns on behalf of others — so called-straw purchases — carries penalties of up to 10 years in jail. Using straw buyers has been one of the cartels’ methods to evade background checks. Gun shows are another.

Just before entering Mexico, large signs at crossing points read: “Warning: Firearms and Ammunition Illegal in Mexico.” Chances that you are stopped and searched by Mexican officials are slim.

Reuters correspondent Tim Gaynor, author of a forthcoming book on the frontier (Midnight on the Line: The Secret Life of the U.S.-Mexico Border) reports: “In scores of crossings I have made to Mexico over several years, I have been stopped on just two or three occasions. Never once have I had my car searched. The odds are heavily in favor of the smugglers.”

Time for Mexico to start watching its border rather than pointing a finger at the United States?

You can contact the author at Debusmann@reuters.com. For previous columns by Bernd Debusmann, click here.