Out of pocket, Part II

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Last month, I wrote about rising prescription drug costs, and made the point that a considerable portion of the cost of new drug development is borne by taxpayers (from the U.S. and other developed nations).

I also noted that many drugs, including some of the newest “breakthrough” drugs, are available in other countries for a small fraction of the cost charged U.S. patients and insurance companies.

I raised concerns about this state of affairs and asked some questions that I felt we should be discussing as a country. Then we received the following email from a Beacon reader, raising a different one:

“In January’s Beacon, Stuart Rosenthal mentions that Gilead Sciences has an $84,000 treatment for hepatitis C that is available in India for $300. I don’t know if anyone can answer this, but is Medicare prohibited by law to get this treatment from India? And if Medicare does [so], would that influence Gilead Sciences to lower their price?”

This question raises a broader set of issues than I addressed last month. But it goes to the heart of the matter, so I would like to devote this month’s column to it.

First, I do believe it’s fair to say Medicare is prohibited from purchasing drugs from foreign countries. In fact, all Americans are prohibited from doing so, under current law, though very little is spent on enforcing the provision. 

The chief justification used for this rule is that it protects Americans from unsafe and counterfeit drugs. In truth, counterfeits are rife in much of the world’s prescription drug-supply chain, and they can be notoriously difficult to detect. The easiest way to keep them out is to forbid all imported drugs.

But that’s not to say we couldn’t come up with ways to ensure that we are importing only safe, properly manufactured drugs from select countries (such as Canada) if we wanted to. It’s been proposed many times as a way to save money, but has been shot down repeatedly. 

Why has it been so difficult to change the law? For one thing, U.S. drug manufacturers have lobbied hard against it.

Pharmaceutical company manufacturers say that it costs $2.6 billion and more than 10 years of development to bring each new drug to market. They also note that the profits from successful new drugs must cover the development costs of many other potential new drugs that end up failing during clinical trials.

While that’s true, others note that drug companies spend much more on marketing than they do on drug development.

Furthermore, between paying high prices to support those development costs and underwriting most basic research through government grants, U.S. taxpayers end up footing most of the bill for the new drugs and treatments that are used to save and extend lives throughout the world.

But is that necessarily unfair? Americans’ standard of living is among the highest in the world. Our Gross Domestic Product per person is over $50,000 a year. The GDP per person in the 30 poorest nations is under $3,000 a year. (India’s is less than $6,000.) Would it make sense to expect people whose income is so far below the average American’s to pay the same price for life-saving drugs as we do?

Furthermore, we engage in, and pay for, this research for our own benefit. If we stop supporting this research, who will take our place? Do we want these breakthroughs or not?

The question is whether Americans need to be paying as much as we do for new and existing drugs to keep drug companies doing necessary R&D.

After all, Americans pay considerably higher prices for drugs than do patients in Canada, Germany and many other developed countries whose GDP per person is not significantly below ours.

This is partly due to the fact that U.S. law also prohibits Medicare from negotiating drug prices directly with manufacturers. Those other countries have national healthcare systems or mandatory insurance programs that can and do negotiate prices, resulting in considerably lower prices than Medicare pays.

U.S. law does permit the Veterans Administration and Medicaid (the healthcare program for poor Americans) to negotiate drug prices for their patients, and those programs typically pay 10 to 20 percent less for drugs than does Medicare. So we know negotiation works to bring down drug prices.

Why is Medicare treated differently? Until 2006, Medicare didn’t even cover prescription drugs. When the Bush Administration proposed adding Part D (prescription drug coverage) to Medicare, it specifically forbade Medicare from negotiating prices directly with drug companies in order to secure necessary support from Congress (and the pharmaceutical industry).

Instead, the program was built around private insurance companies which, it was argued, would do an even better job negotiating with drug manufacturers, and would produce a wider variety of options for consumers.

It has apparently not been true that drug prices have come down as much as they would have through program-wide negotiations. We continue to pay more for drugs in this country than we have to.

But the latter benefit — wider choice — has been achieved, and that’s not insignificant. As anyone who shops for a Part D plan knows, there are a plethora of choices in most markets, and different plans cover different drugs at different prices.

Were Medicare to negotiate as a whole for drug prices, we’d pay less, but there would be one national formulary, as in countries with national health plans.

In those countries, it is common for only certain brand-name drugs to be available, for their use to be limited to certain circumstances, and for generic drugs to be mandated whenever available. Patients who want or need a specific brand-name drug because other options don’t work for them may not be able to obtain coverage for those drugs at all.

For now, Americans can generally get the drugs they want if they choose the right Part D plan (though this may not be true if they get their medications through the VA or Medicaid, which have single formularies).

Candidates now running for national office are raising important questions about this subject, and it’s about time. Are drug companies profiting excessively at U.S. taxpayers’ expense? If so, what should be done about it?

Whatever we decide, we need to remind ourselves that our choices will have consequences. We can’t get something for nothing. Changing the current system will lower prices, but that doesn’t mean there won’t be other costs to bear.