[Ip-health] Public pharmaceuticals--an alternative approach to lowering prices and ensuring access

Dana Brown dbrown at democracycollaborative.org
Mon May 14 07:14:08 PDT 2018

A colleague and I have been working on an alternative model for ensuring
lower drug prices and broader access to critical medicines. Here's our
first attempt at putting it out there. I'm drafting a more in-depth working
paper at the moment that fleshes out the idea further. Would love any
feedback you have.


FEATURES » MAY 11, 2018It’s Time for a Public Option in the Pharmaceutical

Drug companies are hated for a reason—they exist to maximize profits, not
make us healthier. It’s time to put them under public control.

Drug companies are among the most widely despised businesses in America.
Infamous for generating incredible profits at the expense of the sick and
dying while leveraging their enormous economic power to evade regulations
(to say nothing of their role in the opioid epidemic), they are often seen
as a textbook profiteer. Already, many Americans report
 not filling prescriptions, cutting pills in half or skipping doses due to
costs. In the world’s most expensive healthcare system, more than 10
percent of total healthcare costs
<https://www.cdc.gov/nchs/fastats/health-expenditures.htm>and 21 percent of
employer healthcare benefits
 are attributed to pharmaceuticals. Research shows
 that “drug spending is growing faster than any other part of the health
care dollar.”

During Friday’s long-awaited speech on drug prices, President Trump blamed
“foreign freeloaders”, the drug lobby and “middlemen” for rising prices,
promising once again to put American patients first. However, experts
predict the plan—which focuses on private sector competition and
negotiation—will have little effect on the industry or its practices.

In many cases, the profits extracted by drug companies represent a form of
double-taxation, given that public funding underpins pharmaceutical
research and development (R&D). For instance, publicly-funded research
contributed to the development of the cholesterol-lowering medication
Crestor <http://www.futurity.org/nih-funding-drug-development-1608892-2/>.
Yet, U.S. taxpayers spent billions more (either out of pocket, through
rising insurance premiums or through Medicare or Medicaid) to take the drug
at marked up prices while Pharma giant AstraZeneca pulled in over $16
billion in profits
 on Crestor alone over a three-year period.

And that’s not all. We pay a third time when we lose revenue through tax
breaks and loopholes that allow pharmaceutical companies to market their
drugs to us tax-free
operate vast networks of off-shore subsidiaries to avoid paying taxes

In this context, and with increasing pressure to keep healthcare costs down
as the population gets older, isn’t it time to consider a public option in
the pharmaceutical sector?

*Why we need a public option*

The pharmaceutical industry often defends the exorbitant and rising prices
of drugs by citing the high cost of R&D. However, a 2017 study
 from the Institute for New Economic Thinking revealed that over the
ten-year period studied, the top 18 U.S. pharmaceutical companies spent
more on share buybacks and dividends than R&D. Drug marketing—which is
outlawed in all but one other country
<https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3278148/> in the world—also
accounts for more pharmaceutical company spending
 than R&D. And pharmaceutical companies spend big on lobbying in
Washington—more than any other industry
<https://www.opensecrets.org/lobby/incdec.php> in 2017—helping to assure
victories like the 2003 Medicare Part D legislation which banned the
government from negotiating drug prices for covered medications, resulting
in billions of dollars in extra profit
 for the industry.

Research has shown that about 75 percent of new drugs
 (those that are not just variations of existing medications) are developed
with funding from the National Institutes of Health. Other federal and
state agencies also support critical research that leads to breakthrough
drug developments. Examples include the Department of Defense
contribution to the development of the prostate cancer drug Xtandi, the
California Institute for Regenerative Medicine’s investment in stem-cell
research, and the Cancer Prevention and Research Institute of Texas.

Government-funded research is also heavily weighted towards the early,
riskiest stages of drug development. A 2011 study
<https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2009.0917>, for
instance, showed that almost two-thirds of the FDA’s “priority review
drugs” (new drugs expected to have a particularly great impact on disease
treatment) approved from 1988 to 2005 benefitted from such
government-funded basic research. More recently, a National Academy of
Sciences study <http://www.pnas.org/content/early/2018/02/06/1715368115> showed
that each and every one of the 210 drugs approved by the FDA between 2010
and 2016 benefitted from NIH-funded basic research.

The U.S. pharmaceutical industry is highly dependent on the government in
other ways as well, through patent protection, restrictions on imports of
lower-priced drugs and limits on drug resales. Without this degree of
support, it is hard to imagine how drug companies could consistently rake
in their record-breaking profits

Free-marketeers often argue that if the government would just withdraw
entirely, a perfectly functioning competitive market would emerge and drugs
would be supplied by for-profit companies at a cost that consumers would be
willing to pay. But in real-life, market allocation is not nearly as clean
and straightforward as it is the minds of free-market economists. It is
messy, gritty, and in a sector as critical to human existence as
healthcare, has life and death implications. In addition to ample evidence
of fraud, market manipulation, price fixing, cartels, consolidation, and
anti-competitive behavior, the pharmaceutical industry already provides an
excellent example of market failure.

If the industry achieved an efficient allocation of goods, one wouldn’t
expect to see so many medications on the Food and Drug Administration’s drug
shortage list <https://www.accessdata.fda.gov/scripts/drugshortages/> which,
as of this writing, includes 96 pharmaceuticals from pain relievers to
antibiotics, anesthetics, and chemotherapy drugs.

There are more than 180 off-patent drugs with no generic equivalent
 on the market (as of March 2017). This often occurs only because no
company ever applies for the rights to produce one, deeming the profit
margins too low. As Nobel Laureate Joseph Stiglitz wrote in 2007
“It is a matter of simple economics: companies direct their research where
the money is, regardless of the relative value to society. The poor can’t
pay for drugs, so there is little research on their diseases.”

*A Potemkin market*

As a capital-intensive industry of strategic importance which has not been
able to efficiently allocate goods to meet the needs of society, the
pharmaceutical industry is a prime candidate for a public option. Simply
put, there is an argument to be made that pharmaceuticals are a Potemkin
(fake) market which only exists (or is profitable) due to massive public
support—and for a variety or moral and economic reasons the development of
life saving or critical drugs (at a minimum) should be taken out of “the
market” completely.

Publicly owned pharmaceutical companies exist in several countries around
the world including Sweden, Cuba, South Africa and Brazil. Sweden’s
Apoteket AB (a pharmacy chain and drug producer), for instance, is a highly
successful enterprise that in 2015 returned a dividend of approximately $133.5
 to its sole owner—the Swedish state. Cuba’s entirely public pharmaceutical
industry is known for its innovations, including the world’s first cancer
currently in clinical trials <https://www.roswellpark.org/cancer-vaccine> for
use in the United States. It holds over 1,200 international patents,
supplies most of the medications needed internally and markets to more than
50 other countries, generating as much as $700 million
<http://www.who.int/phi/publications/Cuba_case_study121115.pdf>in annual

Public ownership is already much more prevalent and widely accepted in the
United States than most realize. Electric and water utilities, ports and
airports, transit systems, land, broadband internet networks, and shares of
thousands of companies through public pension and sovereign wealth funds
are all under public control.

Pharmaceuticals are a profitable industry, but a more comprehensive measure
of financial success would look beyond the balance sheet and take into
account the direct and indirect economic and social benefits of providing
cheaper, more widely accessible life-saving, life-improving, or
life-extending drugs such as fewer long-term hospitalizations, a more
healthy and productive work force and increased life expectancy. Given
these indirect benefits, publicly owned pharmaceutical companies could even
operate at or below cost.

*Drugs for the public good*

As public entities, these pharmaceutical companies would be charged with
serving the public good and could be tasked with developing drugs based on
need, rather than projected profits. They could be intentionally linked to
the existing network of publicly-funded research facilities and any profit
they did make could be funneled back into R&D, used to off-set the cost of
drugs that are more expensive to produce, or invested in “upstream” public
health interventions and social services that have been proven to improve
health outcomes.

They could focus on public-health related priorities like vaccines,
medications that appear on the FDA’s drug shortage list and treatments for
neglected diseases. They could also ensure that generic equivalents were
available for off-patent drugs critical to public health. State or regional
public companies could even be tasked to produce low cost drugs that match
the unique health needs of area residents. For instance, areas with booming
elderly populations could focus on producing drugs that are regularly used
by seniors.

A public option in the pharmaceutical industry would undoubtedly be
assailed by free-marketeers, but it actually represents something of a
middle of the road approach between a complete government withdraw from the
industry on the one hand and the crony capitalist approach of double
taxation and the subsidization of corporate profits on the other. A public
option would likely prove popular, given that for many Americans the
prospect of lower costs and increased access is probably more important
than the ownership structure of the companies providing the drugs.

It is well-known that the United States has by far one of the most
expensive health systems in the developed world yet delivers relatively
poor outcomes across a host of indicators. While in recent years policy
makers at all levels have begun to focus on our unique (and some would say
irrational) method of providing and paying for healthcare, the role of the
pharmaceutical industry is no less important.

Given the industry’s reliance on public support in a variety of forms, it
is possible to begin to think through how that support can be directed into
alternative approaches and designs that may deliver better long-term
results for both consumers and society more broadly. The time has come for
a public option for pharmaceuticals.

[image: Democracy Collaborative]

*Dana BrownDeputy DirectorThe Next System Project*Phone: (202) 559-1473 x122
Email: dbrown at democracycollaborative.org
Web: www.thenextsystem.org

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