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Home Publications Blogs Beat the Press Failed Medical Innovation: The Secret to the Lower Than Expected Cost of the Medicare Drug Plan

Failed Medical Innovation: The Secret to the Lower Than Expected Cost of the Medicare Drug Plan

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Friday, 20 May 2011 05:46

Michael Leavitt, the Secretary for Health and Human Services under President Bush, touted the Medicare Part D model in an oped in the Washington Post. Leavitt argued that this model, which provided a prescription drug benefit through private insurers, has been effective in providing a wide range of choices to beneficiaries and holding down costs. He notes that the cost of the program has been far lower than the Congressional Budget Office had projected.

While Leavitt is correct in pointing out that the drug benefit has cost much less than had been projected, it is important to note that drug prices in general have risen much less rapidly than was projected when the benefit was introduced in 2006. The obvious explanation for the lower than expected increase in drug prices is a much slower rate of innovation.

In the years since 2005, the Food and Drug Administration has been granting approvals for new drugs that it assigns priority reviews, meaning that they provide a qualitative improvement over existing drugs, at roughly half of the rate that it did in the 1990s. The number of priority approvals averaged just 10 between 2005-2009 compared to 19.9 in the 1990s.

 

new_drug_approvals_20533_image001

 

Source: FDA and Knowledge Ecology International.

 

These new drugs, which supposedly provide much greater medical benefits than existing drugs, are the major factor driving cost increases. Therefore, it is not surprising that a slowdown innovation would be associated with a slower rate of increase in the cost of drugs, including the cost of drugs provided through Medicare Part D.

According to the Center for Medicare and Medicaid Services, we are spending almost 4 times as much on prescription drugs today (adjusted for inflation) as we did in 1990. Given this increase in spending, it would be reasonable to expect the rate of drug development to increase.

Comments (5)Add Comment
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written by bmz, May 20, 2011 6:55
The cost should have been zero, however: simply making it illegal for drug companies to price discriminate against Americans.
marketing paradigm shift
written by frankenduf, May 20, 2011 7:50
wonder if the 5 year dip coincides with a shift in drug marketing- historically, when a drug patent ran out, the generic took over in the market- now, when the patent runs out, the drug is manipulated and repatented, eg via combination drugs (patenting the combination of 2 generics) or additives to modulate absorption (patenting a slower release form of a generic)- this type of patenting chicanery perhaps creates enough bang for the processing buck, as advertising artificially increases the irrational overpayment for these brand name manipulated drugs as compared to the generics- not as much money (cost) made as developing a new drug, but rather holding onto an attrition of exorbitant profits made when the new drugs were under patent
Drug Costs are Driven by Illegal Off-Label Uses
written by Paul, May 20, 2011 8:47
Big Pharma has figured out how to game the system: get a patented drug approved by FDA for a narrow, unprofitable use and then promote it to doctors, with financial incentives to them, for off-label uses that vastly increase profits. This practice is widespread in the industry with some drugs having 90% of prescriptions written off-label.

While highly criminal, Big Pharma routinely engages in off-label promotion and is seldom prosecuted.
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written by Fed Up, May 20, 2011 12:00
"While Leavitt is correct in pointing out that the drug benefit has cost much less than had been projected, it is important to note that drug prices in general have risen much less rapidly than was projected when the benefit was introduced in 2006. The obvious explanation for the lower than expected increase in drug prices is a much slower rate of innovation."

To be a little more precise, there have been fewer PATENTED blockbuster medicines approved. There has also been patented blockbuster medicines that have GONE GENERIC. Go check the price for brand name Zocor and its generic (simvastatin) for one example.

"These new drugs, which supposedly provide much greater medical benefits than existing drugs, are the major factor driving cost increases. Therefore, it is not surprising that a slowdown innovation would be associated with a slower rate of increase in the cost of drugs, including the cost of drugs provided through Medicare Part D."

So maybe it is not the salaries of most of the providers that is the problem, but the cost of other things?

Now the salaries of economists is a different story.
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written by pj, May 21, 2011 11:52
Yes, Medicare Part D has come in under budget. The current total unfunded liability is only.... 7.2 trillion dollars!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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