Federal drug-price controls or divide pharmaceutical companies?

Should we have government drug-price controls? A good article exploring this subject is titled, “Government Regulated or Negotiated Drug Prices: Key Design Considerations.” This is from that article:

1. What process should HHS use to set the price for a drug?

2. Will the new system set prices only for a limited number of high-cost drugs that lack therapeutic alternatives or more broadly by including drugs that compete with other medicines?

3. Does the specified price represent the actual price for all sales of a drug, or is it a “ceiling” price, with payers retaining the ability to negotiate lower prices?

4. Will drug prices set by HHS apply to a narrow or broad population (e.g., only Medicare Part B or Part D beneficiaries or all patients, regardless of their insurance coverage)?

5. How would HHS assess and incorporate the value of a drug when establishing its acceptable price?

   

6. How should HHS select drugs for lowered prices?

The answers are complex, filled with “It depends” and “Maybes.”

The truth is we already have quite a bit of federal price controls, some helpful, some not. The question arises because many people now favor government negotiation of pharmaceutical prices.

Consider this brief video. It shows a woman weeping. She was suffering because the cost of a lifesaving drug was beyond her ability to pay.

In response to many thousands of similar, heart-rending stories:

U.S. Sens. Cory Booker (D-NJ) and Mark R. Warner (D-VA) reintroduced legislation to help lower the costs of needed medical care and prescription drugs for children.

The Fair Drug Prices for Kids Act would give states the ability to purchase prescription drugs at the lowest price possible, reducing the cost of prescription drugs for children who receive coverage through the Children’s Health Insurance Program (CHIP) and generatingimmediate savings for states and the federal government.

Actually, it’s not “the lowest price possible.” It’s the lowest price being offered, anywhere. And it’s state governments that would negotiate.

But that is a digression from our real question. Should the federal government determine prices for pharmaceuticals?

Senior living: Medicare could get to negotiate drug prices under Democratic bill By KAISER HEALTH NEWS | PUBLISHED: July 25, 2022 Democratic senators recently took a formal step toward reviving President Joe Biden’s economic agenda, starting with a measure to let Medicare negotiate prices with drugmakers and to curb rising drug costs more broadly.

A similar proposal died in December when Sen. Joe Manchin, D-W.Va., decided to oppose Biden’s $1.9 trillion Build Back Better bill, which also included provisions allowing for Medicare drug negotiations.

Reining in drug costs has long been wildly popular with the public, with more than 80% of Americans supporting steps such as allowing Medicare to negotiate and placing caps on drug price inflation.

The bill revealed in early July would do both. It would also limit annual out-of-pocket drug costs for Medicare beneficiaries to $2,000, make vaccines free for people on Medicare and provide additional help for lower-income seniors to afford their drugs.

The heart of the bill is the negotiation provisions.

Under the legislation, Medicare could start the new pricing procedures next year, with the secretary of Health and Human Services identifying up to 10 drugs subject to bargaining. The resulting prices would go into effect in 2026. As many as 10 additional drugs would follow by 2029.

The use of the word “negotiate,” when talking about the federal government, is ludicrous if one side has all the power.

The federal government arbitrarily can set an unprofitable price for any drug. But, that drug won’t be sold, which is unacceptable to the public or drug companies.

The populace, which has a limited amount of money available for any spending, always wants, often needs, feels it deserves, and usually will vote for, lower prices.

The federal government, being Monetarily Sovereign, has an unlimited amount of spending money.

With no more effort than to touch a computer key, it can pay the full, asking prices for any drugs, or it can set prices by law. Clearly, when people are made to suffer from high prices, market forces are not working.

So why not either:

1. Have the federal government pay the asking price for all drugs and offer them free to the people or,
2. Have the government set an “affordable” price for all drugs, despite what the drugmakers want.

Solution #1 has problems: Healthcare providers, including pharma makers, would jack up prices to astronomical levels, and simply feed off the government’s trough.

There would be no profit motive for the Research & Development of new drugs, because the current drugs would provide infinite profits.

Government price-setting is a risky business. It often has the opposite results from what one would hope. Rent controls are a perfect example.

Limit rents, and landlords will refuse to maintain or upgrade apartments.

Limit profits, and fewer people will become doctors; fewer hospitals will upgrade ; fewer new drugs will be created; fewer patients will be served.

Solution #2  also has problems. It too would not provide the profits needed for the Research & Development of new drugs, especially drugs for rare diseases and low-profit categories (anti-biotics, for example).

Since the Orphan Drug Act was signed into law in 1983, the FDA has approved hundreds of drugs for rare diseases, but most rare diseases do not have FDA-approved treatments.  

The FDA works with many people and groups, such as patients, caregivers, and drug and device manufactures, to support rare disease product development. 

In one sense, Medicare already does #2.

Without negotiation, it sets the healthcare prices it is willing to pay, on a take-it or leave-it basis with healthcare practitioners.

That policy has generated the “concierge doctor” system. For annual fees, primary care (usually) doctors can limit their practices to a manageable 600-800 patients, allowing plenty of time to devote to each patient.

This compares with the more typical 2500+ patient load, characterized by quick, robotic diagnoses, treatments, then on-to-the-next.

There is a commonality to the problem of all federal price setting. It doesn’t pay for improvements.

When rents are controlled, landlords don’t maintain or upgrade. When doctor’s fees are controlled, doctors are not rewarded for being better doctors. They are not rewarded for doing the daily “R&D” to keep themselves up to date with the latest procedures. Nor are they rewarded for taking more time with patients.

When the primary reward is numbers sold — how many apartments, how many patients, how many sales — hospitals, convalescent homes, pharmaceutical companies, etc. are rewarded for more, but not for better.

All businesses, including the healthcare business — the doctors, nurses, hospitals, equipment manufacturers, all the way to ambulance services — can be thought of as divided into two related businesses:

• • Research and Development of better products.
  • Manufacture and marketing of more products.

Doctors and nurses are not financially rewarded by the market for staying current with the latest procedures and drugs. Nor are hospitals rewarded for improvements. Nor are equipment manufacturers and ambulance services rewarded for R&D.

The tacit assumption is the mousetrap theory. “Build a better mousetrap, and the world will beat a path to your door.” Your R&D will be rewarded indirectly through more, and more profitable sales.

But it doesn’t work with healthcare, where the customer has little choice and even less knowledge. A story:

For many years, I rescued small companies struggling to profit. One such company was a software developing group whose customers were businesses that needed certain software apps. 

We created the software and they paid us on a job/time basis. We did a lot of work for a one-project payment. Because we had no other source of income (for example no government help) our profits were lean.

Finally, we focused on one piece of software and marketed it to the public. That proved profitable for us, because the same software generated profits for us, year after year. We no longer provided R&D to other businesses.

But it reduced, by a small amount, the total amount of software R&D being done in America. We no longer were creating new programs.

Had the federal government compensated us for our ongoing software R&D efforts, we would have continued in that vein, and added to the software available to businesses.

Imagine a pharmaceutical company divided into two companies: One is called ABC R&D. The other is called ABC Sales.

Each has its own officers and balance sheets.

ABC R&D is financed by the federal government and by sales of its research results to pharmaceutical companies. Any patents developed by ABC R&D would be owned and licensed by them, not by ABC Sales.

This would be comparable to the way university patents are handled:

America’s universities are the nation’s principal source of the basic researchthat expands the frontiers of knowledge and produces discoveries that enhance national security, strengthen economic competitiveness, and enrich the lives of our citizens.

Although university research results are disseminated primarily through peer-reviewed publications, conferences, and other forms of open communication, they also are distributed through technology transfer, whereby fundamental discoveries are moved into the commercial sector for development into products and services that benefit society.

The landmark 1980 Bayh-Dole Act, which authorized universities and small businesses to retain patent and licensing rights to inventions resulting from federally funded research, has been an extraordinarily successful mechanism for facilitating the transfer of basic discoveries into the commercial sector for development. The patent system is an integral part of this process.

While the principal motivation of ABC Sales would continue to be profits, the principal motivation of ABC R&D would be more skewed toward discovery.

Researchers have a scientific bent and find joy in the discovery process. Funding would be supplemented by the government, so dollars would be a much less important goal.

Consider NASA’s rocket scientists, who are financed by the federal government. Their primary goal is scientific accomplishment, not selling the results of their work. That would be a pattern for ABC R&D.

By contrast, ABC Sales would be financed by its manufacturing and marketing of products. In such an arrangement, the government would not set product prices. Nor would prices need to evolve from R&D costs.

ABC R&D could afford to spend time and money creating drugs that cure rare diseases, and ABC Sales could profit, even from the resultant limited sales.

The government would reward “scholarships” to R&D companies simply for doing R&D. This would lead to more/better R&D that is not dependent on product sales. 

There is some precedent for this idea:

In developing new drugs for rare diseases, this non-profit steps in when pharmaceutical companies won’t In Silicon Valley, scientific altruism meets entrepreneurship in the race for ne By Dr. Edith Bracho-Sanchez, January 05, 2019

A research team has reason to celebrate after the Food and Drug Administration granted it approval on Friday to begin a clinical trial for a new pediatric brain cancer drug, one that might have ended up overlooked by pharmaceutical companies.

The lead researcher on the team, Dr. Teresa Purzner has already beat impossible odds. The neurosurgeon and mom of three managed to get the approval in record time and with little money thanks to the help of a team of ‘scientific altruists’ called SPARK.

The development of new medications in the United States is driven by pharmaceutical companies; researchers at universities rarely bring their discoveries to the bedside.

For every 10,000 potential new medicines sitting on laboratory shelves around the country, only one will ever reach patients in need, according to the National Institutes of Health.

Why? Because the process can take 10 to 15 years, costing upwards of a billion dollars per drug.

If profit is your primary motive, engaging in a high-risk enterprise that takes 10-15 years for approval, and costs a billion dollars, must be highly selective in its choice of projects.

That selectivity reduces the opportunity for serendipitous discovery. Research requires failure. The evolution of life on earth has taken millions of years and trillions of failures to get where we are now.

Research is the science of learning from failures.

As a result, the number of new medications approved by the FDA has remained stagnant at about 31 per year over the past 10 years.

The majority of these medications are similar to already existing ones, and many target diseases for which there are large markets— like hypertension and high cholesterol — and therefore, a return on investment.

Enter SPARK, a non-profit program created in partnership between Stanford University and volunteers from the biotechnology, pharmaceutical, and investment industries, which helps academic researchers bring their discoveries to patients.

Since its founding, SPARK has given special consideration to projects typically neglected by pharmaceutical companies, including rare diseases and diseases affecting children.

Purzner put her neurosurgery practice on pause to study medulloblastoma, a type of childhood brain cancer.

Compared to diseases like hypertension and high cholesterol, which affect millions of Americans, medulloblastoma is rare, affecting only 250 to 500 children every year.

America should not rely on profit-making companies to develop medicines. The federal government can afford repeated failures and long-term investment. The private sector rarely can.

Without government sponsorship, we never would have gone to the moon, or received the many benefits of that effort. (See: Going to the Moon Was Hard — But the Benefits Were Huge, for All of Us

Thanks in part to the massive, 400,000-person effort that put astronauts on the Moon, our knowledge of the solar system has increased dramatically in the decades since.

The many challenges NASA overcame forced the agency and its partners to devise new inventions and techniques that spread into public life, many of which are taken for granted today.

Here is a small selection of Apollo technologies still in use 50 years after the first Moon landing.

Digital Flight Controls Maybe the clearest illustration of Apollo’s contributions to the state of the art is the digital fly-by-wire control system that guided its path. The technology was unheard-of at the time, but it is now integral to airliners and is even found in most cars.

Food Safety One of the many problems NASA faced planning space missions was the need to ensure all food astronauts took with them was free of microbes that could make them sick. The Hazard Analysis and Critical Control Point (HACCP) system was in place in time for the first Moon missions.

For the past couple of decades, the U.S. government has required meat, poultry, seafood and juice producers to use HACCP system procedures across the entire food industry today.

Space Blankets One of the most prevalent spinoffs from the entire space program was invented for Apollo-era spacesuits. It might be best known as the “space blankets” found in emergency kits and handed out at the end of marathons, but multilayer reflective insulation is more often used in less visible applications.

The insulation has become a ubiquitous spinoff found in clothing, firefighting and camping gear, building insulation, cryogenic storage, magnetic resonance imaging machines and particle colliders, to name a few applications.

Quake-Proofing A technology that started with Apollo-era shock absorbers and computers now protects buildings and bridges around the world from earthquakes. The same technology now reinforces hundreds of buildings, bridges, and other structures around the world, particularly in quake-prone regions.

Rechargeable Hearing Aids Even decades after the Moon landing, new spinoff technologies from the Apollo program continue to arrive on the market. The world’s first practical rechargeable hearing aid batteries, which debuted in 2013, built on extensive work NASA did during and after Apollo.

The batteries have also made their way into a bone-anchored hearing system and a line of noise-canceling wireless earbuds. It is likely that we will see many more silver-zinc battery applications in the future.

See more at the NASA Spinoff website.

The federal government should focus on financing R&D. That is the real benefit to America. The federal government has taken small, tentative steps in this direction:

The Orphan Drug Act is a law passed by Congress in 1983 that incentivizes the development of drugs to treat rare diseases.  Companies and other drug developers can request orphan drug designation and FDA will grant such designation if the drug meets specific criteria.  Orphan designation qualifies sponsors for various incentives, including: 

• • Tax credits for qualified clinical (in humans) testing
  • Waiver of the Prescription Drug User Fee (currently at almost $3 million for a new drug)
  • Potential 7 years of market exclusivity after approval

In addition, the Orphan Drug Act established the Orphan Product Grants Program to provide funding for developing products for rare diseases or conditions. 

The FDA’s Orphan Products Grants Program awards grants to clinical investigators to support the development of safe and effective medical products for patients with rare diseases. The program has supported clinical research since 1983 and has funded clinical trials that have facilitated the approval of more than 70 products.

Although the direction is good, the process still lies in the hands of profit-oriented pharmaceutical companies.

Progress will be made only when the process is in the hands of discovery-oriented R&D companies, separate from the pharmaceuticals.

Despite all its brilliance, Space X rode on NASA’s shoulders. No government, no Space program. No government, no COVID vaccine.

For the federal government, money, time, and profits are not the primary consideration. An intelligent government leadership can keep its eyes on the real goal: Medical solutions.

In summary, R&D is essential for all of America. Many of our most significant discoveries came when someone was looking for something else. One never knows where serendipity will lead.

But R&D is expensive in terms of money and time, and failure is the most common result.

A Monetarily Sovereign government can afford to invest the money and time in R&D projects. The government should do far more to fund medical research, not by supporting traditional pharmaceutical companies but by funding R&D companies that would replace pharmaceutical companies’ R&D departments.

The government can encourage and reward such companies via direct grants. After government-funded R&D has done all the drug heavy-lifting (including FDA approvals), the sales/marketing companies can profit from the lower-risk end of the business and thereby provide lower-cost medicines.

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most critical problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socioeconomic ranking and to come nearer those “above.” The socioeconomic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:

1. Eliminate FICA
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Social Security for all
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction annually. 
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY