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Prescription Drugs and Price Controls

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Prescription Drugs and Price Controls

10 Blocks podcast December 12, 2018
Health Care

John Tierney joins City Journal editor Brian Anderson to discuss what the debate over prescription drugs gets wrong and the cost that government-imposed price controls could have on one of the world’s most innovative industries.

The business practices of the pharmaceutical industry—or “Big Pharma”—are one of the most divisive political issues of our time. Leaders from both political parties, from Bernie Sanders to President Trump, regularly denounce drug companies for profiteering and call for lower drug prices. But as Tierney notes in City Journal, “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.”

America has been called the “Pharmacy to the World” because it’s where more than half of new drugs get developed and tested in clinical trials. Patients in Europe and elsewhere enjoy the benefits of these breakthrough drugs. Price controls in the U.S. would significantly curtail new research and development projects—resulting in a net loss for everyone.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is your host, Brian Anderson, the editor of City Journal. The cost of prescription drugs has become one of the hot political issues of our time. Progressive politicians like Bernie Sanders and Elizabeth Warren have called for strict regulation of prescription drug prices, and as the midterm results indicate their ranks in congress are going to grow next session, but Donald Trump too has grumbled about drug prices and at times has threatened drug companies with further regulation to keep those prices reasonably low. The pharmaceutical industry has been a target of criticism and public anger for decades of what are deemed excessive prices, and the anger is understandable since peoples health can often depend on a regular supply of drugs. Few people understand how drug development works, however. A new drug, for example, takes often more than a decade to bring to market, and the potential for financial losses can be enormous. So that's why we invited John Tierney, City Journal contributing editor, to talk about his piece in the new issue of City Journal, "What the Prescription Drug Debate Gets Wrong." It's a masterful and clear discussion of what's at stake in this very important debate. After the music, we'll talk with John Tierney. We hope you enjoy.

Brian Anderson: Hello again everyone. This is Brian Anderson, the editor of City Journal. Joining me on the show today is John Tierney. John is a contributing editor at City Journal and before joining us he was a reporter and columnist for many years at the New York Times and he is a best selling author. His latest piece for City Journal is called "What the Prescription Drug Debate Gets Wrong" and it appears in our autumn 2018 issue. John, thanks for joining us.

John Tierney: Thanks, Brian.

Brian Anderson: Now, critics of the pharmaceutical industry, Big Pharma, as they often call it, say that the prices of prescription drugs are getting so high that we're reaching a crisis in America. And it's true that Americans tend to pay more for drugs than Europeans. In some cases, a lot more. In this view, we need more regulation, including price controls, to bring those costs under control. What's your general response to that idea?

John Tierney: There are problems with the pharmaceutical industry and the way that drugs are regulated in price, but on the whole Americans get a much better deal than Europeans do. If we imitated them with price controls, as the Trump administration is unfortunately just recently started to do, by having Medicare, they're talking about having Medicare set as prices according to Europe, which basically means importing their price control. But if we imitated Europe, it would hurt us and it would hurt the rest of the world.

Brian Anderson: How so? Can you explain that a little bit?

John Tierney: Well, America has been called the pharmacy of the world because more than half of new drugs are developed here.

Brian Anderson: And developed by private company?

John Tierney: Exactly. The hub of pharmaceutical innovation used to be in Europe, but it's moved to the United States because we have more incentives here. We don't have the price controls that they have. This is the biggest market. And Americans actually pay less for generic drugs than Europeans do because of various factors. But what gets people so upset is that some of these new, you know, expensive breakthrough drugs do cost more in the United States, but the upside of it is that we have far more drugs, we have access to more drugs, we get them sooner than Europeans do. And so as a result, Americans live longer after they get a disease like cancer or heart disease, you know, we fair better than Europeans do in healthcare treatment. Big Pharma is easy attack because that's the thing that people see, you know, that's the one place where you're really reaching into your wallet to spend money, but it's actually a fairly small part of the healthcare system. It's only one dime of every dollar on healthcare spending goes to the pharmacy and that dime does more than anything else that you spend. In fact, it's been argued it does as much as the rest of the system together.

Brian Anderson: So this kind of drug development is absolutely essential for improving healthcare going forward?

John Tierney: Right. If we want to have new cures for Alzheimer's, new treatments for Diabetes, we should want to encourage these companies to keep innovating instead of doing what Europe does, which is basically to discourage innovation.

Brian Anderson: You draw a very interesting comparison in your essay between the way the press has covered the infamous Martin Shkreli, Pharma Bro, as he's known, with another case that involved access to drugs - that of the Lockerbie bomber, Abdelbaset al-Megrahi. This is kind of a complicated comparison, but maybe you could say a bit about those two cases and what they reveal.

John Tierney: Yes, there had been thousands of news articles about the price gouging that was done by an American businessman, Martin Shkreli, because he took a generic drug that had cost thirteen dollars and fifty cents a pill and he jacked up the price to $750. This was a drug used by, by AIDS patients and some others. This was considered a great indictment of the American system. How can we have these profiteers ruining people's health? Now, that was definitely outrageous, but it doesn't reflect a fundamental flaw in the US system. It is something that can and actually is being addressed, by other methods, without having to cripple the whole industry. But a much more instructive story about the difference between the United States in Europe is a drug called Zytiga. This has gotten very little publicity except in connection with al-Megrahi, known as the Lockerbie bomber. He was convicted in connection with the bombing of Lockerbie, of the plane that crashed over Lockerbie Scotland. And he was sentenced to life in prison, but he got prostate cancer and he was released on humane grounds because the British health system said we have no treatment for him at all, he's going to die within a few months. Well he was released, to much international outrage, and he went home, his family managed to get, reportedly in America where the drug was approved first, this drug called Zytiga, a new breakthrough drug. He lived almost another three years and there was more international outrage. But in fact he benefited the way that Americans do from having this new drug. During the time that he was living, thanks to this drug, the British National Health Service refused to give it to its patients. It was an expensive new drug and what European countries tend to do when a new breakthrough drug comes out, is they hold off on approving it for their patients, on including it in their health plans, until there's another one that comes out. This other competition drives down the price where they say we want to study it some more. And what happened in Scotland, it took three years after that for the British system to approve it and only then for some patients. It took another two years for Scotland to approve it and again only for some patients. There was a headline in the express newspaper that I think summed it up; it said, "cancer drug good enough for Lockerbie bomber will not be given to Scott's NHS patients."

Brian Anderson: Right. Talking about healthcare more generally, proponents, and there's quite a few now in the United States, of socialized medicine, typically cite America's lower life expectancy as evidence for why the country needs to adopt a European style system where the government provides subsidized healthcare to everybody. You've dedicated a very interesting section of your essay to explaining why those comparisons are misleading. What are some of the differences between the US and European populations on how long they're living and how do they affect the numbers?

John Tierney: Well, it's true that life expectancy is lower in the United States then in other affluent countries in Europe. But it's not because those countries have nationalized health care systems or lower prices for prescription drugs. If the United States imitated their policies the life expectancy gap would actually increase because we'd be getting worse healthcare. The reason that there's a life expectancy gap. I mean, there are many factors that explain it because it's driven by so many different things. One of the first is that the United States has much greater economic and ethnic diversity than these countries do. There are proportionally more poor people in the United States than in these other countries. Kay Hymowitz has written here at City Journal about how we have this very high rate of child poverty because we admit so many low skilled immigrants. We also have a lot of single parent households compared with other countries and poor people everywhere tend to die sooner because they have higher rates of smoking, diabetes, substance abuse, accidents, things like that. So that's one of the main reasons for the gap but there are many others as well. America has a much higher rate of obesity. It's about twice the rate in Europe, nine times the rate in Japan. There's some interesting statistics - people point to Scandinavians, saying to you that they have higher life expectancy; well Scandinavian-Americans in Minnesota have almost the same life expectancy. People point to Japan, which has the world's highest life expectancy of 84, Singapore also has very high, but Asian-Americans in the United States, their life expectancy is at least 85.

Brian Anderson: So once you disaggregate the populations and start looking at various factors involved with the way people are living, their level of wealth, the numbers get much more complicated.

John Tierney: They do. I mean the other factors are that America until the 1980s had much higher rates of smoking than these other countries, especially among women. And that's by some estimates accounted for 40 percent of the gap. And also there's just, there are more fatal accidents; Americans drive a lot more, there are more car accidents, there are more drug overdoses, there are more homicides. So, so when you add all those factors together, the surprising thing is that the gap isn't even larger. And the reason that it's not is that Americans get better healthcare, particularly for cancer and cardiovascular disease. And a major reason they get that better healthcare is that they get more drugs, they get more new drugs for it.

Brian Anderson: President Trump, you mentioned this earlier, is no fan of the pharmaceutical companies. He's accused them of getting away with murder. That's his exact quote and he's at least gestured in the direction of price controls and maybe more than that going forward, as you earlier suggested. At the same time, his administration has viewed the issue a little differently once you look at some of the other policies that they are pursuing. What reforms has his administration enacted that might address the issue of high prices and is it working?

John Tierney: Well, they are trying to cut the red tape that slows the development of drugs and that prevents competition in the marketplace. They've got some veterans of conservative think tanks, you know, Scott Gottlieb, the head of the FDA, he was at the American Enterprise Institute and our very own Paul Howard from the Manhattan Institute is his assistant. They've been pushing the kind of reforms that free market think tanks have been advocating, which is basically more competition, less regulation.

Brian Anderson: This would accelerate the availability of generics, would that be one?

John Tierney: Exactly. That's one of the big ways to do it is to approve more generic drugs more quickly. And the way it's worked is that the bureaucracy is so complicated in Washington that the companies had been gaming the system to basically keep competitors from entering the marketplace. It's incredibly complicated, but under Gottlieb, the FDA approved last year twice as many new generic drugs as ever. It was a record and this year they're actually out doing that pace. The more generic drugs you get in the market, the more competition there is and the lower prices are.

Brian Anderson: There does seem to be a kind of internal inconsistency in the Trump administration on this question. Between the President's own sort of more populist Twitter rants and the actual policies that have been cooked up by his administrative agencies.

John Tierney: Yeah. Unfortunately, I don't know how many articles in City Journal he has read and how much time he's spent reading free market think tanks. I mean it's very easy to just instinctively say let's lower prices. Politicians love to do that because it's much easier to lower prices this year. It's much more appealing to try and save voter's money this year, rather than try and save their lives in ten years. It's very unfortunate that his administration, since the article appeared, they have proposed that Medicare should start pegging the price it pays for prescription drugs to the average price in Europe and that basically means importing their price controls. I mean it's understandably frustrating that the Europeans are free riders, that they basically benefit from our innovations. You know, we have about a quarter of the world's income, but we provide about two thirds of the pharmaceutical industry's profits. So, that's not fair, but on the other hand, we do get more drugs and we get them sooner and we live longer as a result.

Brian Anderson: And the real key is that we're developing those drugs still and that's extremely important.

John Tierney: Exactly. Economists have done the estimates and they say even if you allow for the extra money that Americans pay, we more than get our money's worth. We get something like 600 billion dollars worth of benefits from the extra life and in less time and disability.

Brian Anderson: Don't forget to check out John Tierney's work on our website, www.city-journal.org. The essay we've been talking about is called "What the Prescription Drug Debate Gets Wrong." It's in our latest issue and it's available on our website. You can follow John on twitter, @JohnTierneyNYC. We'd also love to hear your comments about today's episode on twitter, @CityJournal. Lastly, if you do like the show and want to hear more, please leave ratings and reviews on iTunes. Thanks for listening and thanks John for joining us.

John Tierney: Thank you, Brian.

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Photo by Tim Boyle/Getty Images

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