Reasonable Rx: Solving the Drug Price Crisis

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9780132344494: Reasonable Rx: Solving the Drug Price Crisis

A Real Plan for Making Drugs Affordable–and Promoting Innovation, Too


 “This book is a necessity for understanding the pharmaceutical industry. Both the pluses and minuses of the present system are set forth with a judicious combination of historical narrative, economic analysis, and statistical data. The highly original proposals for reform will be a major stimulant to analysis and policy-making.”

–Kenneth Arrow, Nobel Laureate in Economics, Professor Emeritus, Stanford University


“This is a timely book by authors who know what they are talking about. They tackle a big problem: rising drug prices that are threatening to overwhelm us all–and especially those with limited or absent health care insurance. Will we drive people overseas for healthcare? Will there be social unrest? This book describes the problem and then offers a solution. Worth a careful read by everyone, pharmaceutical manufacturers and government policymakers especially.”

–Roger Williams, M.D., Chief Executive Officer of the United States Pharmacopeia and a former

senior official of the Food and Drug Administration


“This book confounds two sets of skeptics: Those who say there’s no way to resolve the conflict between the need to fund pharmaceutical research and our desire to keep medicine affordable; and those who think that economics never has anything good to say.”

–Honorable Barney Frank, Congressman from Massachusetts


“This book comes at the right time and could become the starting point of discussions, which will eventually lead us into new era in the healthcare care industry. It will without a doubt become a must for insiders of the pharma- and biotech industries.”

–Dr. Jürgen Drews, retired President of Roche Pharmaceutical Group Global Research


Acknowledgments viii

About the Authors ix

Introduction xi


Chapter 1: Drugs and Drug Prices 1

Chapter 2: The American Way to Discover Drugs 21

Chapter 3: The Drug Industry Today 39

Chapter 4: Are Drug Companies Risky? 59

Chapter 5: How Not to Lower Drug Prices 77

Chapter 6: Squandering R & D Resources 103

Chapter 7: How to Lower Drug Prices 129


Appendix: Our Solution in Detail 155

Index 177


"synopsis" may belong to another edition of this title.

About the Author:

STAN FINKELSTEIN, M.D., is a Senior Research Scientist at MIT, Co- Director of the MIT Program on the Pharmaceutical Industry (POPI), and serves as a Senior Lecturer on Health Care Policy at Harvard Medical School.


PETER TEMIN, Ph.D., a widely cited economist and economic historian, is currently Elisha Gray II Professor of Economics and former head of the Economics Department at MIT. He is the author of Taking Your Medicine: Drug Regulation in the United States.


Excerpt. Reprinted by permission. All rights reserved.:

Reasonable Rx


The age of effective medicinal drugs, which dawned about 50 years ago, transformed the health care industry. Americans have become used to taking a pill to cure many diseases and improve their lives in other ways. Many senior citizens, though, can recall growing up in a world where there were no easy cures for many serious conditions that today are regarded as little more than irritations. President Calvin Coolidge's son died from an infection he picked up while playing in the White House rose garden. There's no reason anyone in America should face that risk today. But good drug therapies are only as good as patients' access to them. The best cures in the world are of no use if exorbitant prices put them out of reach.

It is no exaggeration to say that we are past being on the verge of a crisis. No one reading this book can honestly deny that the prices of drugs are high and are getting higher. Even for those fortunate enough to have health insurance that pays part of the cost of prescription drugs, the co-payments keep increasing and insurers put more and more restrictions on what therapies they'll cover. As a revolution in science and technology unfolds that brings us new drugs that are targeted almost to the individual patient, the magnitude of the crisis only grows.

In the not-too-distant future, perhaps just around the corner, we might be faced with the following scenario: new, more effective, "personalized" drugs that address small patient groups but are priced beyond what any individual can afford and what any insurer is willing to pay. If that happens, then the federal government will intervene to control prices—which the experiences of Europe and Canada have shown kills innovation.

What has gotten us to this point? The culprit is a broken system that we've let languish for too long without fixing. It's a flawed system that combines three components that all too often work against each other.

The first component is money. It costs a fortune to develop a new drug, but the potential profits are huge. Not unexpectedly, the pharmaceutical industry is driven to maximize those profits and firms are racing to develop the next big blockbuster drug that will bring in $1 billion or more in sales.

The second component is science. New scientific discoveries about how diseases work, coupled with new technologies, are leading to new therapies that work better for specific patients. We can even know in advance how likely the outcome of a therapy will be with a given patient. But that means selling a drug to smaller numbers of people. If a company's objective is blockbusters, this busts the business model.

The third component is incentives. Simply put, we have the wrong ones. The choices that research-driven pharmaceutical firms make today about which drugs to pursue in their discovery and development programs are just too far afield of what society needs most. For every slight variation on a blockbuster antihistamine for hay fever that the industry pursues, a pressing societal need gets ignored. The incentives, through no direct fault of the industry, are seriously askew.

No wonder we see so many instances where business decisions encroach on science. This is a situation that cannot stand. Some serious changes need to be made—before it's too late.

Lots of people are worried about this situation. Rising drug prices are increasing the cost of health insurance because drugs continue to grow as a share of overall health costs and insurance reimbursements. Those of us who have insurance worry that premiums will increase to the point where we can no longer afford our coverage. State governments that operate Medicaid are finding their costs rising so fast that it puts pressure to restrict the funds available for other purposes. And if all the estimates hold, the federal government, which operates Medicare, will find that the cost of the new Medicare Part D drug benefit to senior citizens is significantly larger than anticipated.

A spate of recent books by distinguished doctors and editors of the prestigious New England Journal of Medicine address these high drug prices and even recommend ways to lower them. 1 Our book is different, however. Here we propose a comprehensive solution that honors the tremendous innovation of the pharmaceutical industry, takes full advantage of today's scientific revolution, and speaks directly to how society can ensure we all get the drugs we need. In doing so, we aim directly at a profound misconception: that high drug prices are a prerequisite if we are to continue to make medical advances with pharmaceuticals. No, the real issue is risk—and who bears it.

Just as we rely on private industry to produce our clothes, houses, cars, and other things that enhance our lives, we rely on a private pharmaceutical industry to create our medicines. But don't be confused by the word "private;" the U.S. government has long been part of the process of drug discovery, manufacture, and sale. In fact, the government's involvement predates the revolution in drug therapies and goes back to the beginning of the twentieth century. And since it's both a private and government effort today, it stands to reason that any solution to the crisis we've described should also be public and private. That solution begins with risk.

Americans face a lot of risks in their lives. In the United States, people accept risks in order to obtain the potential rewards. Even if the economy doesn't always work as it's supposed to, it's designed to allow you to choose your education and career. It is structured for business enterprises to choose where and how they produce their products. True, some government constraints exist in the form of rules and standards, sometimes called "regulations." After all, you couldn't drive your car safely down the street if we didn't have a rule about driving on the right-hand side. The price to pay for successful management of many risks is having rules and behaving in common with other people.

In the world of finance, risk is rampant, and the government plays a big part in making sure things run well. For instance, you can invest in companies with the assurance that they will honor their contracts with you because of government regulations. The government participates in the risk of investing in many other ways, too. Take bankruptcy, a way to limit the cost of unsuccessful gambles. No one wants to declare bankruptcy, but it reduces the losses that will be incurred if a risky enterprise fails. It eases the cost of risk-taking by ordinary people as well as of companies. 2

Health is no different when it comes to the issue of risk. Everyone runs the risk of getting sick, of course, and there's also the risk that someone may not recover if he or she gets sick. 3 In your role as a patient or potential patient, you tend to focus on keeping yourself healthy—that is, avoiding the risk of getting sick—and on how you're going to ensure treatment if you do get sick. Another kind of risk in the world of health involves whether the drugs you take are safe and effective. That's where federal involvement with prescription drugs began.

People without medical training typically know little about the effects of potent drugs and seldom know how much to take, at least not without some guidance. If the government didn't intervene to assure you that drugs are safe to swallow, there would be greater risks in taking them. (To be sure, the government regulators are sometimes criticized legitimately about dropping the ball, but overall prescription drugs are safe and effective when they make it to market.) The government today regulates both drug companies and how drugs are made available to their customers. Government programs encourage and regulate the activities of pharmaceutical companies as they discover, test, and manufacture drugs. The Food and Drug Administration (FDA) has the final say on which drugs can be sold and regulates whether you need to get a prescription for the most powerful medicines. A pharmacy that sells a prescription drug without a prescription is breaking the law—a law enforced so tightly that even alleged violations are rare. In all these ways, the government reduces your risk when you take your medicine. 4

When it comes to how much those medicines cost, though, the government has largely had a hands-off policy.Yes, some intermittent attention to the issue has been paid. Almost 50 years ago, Senator Estes Kefauver held hearings to investigate why the first generation of new drugs cost so much. In 2003, Congress debated the cost of the new Medicare drug benefit. But the United States has never had a consistent policy on drug costs. The pharmaceutical companies have been left to charge what the market will bear for their products. That was fine as long as people only took prescription drugs occasionally, mostly for acute episodes of illness. Today, thanks to tremendous scientific advances, medicines are taken at a much greater rate; some medicines are taken every day for a lifetime.

Rising usage and growing prices fuel a widening discussion about how to solve a problem that more and more people recognize is at a crisis point. But the discussion seems to have reached an impasse. Doctors complain about the costs of drugs on behalf of their patients and so do patients themselves. The pharmaceutical industry responds that high drug prices are needed to finance the discovery of new medicines to benefit the patients. As the two sides talk past each other, recommendations consistently focus only on changing the details of drug distribution.

Rising usage and growling prices fuel a widening discussion about how to solve a problem that more and more people recognize is at a crisis point. But the discussion seems to have reached an impasse.

It's time for a new debate on new terrain. In this book, we assess recent changes in the pharmaceutical industry in depth—not only the expanding scientific revolution, but also the business of pharmaceuticals. We look at the lack of progress that results from the blockbuster mentality. We explain how the drug industry operates, how new drugs are discovered, and how the government affects and controls these processes. These are the prerequisites to understanding how to lower drug prices.

Our examination shows that changes—built on the best aspects of today's pharmaceutical industry but fixing what's broken in our system—can reduce prices and improve the flow of new drugs that best serve society's needs. Sounds implausible? The pharmaceutical industry's mantra that high prices are the only way to ensure innovation has certainly permeated the psyche, but there really is an alternative. It requires bold, but achievable, action. We have a plan that will lower prices while ensuring access for all citizens to today's great medicines and tomorrow's new, revolutionary drug therapies.


  1. Angell, Marcia. 2004. The Truth about the Drug Companies: How They Deceive Us and What to Do about It. New York: Random House. See also: Avorn, Jerry. 2004. Powerful Medicines: The Benefits, Risks, and Costs of Prescription Drugs. New York: Knopf. See also: Kassirer, Jerome P. 2005. On the Take: How America's Complicity with Big Business Can Endanger Your Health. New York: Oxford University Press.

  2. Moss, David. 2002. When All Else Fails. Cambridge, Mass.: Harvard University Press.

  3. Arrow, K. J. 1963. Uncertainty and the welfare economics of medical care. American Economic Review 53:5, 941–73.

  4. Temin, Peter. 1980. Taking Your Medicine: Drug Regulation in the United States. Cambridge, Mass.: Harvard University Press.

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