The Magazine

Dr. Daschle's Dubious Cure

Get ready for health care activism.

Dec 15, 2008, Vol. 14, No. 13 • By DAVE GERSHON and HENRY I. MILLER
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By choosing a seasoned Washington operator like former Senate Democratic leader Tom Daschle as secretary of health and human services, President-elect Barack Obama has made his health care priorities clear. He will promote an aggressive legislative agenda with far-reaching effects not only on health care services and insurance, but also on the makers of drugs and medical devices, pharmacy benefits managers (third party administrators of prescription drug programs), and clinical research organizations, which conduct clinical testing of new drug candidates, under contract from drug companies.

The three major themes of health care reform under the new administration will likely be (1) mandatory national health care coverage, (2) additional power and responsibilities for the FDA, ostensibly to ensure greater drug safety, and (3) reduction of health care costs. There will thus be a push for incentives to encourage the use of generic drugs (at the expense of branded drugs) through a multi-tiered formulary model, patent reform, and new mandates for the FDA.

Let us leave the discussion of resource allocation and compulsory insurance for another day and focus here on the fate of the FDA, which is certainly in need of renewal, but not of the sort contemplated by Daschle's old colleagues on Capitol Hill and by Obama's advisers. The U.S. Food and Drug Administration is suffering from two decades of cultural, organizational, and management problems that have depressed drug approvals to historic lows while pushing drug development costs to stratospheric levels.

In fact, at a time when drug development should have been spurred by innovative new technologies and a decade of steady increases in R&D expenditures--which tripled to more than $45 billion between 1995 and 2007, drug approvals have steadily declined. The 19 new medicines approved in 2007 were a 24-year low. Bringing a new drug to market now requires on average 12-15 years, and costs more than $1.2 billion--in no small part because the average length of a clinical trial increased 70 percent between 1999 and 2006. Perhaps the most ominous statistic is that drug manufacturers eventually recoup their R&D costs for only one in five approved drugs.

Worst of all for the developers of small-molecule drugs and biopharmaceuticals is the prospect of top-down price controls. Although for the most part this approach has been avoided in the United States, some researchers have argued that even here the impact of price control efforts for drugs has been significant. For example, a group at the Center for Healthcare and Insurance Studies at the University of Connecticut reported that prices fall as the government's share of spending on drugs increases, and that this exerts a negative effect on innovation and, ultimately, on public health. They studied U.S. data from 1960 to 2001 and found that "from 1992 to 2001 a 10 percent increase in the growth of government's share of total spending on pharmaceuticals was associated with a 6.7 percent annual reduction in the growth of pharmaceutical prices." When the government increases its share of spending, they argued, pharmaceutical companies considering an investment in the development of new drugs can look forward to lower revenues, and this reduces their incentive to innovate.

Notwithstanding such findings, it is likely that the Democratic congressional leadership will change the Medicare drug benefit to require government officials to negotiate drug prices with the pharmaceutical companies, which would represent de facto price controls. Under the current program, competing insurance companies individually negotiate the deals and offer coverage to the retired and disabled. Inevitably, the government will muscle drug prices to submarket levels, which will inhibit drug companies' ability and willingness to develop new drugs. The precedent of the Veterans Administration health care system suggests that another likely outcome of such compulsory negotiations will be to eliminate completely the coverage of certain drugs under Medicare. Only 19 percent of drugs approved by the FDA since 2000 are listed on the VA formulary, and less than 40 percent of drugs approved in the 1990s are listed.