March, 18, 2004
Director, Health Policy Analysis
The United States prescription drug marketplace is severely broken. It rewards the pharmaceutical industry with profit levels surpassing all other corporate sectors while charging U.S. consumers by far the highest prices in the world. Yet at the same time, high prices ration drug use, as demonstrated by recent reports that life-saving. Cholesterol-reducing drugs are unaffordable for 23 million Americans.
Some U.S. policymakers propose that other countries should change policies so that their citizens can join Americans in paying high prices to finance innovation. This misguided approach should be rejected in the name of both international goodwill and rational drug pricing policy. Instead, U.S. policymakers should develop new models for pharmaceutical innovation and pricing that put first the needs of consumers – here and abroad. A review of some of the facts is in order.
The U.S. government can and has effectively negotiated deep discounts for prescription drugs. Congress wrote into the recently-enacted Medicare prescription drug law an explicit prohibition against the negotiation of prescription drug discounts by the federal government, rejecting the model successfully used by the U.S. Department of Veterans Affairs (which encourages the use of certain lower-cost drugs and negotiates substantial discounts with manufacturers) that saves hundreds of millions of dollars each year without compromising quality of care.
Most “new drugs” are slight variations of “old drugs.” Most U.S. government “new drug approvals” are for slight modifications of existing drugs such as different doses or administration routes, and only about one-third of approvals involve drugs with a new active ingredient, according to analysis of government records by the National Institute of Healthcare Management. A paper in the American Journal of Bioethics suggests that the industry exaggerates the cost of developing new drugs through techniques such as including opportunity costs of stock market earnings and failing to take into account taxpayer subsidies.
The U.S. taxpayer does not get a fair return on its investments for discovery of new drugs. The U.S. General Accounting Office reported that despite an investment of nearly half a billion dollars in research that led to the development of Taxol “the best-selling cancer drug in history,” its manufacturer paid the government royalties of only $35 million during a period when its sales totaled over $9 billion. Instead of achieving a fair return on taxpayers’ investment, the company double-dipped by charging disproportionately high prices to the U.S. government that bought Taxol for Medicare beneficiaries, accounting for one-fifth of domestic sales.
The United States lags behind other countries such as Germany and New Zealand that have curbed prescription drug expenditures by basing purchase decisions on comparative effectiveness and value. With better information controlled by neutral, trusted entities, government purchasers (and individual consumers) in the U.S. would be able to buy drugs based on clinical effectiveness and value at lower prices. Rewarding true innovation that leads to breakthrough drugs, achieving deep discounts through the aggregation of purchasing power, and providing a fair return on taxpayer investments are some of the keys to moving toward a marketplace that provides better value to consumers, both inside and outside the United States.
March 18, 2004