High cost of drugs has little to do with innovation.

High cost of drugs has little to do with innovation.For older folks enrolled in Medicare (and this writer is one) the news of late has been mostly bad. For example, Medicare's trustees estimate that out of pocket expenses for Medicare premiums, deductibles and co-pays will consume more than a third of our Social Security income by 2006. I include as bad news the prescription drug benefit that Congress enacted last year. What I find most disturbing is that the new law forbids government from using its clout to negotiate lower prices--guaranteeing that drug price inflation will continue for the foreseeable future.

The drug industry staunchly defends high prices as essential to fund critical drug research and development. Industry apologists point to treatments for life-threatening conditions like cancer, HIV and heart disease that were not around a few decades ago as justification for banning government from price bargaining. Reining in profits, we are warned, would cause investor dollars needed for research to dry up, and we would be denied future life-saving therapies. Policy makers appear easily swayed by this argument. What elected official wants to be portrayed as blocking research that may produce a life-saving treatment?

How valid is the drug industry's claim that high profits are necessary to support medical progress? In his new book, The $800 Million Dollar Pill, Merrill Goozner sets out to provide some answers. The title refers to what drug manufacturers claim it costs them to get a new drug approved by the FDA--an estimate that is considerably exaggerated.

Goozner, a former Chicago Times economic correspondent, provides a detailed history of the scientific and commercial development of a number of specific drug and biotech products to treat life-threatening illnesses. In the final analysis, he argues, private drug industry investment has not been the most important factor in the discovery and development of important new therapies. In fact, Goozner argues, the success of the drug industry in developing new, life-saving treatments has been largely dependent on government sponsored research and researchers. The result is that American taxpayers end up paying twice: first through their tax dollar support of the National Institutes of Health and of academic research--and then again by paying high prices when they need the drugs. Goozner also discusses the wasteful economics of "me too" or "copy-cat" drugs. By definition, they offer no advantage but are different enough to secure a patent. Goozner traces the industry's love affair with me-too products back to the 1940s.

The industry's copy cat fervor continues unabated today while at the same time the number of newly approved innovative drugs has fallen sharply. According to the FDA's web site, only 21 out of 72 new drug approvals in 2003 were "innovator" drugs with an active ingredient new to the U.S. market. Of those 21, less than half were considered by the FDA to be a significant improvement compared to already marketed products. An editorial in The Lancet (9/24/04) aptly describes this current state of affairs: "In last-ditch flings at seeking new markets, the drugs industry can only come up with new indications for old drugs and me-too compounds to barge into existing markets." The popular heartburn drug, Nexium, for example, is just an expensive knockoff of Prilosec, Prevacid, Protonix and Aciphex.

Drug makers spend tens of billions of dollars to aggressively promote their me-too products and expand market share. In addition, as Goozner argues, and the FDA's judgment above confirms, the largest slice of the research and development dollars spent by industry produces therapies that provide no therapeutic advantage to patients. To add insult to injury, the market share competition among me-too drugs does not necessarily mean lower prices; in fact many are priced higher than the "innovator" drug.

President Bush touts his "marketplace" approach to solving our health care problems on the campaign trail. But nothing is more anti-marketplace than not allowing Medicare to use its buying power to negotiate lower prices for drugs. It's time, I would argue, for policy makers to be more questioning about drug industry claims that lower drug prices will stifle innovation and hurt the sick. After all, The $800 million Pill provides convincing evidence that industry's appetite for high profits is mostly self-serving.