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The pharmaceutical industry: Gouging perfected

July 6, 2020

Topics: Quote of the Day

The United States is the only developed nation unable to balance cost, efficacy and social good in setting prices.

By Elisabeth Rosenthal
The New York Times, July 6, 2020

The last vaccine to quell a global viral scourge was the polio inoculation, which ended outbreaks that killed thousands and paralyzed tens of thousands each year in the United States. The March of Dimes Foundation covered the nominal drug cost for a free national vaccination program, estimated at $50,000.

It came in the mid-1950s, before health insurance for outpatient care was common, before new drugs were protected by multiple patents, before medical research was regarded as a way to become rich. It was not patented because it was not considered patentable under the standards at the time.

Now we are looking for viral deliverance when drug development is one of the world’s most lucrative businesses, ownership of drug patents is disputed in endless court battles, and monopoly power often lets manufacturers set any price, no matter how extraordinary. A new cancer treatment can cost a half-million dollars and old staples like insulin have risen manifold in price to thousands of dollars annually.

And the American government has no effective way to fight back.

If a Covid-19 vaccine yields a price of, say, $500 a course, vaccinating the entire population would bring a company over $150 billion, almost all of it profit.

Kevin Schulman, a physician-economist at Stanford Business School, called that amount “staggering.” But Katherine Baicker, dean of the University of Chicago Harris School of Public Policy, said that from society’s perspective “$150 billion might not be an unreasonable sum” to pay to tame an epidemic that has left millions unemployed and cost the economy trillions.

Every other developed country has evolved schemes to set or negotiate prices, while balancing cost, efficacy and social good. The United States instead has let business calculations drive drug price tags, forcing us to accept and absorb ever higher costs. That feels particularly galling for treatments and vaccines against Covid-19, whose development and production is being subsidized and incentivized with billions in federal investment.

Manufacturers have traditionally claimed that only the lure of windfall profits would encourage them to take the necessary risks, since drug development is expensive and there’s no way of knowing whether they’re putting their money on a horse that will finish first, or scratch.

More recently they have justified high prices by comparing them to the costs they would prevent. Expensive hepatitis C drugs, they say, avoid the need for a $1 million liver transplant. No matter that the comparison being made is to the highly inflated costs of treating disease in American hospitals.

Such logic would be disastrous if it were applied to a successful Covid vaccine. Covid-19 has shut down countless businesses, creating record-high unemployment. And the medical consequences of severe Covid-19 mean weeks of highly expensive intensive care.

There is no simple, direct mechanism for regulators or legislators to control pricing. Our laws, in fact, favor business: Medicare is not allowed to engage in price negotiations for medicines covered by its part D drug plan. The Food and Drug Administration, which will have to approve the manufacturer’s vaccine for use as ‘safe and effective,’ is not allowed to consider proposed cost.

Other countries, such as Britain, take a more head on approach: a national body does a cost-benefit analysis regarding the price at which a new drug is worth being made available to its citizens. Health authorities then use that information to negotiate with a drug maker on price and to develop a national reimbursement scheme.

The federal government could, for example, invoke a never-before-used power called “march-in rights,” through which it can override a patent holder’s rights if it doesn’t make its medicines “available to the public on reasonable terms.”

We could, alternatively, allow Medicare to negotiate drug prices — a proposal that has been raised by politicians and beaten back by industry again and again.



By Don McCanne, M.D.

Perhaps the most appalling measure of the gall of the private pharmaceutical industry is that they believe that they should be able to claim ownership of the financial value of beneficial results from their drug products.

If a drug that is given to 10,000 patients can prevent 100 people from having a $200,000 hospitalization, then, by this reasoning, that $20,000,000 savings belongs to the drug company. It would be collected in the form of a $2,000 marginal price increase from each of the 10,000 patients who receive the drug. This is not theoretical since such reasoning has already been implemented in driving up drug prices, at least indirectly, and has even been under consideration in international trade agreements under pricing of drugs based on “value.”

And the policy community? Katherine Baicker, dean of the University of Chicago Harris School of Public Policy seems to think that “$150 billion might not be an unreasonable sum” to pay for Covid-19 vaccine based on value (though consider that the national polio vaccine program cost $50,000, and, no, inflation does not explain most of the difference). Baicker, as a director of Eli Lilly, is also not likely bothered by the outrageous increases in insulin prices.

Considering the rigid resistance of the industry to establishing fair drug prices, we really should consider beginning the process of nationalizing the pharmaceutical industry. Perhaps then industry leaders would consider changing their tune, but I doubt it. They are truly driven by greed, as this “value pricing” scheme indicates.

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About the Commentator, Don McCanne

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Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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