A Miracle Drug for Some but a Tax Drain for All
The growing presence of the government in financing America’s health care has created a new first--a pharmaceutical company with the federal government as virtually its only customer. This means there is no competitive market to help set a fair price.
The company is Amgen Inc., a small California biotech concern that didn’t even exist before 1980. Its first and, so far, only commercial drug, EPO, eliminates anemia (lack of red blood cells) in dialysis patients whose kidneys have stopped functioning. That makes it a miracle drug for almost all of the 125,000 severely anemic dialysis patients who are in a form of limbo--permanently ill but thankful to be alive. With EPO, these people can now lead nearly normal, upbeat lives.
In return for the gift of well-being, Amgen has extracted a heavy price: EPO sells for a staggering $1.3 million a gram. From Amgen’s perspective, this is better than pure gold, which sells for a mere $12.30 a gram.
It also means hundreds of millions--possibly billions--in potential profits for Amgen Inc.--all financed by the taxpayers through Medicare, which picks up the tab for 93% of dialysis patients.
Alarmed by the price, my office looked into the matter and obtained evidence presented in a court case concerning a dispute between Amgen and the company it had licensed to sell EPO in Europe. It seems that Amgen’s partner estimated the cost of producing the drug (excluding research and development) was only $45,000 per gram--less than 3% of Amgen’s selling price.
EPO’s cost to Medicare is projected in the hundreds of millions of dollars a year and growing. I called on Medicare to bargain hard with the company before beginning its purchases this month. After all, the drug industry is one of the most profitable in America. Medicare simply cannot afford to pay non-competitive, extortionist prices just because a manufacturer says, “Here it is, take it or leave it.”
What did Medicare do? In bureaucratic fashion, it sidestepped the opportunity to develop a procedure for fair pricing of drugs. Instead, Medicare announced it would pay private dialysis centers a lump sum covering labor, drug and overhead. The centers are left to bargain (if they can) with Amgen, which clearly has the stronger bargaining position.
This leaves the underlying question: Is Amgen’s monopoly price a fair price? Medicare tells my office that it was frustrated because Amgen would not provide detailed research-and-development costs of EPO to justify the king’s ransom that Medicare is paying. Medicare also says that it has no legal power to compel Amgen to provide this data.
What to do? Drug companies seem to price their products for a very quick recovery of the costs of development, including “dry holes” or unsuccessful research projects, on the grounds that a competitor may soon develop a similar or better drug, bringing the price down rapidly.
I would argue that the price seldom comes down. But if that is the industry’s concern, how about negotiating long-term contracts with the developers of new drugs? These contracts would guarantee the company a steady cash flow and a good rate of return in exchange for much lower prices to Medicare.
Medicare must also be given access to the true costs of drug development before negotiating a blank check.
The need for new approaches is urgent, because EPO is likely to be just the first in a line of genetically engineered drugs that treat diseases unique to the Medicare population for which the government will be the buyer. With health care taking an ever larger bite of the gross national product, taxpayers need to be more certain than ever that they are getting a fair deal.
