Crying Wolf

In Krugman's otherwise good article on bargaining for pharmaceuticals, he makes a really poor argument on a really important point:

Needless to say, apologists for the law insist that the prohibition on price negotiations had nothing to do with catering to special interests - that it was a matter of principle, of preserving incentives to innovate. How can we refute this defense?

One way is to challenge claims that the pharmaceutical industry needs high prices to innovate. In her book "The Truth About the Drug Companies," Marcia Angell, the former editor in chief of The New England Journal of Medicine, shows convincingly that drug companies spend far more on marketing than they do on research - and that much of the marketing is designed to sell "me, too" drugs, which are no better than the cheaper drugs they replace. It should be possible to pay less for medicine, yet encourage more real innovation.

Sigh.  That's not an important comparison, though.  The drug companies are saying reimportation from Canada will make new, expensive drugs less profitable to produce and thus diminish the incentive to produce them.  Whether or not they break the bank on marketing isn't really an issue here.  Here's what is an issue: drug company R&D is rarely spent on the life-saving, critical medicines that we imagine. 

Much of it goes towards "me-too" drugs, slight variations of popular, existing medications that don't increase their effectiveness at all, but allow drug companies to evade their competitors patents while still using their competitor's latest innovations.  So assume one company brings out a new, powerful, statin drug.  The others will rush it back to the labs, figure out how to change a few molecules in order to call it to evade the patent while retaining the effect, put it in for testing and, so long as it works better than the placebo, the FDA will approve it.  That, of course, is where the marketing comes in.  Since they've all got the same drugs -- and if R&D were truly on such shaky grounds, this would be the problem, not drug reimportation -- they have to use advertising strategies to get a leg up in the market. 

In addition, most of the research is done on the same few ailments, particularly those that offer high profits.  Now, that's often positive -- our society is better off with blood pressure, heart disease, and arthritis medications.  But you're seeing enormous redundancies at work, and it's much to the detriment of rarer, tough illnesses.

Beyond that, a vast amount of this research actually takes place in the hated public sector.  The federal government funds 36% of all U.S medical research.  In fact, of the 21 most important drugs introduced between 1965 and 1992, 15 were developed using taxpayer research.  A study done in 1990 looked at 32 drugs on the market and found that 60% wouldn't have been created without federally funded research.

So what we're seeing here are dual subsidies.  When the NIH discovers a drug, as they did with the cancer drug Taxol, they license it to drug companies at an absurdly low cost.  Bristol-Meyers Squibb is currently the proud owner of Taxol, they sell it for $20,000 when it only costs $1,000 to manufacture, and the NIH gets .5% of the royalties.  So taxpayer research ends up enriching the drug companies.  And then, because without shame you can do thing likes this, the drug companies demand that we don't switch to a Canadian system of bargaining in order to get lower prices.  So we don't, and we keep getting robbed while Canada and all other countries with sane health care systems by their drugs for a fraction of our price.  Brilliant.

And none of this even notes that drug company hyperbole has been tested before, and always proved a lie.  In 84, Congress passed the Waxman-Hatch Act, which increased the availability of generic drugs and created more competition for the brand names.  The drug industry said domestic R&D would grind to a halt.  IN fact, over the next five years, drug company R%D more than doubled, from 4.1 billion to 8.4 billion.  Then, in 1990, Congress created the Medicaid drug rebate forcing pharmaceutical companies to sell at reduced cost to Medicaid. Again, same sky-is-falling rhetoric from the drug companies.  But this time, rather than R&D doubling in the next five years, it tripled in the next eight, from $8.4 billion in 1990 to $24 billion in 1998. These companies are crying wolf, and it's time we stopped believing them.