Efforts to suppress spending on life-saving drugs are working—while development of new drugs is stagnating


New analysis details a disappointing explanation for recent decreases in Medicare spending growth – a paucity of new life-saving and health-preserving drugs

By Jennifer Popik, JD, Robert Powell Center for Medical Ethics

NoMoneyThe title of an October 23, 2014, Washington Post article seemingly would have us rejoicing: “You may want to thank George W. Bush — not Obamacare — for the remarkable Medicare cost slowdown.” The news story, by reporter Lori Montgomery, reports on a posting, “The $500 Billion Medicare Slowdown: A Story About Part D,” by health policy experts Loren Adler and Adam Rosenberg on a blog hosted by the prestigious Health Affairs policy journal.

Adler and Rosenberg make the case that it is Bush-era changes to the Medicare program for seniors that have led to the overall slowing of growth in the Medicare program. Specifically, they point to changes in the Part D program–the prescription drug program.

The authors write, “Despite constituting barely more than 10 percent of Medicare spending, our analysis shows that Part D has accounted for over 60 percent of the slowdown in Medicare benefits since 2011.”

While both decline in spending and cheaper drugs might, at first glance, seem positive, there will be a serious cost. That cost is drug innovation.

Adler and Rosenberg point out two distinct causes of the drug spending decline: “Lower Part D spending primarily stems from the ‘patent cliff’ – a number of blockbuster brand-name drugs that have lost patent protection, paving the way for cheaper generic competitors — and a decrease in the rate of introduction of new brand-name drugs.”

They explain that the Congressional Budget Office (CBO)

“found that, between 2007 and 2010, the share of prescriptions filled with generic drugs rose from 67 percent to 78 percent nationwide (and from 63 percent to 73 percent in Part D). In addition, brand name drugs with a combined $117.2 billion in U.S. sales, including best-sellers like Nexium and Cymbalta, are expected to lose patent protection between 2012 and 2016 according to analysis from the Congressional Research Service.”

The second and more unsettling reason for the lower spending decline is that “CBO also found that new branded pharmaceuticals have been introduced at a slower rate than in the late 1990s.”

What the Health Affairs bloggers and the Washington Post reporter miss, fixated as they are on the goal of limiting health care spending, is the critical point that the development of new drugs, while an expensive process, is a good thing because it leads to life-saving new treatments. For more on this you can read the recent NRL news article, “Even bigoted study finds high-cost drugs worth it.” Also see this article.

The decline in pharmaceutical innovation may be attributed to past changes to the Medicare part D program as well as mechanisms contained in the Obama Health care law – all meant to suppress health care spending. Too few recognize that, drug price controls have a devastating effect on the development of new lifesaving drugs.

Research and development is financed by investors who buy stock or provide venture capital. Investment in pharmaceutical development is risky. Many promising leads fail to work out and never make it to the market. On average, of 5,000 potential new drugs tested, only one is eventually approved for patient use. Of all new drugs brought to market, only 30% recover their research and development costs.

Those who say drugs are overpriced often compare the high price of an innovative, breakthrough drug with the low cost of its production. They conclude that, even taking into account the cost of research and development for that particular drug, the patient is being “gouged” to produce “windfall” profits. This perspective fails to recognize that given the high odds against any given potential drug ever getting to the market and then actually making money, only the possibility of that high rate of return can induce investors to invest.

But while everyone would prefer to pay less–or nothing–for health care (or anything else), government price controls prevent access to lifesaving medical treatment that costs more than the prices set by the government. In fact, the Obama Health care law is full of various ways that the government can limit what resources Americans will be permitted to devote to saving the lives of themselves and their family members (documentation here).

The basic point is that health care spending is crucial to innovation and quality treatments. Now and for years to come, Obamacare will work through regulation and pressure on insurers to hold down spending and will stifle both innovation and quality care. That is, unless the Obama Health law can be repealed.