Pharmaceuticals

What is Medicare Part D?

Medicare Part D began in 2006 and provides insurance coverage for pharmaceuticals for the elderly. The program is set up so that the government does not purchase the drugs directly, but subsidizes private prescription drug plans, which then negotiate prices with the pharmaceutical companies. There are two types of Part D plans. The first are prescription drug plans (PDP) which only cover drugs. Medicare Advantage plans (MA-PD) are comprehensive, managed care insurance plans which also include insurance coverage for pharmaceuticals.

Typical Part D coverage includes a $250 deductible, with 75% coverage for the first $2000 (after the deductible). Part D defers 0% of the cost of drugs between $2000 and $3599–the “donut hole”–and then once annual spending reaches $3600, Part D pays only 95% of the costs.

The government subsidies these PDP and MA-PD plans based on a bidding process. A national average bid is calculated and multiplied by some constant percentage (it was 34% in 2007) to determine what premium the enrollees will pay. The 66% subsidy is distributed to the plans as a lump sum, so that if plans offer higher or lower premiums, the enrollee incurs the full cost (benefit) for higher (lower) premiums.

To reduce the possibility of crowd-out, CMS subsidies firms that provide prescription drug coverage to their retirees.

What does economic theory predict about Medicare Part D’s influence on prices?

Many economists would at first glance believe that this would lead to an increase in prices. Consumers should be have less elastic demand since they will only be paying for a fraction of the drug cost if they have Part D insurance. An NBER working paper by Duggan and Morton (2008) believe that this will not be the case. First, PDPs and MA-PD have large customer bases and can negotiate bulk discounts. Individuals do not have the buying power to negotiate these discounts. Further, drug companies often use formularies which advise patients as to alternative drugs (e.g., generics) which are cheaper. Physicians advice patients as to the most medically effective drug, but not the most cost effective treatment. Thus, insurance company formularies can make patient cross price demand elasticities for drugs more elastic since they are more aware of comparable drug substitutes.

Further, the production of pharmaceuticals is one with extremely high fixed costs (e.g., R&D, advertising) and very low, relatively flat marginal costs. Thus, prescription drug insurance will likely increase pharmaceutical utilization, which will decrease average costs.

Medicare Part D’s impact on Price

Duggan and Morton find the Medicare Part D decreased average overall price by 12%. Patients of course pay even less than this 12% figure, because insurance pays for a portion of the drug costs. Thus, for patients moving from cash payment to Medicare Part D, net drugs prices for them decreased 24%.

This decrease, however, could have reflected an overall decrease in drug costs and may be unrelated to Part D insurance. To test this, Duggan and Morton examine the prices of drugs in “protected” therapeutic classes. The government mandate that insurance companies must cover all drugs for treatment categories such HIV, anti-cancer, immunosuppressant, etc. Because the Part D plans are mandated to cover all drugs in the category, plans cannot 1) use their buying power to negotiate lower prices since producers know that the drug must be covered and 2) use formularies to direct enrollees to less expensive alternatives since all drugs must be covered. Thus, the authors predict that for drugs in these protected classes, their should be no price decrease. This is exactly what the authors find.

“The results…suggest that drug prices offered by Medicare part D plans grew with others in those therapeutic categories where their ability to move market share was most limited. This provides some support for our model…which predicted smaller price declines (or larger price increases) for those treatments without good substitutes.”

• Duggan, Mark; Morton, Fiona Scott; 2008. “The Effect of Medicare Part D on Pharmaceutical Prices and Utilization“, NBER WP #13917.

Is the free market working?  Looks like.  Wal-mart just dropped its prices on pharmaceuticals.  According to a Marketwatch article (”Wal-mart…“) :

• Wal-mart will fill prescriptions for as many as 350 generic drugs costing $10 for a 90-day supply
• Over 1000 over-the-counter drugs are priced at $4 or less.  Many of these include Wal-mart own private label Equate brand.

Wal-mart must compete with some supermarket chains that are offering free generic drugs to draw consumers into the store.

Consumers are starting to pay a larger share for high priced drugs.  According to the N.Y. Times (”Co-payments“), insurance companies “…are charging patients a percentage of the cost of certain high-priced drugs, usually 20 to 33 percent, which can amount to thousands of dollars a month.”  Medicare’s drug plans have introduced new fee schedules where patients pay larger copayments for Tier 4 and Tier 5 drugs.  Private insurers now followed Medicare’s lead.

Should consumers bear a larger burden of their health care costs?  On the one hand, moving towards more out-of-pocket costs will reduce premiums.  Further, higher co-payments will reduce moral hazard (i.e., the use of unnecessary medical care simply because insurance pays for it).  Also, this moves us closer toward insurance as a policy to insure people against catastrophic risk and not as a mechanism to pay for all medical care.

Still, health economist James Robinson from UC-Berkeley states that “It is very unfortunate social policy.  The more the sick person pays, the less the healthy person pays.”

Medicare is inefficient and expensive. Medicare has been expanded through Medicare Part D, which covers prescription drugs. Can expanding an inefficient, expensive system be a good thing? Gary Becker argues yes.

Since drugs have high fixed research costs but low marginal costs, having the government pay for drugs can increase innovation. In fact, a working paper by Blume-Kohout and Sood (2008) finds that “…the passage of Medicare Part D was associated with significant increases in pharmaceutical R&D, especially for classes with high elderly market share.” Further, the fact that there are high fixed costs and low marginal cost means that passing Medicare Part D will likely reduce the average cost of drugs. According to Becker:

This property of the cost of producing drugs has two extremely important implications for Medicare costs. The first is that drugs are an efficient way to treat diseases and disorders that hit a large number of men and women since then the fixed costs can be spread over a larger number of users. This makes them particularly valuable to the elderly who are a growing share of the population in the United States and all other developed countries, and in many developing countries as well, including China…

Drugs are also valuable in inefficient delivery systems that have trouble choking off medical treatments that would not pass a benefit-cost calculation. This would characterize systems with highly subsidized medical care, with excessively low deductibles, or with rules that cannot deny treatments to the very elderly and those close to dying who would benefit only a little from receiving treatment. Surgery, hospitalization, and close physician supervision are expensive ways to treat seniors who do not benefit much from this care since the cost of these procedures tend to rise in proportion to the number treated. On the other hand, while treating seniors with drugs sometimes also may not add much in the way of benefits, the additional cost per user would be much smaller than the average cost per user.

Medicare Part D may increase efficiency in the “second-best” world in which we live today.

Doctors often complain that health insurers are squeezing their profit margins. These insurers offer the physicians access to patients as part of their network in exchange for discounted fees. Physicians can decide not to join the network and charge higher prices, but may be left with fewer patients. The bargaining power of the health insurer depends on how many patients they are able to channel towards these physicians.

In the U.S., most health insurers restrict provider choice ex ante by using either prohibiting patients from visiting providers outside the network or charging the patients significantly higher co-payment rates if go to a provider outside the network. In the Netherlands, almost all care is free to patients so insurer need to use ex post incentives (e.g.: bonuses, gift certificates, and extra services) in order to entice the patients to use the services of the preferred provider.

A paper by Boonen, Schut and Koolman in the most recent edition of Health Economics examines how well the ex post incentives function in the Netherlands’ pharmacy market. Since pharmacies are regulated and prescription drugs are a homogeneous commodity, quality differences between pharmacies are negligible. The authors use data from two health insurers who attempt to direct their enrollees to specific pharmacies.

Using a multinomial logit framework, the authors find that convenience (i.e.: distance to the pharmacy) has a large impact. The financial incentives offered by health insurer A and B cause many enrollees to use the preferred provider. Health insurer A, however, gave a 10 € for the patient’s first visit to the pharmacy and 5 € for their second visit to the pharmacy. Under this incentive structure, individuals were more likely to switch to the preferred provider and then return to their original pharmacy after the incentives had disappeared. Only 25% of those who switch to the preferred provider continue to use them after the financial incentives disappear.

Health insurer B offered a discounts on products offered at the preferred pharmacy and these incentives were made permanent. Unsurprisingly, enrollees also were more likely to go to the preferred provider after the financial incentive regime was enacted.

One interesting item of note is that Health insurer B’s preferred pharmacy was in the same building as a general practitioner (GP). Since GPs function as gatekeepers in the Dutch system (i.e.: one cannot a prescription without the GPs approval), having the GP in the same building as the pharmacy was a huge convenience. Further, the GP could influence the patient to use the preferred pharmacy.

In summary, it was shown in the Dutch setting that even small incentives can have a large effect on provider choice.

• Boonen LH, Schut FT, Koolman X. “Consumer channeling by health insurers: natural experiments with preferred providers in the Dutch pharmacy market.” 17(3):299-316.

Economic theory says that for commodities, there should be one market price. For instance, there is one worldwide price for oil, metals also have a one worldwide price. While there is significant heterogeneity between different types of medical treatments, one would expect that the price of pharmaceuticals would be the same or very similar across different pharmacies. Of course, drugs from different companies, or brand name versus generic drugs would likely have different prices, but economic theory suggests that pharmacies selling drugs with the exact same chemical formulation from the exact same company should sell these drugs at approximately the same price.

This is not what a phone survey by change:healthcare found. According to VentureBeat, the survey examined six prescription drugs: “Copaxone, an injectable multiple-sclerosis drug; the antidepressant Zoloft; the fibromyalgia drug Lyrica; Lipitor, a statin that lowers cholesterol; the sleep aid Ambien; and the allergy/asthma drug Singulair. The survey turned up some surprisingly wide disparities among the pharmacy chains, such as the fact that a Lyrica prescription costs more than twice as much at Rite-Aid as it does at Walgreens. No single pharmacy was consistently the cheapest, and prices could vary considerably even at different branches of the same chain. Kroger, for instance, charged twice as much for Singulair in one Nashville neighborhood (Green Hills/Belle Meade) as it did in another (Franklin).”

How large are these differences? The change:helathcare site states:

“A person buying at the highest priced chain in the survey would have paid about $485 (20%) more than the person buying at the lowest. In fact, the cost of a prescription can vary as much as 20 to 40 percent between major pharmacy chains within walking distance of one another, and as much as 50 percent from one part of a city to another.”

While VentureBeat wisely notes that change:healthcare has “a vested interest in building demand for services that will help individuals compare healthcare costs,” it is still interesting such large price discrepancies could exist.

There is a law which states that drug companies must sell drugs to Medicaid at their the lowest price.  It turns out the Merck was selling drugs to hospitals at a steeper discount than what they were giving to Medicaid.  Merck will pay $399 million for overcharging in Philadelphia and $250 million for overcharging in Louisiana.

According to the New York Times (”$671 million“):

“Merck…was hiding the steep discounts it gave to hospitals by reporting higher prices to the government, prosecutors said.

From 1997 to 2001, Merck also gave money and perks to doctors and other health care professionals to entice them to prescribe Merck drugs, a practice the government called excessive.“

The enforcement of intellectual property rights (IPR) in less developed countries is currently a topic of much public debate. Whether it is protecting the copyrights of Western recording artists or preventing `copycat’ technology goods, OECD countries are attempting to compel less developed countries (LDCs) to enforce IPR in their country. No area of IPR enforcement is more controversial, however, than patent protection for pharmaceutical drugs. In the 1995 Uruguay round of the World Trade Organization talks (WTO) the Trade Related Intellectual Property Rights (TRIPS) agreement was reached. TRIPS specifies that all WTO members must enforce product patents in all fields. While on paper this has occurred, in many countries pharmaceutical patent protection is either not enforced or—as in India—it is explicitly excluded from the TRIPS agreement.

In their 2003 NBER working paper, Chaudhuri, Goldberg and Jia (CGJ) attempt to measure the welfare effects of pharmaceutical patent enforcement in India for the anti-bacterial category fluoroquinolones. The main value of the paper is that the welfare effects are calculated using estimated parameters from retail pharmaceutical audits performed by an Indian market research firm. In most prior studies on LDCs, welfare effects were estimated either in a purely theoretical framework with assumed parameters or employing estimated elasticities from studies on developing countries. While this study provides an interesting case study that can help researchers understand the health care market in LDCs, the authors examination of the welfare effects of IPR occurs in a static setting. Patents are inherently inefficient in the short-run, and Chaudhuri, Goldberg, and Jia’s findings of significant welfare losses are hardly surprising since dynamic innovation effects are not taken into account. Despite these flaws, the paper does give future researchers a base upon which to build dynamic models in the future.

The main finding of the CGJ paper is the patent protection in the fluoroquinolone product market reduces welfare dramatically. The authors claim that if patent production was introduced into India, consumer surplus would drop by 32 billion rupees ($713m USD), domestic profits would drop by 2.3 billion rupees ($50m USD) and foreign producers would only gain about 2.6 billion rupees ($57m USD). While, this claim is eminently believable, the result is far from surprising. In all settings, patents create rents for the firms which hold them; thus it is always welfare improving to eliminate patents in the short run. What the paper mostly ignores is the dynamic effects in which patents act as an incentive for innovation.

Ignoring dynamic effects is acceptable using only very restrictive conditions. India may represent such a small market that western firms would have no incentive to perform R&D for cures for India specific diseases regardless of if patent protection is enforced or not. Further, India may be so poor that no one would purchase the drug at patent-protected world prices. If the only profitable price to sell drugs in India is below the world price, Indian nationals would have an arbitrage opportunity on the world market and worldwide profits of the patent-holding firm would be eroded. Finally, without patent protection, firms may avoid selling in India for fear of local firms creating generic drugs.

Each of these conditions is most likely not satisfied in India. While India does have a low GDP per capita (currently 154th in the world), it is still the fourth largest economy due to its sizable population. Firms may be wary of selling at below world prices since their goal is to maximize worldwide profits and not simply to optimize profits within the Indian market. In this case, the equilibrium simply states that multinationals should charge the world price. Development of generic drugs is a valid worry for western firms, but with the advent of the internet and global professional networks, Indian firms are able to create generic drugs whether or not a Western drug firm sells in India. In fact, the CGJ paper states that India is the leading producer of generic drugs in terms of volume. For all of these reasons, the CGJ paper’s lack of attention to the R&D incentives patents provide creates great doubts as to the validity of any long-run welfare estimation.

CJG find evidence that a domestic product is often a better substitute for another domestically produced product using a different molecule than it is for a foreign-produced produce using the same molecule. CJG claim that distribution networks may explain this finding, but a more realistic conclusion is that doctors who recommend domestically produced ciprofloxacin may also recommend domestically produced norfloxacin. One difficulty in modeling health care demand is that patients do not have perfect information and purchasing decisions are heavily influenced by doctor recommendations. Further research could explore why domestic drugs using different molecules are good substitutes taking into account informational asymmetries.

The major finding of this paper is that patents create significant welfare losses, most of which occurs on the consumer side from decreased product variety. This is not a novel finding since patents by definition create distortionary monopoly rents for its holders at the cost of consumer surplus. The key research question to answer in this field is to estimate the elasticity of R&D for multinational and local firms with respect to LDC patent protection. Since the Indian government knows the disease burden of its country, offering prize money for the discovery of a vaccine or treatment for a specific disease would likely be Pareto improving compared to patent enforcement. The Rockefeller Foundation has pursued this tract and has posted an award for a diagnostic test for chlamydia and gonorrhea. It still remains an open question whether or not pharmaceutical patents improve welfare, and future studies analyzing the health care market should examine whether patents, prizes, research contracts or no IPR enforcement whatsoever is the best way to improve welfare in LDCs.

• Shubham Chaudhuri, Pinelopi K. Goldberg, and Panle Jia (2003) “The Effects of Extending Intellectual Property Rights Protection to Developing Countries: A Case Study of the Indian Pharmaceutical Market” NBER WP #10159.

Merrill Goozner has a very interesting 4 part series on the pharmaceutical industry.  Goozner talks of the inordinate amount of spending on pharmaceutical R&D yet notices a decrease in truly beneficial medicines.  Pharmaceutical firms focus on trying to produce mass-market, blockbuster drugs for markets such as acid indigestion, headaches, and depression, but many of these drugs have little incremental benefit over existing medicines.  For instance, Goozner notes that “Despite its lack of additional efficacy compared to the OTC medications that could be obtained at a fraction of its price, Nexium was the second best-selling drug in the world in 2006 with $6.7 billion in sales and a 16.9 percent annual growth rate.”

Goozner claims that stricter FDA regulations lead to more drug innovations.  “If anything, history shows that the tougher the rules, the greater likelihood that industry will pursue innovative therapies. The number of new drugs and biologics approved by the agency fell consistently over the past 15 years, a period when the legal and regulatory environment was becoming substantially more hospitable to winning approval of new technologies.” I do not agree with this. It could be the case that high regulatory periods happened to be the ones where the most innovation took place by coincidence.  Further, it could be that drugs were developed in the ‘easy’ regulatory period but because of the lag in development, they may have only been approved during the strict regulatory era.

Goozner also wisely notes the problems of developing drugs for the developing world: no money, no drugs.

“Where there is no money, there is no market, and hence does not attract investment by the global pharmaceutical industry. Malaria, leishmaniasis, Chagas disease, hookworm, drug-resistant tuberculosis, diarrheal diseases – the list of infectious diseases devastating the developing world is long, and the science to develop cutting edge therapeutics for treating them is at the pharmaceutical industry’s fingertips. But its resources are rarely deployed in that direction because there is no potential financial payoff.”

The full series is available in 4 parts (I, II, III, and IV).

Would drug importation from countries such as Canada be welfare improving for the U.S.? In the short run, the answer is yes. Lower prices will made pharmaceuticals more affordable and more pharmaceutical consumption closer to the static equilibrium level. In the long run, however, lower drug company profits may lead to less innovation in terms of new chemical compounds brought to market.

Frank Lichtenberg tries to test whether or not drug importation will decrease pharmaceutical innovation by using disease incidence (i.e.: the market size for the drug to be created) as a pseudo-experiment for what would happen under a drug importation scheme.

Lichtenberg looks specifically at chemotherapy drugs and finds that the elasticity of the number of chemotherapy regimens with respect to the number of cancer cases is 0.53. In words, “a 10% decline in drug prices would therefore be likely to cause at least a 5-6% decline in pharmaceutical innovation.”

Yet is market size truly a good proxy for what will happen if pharmaceutical trade barriers are destroyed? I would guess not. If pharmaceutical companies care at all about patient health and not just profits, then it is more likely that these companies will try to find cures for diseases where a large number of people are affected. Even if drug companies are profit maximizing, creating a cure for a serious, high-incidence disease (such as cancer) may have positive reputational effects for the company, thus enabling them to increase the price or increase the quantity sold of other drugs.

Further, the number of drugs that treat a given disease may be less important than whether or not there is at least one drug which does a good job of treatment. Copycat drugs may not be welfare enhancing, but would certainly be positively correlated with market size.

• Lichtenberg, Frank R. (2006) “Importation and Innovation,” NBER Working Paper #12539.

It’s decision time for Medicare Part D purchasers. Seniors have until December 31st to make their Part D choice and this decision is not a painless one.

The Marketplace Money radio program recently reported (’Deciphering Part D‘) that “the most popular policies have increased their prices substantially, especially Humana and United Healthcare, the ones that most of the people are in. Some of the policies’ prices have even doubled. So even though the average prices have only increased by about 14 percent, if you’re in one of the more popular plans, it’s really important to look at what your costs will be next year because you may want to change to a different policy.”

How can some plans double their prices yet still retain customers? Neo-classical economists would say that if the price of insurance at one company would rise, all seniors would switch to the cheaper plan and there would be a competitive equilibrium at the market price. Yet in the presence of switching costs, the insurance companies may be able to raise prices significantly without losing many customers.

Switching costs for Medicare Part D include the time consuming process of selecting from the hundreds of Medicare Part D plans. Children of seniors may also have to aid their parents in selecting a plan. Thus, if the price of my Part D insurance went up 16% while the rest of the plans went up 14%, I may decide to pay the higher price since I do not want to incur the search costs of finding a new Medicare Part D plan.

Companies such as Humana and UnitedHealth knew this would be the case. In the first year of Part D, these companies likely under-priced their insurance plans to attract customers. Once the customers had settled on their policies, they could more easily raise prices.

Despite the market inefficiencies caused by switching costs, this is not a reason to completely abandon a free market system. If the price increases of an individual company get too high, they will eventually outweigh the switching cost and the senior will move to a new plan. Further, information technology advances can help reduce switching costs. For instance, Medicare has a Prescription Drug Plan Finder that helps to estimate the cost of different plans depending on which prescriptions you are taking.

In February of 2o07, the UK’s Office of Fair Trading (OFT) recommended reform to Britain’s current Pharmaceutical Price Regulation Scheme (PPRS). The PPRS sets maximum and minimum profit levels from the sale of branded drugs to the NHS. The PPRS allows companies freedom to set prices as they please on new substances, but restricts subsequent prince increases. A system of price cuts has also been instituted as well, yet it is likely that firms take these future price cuts into account when making their original pricing decisions.

Reform

Are there any other options? Simeon Thornton (Health Econ 2007) argues that a value-based pricing (VBP) scheme would be superior. In VBP, the NHS would pay pharmaceutical companies based on the value of the pharmaceutical to the patient base. One question is how value is determined. Thornton proposes cost effectiveness studies, which in effect means that the government or academics will determine the price.

Pricing will also be allowed to vary by subgroup since people with certain diseases may benefit more from a disease than others. Also, incremental improvement will be encouraged since marginal improvements in treatment will receive higher payments.

This program does seem to be an improvement. It is dynamically efficient since pharmaceutical companies will be paid more for more cost effective treatments. Further, if it turns out patients do not like the medicine and no one takes it, then NHS will not be paying a lot for failed drugs. Also, after generics are available, the price will adjust downward.

In the static environment, the pharmaceutical company will capture all the consumer surplus since price will equal marginal benefit. However, as time passes and generics enter the market, a large consumer surplus will occur.

The major impediment of this reform is the problem of any centralized system: information. How will the NHS determine cost-effectiveness? Will it be impartial? Will the conclusions be manipulable by interested parties? These questions are easy to answer theoretically, but very difficult to predict empirically.

• Thorton S. (2007) “Drug Price Reform in the UK: Debunking the Myths” Health Economics, v16, pp. 981-992.

The Food and Drug Administration is one of the most important government agencies. The FDA has an interesting history and below I will review some important dates.

• 1938 Federal Food, Drug and Cosmetic Act. This law was enacted after the drug Elixer Sulfanilamide killed over 100 people. Firms were required to submit new drugs to the FDA. “If the FDA was not convinced of a drug’s safety then it had 180 days from the receipt of the application to block the drug’s introduction into the market.” The law required that drugs have an appropriate label for safe use.
• 1951 Durham-Humphrey Amendment. The amendment divided the drug world into prescription and over-the-counter drugs. Patients using over-the-counter drugs did not need a physicians prescription.
• 1962 Kefauver Amendments. These amendments removed the 180 day limit. Further, the law required not only that new drugs be safe, but also that they are effective. The FDA also gained control of all drug testing in the U.S.
• 1992 Prescription Drug User Fee Act. Due to lengthy approval times, this law allowed the FDA to charge drug companies user fees in order to receive guarantees on review times.

Presently, there are 4 phases that a drug must go through in order to gain FDA approval.

• Phase I. These are smaller (20-80 participants), clinical trials which determine a drug’s safety and pharmacologic properties among healthy volunteers.
• Phase II. This phase tests a drug’s efficacy and optimal dosage. Typically 100-130 individuals are enrolled and these volunteers have the disease which the drug is supposed to treat.
• Phase III. The third phase is very similar to phase 2, except that the study is much larger. Often there are over 1000 participants in these trials. A drug can receive approval from the FDA if Phase III proves successful.
• Phase IV. This is the least formal stage. It involves post-market surveillance. Often the FDA will request that the pharmaceutical company conducts a study to determine the long term safety of the drug.

A paper by Philipson and Sun (2007) looks at whether having the FDA and product liability is an efficient use of societal resources. If the FDA approves a drug as safe, then why would there be product liability? The chance of an enormous lawsuit will only lead to higher drug prices as companies have to find a way to fund lawyers and damage awarded during lawsuits. “For example, firms seldom do more clinical testing than what the FDA requires, which suggests that at least for this investment in safety, product liability may sometimes duplicate the role of the FDA.” If the drug companies will not preform more clinical trials, having a product liability system will only add the cost of drugs.

One issue not taken into account is one of fairness. If an individual is harmed by an unsafe drug, without a product liability system they will not be compensated. Further, if we believe that individuals harmed by the drug have more medical expenses (from drug complications) and thus lower income, it is possible that an efficiency argument could be made by which product liability redistributes income from those with lower marginal utility of income to those with higher marginal utilities of income. Since I am not in favor of having the courts decide cases based on issues of income inequality, I think the fairness is the most compelling argument for a product liability system.

• Philipson TJ, Sun E (2007) “Is the Food and Drug Administration Safe and Effective” NBER WP #13561.

Many studies have revealed patient non-compliance with medical prescriptions (e.g.: not taking prescribed drugs, not visiting the doctor) at around 50%. Most medical researchers believe that non-adherence is either due to 1) irrationality or 2) misinformation. Yet a Health Economics article by Lamiraud and Geoffard (2007) tests the hypothesis of whether or not this behavior may in fact be rational.

Most medical treatments have costs. There are monetary costs, time costs, inconvenience costs, and physical costs from any side affects which occur. Physicians often focus on the benefits of medication without fully taking into account the discomfort patients experience from medication.

To solve this problem the authors used a data from a randomized controlled trial (RCT) of HIV-1 infected patients. The trial aimed to test the safety and efficacy of two HAART therapies. The authors use the following system of equations to estimate factors associated with compliance.

• θ^*_it=x_1itβ₁+ε_1it
• h^*_it=x_2itβ₂+ θ_itγ +ε_2it
• ε_jit=ν_jt+η_jit

The variable θ^* represents a latent variable as to the level of adherence (θ=1 for full adherence and 0 otherwise) and h* is a latent variable representing the health status of the individual (h=1 if the individual is an a good health status and 0 otherwise). The model is estimated using a panel non-linear simultaneous two-equation system.

The authors find that higher adherence levels are associate with higher patient welfare. Thus, if two drugs are equally effective, the authors recommend that policy-makers, insurance companies, and government should select the pharmaceutical with higher compliance levels. “To the contrary, the clinicians of the trial were tempted to support the treatment in which the adherence level was smaller, based on the rationale that a higher adherence would have pushed the efficacy to upper levels in that group.”

Realizing that adherence is an endogenous behavior made by rational individuals may change the way in which the benefits of prescription drugs are measured in the future.

• Lamiraud K, Geoffard PY (2007) “Therapeutic non-adherence: a rational behavior revealing patient preferences?” Health Economics, vol 16(11), pp. 1185-1204.

Give a patient a pill and they will feel better. Give the same patient the exact same pill and tell them it was purchased at a wholesale discount, and these same people won’t feel as good.

At least that is what a study by Shiv, Carmon and Ariely (2005) found.

In three experiments, the authors show that consumers who pay a discounted price for a product (e.g., an energy drink thought to increase mental acuity) may derive less actual benefit from consuming this product (e.g., they are able to solve fewer puzzles) than consumers who purchase and consume the exact same product but pay its regular price. The studies consistently support the role of expectancies in mediating this placebo effect.

A question remains, are price and quality related? A study by Riesz (1979) looks for a correlation between price and quality as reported by Consumer Reports for packaged food products. “He concludes that the correlation was near zero, and in cases such as frozen foods, it was even negative.”

Thanks to ‘Undercover Economist‘ Tim Harford for link.

In 2006, the federal government first began expanding Medicare coverage to include prescription drugs using the Medicare Part D program. According to one report, Part D will cost taxpayers $47 billion in 2007.

Yet it is possible that Medicare Part D could actually save taxpayers money. If prescription drugs and other medical care are substitutes, then increasing funding for lower cost pharmaceuticals could actually save taxpayers money on the more expensive hospital stays (covered by Medicare Part A) and physician visits (covered by Medicare Part B). For instance, it is possible that regularly taking beta blockers may reduce the chance that one needs an expensive heart surgery.

On the other hand, if pharmaceuticals and other medical care are compliments, than increasing Part D funding, could increase the total spending in Medicare Parts A and B. For instance, individuals taking prescriptions drugs may need to go to the doctor more often–covered by Part B–in order to have their pharmaceutical usage monitored.

So how does Medicare Part D affect other Medicare spending?

This is the question Baoping Shang and Dana Goldman investigate in their NBER Working paper “Prescription Drug Coverage and Elderly Medicare Spending.”

Data and Methods

Shang and Goldman use data from the 1992-2000 Medicare Current Beneficiary Survey (MCBS) and compares Medicare spending differentials between individuals who have a Medigap policy with drug coverage and individuals who have a Medigap policy without drug coverage.

Since Medicare spending–like most health care spending–is right skewed with a large mass at zero expenses. The authors use a two-part regression structure. In the first regression, the the authors use a probit regression to determine the probability an individual had any health care spending. In the second regression, Shang and Goldman utilize an OLS (an later an IV) structure to find the impact of Medigap drug coverage on total spending, conditional on the fact that the individual had some spending. Mathematically, the two regressions look as follows:

1. p* = β₀ + β₁*d +β₂₍d*Income) + ε
2. ln(Y|Y>0) = γ₀ + γ₁*d +γ₂(d*Income) + ν

p* is the probability of any spending, d is a dummy variable if the individual has drug benefits, and Y is total Medicare spending.
This econometric structure could lead to incorrect inferences if selection bias were present. In fact, “[c]ompared to those with prescription drug benefits, Medicare beneficiaries without drug benefits tend to be older, less educated, less likely to be in an urban area, and poorer. They are sicker in term of both self-reported overall health and histories of chronic diseases.”
In an attempt to eliminate selection bias, Shang and Goldman employ state reforms in the health insurance markets as instrumental variables. These reforms include the following:

• “Guaranteed issue requires health plans to offer coverage to all individuals, regardless of their health status or claims experience.
• Rate rating includes rating bands, very tight rating bands, and community rating. Rating bands restrict health plans’ use of experience, health status, or duration of coverage in setting premium rates for individuals. Very tight rating bands allow very limited adjustment for experience, health status, and duration. Community rating prohibits health plans’ use of experience, health status, or duration of coverage in setting premium rates for individual coverage.”

For their instrument, Shang and Goldman look at states with 1) both guaranteed issue and rate rating, 2) states with only rate rating, and 3) states with neither. Since MCBS is a panel, the authors employ a discrete factor model to control for three different levels of unobserved heterogeneity directly and allows some correlation of these fixed effect terms with the error terms.

Results

A simple two part model finds that the “prescription drug benefits increase drug spending by $157, reduces Medicare Part A spending by $135, and increases Medicare Part B spending by $31″–a net $104 reduction in Medicare spending. The more complicated structural model using structurally estimating unobserved heterogeneity parameters finds that the drug benefit increases drug spending by $170 (or 22%). However, “prescription drug benefits decrease Medicare Part A spending by $350 or 13%; and prescription drug benefits decrease Medicare Part B spending by $74 or 4% although the estimates are statistically insignificant.”

Healthcare Economist comment

Even for those who oppose government provided health insurance, few would argue with the statement that given Medicare’s existence, it is important to be sure it operates in the most efficient way possible. This paper demonstrates that Medicare Part D may be cost saving. Leaving out prescription drug benefits may lead patients to choose expensive surgeries–which are free to them since they are covered by Medicare –over taking prescription drugs–which are costly without Medicare Part D. The authors sum up their findings in a compelling manner: “…it appears that Medicare beneficiaries may have been overinsured with respect to medical services, and underinsured with respect to prescription drugs.”

Shang, Baoping; Goldman, Dana; (2007) “Prescription Drug Coverage and Elderly Medicare Spending” NBER WP #13358.

There is an interesting article from the Techdirt blog about “How patents skew medical research.” The blog post states “The monopoly power granted by patents pushes all research money into only things that can be patented, ignoring other possible cures, even if they can be both profitable and quite helpful.”

The post includes an example from the WSJ (”One Doctor’s Lonely Quest…“). Dr. Donald G. Stein found some evidence in the 1960s that the hormone progesterone help to heal brain injuries. Getting funding for more research to prove this finding was difficult. The WSJ writes:

Dr. Stein thought he had a big part of the answer to the question that had been vexing him for years. The medical establishment, however, largely shrugged off the results.

A naturally occurring hormone like progesterone, some forms of which have been available generically for infertility, is of little interest to drug makers. That’s because the substance probably can’t gain secure patent protection. That shut off a major avenue of potential funding for his research. “Big pharma likes more of an airtight protection,” says Todd Scherer, director of the Office of Technology Transfer at Emory, Dr. Stein’s current academic home.

For more information about patent protection, you can also read my review of Boldrin and Levine’s Against Intellectual Property book.

Fentora Deaths

In “The killer drug,” Joe Paduda of Managed Care Matters discusses how four deaths caused by the off-label use of Fentora have had Fentora-manufacturer Cephalon in crisis control. Mr. Paduda claims that Cephalon is known for aggressive marketing to physicians regarding the of off-label uses of their pharmaceuticals.

Why would Nigerians boycott a polio vaccine?

It seems like Africans don’t know what’s best for them. They fear that the vaccine would make them infertile. Shouldn’t they trust Western medicine more than their local health treatments?

If past experience is a guide, probably not.

The Washington Times (”Nigerians suing Pfizer…“) and AllAfrica.com (”…Pfizer…“) report on the 1996 tragedy in Kano, Nigeria. In 1996 there was a Meningitis outbreak in the northern-Nigerian city of Kano.

“The firm, it is alleged, broke all the rules of ethical conduct to rush its doctors and a controversial new and unapproved antibiotic, Trovan, into a rural and crisis-torn area to try the product in a way which was forbidden under international rules.”

Now Pfizer is being sued in four different court cases related to the 11 deaths and 189 injuries cause by Trovan. The case has seriously hurt the reputation of Western medicine in Nigeria and may be the reason locals were hesitant to receive the polio vaccine.

Ahmad Nadabo offers a level-headed argument on the Kano case. He claims that if Pfizer misbehaved, then the myth of the evil first world corporation manipulating third world countries (e.g.: The Constant Gardener) would be fulfilled. Further:

“It is possible that Pfizer did everything that the prosecution alleges. It is possible that everyone lied their heads off and was complicit in an illegal and immoral drugs trial. The medical authorities in Nigeria may have conspired with Pfizer’s employees and stooges to pull off the multinational’s scheme. It is possible because anything is possible. It is also likely that Pfizer did not rush to the outbreak solely because it believed its drug could help the victims. It is very likely that Pfizer also believed that this was an entirely valid and safe trial and that it operated in good faith. It may yet be widely accepted that undertaking it helped children suffer less.

All that can get thrashed out in open court. But we need to remember this. Big firms are not on the whole wicked or even especially devious. We need them and we need to remember that they are not aliens, villains or even strangers. They are seldom heroic philanthropists and we are fools if we expect them to be. So as Pfizer’s behaviour comes under magnifying glass, let’s remember to be fair as well as vigorous in our scrutiny.

Kai Ryssdal interviews Amgen CEO Kevin Sharer on Monday’s edition of NPR’s Marketplace. Below are some excerpts from the interview. The full transcript is available here.

Ryssdal: Do you consider Amgen to be part of what is commonly referred to as “Big Pharma”?

Sharer: We have characteristics financially that look like “Big Pharma.” I’m the chairman of the Pharmaceutical Trade Association. So we obviously –

Ryssdal: So that would sort of be a yes, right?

Sharer: No, it’s not a yes. So people ask that question often. But no, we have a technology base that’s biotechnology. We’ve got a culture that’s biotechnology. And I have a lot of respect for the “Big Pharma” companies. And they’re our partners and competitors. But no, we’re a biotechnology company.

Ryssdal: What happened? How’d you get here? [Regarding the tough year for Amgen]

Sharer: I think we got here through a long series of events. But the challenge is that one of our medicines, our biggest medicine, so called ESAs. We’ve got two of them — Epogen and Aranesp, red blood cell medicines. Have had their labels revised and — by the FDA — and the Medicare, CMS, has changed payment policy. And it’s caused our sales to go down in those areas. So we’ve had to restructure the company. It’s something in our 27-year history we’ve never had to do. We can handle it but it’s sure not pleasant.

Ryssdal: Well let’s break some of those words down. First of all restructure. You’ve had to lay off a bunch of people.

Sharer: We haven’t laid off anybody yet. But we’ve made an announcement that we’re going to lay off through a voluntary program, through attrition and then an involuntary program between 12 and 14 percent of the workforce. Or about 22 to 2600 people. That’s a lot of people.

Ryssdal: Why did the FDA do this? [put a black box warning on Epogen]

Sharer: The FDA got some data over the years that said that our medicines when used above the indicated dose and in some uses was not safe. That is it had negative effect on patient survival. And they wanted doctors to understand that doctors should use the medicine specifically at the doses and in the areas that it was approved for. And the data around those doses and those uses says the medicine is safe. And it’s not unusual that medicines if you use them in areas in which they haven’t been tested or you use them at levels that haven’t been tested can have side effects that aren’t good.

Ryssdal: And yet doctors using your medicines in ways that are beyond the FDA guidance have negative financial repercussions for this company.

Sharer: That’s theoretically true. But our mission is to serve patients. And we want to make sure that our medicines are used in the right way to help patients. And you know we’re an experimental business in the sense that we’re science based. You learn things about medicines with experience. And as you learn where the medicines are best used you have to adapt to that. Biology’s very complicated.

Ryssdal: So how do you do a business plan when you’re in this kind of business? I mean you have to invest huge amounts of money in R&D. You have to have very smart people and pay them a lot of money to spend a lot of hours in the lab doing very difficult things.

Sharer: We’ve got pretty good visibility in what the medicines in the market right now will do for the next two to five years. We’ve got a fair shot at predicting what the very late stage products will do as they approach approval. We have less and less information about the early stage products. So the two to five year vista is fairly clear. Beyond five years is quite unclear. And so what you have to do is have lots of medicines under development. Make sure the biology’s good. Make sure your intellectual property protection is there. And that you’re running experiments based on sound science. And you’ve got the discipline to stop programs when it’s pretty clear they’re not going to work. And so there’s a certain sort of oil business like aspect to this. You get all the right information but you can you know drill dry holes once in a while and you’ve got to have a lot of wells to make sure you hit oil once in a while.

Ryssdal: And when you do hit oil in the oil fields as in biotechnology sometimes you hit a gusher and you get a blockbuster like Aranesp or Epogen.

Sharer: Yes.

Ryssdal: The other thing that’s happened to you that’s sort of made this a curious year for you is the decision by the government to reduce its reimbursement rate for doctors in Medicare. Explain that to us. Why it happened and what that’s going to mean for you.

Sharer: That is a bad decision. It’s not based on science. It’s not good for patients. And we are deeply disappointed in the government’s decision. And we are doing everything we can to change that decision. There’s no science behind this. This was an arbitrary decision by Medicare to reduce payment below the labeled range. In other words, the one arm of the government, Medicare, has made a financial decision that is different than what the label says. And that’s deeply troubling. And I think it’s going to cause patients to have many more transfusions.

In fact, just last night the Senate passed a resolution unanimously asking the government to reconsider this decision.

Ryssdal: And yet again what happens is that because doctors will be receiving lower reimbursement possibly if this decision becomes final, less of your product gets sold. And so you take a hit.

Sharer: Yes. That’s a fact. That’s not our fundamental motivation. I know it’s easy to think that a business only cares about dollars and cents. And obviously we have to care about it. We care about patients. And this is going to hurt patients.

Ryssdal: Surely you appreciate though that when somebody running a multibillion dollar company as this one or any other pharmaceutical company out there or biotechnology company, says repeatedly it’s in the patient’s best interests, it sounds a little facile in terms of business opportunity.

Sharer: Yeah, I think that what you have to do is you’ve got to do your own work to decide, “Do others believe that?” In our case the Oncology Doctors Association has said the same thing. Many other independent people have said the same thing. We’re one voice among many, many, many. And I think that that’s how you ought to test when business people say it’s in the patient’s interest, obviously it’s got financial consequence for us. But we can handle whatever financially happens. And I’m deeply concerned about patients. I’ve had family members who’ve taken this medicine under difficult circumstances. Many people here know people who’ve taken the medicine and had cancer. This is serious stuff.

Ryssdal: This is kind of off topic but who comes up with these drug names? Do you guys have a little room somewhere where it’s computer generated?

Sharer: I can guarantee you that it’s not us. Some agency of I think the government has some naming conventions. And this is not our marketing guy’s best thinking let me tell you.

Ryssdal: You are as many other industries are in this country, but perhaps more than a lot, at the mercy of the federal government. As has been demonstrated in the past year. Whether it’s by regulation or who pays for the medicines. Does that drive you crazy?

Sharer: No. I mean virtually every company in American to one degree or another is heavily influenced by federal government decisions. Whether it’s regulatory, reimbursement, legislative, intellectual property. That’s just the nature of our economy. And sometimes the government’s tough to deal with. But basically I think the process is fair. Good decisions ultimately are made. And we can deal with it. It’s okay. And if you’re in healthcare it’s inescapable.

Ryssdal: Let me reframe the question [about how to fix the healthcare system] then. Do you think the government’s capable of fixing the healthcare problem in this country?

Sharer: I think the country is capable of fixing the healthcare challenge in the country. And the problem is there’s no simple path forward. It’s not have the government take over healthcare. I don’t think our country wants that. And it’s not as simple as without any government intervention the system fixes itself. I think the government’s proper role is to set the rules and to be a smart participant. I think we can get there that way. I don’t think it’s a good idea to have government completely take over healthcare.

Ryssdal: Amgen found itself on the front page of the New York Times a number of months ago over reimbursements to doctors for some of its medicines that those doctors prescribed. Why’d you get yourself into that situation?

Sharer: The system in the United States is that for medicines prescribed by doctors and given in their office, doctors are able to make money on those medicines. That’s a law. That’s part of the system. We didn’t create that system. That is the system. We have a competing product with a J&J product. And since those two products came on the market, the unit price of that product’s gone down 40 percent. And so the society has benefited. And it’s a commercially competitive situation. We’re a relatively small part in these medicines of doctors’ overall reimbursement. And if the laws were to change that said no doctors can make any money on any medicines, you know we’d do it that way too.

Ryssdal: But surely you understand people who picked up the New York Times that day or who read any of a bunch of other stories about doctors and pharmaceutical companies and biotechnology companies having financial relations, they look at it and they say, “Oh, this whole system’s just corrupt.”

Sharer: There’s a point of view that some have. I understand that point of view. That doctors should not make money on things they do. In other words the U.S. healthcare system has as a financial underpinning the idea that the more doctors do the more they get paid. That is if you’re a heart surgeon, the more heart surgeries you do, the more money you’re going to make. If you’re somebody who’s doing tests, the more tests you do, the more money you’re going to make. If you’re prescribing drugs in your office, the more drugs you prescribe, the more money you’re going to make. That is the system we have in the United States. It’s not unique to pharmaceuticals.

We can have a big debate about whether that’s the best system or not. And I’m not trying to defend it. I think that it’s imperfect that’s for sure. And having doctors have a direct economic interest in the number of procedures they do or operations or medicines they prescribe is something that we’ve got to watch. But that is the system we have.

Ryssdal: I’m not hearing you say that Amgen doesn’t want any part of that anymore.

Sharer: Well, we can’t unilaterally say that we can’t participate in the system and hope to succeed as a company. I mean we’ve also got to be a player in the system in a logical, legal and fair way. And we certainly don’t do things to incent doctors or encourage doctors to use medicines that are bad for patients or in the wrong way.

And I think one of the things about the New York Times article that was really unfortunate is it left the impression in the minds of patients that their doctors are going to do things to do them that are not good for them simply for financial reasons. I don’t think doctors do that. I think doctors are, by and large, honest people who are small independent business people. They’ve got to think about making payroll too. And they’ve got to work within the system that we have. And so it’s a more complicated situation than just doctors make money on things they do.

The International Herald Tribune reports that U.S. pain medicine use has increased 88%. Is that a good thing?

Many people will rush to claim that these figures show how pain medication is being abused in the United States (see Brett Favre or Rush Limbaugh). Others will claim that big Pharma’s advertising is leading people to purchase medication they don’t really need. “Spending on drug marketing has gone from $11 billion (€8.2 billion) in 1997 to nearly $30 billion (€22.4 billion) in 2005.”

On the other hand, increasing use of pain medication may be due to treatment philosophy changes. “Doctors who once advised patients that pain is part of the healing process began reversing course in the early 1980s; most now see pain management as an important ingredient in overcoming illness.”

Also, as the population ages, more and more people will need pain medication. According to the U.S. Census Bureau, the number of people over age 65 is projected to increase by 19 million people between 2000 and 2020.

The Healthcare Economist’s Recommendation

So what should be done? Do we need a crackdown on physicians who prescribe painkillers? I don’t think so. Doctors should abandon pain medicine prescription to their chronically ill patients for fear of jail time or government prosecution. The NY Times ran a story two months ago which chronicled how Dr. Ronald McIver was put in jail for over-prescribing pain medication to his chronically ill patients.

Loosening regulations will likely increase the amount of pain killers used for recreational purposes. Nevertheless, would increasing the difficulty for your grandmother to get some relief from her chronic illness be worth the tradeoff of marginally decreasing recreational pain killer usage of people who choose to do so out of their own volition? I’ll side with increasing my grandmother’s freedom to choose painkillers over restricting the freedom of recreational drug users every time.

A letter in the L.A. Times today from a man in Oceanside, California stated the following:

“I read with great interest ["Under the Influence"] in the Aug. 6 Health section because I, at one time, would only use brand-name medications.  Even though I belong to a Medicare HMO, the co-pays sometimes were quite substantial.  I was forced to buy some of my medications from Canada, the United Kingdom and even Israel.

I started to ask my primary physician for generics, and to my surprise he was able to find generics that served the same purpose as the nationally advertised drug.  Today I use only generics — except in one instance, because there is no generic yet on the market.

It is entirely up to patients to insist that their physician prescribe generics whenever possible. It is amazing how much money they could save.”

Patients almost always assume that physicians have only their best interest at heart.  This is not always the case.  Physicians must comply with managed care directives, are often influenced by the free lunches and dinners handed out by drug companies and may prescribe conservatively to avoid malpractice issues.  Even your doctor acts 100% in your medical interest, it is unlikely that they will act in your financial interest.  Since the doctor is not paying for the pharmaceutical–the doctor likely does not know if you or your insurance company is paying for the drug–they do not have any incentive to prescribe based on cost.  As the gentleman from Oceanside stated, “It is entirely up to patients to insist that their physician prescribe generics…”

“Why is there so much controversy about drug testing? I know plenty of guys who would be willing to test any drug they could come up with”- George Carlin

The New York Times published two articles this week about prescription drugs. The first deals with generic drugs (”More Generics Slow Rise in Drug Prices“); the second with the right of terminally ill patients to use drugs which have not yet met FDA approval (”Court Rejects the Right to Use Drugs Being Tested“).

Generic Drugs

Generic drugs are great for consumers in the short run, and likely in the long run. Since patents grant a monopoly to one firm, the ending of a patent leads to a competitive market place. Since marginal costs are so low for pharmaceuticals–but development costs are high, the price cuts can be dramatic. What happens to the inventing firm after a patent expires?

Last week, the big drug maker Johnson & Johnson announced it would eliminate up to 4,800 jobs as it braced for generic competition to its drugs, Risperdal for schizophrenia and Topamax for seizures and migraine headaches. In the last year, combined United States sales of the drugs were $4 billion.

Shortly after the Johnson & Johnson statement, Sanofi-Aventis announced that it had already been hard hit by low-cost alternatives to its sleeping pill, Ambien, which became available in generic form in April. As frequently happens when generics appear, sales of the name-brand Ambien plunged — to $91 million in the second quarter, from $420 million in the same period last year. Generics already account for 60 percent of prescriptions in this country. And that portion is expected to rise, as cheaper substitutes arrive to treat many chronic conditions.

So will big Pharma go bankrupt? It turns out that many of these large companies are creating their own generics. “For example, the generic unit of Pfizer, Greenstone, last year began marketing its own version of the Pfizer antidepressant Zoloft.”

For a more detailed discussion regarding the merits and demerits of the patent system for medications, see my post about intellectual property.

Untested Drug Use

The Side Effects May Vary blog summarizes and adds much to the NYT article about the Appeals Court banning terminally ill patients from taking drugs which have not yet been approved by the FDA. There are 2 posts (Part I, Part II). The blog talks about the Abigail Alliance:

One of the groups who took the case to court (and will subsequently be filing an appeal to the Supreme Court) is the “Abigail Alliance for Better Access to Developmental Drugs.�? Abigail Burroughs was a college student diagnosed with head and neck cancer, who, after exhausting all available therapies, tried to obtain the drugs Iressa and Erbitux in a last ditch effort to save her life. The problem was that those two drugs were being tested in a clinical trial - one that she did not qualify for because her cancer was not the type it was being tested on. She died, and the drugs ended up getting approved 2-3 years later - Erbitux has since been shown to prolong lives of patients with Abigail’s cancer.

I think an FDA prohibition of any drugs is ridiculous. Patients should be able to choose what type of medicines should go in their body. I do not, however, believe the FDA should be disbanded. They provide a valuable service of providing health care information to physicians and the public. Doctors would likely be wary to recommend non-FDA approved medicine to patients in most cases, however this would still allow terminally ill patients and other with a high risk tolerance to take the drugs. As stated on the Abigail Alliance website:

“Every drug for cancer and other serious life-threatening illnesses that the Abigail Alliance has pushed for earlier access to in our five and a half year history is now approved by the FDA! Many lives could have been saved or extended, if there had been earlier access to these drugs!�?

Most health care scholars–whether they are scientists, doctors or economists–believe that randomized controlled trials (RCTs) are the best means by which one can test whether or not a drug is efficacious. Despite its high cost, RCTs are able to abstract from confounding factors by randomly assigning similar patients to both a treatment and a placebo-controlled group.

Dr. James Gaulte of the Retired Doc’s Thoughts blog, however, notes that RCT are not ideal when trying to capture what will be a drug’s side effects (a.k.a. adverse effects).

RCTs are typically short lived and even the larger ones often are too small to have adequate power to detect low frequency AEs. Further,RCTs are designed to demonstrate efficacy-or in some cases the much weaker standard of proof- non-inferiority. The patients in the trial often are less diverse and complicated that a typical subset of patients from real clinical life that will likely be taking the medication.

…It falls on the shoulders of case reports and observational data and meta-analyses to fill in the gaps regarding those less common AEs and those that only develop after the patient has been on the medication for a longer period of time.

A recent meta-analysis study by Dr. Steven Nissen in the NEJM found that patients who took the diabetes drug Avandia had a 43 percent increased risk of heart attack and a 64 percent higher risk of any heart-related death (also see Scientific American “Early Critic…“). The weight of this finding should not be underestimated; this report lead to Avandia-maker GlaxoSmithKline to lose £9.8 billion worth of market value according to the UK’s Independent (”GSK…“).

In the future, more post-FDA approval studies such as Dr. Nissen’s are needed in order to continue to accumulate knowledge regarding each pharmaceutical’s possible adverse effects.

There is an interesting article in the NYT Magazine (”Self-Nonmedication“) about the anti-depressant drugs pharmaceuticals.  The author stops taking Effexor and experiences anti-depressant withdrawl discontinuation syndrome.

The Washington Post (”Senate likely to Back…“) reports that the Senate will support a plan to remove the legislative barriers against the importation of pharmaceuticals from other countries.   According to the article:

“The provision would allow consumers to buy prescription drugs from Canada and permit commercial distributors to obtain them from Canada, Japan, Austria, Switzerland and other European Union nations, … Imported drugs would have to be FDA-approved, manufactured in facilities inspected by the FDA and carry documentation about the chain of custody of the drugs.”

While importing drugs from low cost countries is a sensible means to reduce health care cost without decreasing quality, the Health Affairs blog (”…striking the right balance…“) reports that the government is considering strengthening the FDA’s regulatory authority.  Stricter FDA regulation may reduce American’s ability to import pharmaceuticals from other countries or increase the cost of importation.

Overall, however, I believe that loosening pharmaceutical trade restrictions is a step in the right direction.

“…in a similar way, the slow growth of the coloring industry in the U.S. before the First World War was largely due to patent protection: most patents were held by the large German companies, such as Bayer, BASF, Hoechst and IG Farben. The chemical industry in the US was so underdeveloped, that during the First World War the U.S. was forced to import dies from Germany via submarines to bypass the British blockade.”

There is a very interesting book titled Against Intellectual Monopoly by Michele Boldrin and David K. Levine which was brought to my attention by the author of the Behavioral Trader blog. In the book, the authors build their argument that patent protection is either wholly unnecessary or at the least too broad. Chapter 9 of the book review the pharmaceutical industry and today I will review of few of the authors main points.

The beginning portion of the chapter shows that there has been large cross-country variation in patent protection over time, and that the evidence shows that countries with patent protection are not more innovative than those without patent protection. For instance, Italy had limited or no patent protection for pharmaceuticals until 1978, and before that time was considered the leading manufacturer of generics. Between 1961-1980, Italy discovered 9.3% of the world’s new active chemical compounds, but between 1980-1983, Italy had only discovered 7.5% of the world’s new chemical compounds, despite the fact that Italian scientist now operated in a patent protection system. In recent years, India has claimed the title of the leading manufacturer of generics. In the “Prizes or patents” post, I mention the Chaudhuri, Goldberger and Jai article which finds that instituting mechanisms to enforce foreign patents in the Indian market would reduce welfare in the anti-bacterials segment by $305 million.

Innovation Chains

Innovation chains is a concept that patents prevent innovation by disallowing other firms from building on the work of others. For instance, a patent can be good for one pharmaceutical company, but not for others. While patents confer monopoly rights to the inventor, they preclude other companies from developing new drugs. For instance, the chief scientific officer at Bristol Myers Squib told the New York Times that:

“there were ‘more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties.’”

Corruption

Because patents create rent-seeking behavior, corruption , lobbying and bribery are common in the pharmaceutical industry. Many pharmaceutical firms have pleaded guilty to criminal charges of fraud for inducing physicians to bill the government for some drugs that the company gave the doctors for free. For those who do not believe that rent-seeking is rampant in the pharmaceutical industry, just listen to Sharon Levine:

[Pharmaceutical] Companies today have found that the return on investment for legal tactics is a lot higher than the return on investment for R&D,�? says Sharon Levine, the associate executive director of the HMO Kaiser Permanente. “Consumers today are paying an inordinate premium under the guise of the creating the stream of innovation in the future. But it’s actually funding lawyers.�?

Where do useful drugs come from?

When the British Medical Journal revealed its list of the top 15 medical innovations, only 2 were obtained during a research project motivated by the desire for a patent. None of the CDC’s list of top 10 medical achievements of the past century had been patented when it was introduced. The authors note that private industry only pays for about 1/3 of biomedical R&D, while government institutions such as the NIH fund much of the rest. Boldrin and Levine propose the following solution so that pharmaceutical companies can recoup their large expense to preform clinical trials:

“Clinical trials are the step in the process of developing a new drug during which information is produced about the effect of a given chemical compound on a large sample of humans. The cost of distributing and absorbing this information being low, and the cost of acquiring it being high, it has a strong public good component. There is also no reason, either of by way of economic efficiency or equity, why this should be paid for by the pharmaceutical firms developing the new drug – indeed, as they will be first to market they have a strong conflict of interest. The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed NIH grants. At which point patents on drugs would no longer have any reason to exist.”

There is a very interesting series of blog posts at the Economist’s Free Exchange blog.

• Part I: Me too! Me too!
• Part II: More on me-toos
• Part III: We talk back

Here’s a quotation from part I: “In what other industry does anyone under the age of sixty still believe that each product category should have one, and only one, product produced by a single company—that competition is not a sign of a healthy market, but profligate waste? Has not one person making this argument (doctors included!) ever had to try multiple drugs for a condition until they found one that worked, or had bearable side effects?“

Most economists believe that increasing the price of an item will decrease demand for the item. Health care is no different from any other good. If you increase the copayment or coinsurance rate, people will consume fewer medical services. The famous RAND Health Insurance Experiment (HIE) demonstrated that higher coinsurance rates discourage medical care consumption. As I said, health care is no different from any other good…or is it?

Dana Goldman and Tomas Philipson argue in their 2007 NBER working paper (”Integrated insurance design in the presence of multiple medical technologies“) that the problem of moral hazard in the health insurance market is different from moral hazard under most other insurance markets. For most other types of insurance, only one good is insured (e.g.: a car, a house, etc.). Health insurance, however, covers a wide variety of different services. Thus the authors claim that increasing prescription drug copay costs can actually increase health care spending and make patients worse off. Let us assume that prescription drugs and medical services are substitutes. If the price of prescription drugs increases, it is likely that the individual will consume the more of the expensive medical services which are fully covered by insurance. They suggest that a zero or negative copay may be optimal for some prescription drugs.

The optimal copay is determined by the patients elasticity of demand and the degree to which other medical services are complements or substitutes to the original item in question. The authors give some empirical evidence from other studies to support their claim:

• Soumerai, Ross-Degnan, Avorn, McLaughlin and Choodnovsky (NEJM 1991) compare Medicaid patients in New Hampshire—who had a three-drug limit per patient—and Medicaid patients in New Jersey without the limit. The authors found a 35% reduction in drug use, but a doubling in nursing home admission rates.

• Soumerai, McLaughlin, Ross-Degnan, Casteris, and Bollini (NEJM 1994) look at individuals on psychotropic medications and find that a drug cap led to a 15%-49% reduction in the use of drugs but a 43%-57% increase in mental health visits and emergency mental health services.

• Horn, Sharkey, Tracey, Horn, James and Goodwin (Am. J Man Care 1996) find that formulary limitations in 6 HMOs were associated with increased ER visits and hospitalizations for otitis media, atraumatic arthritis, ulcers, hypertension, and asthma.

• Gaynor, Li, and Vogt (NBER 2005) find that higher drug co-payments in a given year lead to increased spending during the following year.

• On the other hand, studies such as Johnson, Goodman, Hornbrook and Eldredge (Med Care 1997) and Tamblyn, Reid, Mayo, McLeod, and Churchill-Smith (J Clin Epidemio. 2000) found that increased co-pays did not increase outpatient visits, hospitalizations or ER visits.

The authors conclude that “the preponderance of evidence suggests strong negative cross-price elasticities between drugs and other medical spending, at least for patients with chronic disease.�?

Courtesy of Kevin, M.D. blog: an interesting interview with a former drug rep at Eli Lilly employee who sold Zyprexa between 1998 and 2000.

The Manhattan Institute’s Center for Medical Progress has some interesting articles on health care policy.  The Center “…is dedicated to articulating the importance of medical progress and the connection between free-market institutions…”

One paper of note is by Vernon, Santerre and Giaccotto (”Are Drug Price Controls good for your Health“).  The authors examine the Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003 and the possibility that the bill could be extended to allow Medicare to negotiate price decrease directly with the pharmaceutical firms.  The authors astutely observe that federal government negotiation with pharmaceutical firms will create a near monopsony.  This will reduce price charged to consumers initially, but at the cost of a reduction in new drug innovation in the future.  To quote from the executive summary:

“…the MMA will dramatically reduce both real drug prices and R&D spending. We estimate that real drug prices will decline by 67.5 percent (or about 49 percent lower than pre-MMA levels) if purchases under the MMA are treated in the same manner as drug purchases under Medicaid and the VA have been treated historically. We further estimate that this decline will reduce R&D spending by 39.4 percent, or $372 billion over the lifetime of the act. This translates into a reduction of 277 million life years. “

Price controls may save money in the short run, but at significant cost in the long run.

In June of 2005, a pharmaceutical named BiDil used to combat heart failure was approved by the FDA. While this is not a notable event—there are many drugs to treat heart failure—the approval is novel since it was only approved for African-American patients. According to the Kaiser Family Foundation, the FDA “…approved BiDil for use in black patients based on the results of a clinical study sponsored by the drug’s manufacturer NitroMed, which found the medication reduced deaths by 43% within one year of use among black patients who had tried other medications.”

The FDA approval has generated some controversy. Should there be race-specific drugs? Can citizens trust government agencies to decide which pharmaceuticals are beneficial for which races? Which drugs are acceptable for individuals who are classified as ‘mixed race?’

The NAACP has overwhelmingly supported BiDil (see NitroMed website and a Boston-Bay State Banner newspaper report) and hopes to expand . A recent article in the Annals of Internal Medicine (”BiDil for Heart Failure in Black Patients“) gives the FDA’s perspective:

“Critics of the U.S. Food and Drug Administration (FDA) approval of the fixed combination of hydralazine hydrochloride, 37.5 mg, and isosorbide dinitrate, 20 mg, for treating heart failure in black patients have suggested that data were insufficient to distinguish treatment effects in black and white people; that distinctions based on race, rather than pathophysiology, were scientifically unreasonable; and that a “race-based” approval could be a commercial ploy to avoid a more expensive and prolonged full evaluation of a drug. The criticisms acknowledge that data supporting the approval came from a well-designed clinical trial in which self-identified black patients with heart failure who took hydralazine hydrochloride–isosorbide dinitrate with standard therapy experienced a statistically significant 43% (95% CI, 11% to 63%) reduction in mortality compared with those who took only the standard therapy. The criticisms do not always recognize that the decision to conduct the trial in only black patients reflected careful analyses of 2 previous