The Wrong Prescription: Drug Pricing initiatives and the cost of too much regulation.


By Antonio Castillo

A new initiative, the Drug Price Relief Act, will soon be on the ballot in California. The act would require state programs to pay no more for medications than prices negotiated by the U.S. Department of Veterans Affairs. This would apply to any program where the state ultimately pays for a drug, even if the state does not purchase the drug directly.

Essentially, “drug price relief” could be carried out in two manners: price caps or “reimbursable drug formularies.” Price caps would force pharmaceutical companies to sell their drugs at a price set by the government. The second policy would go about determining the “cost-effectiveness” of each drug. Ergo, a regulatory agency would determine the clinical benefit and safety of a product. Then, the government would pay a drug company for all or part of a prescription, or repay the consumer.

"Our primary purpose here is to strengthen the hand of government in negotiating prices, and make clear the public ire over the cost of drugs and the lack of transparency, and that profit is an issue that has to be dealt with," said Michael Weinstein, president of the AIDS Healthcare Foundation, which authored the initiative. His foundation cites exponentially increasing prices of certain drugs (like pyrimethamine) as the problem his act attempts to solve. Weinstein asserts that the initiative would aid at least 5 million Californians, including members of Medi-Cal and the state public employees' pension system.

Currently, various insurance companies act as the third party between the consumer and the drug company. A drug reimbursement is often a benefit of a medical insurance plan, though not all plans offer prescription drug benefits. Moreover, the FDA determines which companies can sell drugs and what drugs they can sell.

This system was created in an effort to lower drug costs and improve public health. However, government price controls actually exacerbate supply difficulties and heighten the risks of drug shortages. Professor Yanick Labrie, a scholar at the Montreal Economic Institute, recently published research on the effects of Canada’s price controls on the drug market. His research points out that the increasing cases of shortages seen in recent years are mainly shortages of generic drugs, and that this coincides with the continued lowering of prices caps by the Canadian government.

Moreover, these policies have the effect of significantly restricting and delaying the development of new drugs. Barely 21 percent of the new drugs approved by Health Canada between 2004 and 2011 could be found on the lists of products covered by drug insurance plans. During this period, the average delay before new drugs became reimbursable by public plans was 659 days. These ill-advised policies not only reduce patients’ access to current drugs, but also discourage investments, which are necessary for the advent of new drugs in the future. In many cases, new drugs actually reduce overall healthcare spending.

Indeed, innovative pharmaceutical technologies have increasingly replaced costlier kinds of medical treatments over the years, especially surgeries requiring hospitalization. Public policy debates regarding the growth in spending on drugs and ways to slow that growth too often lose sight of the many pharmaceutical improvements we have enjoyed over the years. Even if they are expensive, new drugs continue to provide enormous benefits to patients. They help to prolong and improve their lives, as many empirical studies show. Therefore, rather than trying to control costs through measures based on regulation, centralization, and rationing, the author suggests that governments should instead reduce the obstacles in the way of accessing new drugs. This would allow patients to benefit more quickly from the numerous advantages new drugs offer.

If you want to find the root cause of increasing pharmaceutical prices in the United States, look no further than the FDA. A new report by the Government Accountability Office points out that, while pharmaceutical investments increased by 147 percent between 1993 and 2004, the number of new drugs on the market increased by only 38 percent. Today, the FDA requires that drugs go through a three-phase approval process before patients are allowed to have them. Each phase involves clinical trials on a group of people. Total cost: $800 million per new drug approved. Time elapsed: 10 to 15 years.

On top of that, the FDA grants legal-monopoly status to companies that are willing to take “generally recognized as safe” compounds into compliance with their current regulatory framework. The FDA assumes no one would step forward to handle the heavy costs of getting those drugs regulatory clearance. Other companies would need to submit a huge pile of regulatory paperwork in order to compete. This would call on the services of lawyers and scientists, cost a lot of money, and take time. As a consequence, companies might not be able to recover the costs from a relatively small pool of users.

Underlying it all — but seldom asked — is whether the gigantic costs of regulatory approval are really a necessary evil. Scholars have questioned whether hugely expensive studies and paperwork make even theoretical sense in the case of “generally recognized as safe” drugs, many of which have been familiar to the medical profession for decades, or even centuries.

Today’s moralistic politicians denounce the resulting fiasco without acknowledging the role of yesterday’s moralistic politicians in helping to bring it about. The proposed Drug Price Relief Act would not only increase the risk of drug shortages, but also fail to address the cause of high drug prices that lies within government bureaucracy.