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Pharmaceutical Phoolishness

Contributed by Phillip O’Reilly

Phillip O’Reilly has taught economics at several  universities and has worked in public policy for over a decade. He currently resides in Eastern Oregon where has a business and coaches cross country and track.

So, the Democrats exempted themselves from the mandates in the health care reform act. Perhaps, but they might not be as insulated from the act’s effects as they believe. More on that later.

One recurring theme during the health care reform debate was the need to rein in “Big Pharma.” On one hand, I can understand this focus. I have had two experiences with Big Pharma which would provide excellent fonder for liberals’ cannons. The first was when I learned of montelukast sodium, commonly known as Singulair, a non-steroidal, anti-inflammatory asthma medicine. The cost of this drug was approximately $100 for a 30-day prescription – three bucks a pop. The second experience occurred when our oldest son had a bone infection that required extraordinary antibiotics. After checking with the pharmacy on the price of this prescription, we phoned the doctor for certainly there had been some mistake. To the contrary, this was the antibiotic we needed and further the cost we had to pay. An eight week prescription, 56 pills, exceeded $600!

I related the first experience to a friend who works for Procter & Gamble where he is charged with maximizing profits from drug patents. My friend could not disclose much, but I put forth a guess on the cost of producing a single pill. He is honest even when evasive and acknowledge that my guess was in the ballpark. What was my guess? 5¢ a pill. Rounded up to 25¢ a pill; that is a 1,200% markup on the less expensive Singulair.

Should the rancor directed toward Big Pharma surprise us? These markups have impelled many to call for price controls or, at a minimum, the legalization of drug re-importation. Robert B. Reich summarizes this attitude: “Any bonanza for the drug industry means higher health-care costs for the rest of us…”

The shortcoming of this reasoning is that it ignores two very important facts. The first is the cost of developing the actual drug. My P&G friend confirmed estimates that I had heard elsewhere about this number. The cost of bringing a new drug to market, including all the false starts that do not pan out, approaches $850 million. By anyone’s standards – except perhaps the government’s – that is a chunk of change. That is money that must be invested before the drug generates a dollar of revenue. Since pharmaceutical companies have only 5 to 7 years to recover these investments, they rely on hefty markups.

The second fact that the Reich ignores is that the prospect of a bonanza actually leads to lower health care costs for the rest of us. Take my case as an example. I gladly paid $100 every three months for Singulair because it greatly benefited my son and also eliminated the semi-annual middle-of-the-night pilgrimage to the emergency room. The $10-a-pill antibiotic saved us a minimum of $2,000 because it meant we could check out of the hospital two days early. The fact is that the drug companies cannot compel people to buy their products; they must make it worth while.

So how does all this relate to the the health care reform bill? Well, if the bill survives attempts to overturn or repeal it, it will dramatically reduce – perhaps curtail completely – the development of new drugs. This will not only harm Joe the Plumber but also Nancy Pelosi and Barney Frank, who both recently turned 70, and 66-year-old Chris Dodd. The Democrats may think they have eluded the effects of their legislation, but they will likely age less gracefully and be less active than they would have been without health care reform.

The video below discusses medical innovation in the US:

Cato on Medical Innovation

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