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Missed opportunity: GOP tax bill could have lowered crazy-high drug prices

Missed opportunity: GOP tax bill could have lowered crazy-high drug prices
Republican lawmakers rejected a Democratic amendment that would have eliminated the drug industry’s deduction for direct-to-consumer marketing of prescription medicines. (Associated Press)

The Republican tax bill, to be signed into law by President Trump any day now, is a study in missed opportunities.

Conservative lawmakers said the bill would simplify tax returns. It doesn't. They said it wouldn't favor the wealthy. It will. They said it's the biggest tax cut in U.S. history. It isn't.

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Republicans say the tax bill will more than double the economic growth rate, create lots of new jobs and prompt businesses to give all employees raises.

No serious economist believes any of that, even if some PR-minded companies quickly announced one-time-only bonuses.

But here's one missed opportunity you probably didn't know about: The tax bill could have lowered prescription drug prices.

While the legislation was still being shaped largely in secret by GOP lawmakers, Democratic Sen. Claire McCaskill of Missouri crafted an amendment that would have eliminated the drug industry's deduction for direct-to-consumer marketing of prescription medicines.

Such advertising — now a staple of American TV — is widely seen by healthcare experts as a key component of rising drug prices and a waste of money that otherwise could go into research and development.

The American Medical Assn. has called for a ban on direct-to-consumer drug ads, saying the multibillion-dollar marketing campaigns significantly increase the cost of meds and boost "demand for new and more expensive drugs, even when these drugs may not be appropriate."

The United States is one of only two countries worldwide that allow direct-to-consumer advertising of prescription drugs. The other is New Zealand.

McCaskill's amendment was titled "Eliminate the advertising deduction for big PhARMA" and was intended to get rid of "the advertising cost deduction for pharmaceutical companies."

Needless to say, the amendment was treated as radioactive by Republicans and kept well away from their corporate-welfare legislation.

McCaskill was unavailable for comment. But a spokeswoman said the amendment was offered "as part of a constructive attitude toward trying to improve the bill." Like other Democratic proposals, the spokeswoman said, the changes "were rejected along party lines."

Deducting the cost of marketing isn't a special perk for drugmakers. Section 162 of the tax code outlines the various deductions all businesses can make — employee salaries, for example, and travel expenses. (Charmingly, the tax code actually has to spell out that illegal bribes and kickbacks are not tax deductible.)

Section 162 basically allows a deduction for "all the ordinary and necessary expenses" incurred by a business, including marketing, which companies can convincingly argue is a needed part of their interaction with customers and positioning in the marketplace.

The thing about direct-to-consumer drug ads is that they weren't an ordinary and necessary part of pharmaceutical companies' operations until 1997. That's when the Food and Drug Administration relaxed its guidelines for information that had to be imparted to consumers when pitching a prescription med.

In essence, federal officials allowed drug companies to skip all the fine print when advertising on TV, getting by instead with a hurried recitation of warnings and an admonishment to "ask your doctor."

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That opened the floodgates for a deluge of campaigns showing happy people whose lives have been vastly improved through high-priced, patented chemicals.

Annual spending on direct-to-consumer drug ads went from a few million dollars prior to the FDA's policy change to more than $1 billion within a year. Spending on drug ads is expected to top $6 billion this year.

In a recent report, the National Academy of Sciences said drug companies now "spend substantially more on marketing and administration than on research and development that could lead to new drugs."

It called on Congress to "disallow direct-to-consumer advertising of prescription drugs as a tax-deductible business expense" as a way to refocus manufacturers' priorities.

I reached out to the Pharmaceutical Research and Manufacturers of America, the drug industry's main lobbying group, to discuss the matter. They steered me instead to the Coalition for Healthcare Communication, a grouping of advertising and media companies that defends drugmakers' right to reach out to consumers.

John Kamp, the organization's executive director, said any attempt to remove the tax writeoff for direct-to-consumer drug ads would be an assault on free speech and the 1st Amendment.

He also insisted that drug ads "actually lower prices because they increase the size of the market and increase competition."

That, of course, is nonsense.

A recent study by the Blue Cross and Blue Shield Assn. found that even though generic drugs account for the vast majority of drug sales in the United States, the soaring cost of branded drugs represents 78% of total pharmaceutical spending by patients — the same proportion as in 2010.

Moreover, so-called single-source drugs — patent-protected drugs with no generic equivalent — are rising in cost by an average 25% a year, the study found. Typically, those are the drugs most heavily advertised to consumers.

Kamp acknowledged that prior to the FDA's 1997 decision, direct-to-consumer drug advertising "didn't happen very often."

Nevertheless, he said the practice is clearly an "ordinary and necessary" part of drug companies' operations and thus qualifies for the Section 162 tax deduction.

"There's nothing new about marketing drugs to consumers," Kamp said. "It just increased significantly in 1997."

Democratic lawmakers have long recognized the disingenuousness of that argument and have introduced various bills seeking to end the industry's tax benefit. The drug industry has lobbied aggressively to kill all such legislation.

McCaskill's amendment was the latest to die an untimely death.

But don't worry. While the Republican tax bill does nothing to address high drug prices, it does allow U.S. businesses to repatriate at reduced rates gobs of money stashed overseas.

One of the biggest beneficiaries of that provision: drug companies.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to david.lazarus@latimes.com.

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