The ACP Advocate Blog
by Bob Doherty
Wednesday, March 30, 2011
Can the “miracle of the free market” really work when it comes to drug prices?
The Washington Post’s front page yesterday reported on the furor over the “stunning” $1500 per dose price tag for a newly approved drug to prevent babies from being born prematurely. The drug, sold under the brand name, Makena, reportedly uses compounds that previously were available for $10 to $20 a shot. The article says that if all eligible women receive the drug, $4 billion would be added to the national health care bill.
The company that makes the drug argues that “the price is reasonable, given that it is spending more than $200 million to develop the drug and conduct follow-up studies that the Food and Drug Administration demands,” according to the Post. The company also promises to ensure that every woman who would benefit from the drug will be able to get it.
As of this morning, the website of the of the Pharmaceutical Research and Manufacturers Association had no comment on the Makena controversy, but a 2005 speech by then-PhRMA president Billy Tauzin makes the industry’s case that R and D costs are the reason why new drugs cost so much:
“Only 1 in every 5000 compounds gets all the way from the lab through FDA approval. For those that do, the average research cost comes to about a billion dollars. It takes about 14 years of research and clinical trials to bring a drug to market. At that point, the company only has six years at most left on the patent to try to recover their costs. Of those drugs that make it all the way to market, how many manage to recover their costs? Only three out of ten. As the math makes clear, it’s the handful of blockbuster drugs that foot the bill for all of our industry’s R&D – an investment that last year came to almost $39 billion. Let’s put that in context: That’s more than the operating budget of the National Institutes of Health… It’s 19 times as much as pharmaceutical companies were spending in 1980, when I first came to Congress. .. This kind of research is possible for one reason, and one reason only – because of the miracle of the free market system, and its ability to pull together the needed resources.” Now that really would be a miracle drug.”
The problem with PhRMA’s argument, though, is that it doesn’t seem to apply to Makena. “The main study used to demonstrate the drug’s effectiveness was a $5 million project conducted by the National Institutes of Health — paid by taxpayers” writes the Post, and the drug is based on compounding pharmacies, which were previously widely available at very low cost but were of questionable purity and consistency.
So what should a policy-maker do? Eat the cost and pay the $1500 per dose? But wait—unlike other parts of the health care sector (like physicians), drugs generally are not subject to government price controls. Deny eligible women access to the drug? Pass the cost on to everyone else?
I understand that price controls are a blunt instrument that can do more harm than good. A 2008 position paper I co-authored for ACP, published in the Annals of Internal Medicine, compared U.S. health care to other countries’ systems, including how different systems control costs. It concluded that “Cost savings can be achieved through the use of government power to negotiate prices . . . but may result in shortages of the services that are subject to price controls, delays in obtaining elective procedures, cost shifting, and creation of parallel private sector markets for health care services for those who can afford to buy services from sources not subject to price controls.”
Yet as the pricing of Makena demonstrates, not giving government the power to negotiate prices, may result in shortages, delays in obtaining care, cost-shifting, and different access for those who can afford to buy the drug and those who can’t.
Maybe Makena is an outlier, and PhRMA is right that the “miracle of the free market system, and its ability to pull together the needed resources” is the engine behind the development of beneficial new drugs. But you have to wonder, as appears to be the case with Makena, when there is no competition for the drug, when the number of people who will benefit is great, when the taxpayers footed most of the bill for the R and D that led to the drug’s development – and yet there is no ability for the government to condition coverage on negotiating a reasonable price.
Today’s questions: Should the federal government be able to regulate or negotiate prescription drug prices? And what does the Makena controversy say about the broader argument that “the miracle of the free market,” not more government regulation, is the answer to the country’s access and cost problem?
About the Author
Bob Doherty is Senior Vice President, American College of Physicians Government Affairs and Public Policy; Author of the ACP Advocate Blog
Email Bob Doherty: TheACPAdvocateblog@acponline.org.Follow @BobDohertyACP
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