May 31, 2002
USA Today vs. Reason

I am not one who bashes USA Today; I feel that it is unfairly maligned. To be sure, it revolutionized the use of color and changed the layout of many papers, but there are those out there that find the writing to be sub-par. I disagree.

However, when it comes to the editorial page, USA Today is a reliable supporter of regulation. Today they trained their sights on the pharmaceutical industry, one of the favorite whipping boys of the regulations crowd (after tobacco companies and firearms manufacturers, of course). They make several claims (all tried and true) that beg to be rebutted. Luckily for us, Ronald Bailey did just that, in Reason magazine. The interesting thing is that he anticipated USA Today's line by over a year, as his article appeared in the April 2001 issue of Reason. I have linked both articles, but I am going to excerpt both down below. For clarity's sake, the USA Today quotes will be blockquoted and Bailey's writing will be in blockquoted boldface. Any statements in normal face are mine, as USA Today's initial statements cover an area that Bailey did not discuss in his article.

In fact, Clarinex isn't particularly new. It is a modified version of Schering's blockbuster drug Claritin, which will lose its patent protection, and much of its $2 billion in annual sales, by year's end. By modifying Claritin, Schering got a fresh patent and the monopoly profits that go with it.

By attacking Clarinex, USA Today is attacking the idea of copyrights, although they don't realize it. Does a performance of a song (such as an orchestra recording Beethoven's Fifth symphony) not have copyright protection? After all, it's been done before, and previous performances already had copyrights protecting their renditions. We could extend this to print—Paul Ehrlich keeps repeating the same apocalyptic tales of horror in his books, yet each has its own copyright, and the newest will still enjoy copyright protection when the others are in the public domain. Does USA Today really believe that drug companies that improve their medications should not reap the benefits of their research? (Remember, the FDA does not approve drugs that use the same effective ingredients, but provide little to no improvement.) Clarinex probably has some significant improvements, either in reduction of side effects or in treatment of the allergic reactions it was designed to combat.

But the study shows the industry turns tidy profits by making simple modifications to already-proven therapies. The findings are just the latest evidence suggesting the drug industry is more interested in fattening its bottom line than funding innovation.
Such charges raise several issues. First, do less-expensive medicines work just as well as those "newer and more expensive ones"? In a study of the benefits and costs of newer drugs, [Columbia University economist Frank] Lichtenberg shows that older drugs are, in general, not as good as newer drugs. Using data from the 1996 Medical Expenditure Panel Survey, an in-depth national survey of the health care expenditures of more than 22,000 people, Lichtenberg developed an econometric model to compare the costs and benefits of using older and newer drugs to treat similar medical conditions. He concluded that "the replacement of older by newer drugs results in reductions in mortality, morbidity, and total medical expenditure."
Fighting generics. Once a drug goes off patent, cheaper generic copies flood the market, lowering prices. To combat that, the industry uses a number of tricks to extend patents, some of them of questionable legality. The government is investigating the tactics, and this week, the AARP joined a class-action case claiming drug companies illegally thwart generic competition.
Lichtenberg also found that "denying people access to branded drugs [as opposed to cheaper generic drugs] would increase total treatment costs, not reduce them, and would lead to worse outcomes" (emphasis in original).
Fighting discounts. The industry is battling a discount plan in Maine that extends drug discounts to low-income consumers and is lobbying against similar plans in other states.
Central to virtually all "reform" agendas is reining in those drug company profits. Will that contain health care costs? "Suppose we seize all pharmaceutical profit," suggested Sidney Taurel, CEO of Eli Lilly & Co., in a speech last October. "Drugs are just 8 percent of total health care. To simplify the arithmetic, let's stretch and say [profits are] 20 percent of sales. Twenty percent of 8 percent equals just 1.6 percent of total health care costs. Does that sound like a solution to you?" Despite its political appeal, it's not much of one. In fact, that sort of thing would almost certainly retard the development of new drugs by destroying the incentive for research. (It's not called the profit motive for nothing.)
Aggressive marketing. The industry spends more marketing new drugs than on research and development.
This widespread assertion, however, is just plain wrong. In 1999, for instance, the pharmaceutical industry spent $13.9 billion on advertising and promotion. (Half the promotion costs, incidentally, were for drug samples that doctors give to patients for free.) R&D expenditures for 1999 were more than $24 billion.
The industry complains that Blue Cross, which sponsored the NIHCM study, has a clear interest in cutting drug costs. But so do employers and consumers, as spending on drugs nearly doubled since 1997. That has helped push up health insurance premiums, forcing many companies to reevaluate the coverage they provide.
In many cases, spending on drugs does lower health care costs, but often enough the new drugs do cost more than earlier, less effective therapies, so third-party payers are shelling out more money while patients are getting greater benefits. From a strictly actuarial point of view, it's cheaper for patients to drop dead of heart attacks than for the government or insurers to pay for years of cholesterol-lowering life-extending drugs. Employers who don't want to pay the rising costs for employee health insurance, and politically potent seniors who have been schooled by Medicare to think that all health care is a right, complain to legislators that drug costs are out of control. Such complaints focus on increased spending on drugs, while ignoring the costs saved through pharmaceutical treatments and the suffering and disability that afflicted patients before pharmaceutical companies developed the new drugs.
According to the Bureau of Labor Statistics, the average consumer spends just over 1 percent of her annual income on pharmaceuticals, about the same amount that gets spent on tobacco and alcohol. The elderly, who are by far the largest consumers of medicine, spend roughly 3 percent of their annual income on drugs, about the same amount they spend on entertainment. Households with seniors 65 to 74 years old spend $1,587 on entertainment and $698 on drugs, while those over 74 years old spend $875 on entertainment and $719 on drugs. (The average income for 65-74-year-olds is $28,928; for those over 74 it is $23,937.)
As mentioned before, Americans are indeed spending more on prescription medicines in absolute terms. Average expenditures per household were $301 in 1993 and $370 in 1999. But spending totals aren't the end of the analysis. A more important question is whether we are getting value for our money. According to Lichtenberg, the answer is absolutely yes. Between 1960 and 1997, life expectancy at birth for Americans rose from 69.7 years to 76.5 years. "Increased drug approvals and health expenditure per person jointly explain just about 100 percent of the observed long-run longevity increase," writes Lichtenberg in a working paper done last year for the National Bureau of Economic Research. Lichtenberg found that for an expenditure of $11,000 on general medical care, there is a gain of one life-year on average. (A life-year in this context is simply an extra year of life that a patient gains by being treated.) However, spending just $1,345 on pharmaceutical research and development gets the same result. Economists have calculated that, on average, people value an extra year of life at about $150,000. (That figure is based on people's willingness to engage in risky jobs.) Assuming an average value of $150,000 per life-year, the benefits from medical care expenditures outweigh the costs by a factor of more than 13; the benefits of drug R&D are more than 100 times greater than its costs. As important, drugs can also reduce health care costs. In "Do (More and Better) Drugs Keep People Out of the Hospital?" — a 1996 study published in the American Economic Review — Lichtenberg found that "a $1 increase in pharmaceutical expenditure is associated with a $3.65 reduction in hospital-care expenditure."
The story of stomach-acid-blocking drugs such as Tagamet and Zantac illustrates how drugs save money by keeping patients out of the hospital. In 1977, the year in which such drugs were introduced, surgeons performed some 97,000 operations for peptic ulcers. In 1993, despite population growth, that number had shrunk to 19,000. The shift from surgery to highly effective pills — a change that has made life better for tens of thousands of people with stomach problems — is the sort of quiet development that escapes much attention. The Boston Consulting Group's health care practice reported that it saves patients and insurers at least $224 million in annual medical costs.
Other examples abound. In 1991, for instance, the benefits that drugs offered became painfully apparent when New Hampshire, in a cost-saving measure, adopted spending caps on the number of reimbursable medications that Medicaid patients could receive. The result was that nursing home admissions doubled among chronically ill elderly patients and raised government costs for institutional care by $311,000, which was 20 times more than was "saved" by imposing spending caps on drugs. As John Calfee, a drug policy analyst at the market-oriented American Enterprise Institute, has noted, drugs that break apart blood clots cut hospitalization and rehabilitation costs for stroke victims by about four times the cost of the drug. In his recent monograph Prices, Markets and the Pharmaceutical Revolution, Calfee also reports that schizophrenia drugs costing $4,500 per year save more than $70,000 in annual institutional treatment costs.
A yearlong study of 1,100 patients done by Humana Hospitals found that using drugs to treat congestive heart failure increased pharmacy costs 60 percent, but cut hospital costs by 78 percent, for an overall savings of $9.3 million. Better still, the death rate dropped from an expected 25 percent to 10 percent. In Virginia, an asthma study found that new asthma drugs cut emergency room visits by 42 percent. And, relevant to my cat situation, a study by the consulting firm William M. Mercer concluded that every $1 spent on non-sedating antihistamines yielded a $3.07 return to employers, due to increased productivity and reduced accident costs.

Please, read the article in Reason. I have only quoted a few sections of Bailey's article, which is very well written, and demolishes virtually all of the myths and allegations against the pharmaceutical industry.

posted on May 31, 2002 08:05 PM


If Claritin is off-patent, there is still an incentive for manufacturers of generics to weigh in with their own version, even if they can't knock off Clarinex specifically. Look at the sheer number of benzodiazepines (Valium, Ativan, Xanax, just to name a few) that have come along. And your average health-insurance plan (let's call it CFI Care) will happily pay for a knockoff of old-style Claritin when it's prescribed, especially since plan consumers are going to want the lower copayment associated with generics. Schering isn't going to break anybody by this Version 2.0 business, and the USA Today reporter should have figured that out.

posted by CGHill on June 1, 2002 09:11 PM

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