Regulation

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Patents, Regulation, and Fake Drugs

September 13, 2010 in Pharmaceuticals, Regulation | No comments

The Economist notes that counterfeit drugs are a growing problem.

“Counterfeit drugs can kill. Many are shoddily made, containing the wrong dose of the active ingredient. Taking them instead of the real thing can turn a treatable disease into a fatal one. It can also foster drug resistance among germs.”

Do patents cause and increase or decrease in the provision of unsafe, fake drugs?  Most people will say that patents help protect drug safety.  Drugs sold under patent require FDA approval and are generally safe.  However, these drugs are expensive and many people–especially those without insurance–cannot afford them.  Thus, these individuals may turn to less reliable vendors who promise to provide the same drugs at a lower price.

With shorter patent lengths, reliable companies can begin to produce affordable generics.  Companies can build a reputation for high quality generics, while still selling customers through low prices.  Eventually, these “generic” companies could build a brand name as worthwhile as Pfizer.

Just decreasing patent lengths is not a cure all, however.  People have been selling, drugs, tonics and potions which falsely purport to cure all types of ailments since the beginning of mankind (e.g., snake oil salesmen).

Additional drug safety regulation could improve the safety of marketed drugs, but it would also likely drive up prices, thus forcing more individuals to buy medicines on the black market.  Additional regulation also stymies new treatment innovation due to the extra costs regulation imposes.

Fake drugs are a serious problem; a problem without a simple answer.

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Marketing Cocaine

July 19, 2010 in Regulation | No comments

An energy drink called Cocaine has received a lot of press.  Texas has barred the sale of the drink in the state. The FDA made the manufacturers of Cocaine change the label so it looked less like white powder.  To comply with FDA directives, the cans now declare “This product is not intended to be an alternative to an illicit street drug, and anyone who thinks otherwise is an idiot.”

Peru has also banned the sale of Cocaine.  To market the drink in Peru, the manufacturer would need to add extract of coca leaf.

Source: Wilson Quarterly, “Marketing Cocaine” Summer 2010, p. 15.

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Do Economists Support FDA Pre-approval of Drugs?

May 9, 2010 in Pharmaceuticals, Public Health, Regulation | No comments

Conventional wisdom holds that economists advocate for reducing regulation on most policy arenas.  Regulation imposes costs and businesses and is often ineffective.  Further, as technology and market conditions change, regulations which were originally welfare enhancing can now become archane.

The public generally views the FDA’s pre-approval as a worthwhile endeavor.  The goal of FDA pre-approval is to protect consumers against unsafe and/or ineffective drugs.  In the world of neo-classical economics, agents have perfect information about drug quality and the role for the FDA disappears.  Even if information is not perfectly observed, the FDA’s ability to restrict the entry of potentially useful drugs into the market can be welfare destroying.  Certifying drugs as safe rather than prohibiting them through regulations may be a preferable form of spreading information.

In a recent survey of 44 leading economists, 23 support or strongly support pre-market approval of new pharmaceuticals and devices while 15 where opposed or strongly opposed (6 were neutral).  The key rationale behind the support of pre-market approval was the problem of imperfect information and also the public goods aspect of knowledge.  Fewer economists supported the notion that the government has superior ability to assure safety and  efficacy.

The majority of economists also believe:

  • the effect of pre-market approval in suppressing would-have-been benefits is often or typically overstated in public discourse.
  • doctors do not systematically error when prescribing medicines.
  • replacing the current FDA system with a simple physician prescription requirement for new drugs and devices is a bad idea
  • The current FDA system increase the amount of knowledge available on new drugs.

Economists were split as to whether drugs approved by European, Japanese, and Canadian authorities should automatically be approved for use in the U.S.

This survey shows that economists do not have a clear consensus answer to the question of whether there is “a sound market-failure rationale for the banned-till-permitted policy for drugs and devices.“

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Health Care Reform in Massachusetts

May 3, 2010 in Health Insurance, Regulation | 7 comments

With healthcare reform having passed, how will the health insurance market look a few years from now?  Although Mitt Romney may (or may not) deny it, Massachusetts has been a model for President Obama’s health reform bill.  In 2006, Massachusetts passed its own health reform and when the share of uninsured residents was at 14%.  By 2008, this figure had fallen to 2.6%.  Let us now take a look at the specific reforms Massachusetts implement to increase coverage.

Based on the research of Doonan and Tull (2010), one can divide the Massachusetts expansion efforts into five broad categories.

  • Medicaid Expansion. Massachusetts expanded Medicaid eligibility to all children below 300% of the federal poverty line (FPL) and all adults below 150% of the FPL.
  • New subsidized health insurance exchange.  Commonwealth Care is a program that provides aces to health insurance for individuals with incomes between 150% -300% FPL.  The government subsidizes these plans depending on the individual’s income.  The state moved individuals who were previously in the stat’s uncompensated care pool (UCP) to Commonwealth Care by restructuring the UCP so that copays, deductibles, and premiums were similar to those offered in Commonwealth Care.
  • Insurance Exchange for Individuals and Small Businesses.  Commonwealth Choice is a program that provides a number of unsubsidized insurance plans to individuals and small businesses (with 50 or fewer employees).
  • Mandates.  The Massachusetts legislature enacted an employer mandate and an individual mandate.  The employer mandate stats that employers with more than 50 people who do not provide insurance must pay a “fair share” assessment of $295/employee/year.  The state also mandates that all residents purchase insurance through an individual mandate.  Each year, each Massachusetts resident must submit a Schedule HC to the Massachusetts Department of Revenue to verify that they do indeed have Connector-approved insurance.  After a 90 day grace period, individuals are penalized each month that they are not insurance in the previous tax year.  The penalty for not having health insurance in Massachusetts is generally much larger than what Congress is currently considering.
  • Insurance Regulation.  The Commonwealth Health Insurance Connector Authority (the Connector) created minimum standards for any insurance product to be offered in the state.  Thus, individuals could not bypass the individual mandate by taking out a very inexpensive health insurance product with a $50,000 deductible.  The Connector Board recommended that the minimum credible coverage (MCC) include preventive and primary care, emergency services, hospitalization benefits, ambulatory patient services, mental health services, and prescription drug coverage.  Doonan and Tull (2010) claim that the mandated benefits were fairly generous, but not out line with what private insurance companies previously had offered.  Because there is more heterogeneity in insurance products across the country than within Massachusetts, Congress would have a much more difficult time determining a valid coverage minimum that did Massachusetts.

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Drug Safety: FDA Approval vs. Product Liability

February 22, 2010 in Pharmaceuticals, Regulation, Vaccinations | 1 comment

Before a drug can come to market, it must receive FDA approval.  This involves 3 phases of testing with Phase I having 20-80 volunteers and Phase III often testing more than 1,000 people.  Despite the FDA approval, patients can sue drug companies if they are injured by a drug.  Patients can generally sue manufacturers under one of three theories of legal liability:

  • defective design (design of a drug or device was inherently unsafe)
  • defective manufacturing
  • defective warnings, the firm failed to provide sufficient warning of the possibility of an adverse event if it knew or shown have known about the risks.

Is it efficient to maintain a system of product liability in addition to government licensing or does this legal framework simply drive up the costs of pharmaceuticals?

A paper by Philipson, Sun, and Goldman (2009) argues that when FDA approval is binding, the removing the drugs product liability increases efficiency.  This is because the product liability “has no additional effect on the level of safety firms choose to provide, but raises prices and thus restricts access.”   I believe, this is the system adopted by the UK where drugs that are approved by NICE are not liable for lawsuits.  If the drug turns out to perform poorly in practice, NICE will pull it off the market (readers, can you confirms this is correct?).

The authors use American policy on vaccine liability to elucidate their point. “The National Vaccine Injury Compensation Program (NVICP) provides a useful case study. This program shielded vaccine makers from liability in exchange for a special compensation program funded by an excise tax on vaccines. This program therefore essentially mimicked pre-emption by lowering the cost of liability dramatically.”

However, the problem with the paper is knowing whether the FDA safety procedures are binding in practice.  For some drugs, the FDA approval provides firms with more than enough incentive to produce evidence of the safety of their projects.  On the other hand, for other cases FDA approval may not provide sufficient incentives to make the drugs safe.

In the larger view, if the FDA approval does a good job of monitoring safety, then product liability could be abandoned to increase safety.  However, if the FDA approval does not induce firms to make their drugs safe, the product liability acts as a costly but effective backup to insure the firms manufacture products that are safe for consumers.

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Is licensing tax preparers a good idea?

January 7, 2010 in Regulation, Taxes | 3 comments

The USA Today writes that “the IRS has proposed a broad initiative that would require hundreds of thousands of tax preparers to register with the government, pass a competency exam and adhere to ethical standards.”  This sounds like a good idea as it will safeguard individuals from unscrupulous tax preparers.  But who will this truly benefit?

If you want a high quality tax preparer, there are many reputable companies that can prepare your taxes.  These tax preparers will be well trained and you’ll pay more for them.  Firms have an incentive to maintain this quality so their customers continue to require their services.  If quality is above average over the long run, they can build a reputation and charge higher prices.  Thus, for individuals who already have high quality tax preparation, there is no benefit.  In fact, there could be an increase in cost to these individuals if the government standards require additional training that does little to improve quality.

This idea will most certainly hurt poor immigrants.  When I was in college, I spent my Saturdays in the spring doing tax preparation for immigrant farm workers in Kennett Square, PA.  I worked for a non-profit legal firm.  I receive training on the basics of tax preparation.  Because most of these migrant workers had little assets and no mortgage, doing their taxes was simple.  If an individual had a more complex tax return (e.g., if they had a mortgage), I would refer them to the supervising lawyer.  The migrant workers received their tax preparation for free since we were volunteers.  However, this practice may not continue into the future.

If the government requires everyone who prepares taxes to pass through an onerous training program, fewer volunteers will decide to participate in free tax clinics.  Many non-English speaking Americans may not fill out their taxes themselves.  Further, the non-profit’s scope of their program will likely decrease if they have to pay for additional training for all their staff. 

Also, how will the government guarantee people will act ethically?  Will they give them a test of what is ethical?  Will they ask nicely ask people not to do a bad job?  

In short, licensing tax preparers is a bad idea.

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How do state health insurance regulations affect the price of high-deductible policies?

December 1, 2009 in Health Insurance, Regulation | 2 comments

A paper by Kowalski, Congdon and Showalter (2009) examines how state health insurance regulations affect the price of health insurance.  The four regulations are the following:

  • Community rating regulations limit premium differences across policies.  The most stringent form requires insurers to offer the same premium to every individual, regardless of age, gender, or health status. These regulations are usually motivated on equity grounds. However, such regulations may lead to adverse selection, thereby making policies prohibitively expensive for healthy individuals.
  • Guarantee issue regulations limit the ability of insurers to deny coverage to potential and existing customers. Insurers could circumvent guarantee issue requirements by offering only very expensive policies to high-risk individuals. In practice, however, guarantee issue regulations usually accompany community rating regulations.
  • Any willing provider regulations restrict the ability of insurers to exclude hospitals and doctors from their networks. Typically, such regulations are motivated by a desire to offer consumers more choice and flexibility. However, such regulations may hinder insurers’ ability to contain costs.
  • Mandated benefits regulations require insurers to cover particular treatments.  The states with the fewest number of mandates were Idaho (6), Alabama (10), and Iowa (12).  Those with the highest number of mandates were Maryland (48), Connecticut (40) and Minnesota (37).

Using non-group insurance policy data from eHealthInsurance and Golden Rule, the authors find that “the existence of community rating regulations raises premiums by 10.2 to 17.1 percent for individual policies, and 20.9 to 33.1 percent for family policies. We also find that guarantee issue regulations that accompany community rating regulations in New Jersey are associated with premium increases of well over 100 percent for individual and family policies. The effects of mandated benefits and any willing provider regulations tend to be positive, but these results are sensitive to the econometric specification. We also find that the terms of the insurance contract—deductibles, coinsurance rates, stop loss limits—are also affected by the regulatory regime.”

It is also likely that these regulations affected the policies available to consumers.  “Of the eight states in which eHealthInsurance sold no policies in 2003, four states—Maine, Massachusetts, New York, and Vermont—had guarantee issue and community rating regulations. Furthermore, Golden Rule does not offer policies in any states with guarantee issue or community rating regulations.”

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“Somehow, this time will be different”

November 16, 2009 in Economics - General | No comments

“Despite the spectacular failure of Fannie Mae and Freddie Mac, some economists insist that Fannie and Freddie need to be kept in place but somehow, just made safer. This optimistic advocacy—which assumes that Fannie and Freddie are like airplanes that need better landing gear—is in spite of the fact that between 1992 and 2008 Fannie and Freddie had their own regulator, the Office of Federal Housing Enterprises Oversight, that failed to stop the meltdown of Fannie and Freddie that has cost the U.S. taxpayer about $100 billion and counting.  Somehow, this time will be different.”

  • Roberts, Russell (2009) “How Little We Know,” The Economists’ Voice: Vol. 6: Iss.11, Article 3.

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Federal Health Care Regulation: Taxation

November 4, 2009 in HSA, Public Policy, Taxes | 1 comment

Today we will discuss how the tax code affects health care.

  • Tax exemption of employer-provided health insurance. “In 1943, the Internal Revenue Service (ruled) that employees could exclude the value of employer-paid health insurance premiums from their taxable income. In 1954, Congress excluded by statute the value of employer-purchase health insurance from gross income.” To this day, employees essentially receive a subsidy to buy health insurance from their employers; this is because they can use pre-tax dollars to purchase employer-provided health insurance benefits.
  • Tax-deductibility of individually purchased health insurance. Individual health insurance benefits are tax deductible only if the individual itemizes deductions on their tax return. Since it is more likely wealthier individuals itemize, the benefits of this rule are more likely to accrue to the rich.
  • Deductibility of medical expenses. The IRS tax code states that individuals can deduct medcial expenses that exceed more than 7.5% of their gross income.
  • Health Savings Accounts (HSA). An HSA is a trust similar to a 401(k) where individuals can use pre-tax money to pay for medical expenses. HSAs must be linked to an high deductible health plan (HDHP) which was defined in 2006 as a plan that had a deductible not less than $1050 for the individual or $2100 for a family. Money left in an HSA account at the end of the year can be carried over to future years.
  • Flexible Spending Accounts (FSA). Individuals can deposit pre-tax dollars into a fund to pay for health care expenses. Unlike HSAs, FSAs need not be tied to a HDHP. Also, unlike HSAs, money deposited in an FSA that is not spent by years end is lost. This is why FSAs are considered “use it or lose it” accounts.

Source:

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FDA bans import of Indian Pharmaceuticals

April 28, 2009 in Pharmaceuticals | No comments

Marketplace reports that the FDA has blocked sales from one of India’s largest drug producers, Ranbaxy Pharmaceuticals.  “It prevented sales of Ranbaxy’s generic versions of the antibiotic Cipro and the cholesterol pill Zocor.”

This begs the question: should the FDA put office in foreign countries?  On the one hand, it is important to ensure that imported drugs are safe.  However, FDA decisions to ban certain drugs could be influenced by protectionist concerns rather than patient health. 

Ajay Sahai, executive director of the Federation of Indian Export Organizations: ”In many of the cases, Indian companies do have a case where they have been stopped by large companies present in the importing countries. They have tried to restrict the imports at whatever cost or citing whatever reason.”

Is the FDA doing a diligent job or protecting the safety of the U.S. drug supply, or is it engaged in protectionism.  Finding the true answer is exceedingly difficult.

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