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Pharmaceutical Price Controls: Pay Now or Pay Later

Would you pay more for drugs now in order to ensure a wide choice of current treatments and an abundant supply of new cures twenty years from now If you said yes, you disagree with the Colorado Progressive Coalition (CPC), the American Association of Retired Persons (AARP), the Colorado AFL-CIO, and the Lutheran Office of Governmental Ministry. They want cheap drugs now, regardless of future consequences, and claim that imposing price controls will have no effect on drug supplies, the quality of medical care, or the development of new medicines. Anyone who disagrees is dismissed as a pharmaceutical-company shill.

Senate Bill 162 was their latest attempt to impose their preferences on you. It would have made state government the tsar of pharmaceutical pricing, and was killed by some courageous members of the HEWI committee.[1] In his testimony for the bill, Clark Bouton, a Colorado Progressive Coalition member, called U.S. drug companies criminal. He said that failing to pass SB 162 would mean that people were blinded by money and the power of pharmaceutical companies into neglecting the interest of Coloradoans. If this bill fails, he asked, what are we saying to Coloradoans That they will have to live on charity[2]

Although Mr. Bouton at least understands that tax dollars and charity are not the same thing, to claim that price controls only affect prices is silly. As long ago as 3000 B.C., Egyptian pharaohs tried to prevent famine by controlling the price of wheat. The historical record shows that government controls led to decreased profits for farmers, who produced less and less wheat. When the inevitable famine set in, the government fell.[3]

Whether the product is wheat or pharmaceuticals, people who produce real goods must charge enough to finance production, distribution, and future innovation. Plants to manufacture drugs are unique, cost billions to build, and take years to complete. After drug companies identify a promising new compound they must complete the FDA approval process, which includes three phases of clinical trials. The Tufts University Center for Drug Development estimates that developing a new prescription medication takes years and costs $802,000,000. Pharmaceutical manufacturers say that for every 5,000 medicines tested, only five make it to first stage clinical trials.[4]

Few of those become commercial successes. For perspective, consider the economics of Amgen, the pharmaceutical company that introduced Epogen, a blockbuster anemia treatment, in 1989. Epogen stimulates the production of red blood cells and saves dialysis patients from repeated blood transfusions that often result in iron overload and antibodies that decrease the chances of a successful kidney transplant. In 2001, Amgens product sales were $3,511,000,000. Epogen sales were roughly $2,200,000,000 of that total.[5] The company spent $865,000,000 on research and development, paid $567,000,000 in income taxes, and ended up with $1,119,700,000 in net income, roughly enough to finance the development of one more new drug.

Epogen sales finance other products. Of those that make it to market, most are only modest commercial successes even though they make huge differences in the lives of the people that they help. If the government had the power to control Epogen and eliminate profits from it, research on other drugs would decrease. In 1997 and 1998, for example, Epogen profits helped finance research on two Amgen drugs that failed their stage 3 clinical trials.[6]

In 1994 Medicare bureaucrats decided that the federal government was spending too much on Epogen. They instituted price controls for purchases by the federal government. When the inevitable shortage occurred in the Medicare program, they gave it only to the sickest dialysis patients. In the words of economist Robert Goldberg, Subsequently the number of people who died in the program increased and people with healthy blood levels wound up getting sicker and spending more time in dialysis and in hospitals. It took five years of lobbying and administrative review to change [the Medicare policy].[7] In this case, price controls were deadly.

Allowing markets to set prices also leaves room for generic drug manufacturers to thrive. This helps explain why U.S. consumers both enjoy better medical outcomes and pay less overall than their counterparts abroad. When generic prices, package sizes, and actual purchases are taken into account, the average Canadian consumer pays 3% more for drugs, Germans pay 27% more, and the Swiss pay 44% more.[8]

The British do pay 24% less, but there is no free lunch. Like the Medicare bureaucrats, the British government keeps prices and spending down by simply refusing to buy drugs deemed too expensive. As a result, many chemotherapy drugs commonly available in the U.S. are not available in Britain. Thanks to market pricing, the five-year survival rate for a patient with colon cancer is 60% in the United States. Under British price controls it is just 36%.[9]

1. Mimeo, Colorado Progressive Coalition update. April 24, 2002. Drug Industry amp; Its Legislative Supporters Kill Affordable Prescription Drug.

2. Author#39;s notes from April 24, 2002, Health, Environment, Welfare and Institutions Committee hearing, State Capitol, Denver, Colorado.

3. Charli Coon. July 3, 2001. The Folly of Price Controls. The Heritage Foundation, Washington, D.C. As posted on the web at http://www.heritage.org/views/2001/ed070301.html on June 12, 2002.

4. Tufts Center for the Study of Drug Development, November 30, 2001. How New Drugs Move through the Development and Approval Process, Backgrounder. http://www.tufts.edu/med/csdd/images/StepsInDrugDevelopment.pdf as of June 12, 2002.

5. Amgen Annual Report, February 26, 2002. SEC form 10-K, Item 7 Management#39;s discussion and analysis of financial condition and results of operations. As reprinted on Yahoo Finance http://biz.yahoo.com/e/020226/amgn.html as of June 12, 2002. Also Amgen financials, same website and date at http://biz.yahoo.com/fin/l/a/amgn_ai.html.

6. Amgen, Inc. Form 10-K for the fiscal year ended December 31, 2001. United States Securities and Exchange Commission file number 000-12477. As posted on the web at http://www.amgen.com/pdf/0010k.pdf on June 12, 2002.

7. Robert Goldberg. October 1999. Ten Myths About the Market for Prescription Drugs. National Center for Policy Analysis Report No. 230, Dallas, Texas. p. 13.

8. Patricia M. Danzon. Winter 2000. Making Sense of Drug Prices. Regulation, 23,1. p. 57.

9. BBC Online Network. November 9, 1999. UK cancer care #39;fails patients.#39; http://news.bbc.co.uk/hi/english/health/newsid_511000/511286.stm as of June 12, 2002.

Copyright 2002, Independence Institute

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is President of the Institute.

LINDA GORMAN is the Director of the Rocky Mountain Health Care Center at the Independence Institute.

ADDITIONAL RESOURCES on this subject can be found at: www.i2i.org

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