A very interesting, if politically skewed, column claiming that the Veteran's Administration's ability to negotiate drug prices amounts to "drug price-fixing" appears in the January 21 issue of the LATimes.

The column is authored by an economist working for an institute which receives funding from the pharmaceutical research and manufacturers ass'n (PHRMA) and is somewhat breathtaking in its claims. For example, the author, Benjamin Zycher, senior fellow in economics at the Pacific Research Institute, states that the drug companies are forced to participate in the "price fixing" scheme required by the VA, for if they do not, they would be excluded from "a market accounting for roughly 10% to 15% of their sales."

News flash to Mr. Zycher - for-profit companies do this all the time - if a potential customer can't afford a Mercedes, Mercedes does not have to sell to them. Many companies would be delighted to have their products priced such that they are affordable for 85% of the total potential market.

Next, Mr. Zycher states

"Despite many casual assertions about "huge profits," the truth is that pharmaceutical companies face enormous research-and-development costs — about $800 million per drug — as well as increasing regulatory burdens, a growing squeeze on patent protections, a 15-year period of development uncertainty and huge potential litigation risks."

Well, other companies would learn to be much more efficient about their R&D, perhaps not paying for junkets to Vail for physicians under the guise of "expert boards". I hyperbolize to make a point - because pharmas can charge whatever they want, there is little in the way of economic restraint on their expenditures.

Moreover, and perhaps more-importantly, unlike other business or consumer products, the "buyer" is not the payer, and in many cases is not the user either. For an economist to talk about drug pricing or price fixing in a market with an almost complete lack of supply-and-demand is pointless. Basic economic principles simply do not apply to the drug industry.

If they did, drugs would not cost $800 million to develop.

Finally, part of the column reads:

"Under the 1992 Veterans Health Care Act, two price constraints are imposed upon pharmaceutical manufacturers in dealing with the VA: There is a minimum 24% discount off the "non-federal average manufacturer price." And there also is the Federal Supply Schedule, or FSS, requirement that the pharmaceutical producers sell drugs to the VA at the "best price" offered to private-sector buyers.

The VA is entitled under the law to receive either the minimum 24% discounted price or the "best price," whichever is lower." (I suggest you read the whole column if concerned about taking this out of context)

The column goes on to decry the negotiations done by other countries for the best possible drug prices, negotiations that result in significant savings on brand name drugs only. Generics are actually much more expensive in many other countries than in the US.

Well, what would Mr. Zycher have these other countries do? Simply pay whatever is charged? No, he wants the US government to somehow "end the free ride that foreign pharmaceutical consumers — particularly in wealthy economies like those of Canada and Europe — now receive."

How? These are multi-national companies. Are we to regulate pricing in other countries? How would we enforce that ? Does this not go against free trade? Would this not amount to eliminating the ability of a soveriegn nation to conduct its public policy? How would that sit with their citizens?

No, Mr. Zycher. Your finger-pointing is a smokescreen, easily blown aside by the lightest of zephyrs. Pharmaceuticals are a very heavily subsidized industry, with regulations designed to protect them from future lawsuits, operating in a non-economic market (if such is possible). It is indeed commendable that the VA, which is funded by taxpayers, is negotiating for a better price. Next, the insurance industry will no longer be willing, or able, to pay "llist price".

Finally, I do agree that the Euros et al do need to assist in paying for drug development, and to a greater extent than they are today. I would also argue that the cost for drug development would be much lower if pharmas would get a lot more efficient about their expenditures.