NAAG Casts Its Eyes on the Drug Industry

Published January 27, 2005

Earlier this week, the National Association of Attorneys General (NAAG) met in Chicago to discuss “the costs and benefits of prescription drugs.” Many of us who have watched NAAG over the years feared for the worst. Was NAAG planning to launch a new wave of litigation against the prescription drug industry?

Attorneys general have become adept at filing increasingly imaginative lawsuits against companies and whole industries in recent years. NAAG has facilitated this trend by helping AGs share the burden of preparing and pursuing cases by filing joint suits against companies. A visit to NAAG’s Web site at reveals packs of AGs in hot pursuit of an Internet porn company, a telemarketing company, the country’s largest wireless phone companies, a car financing company, and many other companies.

Some drug companies undoubtedly deserve to be sued at times, and at times by state AGs. No argument there. The problem is when AGs exceed their authority by using lawsuits and threats of the same to create public policy. Then the separation of powers doctrine and legal protections intended to shield individuals and businesses from government abuses of authority are put at grave risk. The harmful consequences can extend far beyond drug companies and their shareholders.

On the program at the NAAG meeting were some of the loudest critics of the prescription drug industry and of free enterprise in general. Their public policy agendas include imposing price controls on prescription drugs, restricting patent protection of new drugs, suing the drug industry for misleading advertising, and giving government control over the industry’s research and development efforts. Others on the program sought to restrict direct-to-consumer advertising and drug company marketing to physicians and penalize doctors who accept payment from the industry. Thankfully, though, several pro-market experts were also on the program.

The Heartland Institute arranged for several free-market thinkers to attend the conference and monitor the presentations. I also attended and was able to listen to nearly all the panelists, though I missed the keynote speakers. This is my report.

Pricing prescription drugs

At several points during the conference, Marcia Angell, author of The Truth About the Drug Companies, and Merrill Goozner, a former journalist who works for the liberal Center for Science in the Public Interest, alleged that drug prices in the U.S. are far higher than they are in other countries and higher than they need to be. They and other speakers also accused the industry of charging the uninsured their highest prices and violating laws that require drug companies to sell their products to government agencies at their lowest prices.

Speakers on the first panel of the program discussed drug pricing in great detail. Different federal and state programs impose different pricing requirements and those requirements frequently change, sometimes with new rules that apply retroactively and sometimes not. Meanwhile, drug companies are selling to hospitals, wholesalers, pharmacies, and direct to consumer at prices that vary widely and over time, sometimes leading to violations of the lowest-price rule.

What the presentations made clear was not that industry inflates or manipulates prices to circumvent the law, but that both the law and the marketplace for drugs are so complex that drug companies find it difficult to comply with the law and government officials often do not know until after the fact if they paid too high a price. The whole system seems ripe for reform, but no one explained how litigation would lead to that outcome.

Overlooked by most speakers was the fact that drug prices in the U.S. are not rising particularly fast –only about 3 percent last year, by most estimates–and less rapidly than spending on other aspects of health care. While brand-name drugs are more expensive in the U.S. than in other countries, generic drugs are usually much cheaper in the U.S. Since generic drugs account for approximately half of the pills sold in the U.S. (a much higher percentage than in other countries), a typical U.S. citizen spends about the same for her drugs as she would have to pay for the same combination of drugs in Europe.

John Calfee, a resident scholar at the American Enterprise Institute, pointed out that drug prices are expected to rise more slowly or even fall in the coming years as generic substitutes for five of the top ten selling drugs come onto the market. He also pointed out that estimates of price increases in the recent past are often exaggerated because they drop from the comparisons those drugs that have gone generic or over-the-counter.

The problem of overcharging the uninsured has been at least partly solved already. Depending on their income, the uninsured qualify for large discounts or even free drugs under discount plans such as Pfizer Pfriends and Together ? sponsored by drug companies. Through Pfizer Pfriends, for example, families earning $45,000 or less per year save an average of 37 percent off retail prices on Pfizer medicines. Other industry-sponsored programs, such as Pfizer’s Connection to Care™ and Sharing the Care®, provide free drugs to families earning $31,000 or less.

The new prescription drug benefit for seniors created by the Medicare Modernization Act will give millions of seniors access to prescription drug insurance. While the Act prohibits the government from negotiating directly with drug companies, it nevertheless authorizes prescription benefit managers to negotiate volume discounts on behalf of seniors.

Finally, the reason drug spending is rising is because we are using more drugs and newer drugs. Frank Lichtenberg, an economist at Columbia University Graduate School of Business, pointed out that this is a good thing, since a dollar spent on a new drug reduces hospitalization expenses by much more than a dollar. Comparing spending on drugs to spending on hospital care, then, can be paradoxical, because the more we spend on drugs, the less we should need to spend on hospitals.

“Me-too” drugs

The second panel focused on research and development. Angell and Goozner said repeatedly that investments in “me-too” drugs–drugs that are similar to or have effects similar to drugs already on the market–and “lifestyle” drugs such as Viagra and its competitors–are simply “wasted.” These drugs “add nothing to the arsenals of doctors,” Goozner said, and are pursued by drug companies at the expense of other, more important, drugs.

It is an astounding claim. It assumes these two advocates know better than thousands of research scientists conducting research on new and existing drugs, as well as thousands of medical doctors who choose prescription drugs for their patients, as well, finally, as millions of consumers talking to their doctors and pharmacists and experiencing the effects of the drugs they consume.

During a question and answer session, Michigan AG Michael Fox asked if, following Angell’s and Goozner’s logic, General Motors and DaimlerChrysler were guilt of “me too-ism” by producing cars that differ only marginally from those produced by Ford. His point was well taken. Gradual improvement of existing products is the rule, not the exception, in nearly all industries. Why should the drug industry be held to a different standard?

Calfee pointed out that many of the so-called me-too drugs are developed and tested in parallel with, rather than after, a market-leading drug. Who should decide whether and when to stop investing in a promising new drug because some other research team, working for a different company, might be pursuing a similar drug? With perfect hindsight the job might seem simple. In reality, it is anything but simple.

Calfee also pointed out that having multiple similar drugs is essential to producing the competition needed to lower prices, that research on these drugs produces valuable new insights into additional benefits and uses for drugs, and that the availability of close substitutes provides valuable protection for consumers should a market-leading drug be withdrawn from the market.

Lichtenberg observed that the drug industry is the most research-intensive industry in America “by a wide margin.” He reported that some 1,000 new drugs have been brought to market since 1950, that new drugs are adding three weeks a year to the life expectancy of people born in the U.S. (40 percent of the total increase in longevity from all factors), and that new drugs are cost-effective–they produce more benefit in terms of quality of life than they cost.

Excessive profits?

Angell asserted that “if [drug companies] spend more on marketing and have more left over as profits, they can hardly claim that high prices are necessary to cover their research and development.” But the ratio of spending on R&D to marketing or profits is meaningless.

There is no reason to assume that the cost of effectively marketing drugs should be more or less than either R&D or profits. Indeed, there probably isn’t an industry in the world that spends less on marketing than R&D. Most spend far more on marketing, and far less on R&D, than the drug industry. After all, what is the value (to investors or society) of inventing a product no one knows about?

If either Angell or Goozner, who also attacked drug company R&D spending, knows the correct ratio of R&D to marketing and profits, they aren’t telling. In fact, there is no secret formula. Markets are a process that leads to the discovery of the correct ratio for each business and industry, and that ratio varies over time in light of discoveries, opportunities, competition, and consumer demand. No regulator is so omniscient as to know what the ratio ought to be.

Lichtenberg reported on his research showing that investment in R&D is sensitive to changes in drug prices, so lowering prices through price controls–as Angell advocated–would mean fewer new drugs coming to market and consequently shorter lifespans and a lower quality of life for millions of people. Many other researchers have reached similar conclusions.

Several speakers–Angell and Arnold Relman, professor emeritus of medicine and social medicine at Harvard Medical School, in particular–often spoke disparagingly of “profit-making” in the health care industry, with Relman deploring the retention of “for-profit” companies to oversee clinical trials and Angell saying near the end of the conference that the “real problem” facing the industry was the decision to treat health care as a “commodity.”

David Hyman, a law professor at the University of Illinois at Champaign-Urbana, responded to this naive socialism head on, saying at one point, “I didn’t know we were holding a [religious] revival” and adding, “for-profit is not a dirty word.” Indeed. Profits keep not only the drug industry alive but also hospitals, clinics, publishers, and all the other related parts of what we recognize as modern health care.

Advertising and marketing

Considerable attention at the NAAG meeting was focused on direct-to-consumer (DTC) advertising of prescription drugs and marketing by drug companies to physicians. The critics claimed money spent on advertising is wasted because there is little or no educational content to such ads and consumers are too ill-informed to understand real data. Relman even floated the idea that prescription drug advertising ought to be banned, or at least banned from television.

Marketing to physicians was similarly attacked. Relman and Jerry Avorn, professor of medicine at Harvard Medical School, disparaged the ability of physicians to make informed choices. Relman said giving doctors free samples was “stepping back to the dark ages of medicine,” since it implied a trial-and-error methodology instead of the double blind clinical trials that are the “gold standard” of medical research. Medical doctors have “no scientific training,” said Relman, and cannot be trusted to enroll and supervise their patients in clinical trials. Both thought many doctors had become, unwittingly or otherwise, marketers of the latest and most expensive products of the drug companies.

Ed Slaughter, director of advertising and trends research for Rodale, Inc., and Dan Troy, former chief counsel for the FDA, ably defended DTC. Both commented on the paradox of self-proclaimed consumer advocates calling for giving consumers less, rather than more, information upon which to make decisions. No one forces a person to buy a prescription drug, said Troy. All advertising can make you do is ask your doctor about the drug.

Slaughter’s survey research showed that only 7 percent of adults report having asked their doctors for an advertised medicine (93 percent did not). Surprisingly, this figure has remained unchanged since 1997, “despite a nearly 300 percent increase in spending on DTC advertising.”

DTC is effective in reaching people who are unlikely to read medical journals or other sophisticated sources of information. According to Slaughter, the ads also serve as a source of information about prescription drugs taken by friends or family members, and about drugs people are already taking.

Calfee remarked that hospitals are not required to disclose in their advertising risks that are many times larger than the risks disclosed by drug companies in their ads. Relman acknowledged this and said he hoped hospitals could be coaxed to disclose more. Scott Lassman, assistant general counsel for PhRMA, also commented that drug ads are already much more strictly regulated than ads for other consumer products.

A practicing clinical endocrinologist, Richard Dolinar, was on hand to reject, with passion as well as common sense, the claim that doctors are easily manipulated by drug companies or should somehow be protected from the insidious temptation posed by free samples. He spoke of the tremendous hardship imposed on his patients by government regulations, how useful it is to get information from drug company representatives, and how insulted he felt by the implication that he and his colleagues are “on the take.”

The most compelling message from the panels on advertising and marketing came during the question and answer session at the end of the conference. Relman, who had been so critical of the ethics and training of doctors in earlier remarks, stressed that the solution to the problem rested entirely in the hands of the profession. “There is nothing policymakers can do about it,” he said. Doctors, he said, need to take greater responsibility for their journals, training, and enforcement of ethical standards on members who accept corporate dollars.

Learning from other countries

A panel on the second day of the NAAG conference compared European and Canadian regulatory structures to those in the U.S. Scott McKibbin, Illinois Gov. Rod Blagojevich’s advocate for drug importation, clearly thought U.S. consumers would benefit by following the lead of other countries, saying “we cannot continue to pay for all the research and pay the highest prices,” and “America consumes 8 percent of the world’s drugs but accounts for 55 percent of the drug industry’s profits.”

But McKibbin’s presentation, like those of the other speakers on his panel, did not suggest the superiority of foreign regulations and indeed suggested the opposite. Michael Doodson, former vice president of Merck, showed how investment in drug R&D had migrated over time to the U.S., how other countries were not doing any better than the U.S. at controlling the rate of increase in drug prices, and how their regulations were causing serious delays in the marketing of new drugs.

Andreas Laupacis, president of the Institute for Clinical Evaluative Sciences in Toronto, Canada, probably surprised many listeners when he reported that “health care quality in the U.S. is definitely better” than in Canada, and that Canada has done a poorer job than the U.S. controlling drug prices in recent years. U.S. drug companies, he said, do a “fantastic job educating consumers and prescribing physicians.” Canada’s drug price controls, he said, mean “we are losing out in Canada on a lot of highly paid jobs.”

During a question and answer period, Angell claimed that drug companies are attracted to the U.S. to “feed off” original research funded by the National Institutes of Health (NIH), not because of lighter regulation here. But Doodson disagreed, saying original research is only the beginning of a long and expensive process of discovery, testing, and marketing. Regulations affecting those later steps have a major impact on where drug companies can be most successful.

Malpractice reform

During the final panel of the conference, addressing “hot topics,” panelists responded to a series of prepared questions. One addressed the importance of malpractice reform to the health care industry. Hyman gave a succinct overview of key numbers in the debate: only 1 in 50 injured patients sue; most lawsuits are dropped before going to trial; doctors win 70 to 80 percent of cases; but when doctors lose, they lose big. Doctors probably over-estimate their legal exposure, which makes them engage in defensive medicine. Hyman concluded by saying juries are good at determining matters of fact but not at judging costs or awards since they have little experience with similar cases. Consequently, awards in similar cases can be wildly different.

Relman made a sweeping denial that defensive medicine is a problem and claimed that estimates of the cost of the problem were contrived and inaccurate. But Lichtenberg quickly contradicted him, pointing to a highly regarded 1996 study by Daniel Kessler and Mark McClellan, which estimated the effects of state malpractice liability reforms using data on Medicare beneficiaries treated for heart disease in 1984, 1987, and 1990. They found malpractice reforms reduced medical expenditures by 5 to 9 percent without negative effects on patient care or mortality.

Calfee expressed what seemed to be a consensus that fixing malpractice would help but not solve the problem of rising spending in health care.

What will the AGs do?

Contrary to my initial concerns, the panel discussions at NAAG’s meeting on prescription drugs were well balanced. One could not deduce from this conference that NAAG is planning new litigation against the prescription drug industry.

It is true that the line-up of speakers included a Who’s Who of anti-industry extremists, and those folks were shrill as usual. But the program also provided top-notch speakers from the other side who did an excellent job making sure important facts and opinions were heard.

Judging by the applause, most AGs and their staff seemed more sympathetic to the anti-industry spokespersons, who often sounded like the populists and journalists they are, than to the free-market experts, who spoke more like the lawyers and economists they are. Neither side held back, though, and a robust debate took place among the speakers.

The closest to an action item I heard was the suggestion by Sid Wolfe, director of the liberal Public Citizen Health Research Group, that AGs use the FDA’s web site, which apparently reports when drug ads are deemed misleading and ordered off the air, as the trigger for launching lawsuits against the offending companies, alleging harm to consumers in each state. FDA apparently does not penalize companies; AGs can. Vioxx litigation was mentioned several times, with the implication that AGs ought to get in on the litigation before private trial lawyers take all the spoils, but no one made a strong case for doing so.

Nothing else I heard strongly encouraged litigation. While Angell, Goozner, and Avorn seemed to want AGs to sue the industry to lower prices, stop producing me-too drugs, and penalize companies for running misleading ads and suppressing negative research, there was no detailed roadmap or explanation of the legal background that might justify such litigation. Documentation of the alleged crimes was also thin, given that these anti-industry experts knew this was their chance to convince a most important audience. Either they don’t have the data or they withheld it.

Joseph L. Bast is president of The Heartland Institute, coauthor of two books on health care reform, and publisher of Health Care News. He can be contacted at [email protected].