The Pharmaceutical Industry

Merrill Goozner, former chief economics correspondent for the Chicago Tribune, is a professor of journalism at New York University. Andrew Sullivan, a senior editor at the New Republic, writes daily for andrewsullivan.com. This week, they discuss whether the pharmaceutical industry needs to charge high prices to protect innovation. 


It looks like we’re not going to agree on much. Since this is my last post, I will revisit the most important issues we’ve identified. But before I begin, a minor complaint. I don’t think your prattling on about socialized medicine and cultures of envy and resentment has helped the discussion at all. You may find this hard to believe, but I would like to see a successful drug industry in this country. We just differ in our definitions of success. Success to you is a health system that rations one of its more critical elements through price and justifies that rationing in the name of innovation. I say we can provide the most important medicines to all people at affordable prices without jeopardizing innovation. We can do it if we would just eliminate corporate waste. Allow me to explain.

Me-too drugs do not lower prices through competition, as you asserted. Generic drugs lower prices. All the studies of me-too drugs show that they enter the market at about the same price as their competitors, or they enter at slightly higher prices because their minor differences are marketed as innovations. Since these new drugs are patented, just like the prior drugs in that market segment, it would be foolish for any firm to upend the segment’s pricing power by, gulp, actually competing through lower prices.

Indeed, the best place to learn about the value of most me-too drugs is in a business-school marketing class, not a doctor’s office. I’m not against drug companies developing products to go after other firms’ market share. I just don’t want to be billed for it. It never ceases to amaze me how the same conservative commentators who continually complain about government waste can never find a single corporate expenditure worth impugning. Let’s call most me-too research what it is: corporate waste.

Who’s responsible for innovation? You say the international drug industry has located operations here because we don’t allow envy to stand in the way of innovation. I have a better reason. No government on Earth supports health research and drug development like the United States does, and it is growing by leaps and bounds every day. It was a big winner in the Bush administration budget released this week just as it was a big winner in the Clinton administration. (You got your facts wrong again. The NIH is currently nearing the end of a five-year plan to double its budget.) What has that plan produced? A growing portfolio of patented inventions, which are then licensed to the private sector through technology transfer offices at NIH, universities, and nonprofit labs. But to make use of those government-funded patents, firms are required to be located here. I quote from the NIH technology transfer office Web site: “Licensees must normally agree that any products embodying the invention or made through the use of the invention, and which are sold in the United States will be manufactured in the United States.” This law is courtesy of the 1980 Bayh-Dole act, that neat little piece of—perish the thought!—industrial policy that was passed in the waning days of the Carter administration to bolster the lagging competitiveness of U.S. manufacturing. One final point on this issue: Your insistence that the industry alone was responsible for developing the latest AIDS drugs is either willful ignorance of history or deliberate distortion. I long ago granted the industry’s important role in drug development. I’ve yet to hear you say a single positive word about the government’s role.

By the way, I’m glad you dragged Hillary Clinton into this. PhRMA, the industry trade group, has been foisting that canard—that drug industry R&D slowed because of the mere discussion of her health care plan—onto gullible reporters for years. Industry R&D slowed in 1993 and 1994 because the economy slowed, thanks to Alan Greenspan raising interest rates by nearly two percentage points to slay the phantom dragon of inflation. Since the drug industry funds R&D out of current revenues—a point discussed in yesterday’s post—it was among the first budgets slashed when the economy turned down. They’ll probably cut back again as the latest Greenspan spasm works its way through the economy. Who knows, Andrew, perhaps this time they’ll blame John le Carré, Tina Rosenberg, Stephen Hall, Jeff Gerth, Sheryl Gay Stolberg, Barton Gellman, and other leading journalists and writers who took on the drug industry on the eve of the slowdown.

Drug advertising? A growing number of doctors agree it is distorting consumer behavior and interfering with best medical practice. When it comes to my health, I’m with you: The informed consumer is the smart consumer. But where should I get that information? I’ll take the word of a medical professional or reputable information source over a 30-second ad any day.

Bottom line: You conclude by stating that important new drugs should only go to those who can afford them, the “brutal consequence” of the current system. Then you attack government for failing to be honest when it seeks to subsidize them. Well, let us agree on that point. I am dead set against the government writing the industry a blank check in the name of providing a Medicare drug benefit to the one-third of senior citizens who have no coverage.

How could we provide the benefit without sanctioning a drug industry raid on the Treasury? We should adopt a reform that noted Princeton University health economist Uwe Reinhardt wrote about in the New York Times earlier this year. The government and private insurers should put up $1 billion to create a private, nonprofit research institute to study and report on the relative advantages of different medicines. Insurers, whether the government or in the private sector, could then “reimburse patients fully only for the relatively low-cost effective drugs, but require consumers who want a higher-priced alternative to pay the price difference. … Patients cannot receive financing for slightly improved medications at whatever cost.”

Let the drug industry’s innovations—both the good and the bad—compete in the information marketplace. Now, there’s an innovative therapy for the skyrocketing cost of drugs.