Freeman

POTOMAC PRINCIPLES

Demonizing Drug Makers

Governments Risk Killing the Goose That Lays the Golden Eggs

SEPTEMBER 01, 2001 by DOUG BANDOW

Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books.

The pharmaceutical industry is under siege. Congress is considering various measures to control drug prices and use. More than 40 states are debating proposals to do the same. Demonstrators around the world are targeting drug makers for selling the AIDS drugs that they created.

The more good the companies do, the more hated they become.

The driving issue is cost. The National Institute for Health Care Management Foundation reports that total pharmaceutical outlays rose 18.8 percent last year—faster than medical expenditures and overall inflation.

This raises Medicaid spending for the state and federal governments, encouraging legislators to clamp down. Moreover, people accustomed to largely “free” medical care are complaining to the same politicians. Patients feel the brunt of drug expenditures more than other medical expenses because private insurance and Medicare cover less of the former.

Unfortunately, many lawmakers lean toward the simple answer of price controls. Under one guise or another, government would steal revenue from the firms, in effect confiscating their property.

Similar complaints are being lodged overseas. In many poor nations the standard treatment for AIDS costs many times the local per capita income.

Foreign patients can’t directly lobby American states or the federal government. So nations such as India and South Africa are attempting to lower prices by disregarding patents and producing cheap substitutes.

Alas, drug industry critics at home and abroad have gotten the issue almost entirely wrong, from the statistics they cite to the solutions they promote. Thus governments risk killing the goose that lays the golden eggs.

Increased Demand

Costs are not rising dramatically because drug makers are hiking prices. It only seems so because, as the old adage goes, if you torture statistics long enough, they will confess to anything.

According to the National Institute for Health Care Management Foundation, just 22 percent of last year’s rise was attributable to price hikes. The bulk of the cause, 42 percent, was increased demand for drugs. Another 36 percent was due to the use of newer, more effective, and thus more expensive drugs.

Explained the National Institute, “Americans are demanding, and physicians are prescribing, a higher volume of medicines.” That is, more patients are better meeting their medical needs. Drugs cannot be looked at only as a negative, an expense to be controlled. After all, people demand access to pharmaceuticals because they offer enormous benefits.

Medicines extend and improve the quality of lives, including those of family members and caregivers. Moreover, drugs cut alternative medical expenditures by reducing hospitalizations, surgeries, and other more-invasive treatments. Columbia University economist Frank Lichtenberg figures that every $1 increase in pharmaceutical expenditures actually lowers hospital spending by $3.65.

Most dramatic is the life-saving potential for drugs, which have contributed much to the dramatic increase in longevity, up seven years since 1960 alone. Today 402 medicines to fight cancer and 122 to combat heart disease and strokes are currently in the industry pipeline.

The value of drugs is particularly obvious with a disease like AIDS. When it was first identified in the early 1980s there was no treatment. In 1987 there was one. Now there are 64 AIDS drugs available, with another hundred in development. Such advances warrant a high price.

Thus government action that discourages creation and distribution of drugs will “save” money only at enormous cost. People will die sooner. Their lives will be more painful. And other health-care spending will rise.

Moreover, there should be no doubt that intrusive regulatory proposals will deter innovation. Many people seem to believe that drugs fall from the sky rather like manna from heaven. In their view employees of the evil drug companies got up before anyone else and grabbed the manna, and then put it up for sale at outrageous prices.

In fact, the U.S pharmaceutical makers spent more than $26 billion last year to find needles in haystacks. In contrast, government R&D expenditures through the National Institutes of Health are primarily for basic research; less than $1 billion goes to pharmaceutical work.

No Guarantees

Even $26 billion doesn’t guarantee results. Of every 5,000 to 10,000 substances reviewed, one, on average, finally makes it onto the market. Even then, seven of ten new drugs actually lose money.

Just one of every 60,000 substances studied between 1961 and 1983 was considered to be “highly successful,” generating more than $100 million in annual sales. These few medicines must pay for everything—research, administration, and all the failures.

But critics complain about industry advertising. The $2 billion devoted to ads in the mass media, is, however, dwarfed by R&D expenditures. Moreover, what industry makes a product and tells no one about it? Imagine General Motors developing a new car but keeping it secret.

In fact, pharmaceutical companies devote a larger share of sales to R&D than does the medical industry generally, or computer makers, software developers, or automakers. And advertising informs patients and doctors about what is available. Patient advocates in Canada’s nationalized system, in contrast, complain about the lack of information available to them.

Still, some low-income people have trouble paying for medicines. Wealthy and compassionate individuals should lend a hand. But “first, do no harm” should be the principle that governs any action, private or public.

Thus government should not interfere with a pharmaceutical market that works as well as it does only because it remains relatively free. Instead, private remedies should be narrowly targeted to meet genuine needs.

The pharmaceutical companies already do their part. Forty-nine companies have programs for the uninsured and indigent, and gave away 2.8 million prescriptions in 1998. The Pharmaceutical Research and Manufacturers of America (PhRMA) maintains RxHope.com, a Web site to match patients to private charitable drug-assistance programs. The site states, “The Pharmaceutical Industry is committed to ensuring that everyone who needs prescription medications is able to receive them.”

As for the elderly, what must be avoided is a stand-alone prescription-drug program, which would inevitably lead to runaway costs and overwhelming pressure for price controls.

Americans are rightly concerned about rising pharmaceutical costs. But the reason they are concerned is because of the great benefits provided by drugs. Which means that government must not wreck a world-leading industry and deny people access to lifesaving medicines.

Today, high costs pose a serious, but manageable problem. Intrusive regulation and price controls would pose a far more serious and essentially unmanageable problem tomorrow. Drugs are saving countless lives. Government should keep out of the way.

ASSOCIATED ISSUE

September 2001

ABOUT

DOUG BANDOW

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

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