Big Pharma: Prescription Drug Costs, Price Controls, and Greed
Gosplan
On Wednesday, October 4th, Michigan’s state senate passed the Democratic-introduced Senate Bill 483, a three-bill package designed to create an independent board tasked with addressing the growing issue of prescription drug affordability. The bill follows comments made by Governor Gretchen Whitmer on the growing disparity between the costs of prescription drugs and people of the state’s ability to afford them, saying, “The board would use data and evidence-based research to tackle the cost of prescription drugs.” She continued, “Nobody should have to make impossible choices between getting better and paying the bills. Let’s get it done.”
To cite a recent Detroit Free Press article on the three-package bill, “Under the bill, the board would consult the council and select at least one prescription drug for an affordability review. If the board finds that the drug’s pricing creates affordability challenges for the state’s healthcare system or imposes high costs on patients, the board can set an upper payment limit for the drug.”
Democrat and bill sponsor Darrin Camilleri stated, “If Michigan creates its first-ever prescription drug affordability board it would help consumers take back power from “Big Pharma.”
But will it? And while I agree with the sentiment put forth by our Governor that people should not be left having to choose between needed medications and having food or power, I couldn’t be in less agreement with the proposed method to alleviate the burdening costs. Perhaps the only proposal that could make access to affordable prescriptions worse than these price controls is if the government itself became the means of prescription drug production and instituted a central planning price-setting board. Rather than exploring the root causes of increasing costs and decreasing affordability we instead reach for ol’ reliable, the one answer applied to all monetary issues, greed.
Greed
“Greed” is not an advent of 21st-century capitalism. Greed is a by-product of human nature, an inherent aspect of our species that dwells within us from time past, present, and future. This idea that government has the power to remove greed from society, and with it, the human psyche, is an economic fallacy that has survived generation after generation, empire after empire, civilization after civilization.
When, for example, the cost of gas gets cheaper, it is not because “Big Oil” decided to be less greedy out of the goodness of their hearts. It’s because market demand has cooled due to an increase in the supply. When corporations make less profits in a given year is it because the CEOs suddenly decided to be less greedy? No. It’s typically because their costs of production went up and demand for their product cooled. Corporations have a fiduciary responsibility to investors and stockholders (Where billions of working American’s retirement dollars are invested) to produce yields if and where they can be found and as costs of production (including labor) as well as demand increase, so do consumer costs for said product. And they’re greedy.
Price Controls
Price controls, in short, do not work. If the idea that the government can simply step into any industry that produces any product and tell them, “The cost for product X needs to be lowered to cost Y” without any consequences for the consumer or the company, why wouldn’t the government simply step in and make everything incredibly cheap and or free? When the government at any level attempts to step in and implement price controls, negative by-products emerge from unintended consequences resulting from the inability to understand human behavior. Here are a few.
- Shortages and Reduced Supply: If there is little-to-no profit to be made from a product, and the cost of producing it leads to a loss, what is the incentive for a company to allocate time, money, and labor to a product putting them in a hole and or out of business? If producing a product causes a company to have razor-thin margins, break even, or lose money on a product, a company will simply allocate its time, money, and resources to a different product it can actually make money on. If there is already a demand for a product but there is little-to-no money to be made from producing it due to implemented price controls, a company will simply cut back on the production of the in-demand product which will lead to shortages, and as a result, a surge in demand and skyrocketing consumer prices for said product.
- Delays in access: If little or no profit can be made off of a product due to the implemented price controls, there will be a natural drop off in the driving incentive of a company to allocate labor resources and overhead costs to produce or expand the production of the product. Since the company makes far more profit off of Product B instead of price-controlled Product A, the company will not expand the production operation of that product and will instead opt for the labor force to produce the far more profitable Product B. With the growing list of consumers in need of Product A, the demand grows larger and what results are shortages or people waiting for a product, and once available, delivered at a much higher cost.
- Degradation of Research and Development: If a company is barely breaking even or losing money on a product, why would a company invest in the research and development needed to make a breakthrough that creates a better and more efficient product if they’ll ultimately lose money on said breakthrough? Moreover, revenue and profits lead to greater investment in R&D because, after all, companies want to create the next big product they can make money off of. With less money available to invest, less money is allocated to advancement in their respective field.
- Underinvestment in other areas: If I own a bakery and sell cupcakes for $5 a piece while labor and ingredients cost $2 per cupcake, I may take $1 off of each cupcake sale to purchase cake ingredients in order to meet the town’s demand for birthday cakes. If a law is passed stipulating cupcakes cannot exceed $3 per cupcake while my costs to produce remain at $2 a piece, I am going to pocket the remaining $1 and choose to not lose money by investing in cake ingredients. The end result is that we’ll reside in a cakeless town where kids have sad, sad birthdays.
- Quality Reduction: If a product generates a loss, breaks even, or is narrowly profitable, companies will naturally cut corners in order to recoup all that they can after labor and overhead costs. Ensuring product quality and safety is one of those corners that get naturally cut. Consumers then receive a worse product at a higher cost.
- Rise in Black Markets: Where there is human demand for a product or service that has been made illegal or stifled by government intervention, unregulated black markets will inevitably step in to fill the void, e.g. prostitution, guns, and drugs. A more relevant example may be the FDA-approved Oxycontin painkiller that when finally recognized for getting unwitting patients addicted and destroying their lives, artificially created an opioid demand that was filled by the cheaper, deadlier, and more readily available option, heroin.
These, amongst other reasons, are by-products that fail to be considered when government price controls are implemented. In the state of California, for example, where homelessness is at crisis levels and getting worse, the state government decided to impose rent control laws. The result? More homelessness. Why? Because when the government steps in and decides a housing developer can only make $X on rent per month while the cost to construct housing is exponentially more expensive than what would be received in rent payments, who would voluntarily sign up to build housing and lose millions of dollars? So rather than housing developers being able to achieve a profit on their millions of dollars invested while housing costs become reduced naturally through an increase in supply and a reduction in demand, the state of California doubles down by giving tax money to developers to construct low-income housing and then once constructed, paying the owners rent subsidies for tenants who otherwise could not afford to do so which then increases taxation and the cost of living for California residents.
As it pertains to prescription drug costs, what is the solution? There isn’t one, we do not live in an alternate utopian universe where labor and costs of production are free. In the imperfect reality of the real world, the best possible way to counteract high prices is simple, leverage the US’ entrepreneurial drive and increase the supply.
Patent Reform
A great myth as it relates to Canada’s socialized healthcare system is that low prescription drug costs are able to be achieved because the government has control of it. The reality is that prescription drug costs are significantly lower in Canada because it has employed a system of competition in the marketplace that drives down consumer and healthcare system drug costs. While here in the U.S. there may be only one option for a particular drug, in Canada there are several. Competition through reform to our patent system is one of the easiest methods available to lower drug costs for consumers and healthcare systems.
To be clear, the U.S.’s patent system is amongst the most stringent in the world and it is incredibly important for it to remain that way as it is a backbone of American entrepreneurialism and drives innovation. Pharmaceutical manufacturers incur high costs to research, develop, and manufacture a drug and without the initial monopoly on the product, manufacturers will not be able to recoup their investment and generate profits. The moment you take away the ability to monopolize an invented product and profit off of it, all incentive to innovate is gone. Without innovation in pharmaceuticals, many people will unnecessarily suffer or die who otherwise would not have had pharmaceutical companies invested and created “The next breakthrough.” However, it is clear that the U.S. patent system is being exploited and abused by Big Pharma and the power they wield in Washington.
The best and most comprehensive research I was able to find was conducted and assembled by the healthcare company, Kaiser Permanente.
When a pharmaceutical manufacturer creates a new drug, they file a patent on the product where if approved, they receive a typically 20-year monopoly on the invention. This is not dissimilar to the patent laws in Canada or Scandinavian countries. However, where we differ is in that “The majority of patents issued by the U.S. Patent and Trademark Office are for existing-not-new-drugs.” What this means is that through various methods, brand-name drug manufacturers can file extensions on their products so that the monopoly extends beyond the initial 20-year window. One of these methods is known as “Patent thickets” which create legal fortresses that, “Block competition and keep less expensive alternatives from entering the market,” driving up health care and prescription drug costs. Alternative options for a drug product include “Generic” options which are identical alternatives to brand-name drugs (e.g. Motrin and Ibuprofen) and “Biosimilar” options which are very similar, but slightly different alternatives to the original brand-name drug. Biosimilar drugs typically save 30% on cost and according to their research, “Could lower [healthcare] spending by more than $100 billion in the next 5 years.”
To cite an example, the patent thicket surrounding AbbVie’s arthritis drug, Humira. While the original patent for the drug expired in 2016, “More than 100 other patents protect it through 2034. The company has filed an additional 247 patents to extend patent protection even further.” “The top selling injectable medicine used to treat arthritis has 166 patents. One is for the autoinjector device, another is for the firing button on the device. Both “Inventions” are obvious–Humira is an injectable drug so there must be a mechanism for patients to self-inject it. Furthermore, 90% of Humira’s patents were filed after the drug received approval from the Food and Drug Administration. Under the patent protection, the drug has made AbbVie nearly $200 billion, and the company has increased its price by a whopping 470% since its introduction to the market.”
In order for a patent to be issued, the product has to be considered truly unique and innovative, so rather than passing new laws and regulations that often stifle innovation through greater government intervention, we could reduce the number of patent thickets created by using the existing laws and regulations already on the books and better scrutinize the patents issued to manufacturers.
For example, take the aforementioned Humira. The arthritis drug was a breakthrough in reducing the effects of arthritis. Therefore, AbbVie should benefit through a 20-year monopoly on the product. However, a system that allows for hundreds of patents that are not unique, but minor and insignificant modifications to the product or its features should not be allowed to bar generic-and-biosimilar manufacturers from creating a competing product which would dramatically lower costs. When you consider that our healthcare system is becoming increasingly socialized and the number of people eligible for entitlement programs such as Medicare and Medicaid is ever broadening, this is an unsustainable practice as not only will individual consumers pay more for the product but they’ll be hit again through higher taxation and money devaluation through money printing (inflation) to pay for everyone else.
Other means of Big Pharma abusing the U.S. patent system include a practice called, “Pay-for-delay.” When brand-name manufacturers apply and are granted a patent with a monopoly term of typically 20 years, generic drug manufacturers (under the Hatch Wayman Act of 1984) hold the right to contest the patent by attempting to create a similar, but different version of the drug. Big Pharma, with their endless resources, can challenge the challenge on their patent and issue a lawsuit against the attempting competitor, burying them in an insurmountable mountain of litigation. Generic manufacturers, knowing they cannot keep up, then agree to a monetary settlement in exchange for the guarantee that they will not attempt to bring a similar product into the marketplace for a specified amount of time. In short, Big Pharma pays generic drug manufacturers “Fuck off” money in order to eliminate competition and maintain a monopoly on a drug which keeps costs high for consumers and health care systems. The Federal Trade Commission has cited these arrangements “Cost consumers and taxpayers $3.5 billion in higher drug costs every year due to a lack of competition from cheaper generics.” While I am admittedly much more sceptical about reforming pay-for-delay arrangements as I believe it opens the door to generic and biosimilar manufacturers being able to produce what is essentially the same product and as a result, making an initial 20-year patent useless, it seems there is wiggle room in finding an appropriate middle ground within this procedure that abuses the process at the expense of consumers.
In the representative and bill sponsor’s statement regarding “consumers [taking] back power from ‘Big Pharma” there is a glaring oversight. Big Pharma has no greater friend than our federal government and its politicians.
Big Pharma
The illusion created by politicians that the government is the hero standing between us and big pharma, fighting off the evils of their greed is not only a myth but the antithesis of truth. The truth is that there is no greater ally for big pharma than our government. Last year in 2022, 8 of the biggest US pharmaceutical companies reported revenue of $214 billion domestically and $117 billion outside of the country. In that same year, Pfizer reported over $100 billion in revenue alone, due in large part to the billions in government tax dollars issued for the Covid vaccine. I cannot help but find it ironic that politicians come out slamming “Big Pharma” for their greed and immoral practices, yet, the drug manufacturers line the pockets of our elected officials via their lobbying presence to the tune of more than three lobbyists for each member of Congress. Furthermore, over these past couple of years, there were no greater salesmen for Pfizer and Moderna than our government who made it mandatory for each person to inject one of their products (COVID-19 vaccine) or be unable to have a job or enter a grocery store to purchase food. While there are laws in place preventing fraudulent claims in advertising, it was our government officials such as Biden, Trump, Anthony Fauci, and many others who made the claim, “You can’t become infected or spread Covid if you get the vaccine” in addition to telling us there are no side-effects, both claims now found to be completely false.
If you are looking for corruption between the government and big pharma, look no further than the Food and Drug Administration where there is a revolving door system between them. Pharmaceutical manufacturers, such as Pfizer, reward FDA staffers who manage the approval of one of their products by providing them with high salaries and bonuses when they decide to leave the federal agency.
To cite a specific example, Scott Gotlieb was the FDA Commissioner between 2017 and 2019. Immediately following his departure from the FDA and during the Covid crisis, Gottlieb was appointed to the Pfizer Board of Directors and made Partner of the company that received fast-track approval for their vaccine and generated over $100 billion in revenue during 2022. The current FDA Commissioner, Robert Califf, was a paid consultant for Merck, Johnson & Johnson, GlaxoSmithKline, Astra Zeneca, and Eli Lilly from 2009 to 2013, and was the director of Portola Pharmaceuticals from 2012 to 2015. In September 2015, Barack Obama appointed Califf to the role of FDA Commissioner until he stepped down in 2017 and was then re-appointed to the position by President Biden in February 2022.
A 2016 study conducted by the British Medical Journal examined the histories of 55 FDA staffers who had conducted drug reviews over a 9-year period within the hematologynocology field. What they found is that of the 26 employees who left the FDA, 15 of them were later brought in by biopharmaceutical companies as employees or paid consultants. Are we naive enough to pretend that the purpose of the back and forth between the FDA and pharmaceutical corporations is not to buy influence over the policy decisions of the governing body tasked with oversight over these corporations?
Big Pharma, the designated “Heroes” during Covid, has an extensive history of corruption. When you combine the 20 largest settlements between 2001 and 2012, the total amount agreed to be paid out by pharmaceutical manufacturers amounts to nearly $20 billion. Included in this nearly $20B figure is a $2.3B Pfizer settlement in 2009 and a $2.2B Johnson & Johnson settlement in 2013, both on account of fraud. Made popular by the mini-series “Dopesick” is the $601 million dollar settlement paid out by Purdue Pharma for fraudulently claiming their FDA-approved painkilling drug, Oxycontin is not addictive. The issued FDA approval for Purdue’s product led to widespread opioid addiction that has since left us with the opioid epidemic we find ourselves in today.
Inflation & Taxation
Price controls will not stop the growing problem of working-class Americans being unable to afford prescription drugs or anything for that matter. What will inevitably take place is a drop off in supply, a surge in demand, and prices that will skyrocket as a result. Because it will be unsustainable for pharmaceutical manufacturers to produce price-controlled drugs and the supply will be unable to keep up with the demand, a new bill will eventually have to be produced that promises “Free and greatly reduced prescription drug costs.” Because there is no such thing as a free lunch nor is anything that requires labor and is subject to the laws of supply and demand “A right,” they will only be made “Free or Affordable” by government subsidies. The government, which produces no wealth and only exists through the taxing of the dollars we earn, will then pay the pharmaceutical companies to produce the product which will come from higher taxes and money printing causing inflation and with it, a higher cost of living. Moreover, subsidies will not reduce the cost of the drugs but rather increase it. We see this already as it pertains to the cost of higher education where for every $1 increase in federal student loan aid granted, the cost of tuition goes up 65 cents.
There are three certainties in life: death, taxes, and the worsening of an existing problem when the government seeks to further involve itself in problems that it has created or exacerbated in the first place.