The assault on Big Pharma and the unintended consequences

Everybody loves to hate those durn pharmaceutical companies, the ones that provide life-saving drugs for millions of Americans, what with their profit seeking. Writing in the libertarian-leaning Reason, Katherine Mangu-Ward wonders what the Democrats might do to make Medicare’s prescription drug benefit worse (HT - Decision08):

When the Republicans passed Medicare part D, I—like many libertarians—despaired of the GOP. The only thing worse than a massive new entitlement ushered in by Republicans? A passel of aggressive Democrats promising to "fix it." By allowing Medicare to negotiate for lower drug prices with pharmaceutical companies and permitting more importation of pre-price controlled drugs from Canada, Democrats will add another command-and-control component to our already monstrosity of a health care system.

There's the old familiar song and dance about how if you decrease Big Pharma's prospective profits on new drugs, they will (reasonably) retaliate with less spending on research and development. According to the author of a new study from the Manhattan Institute: "Prices would be driven down by over 35 percent by 2025. The cumulative decline in drug R&D for 2007-2025 would be about $196 billion in year 2005 dollars, or $10.3 billion per year. Because R&D costs for new medicines are about $1 billion, the loss would be about 196 new drugs."

But to really understand the havoc a Democratic "fix" could wreak, warily eyeball the Department of Veterans Affairs, which already negotiates for its drugs and has been cited by Democrats as a model for Medicare. At the VA, prices for drugs are very low. But one way that the VA keeps overall prices down is by making it tough to get new, expensive drugs. Their formulary includes about 1400 drugs, and they refuse to consider a drug for inclusion until it has been on the market for three years. Compare that with the 4,300 drugs currently listed at (the privately negotiated) Part D formularies. Right now, a third of VA seniors say they would rather be on Part D. If Dems have their way, at least these vets won't have to bother with the paperwork for switching.

The Boston Globe also had an analysis in the similar vein today titled: “What’s good for Pharma is good for America”

The huge profits of major drug firms are often tied to one or two drugs, such as Pfizer's Lipitor or Viagra -- profits that evaporate when their patents expire and generics enter the marketplace. The Standard & Poor's review of pharmaceuticals thus starts somberly, noting that products with $21 billion in US drug sales are going off patent in 2006, with another $24 billion to follow over the next three years -- a sharp dent for an industry that today generates about $250 billion in revenue. All the while, the pharmaceutical houses also must absorb the legal and business risks needed to identify, patent, test, license, and market any new drug.

These trends should worry us all. Pharmaceuticals are not tobacco. There is no reason to rejoice in putting pharma on the ropes if its business reversals hurt the very consumers they are trying to serve. The medical advances of the past 30 years are not just a matter of dumb luck. They are very heavily dependent on the patent law, pricing freedom, and marketing strategies that have allowed these firms to bring a wide variety of vital products to market.

The champions of further regulation argue that their efforts won't limit innovations or curtail the widespread use of new drugs. But there are no free fixes. Too often ill-designed regulation gives us the worst of both worlds -- slower innovation and more limited drug use.

I’m no fan of the prescription drug benefit since it’s yet another entitlement heaped on the back of taxpayers without much regard to spiraling long-term costs. But by nearly every account, it’s been an effective and popular program. Why mess with success?