I wrote a little piece the other day pointing out that Denny Rehberg so often talks up the free market but only when it is beneficial to certain industries. The words ‘free market’ must have hit and alarm in Dave Budge’s text filter, because he showed up straight away and went to town telling me that I don’t know anything about economics.
So, after a long back-and-forth, I grew weary and I promised Dave that I would answer a question in a post of it’s own. Welcome to that post, glad you could make it. The central issue was allowing Medicare to negotiate on prescription drug prices. While we argued back and forth on whether Medicare was a monopsony ( a market with only one buyer ). Dave refused to concede that this was not the case and that I had failed to show a “dominating list of buyers that would push the industry past monopsonistic competion”, even though I pointed to insurance plans and the fact that France and Germany both spent more on drugs than Medicare, not to mention a long list of countries that purchased high fractions of Medicare’s budget. Dave just answered by making this point and demanding that I answer it:
U.S. pharma produces roughly 70% of all pharmaceutical innovations in the world. According to a report by the AMA last year, U.S. consumers subsidize roughly 20% of the price of exported drugs to countries that impose price controls _ pretty much the list that you mention above. In the same report the AMA urged the Dept. of Commerce to pressure those countries to “share the burden of innovation” buy opening up the markets so it wasn’t entirely on the backs of U.S. consumers.
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What you’re proposing will eviscerate the development of new drug technologies. So, when I ask you who it will help and who it will hurt you fall back on a superficial argument of the short run. In the context of this market - which funds the vast majority of clinical research and innovation, the U.S oligopsony is real as to practical effects inasmuch it’s the last relatively free market that exists and the source of profits that fund innovation. But I guess you don’t give a shit about that.
I thought that this might take me a bit of time to research and answer appropriately, but it turns out that my Google-foo is still pretty good and I came up with this piece [website, PDF ] that answers the question well enough for me. What Dave is saying here is that if the government pays less for drugs by negotiating in the free market, then it will “eviscerate the development of new drug technologies”. The answer to that:
Fact 1: Drug companies are already spending more than twice as much on marketing
and advertising as on R&D.
In 2004, pharmaceutical companies spent, on average, nearly one-third (32 percent) of revenues on marketing, administration and advertising, compared with 14 percent on R&D.
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Fact 2: The drug industry is one of the most profitable industries in the country.
In 2005, the pharmaceutical industry kept 15.7 percent of revenue as profit, making it the fifth most profitable industry in the country. The industry’s high rates of return leave enough room for a significant reduction of drug prices without harming R&D.3
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Fact 3: New ‘breakthrough’ drugs, the costliest to develop, actually account for only a small proportion of medicines produced by drug companies.
The majority of drugs that the pharmaceutical industry develops each year are so-called “me too” drugs—modified forms or new uses of existing drugs, which incur lower R&D costs, such as the development of similar drugs following Gleevec, a breakthrough cancer drug.
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Fact 4: The industry exaggerates the role of private drug companies in the R&D of ‘breakthrough’ drugs.
Taxpayer-funded research, particularly by the National Institutes of Health (NIH), forms a significant foundation for R&D by private drug companies. Most of the important new drugs introduced by the drug industry in the past 40 years were developed with some contribution from the public sector. Only 5 out of the 21 most influential drugs introduced between 1965 and 1992
were developed entirely by the private sector.
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Fact 5: Lowered drug prices would likely spur demand.
Public Citizen cites a study indicating that cutting drug prices by 40 percent for people with Medicare would have a minimal effect on profits due to increased demand. Furthermore, lowered drug prices would induce companies to boost R&D for new drugs to sustain themselves, since the industry depends on research to come out with new and “potentially lucrative” medicines.6
All of these make a lot of sense to me. I find it patently absurd to suggest that lowering the price that Medicare pays one of the most profitable industry in the world would somehow make them shutdown and stop making new product. Note that Dave pointed out the fact that big pharma claims that they must charge us higher prices because they are selling drugs at lower costs to other nations. Do Dave and big pharma expect me to buy that argument when their profit margin is a matter of public record?
Now look back at Dave’s statement and note this:
In the context of this market - which funds the vast majority of clinical research and innovation, the U.S oligopsony is real as to practical effects inasmuch it’s the last relatively free market that exists and the source of profits that fund innovation.
I actually am privy to a bit of knowledge that this is not the case, and it was pointed out in the PDF referenced above. The simple fact is that the government puts a lot of money into drug R&D each year.
A National Institutes of Health (NIH) internal document, dated February 2000 and obtained by Public Citizen earlier this year, showed that all the top five selling drugs in 1995 received significant taxpayer backing in the discovery and development phases. Investigations by the Massachusetts Institute of Technology and The Boston Globe also have examined samples of medically important and top-selling drugs and found that a vast majority of drugs in each group received government support.
I’ll end with the one point that pisses Dave off more than any others. You see, Dave hates the ‘rule of the masses’, or Democracy as I like to call it. One reason to allow Medicare to negotiate for prescription drug prices is because 86% of Americans think that it should.
Now, if you grow weary of this debate, go over to Left in the West and read Matt’s take on the argument.
[UPDATE: I had left out a link to the PDF document from The Medicare Rights Center I referenced above. Those links are now in place.]