Health Reform Puts Innovation At Risk

Investor’s Business Daily, July 23, 2009

President Obama and congressional Democrats have spelled out few details in their health reform plan. But one thing is certain — it’s going to be expensive. A new report from the Congressional Budget Office puts the price tag of the current proposal from Sen. Kennedy at more than $1 trillion over the next 10 years. An Associated Press report puts the Senate price tag at $1.6 trillion.

In order to fund reform and reduce costs, lawmakers will be leaning heavily on hospitals, doctors, insurers and drug companies. But, while extracting money from drug companies in particular may be politically popular, it will only impede other health reform goals. In fact, by targeting drug firms, lawmakers risk crippling research into future cures and raising long-term health costs.

How is such a double-whammy possible? For starters, drugmaking is expensive and time-consuming. It takes more than $1.3 billion, on average, to research and develop a new medicine. Only about 20% of the compounds that make it from the lab to clinical trials achieve approval from federal regulators.

And with research spending in all sectors already plummeting because of the economic downturn, is it really wise to squeeze this innovative industry even further? If Congress were to attack the drug industry, tens of thousands of the more than 3 million Americans who depend on biopharmaceutical companies for work (either directly or indirectly) would likely find themselves out of work.

Fleecing drug companies is also unnecessary, considering the industry’s own willingness to work with lawmakers. On June 22, the leading drug companies voluntarily pledged $80 billion over the next 10 years to help bring down health care costs for seniors who have hit the “doughnut hole” under Medicare Part D. And at Wednesday’s prime time news conference, President Obama intimated that he might seek $100 billion or more from the pharmaceutical industry.

Those figures are four to five times what Amgen, the world’s largest independent biotechnology firm, would spend on research over the course of a decade. The industry concessions would amount to Pfizer’s entire research budget during the same time frame.

Furthermore, attempting to lower health spending by launching an assault on drugmakers is counterproductive. Contrary to popular belief, drug spending has little to do with our nation’s exploding health care costs.

A recent report by the Kaiser Family Foundation found that only 10% of U.S. health care spending goes toward prescription drugs. And as Columbia Professor Frank Lichtenberg has pointed out, for every dollar spent on newer pharmaceuticals, there is a savings of $7.17 in hospital costs. Hospital care and physician services account for more than 50%.

The latest research suggests that the rise in prices of prescription drugs is flattening. In 2007 — the most recent year for which data are available — prescription drug prices increased at the slowest rate since 1963.

What’s more, efficient usage of prescription drugs can actually lower overall health spending.

By obviating the need for costly procedures like emergency room visits or surgery, prescription drugs can serve as effective preventive measures.

According to research published by the National Bureau of Economic Research, newer prescription drugs decrease overall health care spending by seven times what they cost.

In other words, drugs may seem expensive in the short term, but they more than make up for their price tag with long-term savings.

Health reform will require prudent trimming of America’s medical budget. Any shakedown of pharmaceutical companies would undermine our attempts to lower health costs and preserve medical innovation that allows us to live longer and healthier lives.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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