[Ip-health] NYT: Do New Drugs Always Have to Cost So Much?

[Amy Kapczynski]

very interesting piece in today's NYT -

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Do New Drugs Always Have to Cost So Much?
By EDUARDO PORTER
Published: November 14, 2004
Copyright the New York Times 2004

AMERICAN politicians are so perplexed about how to deal with
prescription drug prices that the best solution they can offer is to
effectively import a Canadian law - by buying drugs subject to Canadian
government price controls - rather than pass one of their own.

There are, however, more straightforward ways to get cheaper drugs than
by borrowing price fixes from across the border. Some economists say
the government can reduce pharmaceutical prices by changing how the
nation pays for innovation.

Prescription drugs are expensive by design. They cost a lot to invent
but are relatively cheap to make, so companies receive patents from the
government that grant them a monopoly and enable them to sell the
medicine at a premium. In doing so, the idea goes, drug makers recoup
their investments in research and development and are encouraged to
invent more.

But some economists say that there is no inexorable economic reason for
drug prices to be as high as they are. "Patents are one way to get
medical innovation, but they are not a fact of nature," said Michael R.
Kremer, an economics professor at Harvard. "It is worth looking for
alternatives."

Strong patent protection has allowed substantial spending on
innovation. American drug companies invested $33 billion in it last
year, according to the Pharmaceutical Research and Manufacturers of
America, a lobbying group. But this arrangement has a measurable
economic cost, keeping drugs from consumers who would buy them if they
were priced like other competitive commodities - marginally above
production costs.

That is not the only inefficiency that patents breed. In the insured
health market, where neither patients nor their doctors actually pay
for drugs, drug companies are subject to all manner of perverse
incentives. For instance, they can reap more from investing in marginal
improvements over existing therapies - and buying ads to persuade
patients to pay big markups for them - than from investing in riskier,
ground-breaking drugs.

The Food and Drug Administration has classified only about 20 percent
of the drugs developed over the last 10 years as qualitative
breakthroughs. Even though they spend more on research, pharmaceutical
companies are finding fewer new drugs. In a report this year, the
F.D.A. said that the way drugs are developed "is becoming increasingly
challenging, inefficient and costly."

One alternative is to have the government pay directly for research,
which some economists say could maintain innovation while reducing drug
prices. The government already spends almost $30 billion a year on
basic drug research at National Institutes of Health laboratories and
at universities, much of which results in new drugs. It would be
relatively straightforward to extend this to cover the research now
done in drug company labs, economists say.

There are other alternatives. For example, the government could
compensate drug companies for their inventions as an incentive for them
to keep innovating. How to determine how much an innovation is worth?
One possibility would be for the government to selectively buy patents
at a premium over the price a private bidder was willing to offer, and
then put them into the public domain, Professor Kremer said. Aidan
Hollis, an assistant professor of economics at the University of
Calgary in Alberta, devised a different approach: the government would
set up a fund to compensate drug companies based on how much their new
drugs improve the quality of life and how often they were used.

These alternatives would carry several benefits, economists say. In
addition to making drugs available at lower prices, they would make it
much less profitable for pharmaceutical companies to spend millions of
dollars to develop drugs, like Nexium and Clarinex, that are protected
by patents but offer little improvement over similar drugs already on
the market.

The goal is not to spend less to develop new drugs, Professor Hollis
said, but to get more therapeutic bang for the buck - by channeling
investment to where it matters most - as well as to increase access to
the resulting drugs. "This can be done within the same budget as we
devote to pharmaceuticals now," he said.

There is an incentive for the government to seek ways to control drug
costs. Through programs like Medicare and agencies like the Veterans
Administration, its spending on prescription drugs is growing more than
10 percent a year and will hit $46 billion in 2004, almost one-fourth
of the nation's total spending on these drugs, according to the
Department of Health and Human Services. The expansion of Medicare's
drug coverage will add more than $50 billion a year to the bill, on
average, over the next decade.

Drug companies, of course, do not like any of this. They have mustered
lobbyists to oppose such ideas and have referred to research that
supports strong patent protections.

Patricia M. Danzon, a professor at the Wharton School at the University
of Pennsylvania whose work is often cited by drug makers, said that
lack of access to prescription drugs was not a big problem in the
United States. Most Americans have health insurance with drug coverage,
she said; for those who don't, the solution is to provide them with
coverage - not to upend the patent system. "I'm not sure what all this
gains us," she said of the call for reform.

She added that "small adjustments in the patent system would be a more
appropriate way to address" the investment in "me too" drugs. And
changing the rules of the game might itself introduce inefficiency.

Another critique, by Joseph A. DiMasi of Tufts University and Henry G.
Grabowsky of Duke University, compared proposals for government rewards
for research to the way the old Soviet Union gave prizes to its
inventors. The Soviet "record of innovation was not impressive," they
said.

There are potential problems to be considered in the alternatives.
Political decisions could skew government-financed research,
misallocating investment. Governments short on cash may be tempted to
underpay for private-sector invention, reducing companies' incentives
to innovate.

Auctions like the one proposed by Professor Kremer could be manipulated
or undermined by corruption, while bids for patents might be low
because most drugs would be sold as cheap generics. Pricing techniques
like those proposed by Professor Hollis would require controversial
decisions about issues like the monetary value of an extra month of
life.

Professor Kremer, Professor Hollis and others say their proposals will
probably need to be tweaked. They could be made voluntary, for
instance, letting companies keep their drugs out of a new system but
providing enough rewards to entice them in.

Other ideas should be explored and tested, too, they say, urging policy
makers to remember the main point: the current system is not working
well. "The pharmaceutical market is probably the worst-functioning
market that there is," Professor Hollis said.

SO what's the chance it will change? Last month, Representative Dennis
J. Kucinich of Ohio, who sought the Democratic presidential nomination
this year, introduced a bill in the House to essentially replace drug
patents with direct government financing of research. But even Dean
Baker, co-director of the Center for Economic and Policy Research, who
advised Mr. Kucinich on the idea, is skeptical of the bill's prospects.
"Today all of these proposals are going nowhere," he conceded.

But the nation's bill for prescription drugs is forecast to reach $520
billion by 2013, more than twice its current level. At some point,
something may crack. "We're on a path that is clearly not sustainable,"
Mr. Baker said. Then, perhaps, the current system could change or die.

Until then, the United States can rely on Canada.