Pundits and experts on the right side of the political spectrum are claiming that giving CMS the authority to negotiate drug prices will cost Americans $500 billion in lost productivity due to an annual loss of five million life years.
There are so many flaws in their arguments it’s hard to know where to start, but let’s plunge in.
Conservative think-tank Manhattan Institute is the source of these statistics, which are based on their analysis of the financial impact on big pharma if CMS adopts the VA’s pricing. The analysis is based on a faulty premise, uses a flat-out wrong methodology, and produces results that are, in a word, hysterical.
MI’s lead expert, economist Benjamin Zycher, claims that drug companies would lose the incentive to do research if the Feds based their prices on the VA, and investment in new drug research and development would (therefore) decline by approximately $10 billion per year. In turn, this would mean about 10 fewer drugs per year.
In all of his research efforts, Zycher evidently did not bother to look at pharma investment in Europe, where countries negotiate for drugs directly with manufacturers (like the VA does, and restrict the formularies to boot). As a result their costs for brand drugs are about 60% of US costs. One would think that European pharma companies would therefore spend less on R&D. And one would be wrong; there’s more investment by European companies, not less.
Zycher’s methodology makes some wild assumptions as well, noting that “If the average expected return in the absence of federally mandated price discounts is at the market rate of interest, the introduction of discounts must yield a reduction in investment, and perhaps zero (or near zero) investment….This case of zero investment may seem extreme, but it is highly plausible under a broad set of conditions.” Boy, that’s a big “if”.
The average rate of return for pharma (24.4%) is five times higher than the market rate of interest (4.77% for the 10 year bond).
Zycher also seems to ignore the innovation that comes from taxpayer-funded research, which provides pharma manufacturers with much of the data and information they use to come up with marketable drugs. There is no question big pharma, and their stockholders, are benefiting from subsidies from taxpayers, which amounted to over a billion dollars a year in 1996. For all this research, pharmaceutical manufacturers paid taxpayers a princely $27 million in royalties.
Unfortunately, the mass media seems to have swallowed this castor oil without even holding their collective nose.
What’s really disappointing here is the use of a faulty methodoloogy and selective data to promote a perspective. Undoubtedly Zycher is a smart guy who knows his science; it is troubling that he uses it so selectively. And it just doesn’t stand up to even superficial scrutiny.
Joe — I think foreign drug companies have the same access to the uncontrolled U.S. market that U.S. drug companies have. Since they all have the same worldwide market opportunity, one would expect their R&D spending as a percentage of revenue to be comparable whether they are headquartered here or overseas.
The Manhattan Institute is nothing more than a body funded by the pharmaceutical industry to put out garbage that supports their position. I wouldn’t use anything they produced for any purpose other than kindling for a fire.