The global Pharma vs Government Battle

Lines are being drawn across the world and increasing pharma battles are displayed in our media. In Australia, much of the possible reform centers around the PBS regulations. While in the US, the debate is being carried far wider to include issues such as comparative effectiveness research and reforming the patent system. What will be the outcome? Is targeting pharma for cost reductions a good idea?

In this WSJ op-ed, Eli-Lilly boss John Lechleiter argues the benefits of pharma innovation. He cites the independant research saying pharmaceuticals have added 40% to our life expectancy in the last 20 years. He reminds us of the 800 new anti-cancer drugs currently in development – not to mention the countless other therapeutic areas. He sums up by saying that government involvement is more likely to create hurdles to better healthcare than to make it cost effective.

This argument has not been bought by everyone. It seems the US Democrats are preparing to counter the idea that treatment ‘choice’ will be limited. 

These discussions are important, for no person wants to stifle innovation. The recent increase in pharmaceutical company mergers may be seen as an indicator that pharma companies will engage in less innovation as product pipelines converge. These mergers are also a sign that not all companies are doing so well. And to me, this is where the real debate should lie – generating value for money in a profit making market.

In 2006-07, Australia spent 14% of it’s health budget on pharmaceuticals. This amounts to about 1% of our GDP. We are below average OECD spending on health and medicines. While spending on health and medicines is growing, so is demand for better treatments. The real question is: are we getting value for money?

Many would argue no. In the 2006 PBS reforms, the government implicitly stated that it believed pharmaceutical companies were making too much profit (read this press conference for some interesting comments by the then health minister Tony Abbot). In this recent interview with Bill Clinton, a famously failed health reformer, he compares pharma to America’s Wal-mart saying that for most of the 90’s and 00’s, pharma probably had an 18% profit margin, while Wal-mart has 5-6%.

It may well be that pharma profit margins are high. But how do we measure too high? Do we believe that if it was a truly free market, then profit margins would not be so high – rather, they would be in the 5-6% range seen in other industries? Perhaps. I think it is difficult to determine what profit margins should be when we are unable even to put a good number on the benefit pharmaceuticals give to our population. After all, won’t we pay more for things we value more? The other side of this profit margin discussion is that the pharmaceuticals market will never be a ‘free’ one while the current level of government regulation is in place. While dictating that only the cheapest generic be available to treat a certain condition across the entire country may save on short-term costs, it will also limit company interest in competing in that sector, thus reducing competition and further innovation.

Clinton was quick to say we shouldn’t bash the drug makers. They are doing us a good service, and we agreed to fund their work all along. But, he argues, we’ve got to limit the rise in costs. He suggests they target profit margins, and improve the link between the patent and research process (a century old system). There is also a big battle developing over plans for cost-effectiveness research in the USA.

Whatever happens, I believe it is essential that government, media and industry all educate themselves well on the complexity of the health industry and the various options we face. Many of the reform suggestions we hear today seem quite limited in scope – perhaps for political reasons. In the final analysis, we have to ask ourselves what we actually want to achieve from all these reforms. If we focus exclusively on clawing back money because we believe profits are too high, we could be committing a fundamental error of economic judgement – the consequences of which will not be obvious for some time.