No placebo for lower costs

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By Jeff Stier and Henry I. Miller

There must be a self-satisfied smirk on the face of the executives at big pharmaceutical companies as they watch congressional Democrats attempt to punish health insurance plans for having the nerve to raise questions about the consequences of current health reform proposals. Why? Because early on, Big Pharma cut a deal, paid up and bought itself some time. It was a Faustian bargain: The deal may protect some of the companies' profits, but by stifling innovation, it ultimately will harm both patients and the companies themselves.

In spite of Democratic majorities in the House and Senate, Congress still can't agree on the details of health care reform. However, if there's one principle that unites the bodies, including Republicans, it is the need to control health care costs. Thus, at the crux of the health care reform debate is the critical question: Where will cost savings come from? Not all cost-cutting is equal.

It has become fashionable at the White House and on Capitol Hill to try to cut costs at the expense of the research-intensive (as opposed to generic) pharmaceutical industry, although this sector has been one of the nation's most innovative and successful.

Drugs often improve the span and quality of life in a remarkably cost-effective way. Innovative new drugs have helped many patients avoid costly hospitalization, for example. Between 1980 and 2000, the number of hospital days fell by 56 percent and, as a result, Americans avoided 206 million days of hospital care in 2000 alone, according to Medtap International, which provides health economics and outcome research services. A 1997 report by the National Bureau of Economic Research found that the costs of treatment per episode of major depression fell by 25 percent from 1991 to 1995, and a study in 2000 sponsored by the Agency for Health Care Policy and Research concluded that increased use of a blood-thinning drug would prevent 40,000 strokes a year, saving $600 million annually.

Another sign of progress is that, in general, new drugs are better than older ones at reducing mortality. In a study of patients who took drugs between January and June 2000, those who took newer medications were less likely to die by the end of 2002. The estimated mortality rates were directly related to time that had elapsed since approval of the drugs.

Research-and-development investments per new drug introduced approximately doubled between the early 1980s and early 1990s, but approvals have been dropping, and even after drugs are approved for marketing, only about 3 in 10 drugs recoup their development costs. The climate for new drug development has been deteriorating, and Congress is on the verge of making it significantly worse.

The president has bragged that he intends to eke out huge cost savings at drug companies' expense, saying, "You've heard that as a consequence of our efforts at reform, the pharmaceutical industry has already said they're willing to put $80 billion on the table." He added, "We might be able to get $100 billion out or more." The industry was willing to "give" back its profits, because if it didn't go along, it was told it wouldn't have a seat at the negotiating table.

An empty threat? As the health insurers can tell the pharmaceutical companies, not at all: If you don't pay up, the thugs smash your kneecaps.

But during the summer, as a House committee reached a compromise bill, the pharmaceutical industry realized that if you give them a hand, they'll take an arm. The industry now realizes that the bill will cost jobs and stifle innovation.

Where will the cost savings come from? One approach is the imposition of new, hidden taxes. The House bill unveiled this week touts $20 billion in "user fees" (read: taxes) on medical device manufacturers. New devices often are developed by small start-up companies - those least capable of paying these expensive upfront regulatory expenses that must be paid well in advance of even the possibility of selling their first product. It could be worse. The Senate version calls for $40 billion from device manufacturers. Whatever the final number, it ultimately will be passed along to patients.

Another approach seems simple and is popular. It goes like this: If we want to spend less on drugs, why not just legalize importation of the same drugs from Canada, where they're cheaper? This is a smoke-and-mirrors solution. In fact, there's nothing intrinsically less expensive about drugs from Canada; it's only that the government imposes price controls. If huge amounts of these lower-priced drugs began to be imported into the United States, in order to prevent drops in revenue, the drug companies would simply raise the prices in Canada. Abracadabra: end of savings!

The tactics employed by the administration and Congress are more befitting a rough playground. The bully politicians are battering the drug industry, but in the end, it is patients who will bleed.

Jeff Stier is an associate director of the American Council on Science and Health. Henry I. Miller, a physician and fellow at Stanford University's Hoover Institution, was an official at the Food and Drug Administration from 1979 to 1994.