Demonizing drugmakers: the political assault on the pharmaceutical industry.

• Author: Bandow, Doug
• Position: Medicine & Health

FEW SECTORS of the economy have provided more benefits to consumers than the pharmaceutical industry. Drugmakers have been vilified by patients and politicians alike, however, because of what they see as unreasonably high drug costs. Yet, medicine is not the most important component of the recent rise in health care expenses. Morever, the primary reason for current increases in total drug costs is that more and more people are using newer medicines--which means that consumer benefits are rising even faster

Simplistic comparisons between drug costs in the U.S. and those in other countries have little value. Economic wealth, exchange rates, product liability roles, price controls, and other factors all contribute to the prince el drugs. More important, prices for U.S. pharmaceuticals are not excessive relative to the benefits they offer. Drugs have contributed to the sharp reduction in mortality rates from many diseases, including AIDS. Pharmaceuticals also reduce the cost of alternative treatments. Thus, restricting access to the newest and best drugs can be economically counterproductive.

However, the only way to develop new drugs is to invest heavily in research and development. The $30,000,000,000 spent annually by U.S. drugmakers dwarfs the budget of the National Institutes of Health and investments by foreign drug companies. Profits of U.S. firms tend to be high, but not uniformly so, and they create a "virtuous cycle" that encourages more research and development to create groundbreaking medicine.

Yet, industry critics propose everything from socialized medicine to price controls and limits on patents. Such measures would reduce incentives to create new medicines. It is true that some people, especially poor individuals in less-developed countries, lack sufficient access to pharmaceuticals. Private charily at home and abroad should make them more available to those who are most in need, and Washington should include a drug benefit as part of overall Medicare reform. In the meantime, states should help needy seniors through limited pharmaceutical access programs. In addition, policymakers must avoid taking steps that would, intentionally or not, wreck a world-leading industry and deny people access to life-saving medicines.

Many Americans owe their health and lives to new products that emerge on a regular basis from the pharmaceutical industry. In the coming years, genetic research is likely to dramatically expand the benefits of pharmaceutical R&D. One might fairly expect most people, especially those who are ill, to be grateful. However, demonstrators around the world are targeting the pharmaceutical industry, apparently for daring to sell the AIDS drugs that it created at high cost. The tome for the war on "Big Pharma" was set in the 2000 presidential race, when then-Vice Pres. Al Gore campaigned against drugmakers with faux populist rhetoric: "Big tobacco, big oil. the big polluters, the pharmaceutical companies, the HMOs, sometimes you have to be willing to stand up and say no, so families can have a better life." It was an astonishing comparison that equated companies that make life-saving products with those that often are accused of harming consumers. Yet, in the same speech, the Vice President acknowledged "a time of almost unimaginable medical breakthroughs"--produced by the very companies he was attacking.

Although George W. Bush won the election, his Administration largely abandoned its defense of drug patents at later meetings of the World Trade Organization. In the tall of 2001, Department of Health and Human Services Secretary Tommy Thompson implicitly threatened to override Bayer's patent for Cipro if the company did not sharply cut the drug's price during negotiations to purchase a large quantity for protection against the new threat of anthrax bioterrorism.

Legislators have been even more hostile. Rep. Bernard Sanders (1-Vt.) argues that because people can't afford necessary drugs, "many are suffering and even dying." Instead of lauding drugmakers for preventing pain and death, he blames them for causing these things. State officials voice similar criticism. West Virginia governor Bob Wise says that pharmaceutical prices are "outrageous" and warns that big, brand-name drug companies are "going to be spreading lies and half-truths" in response to Iris state government's efforts to control the prices they charge.

On what seems to be a daily basis, both Federal and state politicians are putting forward proposals for various terms of price controls, patent invalidations, and advertising restrictions. The hunt is on for more generous drug benefits at lower prices. A potentially unprecedented expansion of the Medicare entitlement in the form of prescription drug benefits has become the top domestic policy issue in Congress. Whether those benefits will be managed in private competitive markets or subjected to centralized price controls remains to be seen. State legislators faced with bloated Medicaid program budgets have latched onto high drug prices as the key culprit. The political appetite for increased Medicare and Medicaid drug benefits shows no sign of abating. Many officeholders hope to feed it with a steady diet of mandatory price ceilings, weakened patent rights, and restrictive drug formularies (lists of covered and preferred drugs). Increasingly, policymakers treat the innovative drug industry like a political pinata--whacking it with accusations and threats while expecting it to yield its treasured prizes.

Others fault drug companies for advertising their wares too directly and aggressively to consumers, claiming that such advertising merely increases purchases of high-priced "me-too" drugs that offer little therapeutic advantage over cheaper and older ones. Many drugmakers also are accused of exploiting legal loopholes to extend their patented drug monopolies well beyond reasonable bounds.

Even in the aftermath of the fall 2002 elections, which restored Re publican Party control of both Houses of Congress and a marginally more favorable Capitol Hill climate for the pharmaceutical industry, the crusade against drug companies continues. The heat is still on brand-name drugmakers to yield more of their profits and the patent rights that protect them so that generic imitators can flood the market with lower-cost versions of today's drugs and officeholders can dispense them more widely to public health program beneficiaries.

Whether the issues ahead are indirect price controls, coerced "discounts," dilution of patent rights, reimportation of U.S.-manufactured drugs from lower-priced foreign markets, or just plain old-fashioned political scapegoating, the common focus is to force down prices. Under one guise or another, government would confiscate revenue from firms, in effect seizing their property.

With government outlays accounting for more than 45% of all health care spending (plus another 10% in lax subsidies for private health insurance premiums), snaring drug costs weigh heavily on Federal and state bud gets, encouraging legislators to clamp down. For example, Medicaid spending for outpatient drugs increased by an average of 18.1% per year from 1997 to 2000, compared to 7.7% for total Medicaid expenditures. Office-holders would prefer to offer even more generous drug benefits to their citizens, but without asking them to pay most, if not all, of the costs.

The trouble is, some of their constituents are accustomed to insurance coverage for most other forms of medical care that, from an insured person's perspective, appears to be largely free, and they therefore complain about rising out-of pocket costs for prescription drugs. In particular, the traditional Medicare program does not provide outpatient prescription drug benefits, and even other supplemental private insurance coverage for seniors requires significant co-payments and cost sharing. Approximately one-third of all Medicare seniors lack any insurance coverage for outpatient prescription drugs. Unless they qualify for subsidized drug discount cards or state-based assistance programs, seniors who don't have drug coverage lack bargaining clout and must pay cash to meet the highest retail prices in the marketplace.

More recently, even workers and families with private insurance coverage for prescription drugs increasingly see themselves at greater financial Pressured by the rising costs of health plan benefits, their employers and health insurers are asking them to share more of the costs of prescription drugs by paying higher copayments when they fill prescriptions for brand name (nongeneric drugs. Thus, many patients are more likely to know when pharmaceuticals cost more, even if they otherwise pay little or no attention to higher charges by doctors and hospitals that are covered by comprehensive third-party insurance This disparate treatment in health care expenditures increases sensitivity to rising drug prices and fuels political demands for expanded coverage and lower prices.

Alas, drug industry critics have gotten the issue almost entirely...