Ripped from my old blog:
Nothing makes me happier than sitting in my little office with a cup of coffee, reading Dean Baker’s paper, “The Benefits and Savings of Publicly-Funded Clinical Trials of Prescription Drugs.” What does that say about me, exactly?
To summarize, the paper argues that the public sector should take over the costs and the administration of clinical trials (which is currently performed and paid for by the drug companies). The costs (about $20 billion/yr) that the Feds will have to shell out, could be recouped by allowing Medicare to negotiate prices with pharma (something it cannot do currently, courtesy of the 2003 Medicare bill). There may be some savings in doing this, but the real advantages are that:
1) it eliminates perverse incentives; a) by decoupling the company developing the drug from the company conducting the trials, you can be more confident of the results because the company conducting the trials has no incentive to lie; b) full and timely disclosure (no incentive for contractor to hide uncomfortable truths) will accelerate the pace of research by making information available to all; c) lowers cost of drugs in developing countries because, currently, test data exclusivity keeps prices high; d) you save money because you no longer have an incentive to overpay doctors conducting the trials.
2) there are benefits to lower drug prices per se; a) eliminate the wasteful games played between insurers trying not to pay for expensive drugs, and doctors/patients trying to get around it; b) patients will no longer try to find cheaper but unauthorized versions of the drugs.
My initial thought was that this paper is basically laying out a economic rationale for a political play: namely, how do you give Medicare negotiating power over drug prices, and have Big Pharma go along with it? Answer: throw Big Pharma a $20 billion bone. Of course, my initial reaction was – if the right people were in power (i.e. Democrats), you could just give Medicare this power by an act of Congress, have Big Pharma eat it, and save the taxpayers $20 billion/year.
Being neither an economist, a public policy expert nor a member of the pharmacological fraternity, there are many things I don’t understand (but wish I did).
1) I don’t quite understand what the advantages of using contractors vs doing the trials in-house – as a brand new stand-alone institution (e.g. the National Institute of Clinical Trials), or as part of the NIH, or FDA or whatever. I imagine that what Baker means by “contractors” is pretty much the role that CRO’s currently play – except contractors would be paid by the Feds. What exactly are the benefits of using private contractors in this regard?
2) One would think that the most obvious consequence of government-administered clinical trials would be that Big Pharma would no longer have an incentive to be choosy about which drugs they push into clinical trials. In fact, there would be a clear disincentive, given that pharmaceutical companies are competing with one another. So, what’s to prevent Big Pharma from hurling every half-assed chemical or protein into the clinical trial pipeline, and making the Feds sort it all out? Hence the FDA would still make companies maintain some validation process – which would eat into the $20 billion. Which leads to an important question: what is the total expenditure from, let’s say, target validation to NDA as a fraction of total amount spent up to FDA approval? Is it trivial? Is it large enough that it would disincentivize Big Pharma from going along with the public clinical trials idea?
3) Baker says that lower drug prices will eliminate the incentive for drug marketing. (This has to be one of the most odious aspects of the current system. Good drugs don’t need marketing – they sell themselves. It’s the middling drugs that need the marketing, or me-too drugs, or when you’re trying to push drugs for use in new ways). I don’t quite understand how cheaper prices will disincentivize marketing. If you lop off costs at one end (clinical trials) and incur costs at the other end (can’t charge as much for the drug), then won’t your profits remain constant? Someone help me out – what am I not understanding here? (Is he saying that marketing dollars won’t change regardless of the price of the drug, so if you have a cheaper drug then marketing will take a larger chunk of revenues?).
It seems like a sensible idea, though. Although, the cynic in me tells me that it’s gonna be all in the implementation. After all, what’s to stop Big Pharma from going along initially – until the clinical trials process is instituted – and then hardballing politicians to prevent Medicare from getting negotiating powers?
I had fun reading the paper. And this post has been a bit stream-of-consciousness. So does anyone who knows something about the economics of health care want to weigh in?
Dean Baker responded to my post:
Thanks for the write-up.
Here are quick responses:
1) I have no problem with expanding NIH or the FDA to have the public sector directly do the trials. The reason for going with private contractors is purely political. You have a lot of people in DC that yell “socialism” at every opportunity, so to make them happy, I’m saying that we will leave it with the private sector.
2) The drug companies would throw everything in the world up to be tested, but it will be the job of the CROs to sort the wheat from the chaff. Presumably, there would be some reputation issues that develop over time which could discourage companies from passing along garbage. For example, if Pfizer says every chemical compound it ever touches is going to save millions of lives, the CROs would presumably start to ignore Pfizer’s claims pretty quickly. Remember mistakes cost the CROs money, so if a drug company is making false claims about pre-clinical results, then they will have a strong incentive to stop taking them seriously.
3) You’re right about profits for the drug companies under my plan (they could even rise), but the incentive issue is somewhat different. Their incentive to market depends on the marginal profit per prescription. At the point where the drug is developed, research is a sunk cost. The marginal profit per prescription is simply the sale price minus the manufacturing and distribution cost. If we knock the sale price down by 40 to 50 percent, then they have far less incentive to market their drugs, which I think that we agree is a good thing.
I’m glad I could help make your day.
Regards,
Dean Baker
Tags: Clinical Trials
