Saturday, October 28, 2006

Price controls on prescriptions: Killing the goose that laid the golden egg

By Mark Dorroh

The fable of the goose that laid the golden egg should be mandatory reading for anyone publicly discussing the "soaring prices of prescription drugs" in America today. The fable goes like this: A poor peasant discovers one morning that his prized possession, a fine, fat goose, has laid a solid gold egg. Each morning thereafter, there's another egg, and soon the formerly poor man is wealthy.

But greed gets the better of him. One day, as he's counting his wealth and wishing he had even more, he gets to thinking, "If there's one egg each morning, how many more must there be inside the goose? It would be the mother lode!" So he cuts open the goose, looking for the source of the wealth, and discovers that all he's got now is a dead goose.

This story has a moral applicable to a number of current issues, none more so than the debate over prescription drug costs and the pending plans to lower them through government price negotiations with drug companies.

To get a full understanding of what's at stake, let's go back in time. In 2004, the Associated Press reported "about a dozen states are exploring ways to buy cheap prescription drugs from Canada and make them widely available to Americans, even though importing the drugs is illegal."

The story goes on to say representatives from the states met with Canadian drug companies which say they can deliver the same drugs bought here in the U.S.A. at 40 to 60 percent off. "Drugs from Canada are generally made by the same pharmaceutical companies, but price controls keep their costs to about half those in the United States," states the A.P.

Those Canadian government-capped prices are why individual Americans in border states make regular trips to Canada to buy at the lower prices. But importation for resale is forbidden. ‘‘Drugs are cheaper in Canada — how do we bring these drugs into the states?’’ asked Tom Susman, acting administration secretary for West Virginia. ‘‘If they work better, and the cost is cheaper, I think it’s legitimate."

The drugs they're talking about were, for the most part, invented by American drug companies. One reason they're more expensive in America is, even though our government taxes the living bejumpus out of the companies and their workers, it does not limit profits that can be made with a popular drug.

Accordingly, investors from around the world know if they put their money into an American drug company, their investment will be risky but potentially more profitable than investments in other sectors. Consider; in 2004, an article in the Journal of Health Economics estimated the cost of researching, developing, testing and bringing a new drug to market at $802 million. Add to that the information in the journal Pharmaeconomics that only three out of ten new drugs recoup research and development costs and generate profits, and one begins to perceive the dimensions of an investor's conundrum. Would any sane investor take such a long-shot risk if the potential for profit was not commiserate?

Everybody knows how betting on a long-shot works. If your horse goes off at 15 - 1, you'll win more money if it wins than if you'd backed the 2 - 1 favorite. Investors also understand the concept of the long shot. The drug company they put their money into may invent the next Prozac and reap billions, or might have a streak of unprofitable projects which don't get back the money spent on research and development.

In some cases the company can be sued out of business, leaving investors with nothing, not even a devalued stock to sell and get back pennies on the dollar. Under those circumstances, would it be wise to cap the "winnings" of investors who choose the right company? I think not.

Look at it from their perspective; if they make no more buying drug company shares than they do buying Sony or General Motors, why not choose the less risky investment? And if that pool of capital dries up due to price caps (or the virtual price caps imposed by government-drug company negotiations), where do drug companies get the money they need to hire scientists to invent the next generation of miracle drugs?

If you think the answer is "federal or state government," please do a little research into the history of government appropriations. Do we really want decisions on which drugs to fund for development made by the same folks who, during the military procurement scandals of the 1980s, bought $3,000 coffee makers and $100 hex wrenches?

On the issue of all the supposedly "unconscionably expensive drugs" available these days, it must be noted that of course drugs cost more than they used to. They also do more than they used to. And dollar for dollar, they're generally much cheaper and more effective than the old treatments, including some dangerous major surgeries now made obsolete by those pricey drugs.


Market "fairness" seems to be an obsession of many on the anti-corporate side of the drug debate, so let's talk about fairness for a minute. Specifically, let us ask the question, "why is it fair for a sports star to make millions, but not the people who invest in companies which invent drugs that save lives?"

For our follow-up questions, let us inquire, "Wouldn't you want those folks to make lots and lots of money, so they'll keep investing in the creation of lots and lots of new, useful drugs?" and, "Is the investment of hundreds of millions of dollars in the next generation of drugs less important than paying tens of millions of dollars to some guy with excellent eye-hand coordination?"

Bottom line: Limiting wages, prices and profits has been tried at various times in various countries, and has never worked. How many useful drugs did the late U.S.S.R. create, despite its extensive corps of world-class scientists? Or for that matter, how many new drugs have been invented by the many world-class researchers working in Canada's price-capped environment?

So here's the deal: We can keep feeding our goose the best, most expensive food we can find and continue thereby to benefit from its golden eggs, or we can feed our goose cheaply and think we're getting a better deal. But the history of invention and investment strongly suggests that the creation of the next generation of life-saving drugs will not be among the dividends of cheap goose food.

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