What the Prescription Drug Debate Gets Wrong Price controls on pharmaceuticals might save Americans money in the short term—but at the potential cost of millions of lives. John Tierney
https://www.city-journal.org/price-controls-on-pharmaceuticals
The American pharmaceutical industry is the most innovative in the world and saves more lives than any other institution. So, of course, it is also the national villain.
In this autumn’s election, once again, voters say that one of the top issues—the top issue, in some polls—is lowering the price of prescription drugs. Politicians of both parties ritually denounce Big Pharma for profiteering. In his first press conference as president, Donald Trump accused drug companies of “getting away with murder,” and Bernie Sanders has called the industry’s greed a “public-health hazard to the American people.” A central plank in the “Better Deal” that Democrats are promising in the midterm elections is for the federal government to “negotiate” drug prices, and some progressives don’t even make that semantical pretense. They call for outright price controls, if not the “deprivatization” of the industry, on the grounds that Big Pharma is too powerful to be constrained by market forces.
At one level, this is just political opportunism. Big Pharma is easy to resent because its products are so essential, and it’s easy to attack because it’s actually not so big. Of every dollar that Americans spend on health, only a dime goes for prescription drugs. The lion’s share of health spending goes to hospitals and people in the health-care professions, whose relatively high fees and salaries are largely responsible for Americans bearing the world’s highest health-care costs. But how many politicians want to go after doctors and nurses? What Democrat would dare arouse the ire of the health-care unions? Much easier to scapegoat the greedy drug companies.
The critics do get one thing right: the pharmaceutical industry is no paragon of free-market capitalism. Companies spend much of their time appeasing regulators instead of satisfying customers. The bureaucratic delays and complexities discourage innovation and competition, allowing some firms to profit by gaming the rules rather than developing new drugs. The system is so opaque and convoluted that both parties agree that it needs to be reformed.
For Democrats, the answer is a system modeled on Canada and European countries with nationalized health systems that use their monopoly power to dictate which drugs are available at what price. On average, Americans spend more money on prescription drugs than people do in those other countries, a favorite talking point for Democrats advocating price controls and “Medicare for All.” As a candidate, Trump endorsed the big-government approach to controlling prices, and, as president, he has personally bullied pharmaceutical executives into rolling back some prices. But so far, thanks to some smart appointments, his administration is pursuing more sensible reforms. Instead of joining the march toward nationalized health care, it is focused on reviving market competition.
These reforms are moving forward at a remarkably brisk pace (for Washington), but there’s always the danger that Trump’s populist instincts and a resurgent Democratic Party could prevail. Politicians of both parties know how popular Democratic ideas on drugs are—and how unpopular Big Pharma is. Public-opinion polls by the Kaiser Family Foundation show that most Republicans as well as Democrats support tighter regulation of prescription-drug prices. Three-quarters of Americans favor outright price controls on some drugs, and more than 90 percent want the federal government to “negotiate” lower prices across the board.
But it’s also clear from those polls that Americans’ opinions on this topic are rather muddled. More than 80 percent of them say that the cost of prescription drugs is unreasonable, but nearly as many, 74 percent, say that they personally find it easy to afford the drugs. Their views are still less coherent when contemplating the benefits of those purchases. A dollar spent at the pharmacy does more to combat disease and disability than a dollar spent anywhere else, and newly developed drugs are credited with most of the recent gains in longevity. Yet when asked if these new drugs have made life better, barely half of Americans agree. Voters don’t realize what they’re getting from their pills, and they have even less idea of what they stand to lose.
The campaign to remake the pharmaceutical industry is based on a myth that has been repeated so often for so long that it’s conventional wisdom: Americans are dying because their health-care system is an international disgrace. It’s the same myth that Barack Obama invoked to justify Obamacare, and he recited the usual statistics to support it: the United States spends more than any other country on health care but ranks below dozens of other countries in comparisons of life expectancy and infant mortality.
The obvious explanation, at least to the academics and journalists and politicians who have dominated the debate for decades, is that America lacks the nationalized health systems of other developed countries. Too much of the money goes into the coffers of drug companies, private insurers, advertisers, and other profiteers. To make health care affordable and spread the benefits equitably, America must emulate the systems in Europe and countries like Canada and Japan.
The conclusion sounds plausible until you take a closer look at the numbers. Yes, Americans do spend more, but they can afford more because their incomes are higher, and they’re getting more in return. Yes, the statistics are better in other countries, but it’s not because of their price-controlled drugs and national health services. If America adopted their policies, the gaps would only widen.
The gap in life expectancy is due to demographic and cultural differences, starting with the much greater ethnic and economic diversity in the United States. Fans of government health care like to point to Sweden and Norway, where people live three years longer than Americans, but that gap shrinks to one year if you consider just Minnesota, a state with relatively little poverty or racial diversity and lots of well-educated Scandinavian-Americans. The U.S. life expectancy at birth, 79 years, looks bad compared with Singapore’s 83 or Japan’s 84 (the world’s highest), but people from those countries live even longer in the United States. The life expectancy for Asian-Americans is at least 85, and some estimates put it at 87. Some of that added longevity is presumably due to the American health-care system, though it’s hard to quantify because so many variables affect life expectancy: genes, income, education, diet, exercise, lifestyle, and other cultural factors.
People below the poverty line tend to die younger no matter what country they live in, and there are proportionately more of them in the United States, which has far more low-skilled immigrants and single-parent households. (See “Why America Can’t Lower Child-Poverty Rates,” August 2017.) The poor and the less educated tend to be less healthy everywhere—they have higher rates of smoking, substance abuse, obesity, and diabetes—and they have more trouble navigating the complexities of any kind of health-care system.
“Instead of joining the call for national health care, the Trump administration wants to revive market competition.”
Canadians like to think that the low drug prices and universal coverage offered by their government-run system means better treatment and outcomes for the poor than America’s, but that’s not what June O’Neill and Dave O’Neill of the National Bureau of Economic Research found by analyzing health surveys administered jointly to Canadians and Americans. When the economists computed the “income/health gradient,” a measure of how much healthier an affluent person is than a person with below-average income, it turned out that the difference was greater in Canada than in the U.S. Even though the poor in Canada had access to free government health care, they were doing relatively worse than the poor in America because they were stymied by other obstacles, such as the longer waiting times to receive treatment.
That study happened to come out the same year, 2007, as Michael Moore’s film Sicko, an attack on American health care that includes a paean to the Canadian system and the inevitable statistics about life expectancy and infant mortality (plus, of course, a denunciation of Big Pharma). But as the O’Neill study noted, Canadians actually reported slightly less satisfaction than Americans with the treatment they received, and their treatment was indeed inferior in many ways: fewer available drugs and less access to diagnostic machines and screening tests for cancer.
Once the O’Neills adjusted for demographic differences, Canada no longer looked like Moore’s Arcadia. The gap in infant mortality was due not to shoddy health care but to America’s higher proportion of teenage mothers. Teenagers are more likely to deliver preterm babies of low birth weight, who are less likely to survive. If the proportion of those births were the same in both countries, the O’Neills calculated, Canada’s infant-mortality rate would be higher than America’s. But because the proportion was three times higher in America than in Canada—and seven times higher than in Sweden—babies were more likely to die in America.
American teenagers and young adults are also more likely to die for reasons unrelated to medical care. About half of the overall longevity gap between the U.S. and other developed countries stems from its higher mortality rate below age 50, which is partly due to infant mortality but mainly to the much higher rates of homicides, fatal motor-vehicle accidents (Americans drive much more than Europeans do), and other injuries—notably, drug overdoses. In middle age and beyond, one of the chief causes of the longevity gap is the U.S. rate of obesity, which is nine times higher than Japan’s and about double the rate of Europe. When a National Academy of Sciences panel in 2011 analyzed the longevity of Americans above age 50, it concluded that obesity accounts for 20 percent to 35 percent, and possibly more than half, of the gap with other affluent countries.
An even bigger factor is smoking, which was much more common through the 1980s among Americans, especially women. Samuel Preston, a demographer at the University of Pennsylvania who was one of the editors of the National Academy report, estimated that smoking accounted for 41 percent of the life-expectancy gap among men and 78 percent of the gap among women. He found that if deaths due to smoking were excluded, the United States would rise to the top half of the longevity rankings among developed countries.
Considering all these disproportionate killers in the United States—smoking, obesity, fatal injuries, and the rest—why isn’t the life-expectancy gap even larger? Because Americans receive better treatment, particularly for cardiovascular disease and cancer, the two leading causes of death after 45. While heart disease is more prevalent in the United States than in other developed countries (no surprise, considering all the overweight Americans with a history of smoking), people with high cholesterol and hypertension are more likely to receive treatment for their condition in the U.S. than in other countries.
So Americans’ cholesterol levels are comparable with levels in other developed countries, and their blood pressure is lower. They’re more likely to survive a heart attack or a stroke. Their cancer is diagnosed earlier and treated more effectively. These benefits get little publicity, though, partly because they’re harder to explain than a simple statistic like life expectancy, and partly because they don’t fit the narrative about the overpriced, unfair, inefficient U.S. health-care system. Journalists prefer to tell stories of desperately ill Americans being gouged of their life savings by Big Pharma, and to report surveys showing that a majority of the public is dissatisfied with the health-care system. But when Europeans are surveyed, a majority of them are dissatisfied with their systems, too. And they have more reasons to be unhappy.
If you do a Google search for the drug Daraprim and the name Martin Shkreli, you’ll find thousands of news articles from around the world. If you try the drug Zytiga and the words “Lockerbie” or “al-Megrahi,” you’ll be lucky to break into double digits. (My search yielded a grand total of nine articles.) Journalists are obviously more interested in the first drug, but the second one is more instructive.
Daraprim has become the poster drug of reformers, a symbol of what’s wrong with Big Pharma and why America needs to emulate Europe. It’s the drug, used to combat infections in patients with HIV, whose price was raised from $13.50 a pill to $750 by the businessman Martin Shkreli, inspiring the press to dub him “the most hated man in America.” But while his price-gouging was indeed outrageous, it was an aberration that doesn’t reflect a fundamental flaw in the American system. This sort of problem can be mitigated with reforms that don’t require crippling the pharmaceutical industry with price controls.
Zytiga hasn’t been as newsy, but it’s a worthier poster drug because it does reflect a widespread and fundamental problem with the European system. This prostate-cancer drug received brief attention in connection with Abdelbaset al-Megrahi, the Libyan convicted of plotting the bombing of a Pan Am plane over Lockerbie, Scotland, in 1988. He was sentenced to life in prison in Scotland but released in 2009. The release, which generated international outrage, was justified on compassionate grounds after British doctors determined that he had less than three months to live because his prostate cancer was “resistant to any treatment options of known effectiveness.”
After returning to Libya, he received treatments not offered in the United Kingdom, including Zytiga, a new drug that dramatically increased survival rates. It was developed by Johnson & Johnson and launched first in the United States, where al-Megrahi’s family reportedly procured it. Instead of dying within three months, he lived for almost three more years (generating more outrage). During that time, the British government rejected Zytiga as too expensive to be offered to patients in the National Health Service. Shortly after al-Megrahi’s death in 2012, the drug won approval for use by a limited number of patients in England, but it took another three years to be approved in Scotland, and even then, it was limited to a minority of men with prostate cancer (those who had already undergone other therapy). The frustration of the majority was summed up in 2016 by the Express newspaper in a headline: CANCER DRUG “GOOD ENOUGH FOR LOCKERBIE BOMBER” WILL NOT BE GIVEN TO SCOTS NHS PATIENTS.
Zytiga is not an isolated example. All kinds of patients die in Europe waiting for drugs already available to Americans. The hub of pharmaceutical innovation has moved from the price-controlled countries of Europe to the United States as companies have shifted laboratories and focus to the market with the best returns. America has been called the “Pharmacy to the World” because it’s where more than half of new drugs are developed and tested in clinical trials. In launching a drug, the companies typically start going through the regulatory process first in America, so the drug’s safety and effectiveness are typically certified earlier.
Even after the drug has been certified for use in Europe, there’s often a further delay in reaching patients because their national health plans won’t include it in the list of covered drugs. To avoid the high price of a new breakthrough drug, European authorities like to wait until it’s been further studied or its price has been driven down by the emergence of competing drugs. That’s what happened in Scotland with Zytiga, and in much of Europe with Herceptin, a breakthrough drug for breast cancer. It quickly became standard treatment for women in the United States, but it took another two years to reach France, Germany, Sweden, and other countries—and then an additional two years to be covered in the United Kingdom.
These delays save Europeans money, and so do the bargaining tactics of national health systems, which can use their monopoly power to extract price concessions. The competing insurance companies in the U.S. don’t have that leverage, so Americans pay higher prices for some drugs. But to put those prices in perspective, consider an international comparison published this year by Irene Papanicolas and colleagues at Harvard. Americans spend annually about $1,000 per capita on prescription drugs (of which $150 comes out of their pockets—the rest is covered by insurance). In other affluent countries, the per-capita spending ranges from about $300 in Australia and the Netherlands to about $800 in Switzerland (a distant second to America in developing new drugs). The annual figure is about $400 in the United Kingdom and Japan, $500 in Germany, France, and Sweden, and $600 in Canada and Denmark.
So the average difference between the U.S. and the other countries on drug spending is about $500 a year per person, hardly an astronomical sum to pay for better health, especially considering how much more money is spent in the rest of the health-care system. Even when you add the cost of drugs administered in hospitals and doctors’ offices, the total spending on drugs accounts for less than a quarter of the difference in overall health-care costs between the U.S. and the Netherlands or Germany. The rest of the difference is due to higher hospital bills and salaries and other factors, like Americans’ higher rate of diagnostic testing and elective surgeries (such as knee replacements).
What are Americans getting for their money? In the case of cancer patients, over a 16-year period they gained a half-year of life, according to Tomas Philipson, now a member of the White House Council of Economic Advisers. While at the University of Chicago, he led a team of researchers that compared cancer survival rates and the costs of cancer treatment in the United States and European countries. And then, as economists will do, the group estimated the value of the extra years of life in the United States. They concluded that, even after allowing for the higher spending, Americans came out nearly $600 billion ahead of the Europeans.
“Developing a new drug often takes more than a decade—an eternity to a politician. Lowering prices is far more appealing.”
Most of those benefits are due to new drugs, as Frank Lichtenberg has demonstrated in a series of studies. Lichtenberg, an economist at Columbia, recently analyzed the toll of 19 types of cancer in 36 countries by measuring how many years of life were lost to either disability or death. He found that the toll depended on how many new drugs had recently been introduced in each country. American cancer patients enjoyed more years of healthy life because they got more new drugs than any other country. For instance, twice as many new cancer drugs were launched in the United States than in Canada during the decade preceding 2015. As a result, Lichtenberg estimates, in 2015 cancer patients lost 9 percent fewer years of healthy life in the U.S. than in Canada.
New drugs yield similar benefits for people with other diseases, and the benefits extend beyond their obvious personal gain. Healthier patients spend less time in the hospital and miss less work. Lichtenberg calculates that each dollar spent on new drugs yields three dollars in social benefits just from the reductions in hospital bills and lost work days. He also concludes, by analyzing international trends in life expectancy and other variables, that new drugs are responsible for about three-quarters of the gains in longevity this century in the United States and other affluent countries.
To economists studying longevity, it’s not hard to justify Americans’ spending at the pharmacy. The better question is: Why shouldn’t Europeans spend more? Americans pay far more than their fair share for drug research and development. Their income is about a quarter of the world’s total, but they provide two-thirds of the profits of the global pharmaceutical industry, according to Dana Goldman and Darius Lakdawalla of the University of Southern California.
If European prices were just 20 percent higher, the USC economists calculate, that extra money would pay for the development of new drugs that would boost longevity on both sides of the Atlantic. The net benefits to Europeans and Americans would amount to $17.5 trillion over the next 50 years, and there’d be enormous benefits to people elsewhere, too. It’s a wonderful scenario—new hope against diseases like diabetes or Alzheimer’s—and if people paid attention to statistics like these, they’d worry less about today’s prices and more about new drugs that could help them in their old age. But that’s not how most people think, especially the ones running for political office.
Developing a new drug often takes more than a decade—an eternity to a politician. Lowering prices for today’s voters is far more appealing than saving the lives of voters in 2030. During the presidential campaign, Trump endorsed the Democratic proposal for letting the federal government negotiate below-market prices for people on Medicare. Given Medicare’s dominance in the market, that would essentially mean European-style price controls.
Fortunately, the Trump administration resisted that European temptation when it released its plan this year for lowering prescription prices. The officials in charge of it—Alex Azar, secretary of Health and Human Services, and Scott Gottlieb, commissioner of the Food and Drug Administration—have experience with private-sector drug development as well as the federal bureaucracy, and they’ve adopted reforms advocated by free-market think tanks: less government control, more market competition. Gottlieb went to the FDA from a stint at the American Enterprise Institute, and he appointed Paul Howard, former director of health policy at the Manhattan Institute, as senior advisor. Under Gottlieb, the FDA has focused on cutting the red tape that slows the development of new drugs, prevents competitors from entering the marketplace—and enriches rent-seekers like Martin Shkreli.
Shkreli profited not by innovating but by exploiting the slow pace of the regulatory process. His company was selling a generic drug, pyrimethamine, that had been in use since the 1950s to treat infections. It wasn’t under patent and could have been cheaply produced and sold by other companies, but there was little demand for it, so no one else had bothered spending the time and money to win FDA approval. That gave Shkreli a temporary monopoly, allowing him to jack up the price to $750 a pill. The effect on patients wasn’t as dire as it appeared in the press, because another company began offering them $1 pills of a different drug that could be used instead. But the story did illustrate a genuine problem because other companies have exploited similar monopolies to jack up prices on generic drugs that cost little to produce. “They’ve been playing regulatory arbitrage because they know it will take us time to approve another generic drug,” says Gottlieb, whose solution is to cut down that time and hence the potential profits. “We want the speculators to know up front they’re not going to have a lot of time, so hopefully that discourages that economic behavior.”
It used to take the FDA an average of four years to approve a generic drug, but that delay has been cut in half, and the agency has instituted a still-faster process for situations in which one company has a monopoly like Shkreli’s. Last year, the FDA approved a record number of new generics; this year, it’s outdoing that pace. The competition from these new drugs can drive down prices, accentuating a rarely mentioned advantage of the U.S. system: Americans use generics more than Europeans do, and pay less for them, too. The reason Americans pay more overall is the high cost of newer branded drugs—the ones like Zytiga that do the most to reduce disability and mortality. “Europeans are overpaying for the least innovative drugs and underpaying for the most innovative drugs,” says Gottlieb. “That’s exactly the opposite economic model you want if you’re trying to support innovation. So I don’t think they’re getting a great deal across the board.”
They’d be getting an even worse deal if the United States adopted their pricing policies. As it is, people in Europe and elsewhere enjoy benefits from breakthrough drugs developed in America that eventually make it to patients overseas. But what happens to the Pharmacy of the World if its chief customers stop paying? It’s been estimated that the price controls in the U.S. would cut the number of new research and development projects by 30 percent to 60 percent. That would mean fewer new drugs to ward off disability and death, slowing the increase in longevity, so that Americans in 2060 would die a half-year sooner than if the price controls had never been adopted.
That’s not the kind of life-expectancy gap that gets much attention, but it’s worth keeping in mind the next time someone goes on about the longevity of today’s Swedes and Britons. If the United States followed Europe’s example, Americans could save money in the short term, and they’d have the satisfaction of reducing their national villain’s profits, but they and the rest of the world would pay dearly for it.
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