How To Boost Drug Companies’ Profits Without Hurting Poor Americans by Cathy Reisenwitz, Foundation For Economic Education

A Free Market Reform that Can Help Everybody

Drug companies, like all for-profit companies, are all about profits. Their basic job is to take investors’ money and use it to get more money. Unfortunately, one major source of those bucks is Washington, DC — and government money always comes with strings attached.

Companies that rely on government have two goals: maximize the cash flowing in and minimize the strings that come with it. Drug companies’ latest target in this game is the 340B federal drug discount program.

Cutting the Strings

The discount program is intended to help low-income patients by reducing costs for the facilities that serve them. Begun in 1992, the program requires drug companies, as a condition of participating in Medicaid and Medicare Part B, to provide discounted drugs to public hospitals that serve a disproportionate share of low-income patients.

About a third of US hospitals participate in 340B, and about two percent of all drugs are purchased through it. Also in the program are community health centers, AIDS clinics, children’s hospitals, cancer centers, and hemophilia treatment facilities.

Drug companies want to shrink 340B to boost their bottom lines, but the move will harm health care providers in poor areas and the people they serve. The industry’s agenda looks superficially small government and conservative, but in truth, it’s more likely to result in bigger government, as taxpayers are left to pick up the tab.

Luckily, there are other policy prescriptions that could increase pharmaceutical profitability, while also helping poor Americans and shrinking government.

Targeting the Real Problem

When it comes to protecting profits, lowering costs is as effective as keeping prices high, and lower costs are good for both sick consumers and corporate shareholders.

Drug companies argue that the cost of developing new drugs necessitates their high prices. There’s no argument that developing new drugs is expensive and time consuming. According to the pharma-friendly Pacific Research Institute, “A successful drug must earn $1.5 billion in revenues each and every year just to cover the capital costs for the R&D expenditures.” (Others put the figure much lower, around $75 million on average.) Either way, we’re still talking big bucks.

One reason it’s so expensive to develop new drugs is the Food and Drug Administration. It can take a decade or more for new drugs to get approval, and that’s just the precious few that survive the process. PCI claims the FDA approves only 0.1 percent of drugs in pre-clinical testing for human testing. Of those, only 20 percent are allowed to reach the market.

There are many natural dead-ends in drug development, of course — not every new compound is going to be safe or effective — but complex regulations and extremely long waits make every treatment much more expensive. Each one that arrives in the market has to make enough money to recoup the costs not only if its own development but also of all the medicines that failed or are languishing in FDA purgatory.

Streamlining the drug approval process would lower the cost of developing new prescription drugs. Consumers would enjoy lower prices for new medications, while manufacturers could still enjoy a healthy profit.

Most importantly, it would also save lives. More people would take their meds as prescribed if they could afford them. Government resources could also go further without raising taxes. Lower prices would save money for the entire health care system, public and private, by improving medication adherence, a major driver of unnecessary spending. A faster approval process would help make sure sick people receive lifesaving drugs in time instead of dying from diseases that would be curable without bureaucratic bloat.

Fix the Game

The FDA approval process is not long and arduous because patient safety requires it, but because government bureaucrats have much more incentive to avoid the possibility of something going wrong than to make sure things go right. These perverse incentives mean, in practice, that tens of thousands of Americans needlessly die from curable diseases in order to prevent a few Americans from dying from drug complications — thus getting some FDA bureaucrats in trouble.

As if to prove the power of proper incentives, it took an FDA regulator’s wife being diagnosed with ovarian cancer to speed up approvals at the agency. In National Review, Veronique de Rugy highlighted a salient point about this heartbreaking story. While his wife was fighting a battle she’d ultimately lose, her husband pushed drugs through the FDA faster than they’d ever been moved. It took a personal tragedy to motivate one tiny improvement at the FDA.

It’s fortunate that not every FDA regulator will feel the impact of the precautionary principle so acutely. But that also means that current tinkering around the edges of the FDA process, while laudable, won’t significantly reduce costs and needless deaths. Major reforms, such as allowing people to try drugs that have been proven safe, are needed. Isn’t this the problem the pharmaceutical industry should put its resources into fixing?

There’s no use in begrudging drug companies lobbying for policy changes that will boost their profits — don’t hate the player, hate the game. But targeting a minor program like 340B is a mistake in priorities. The problem for all of us is the system itself. The drug industry should put its considerable muscle into lobbying for policies, such as a faster drug approval process, that can actually save lives and improve the corporate bottom line at the same time.

How To Boost Drug Companies' Profits Without Hurting Poor Americans

Drug Companies