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Concern about the retail price of prescription medicine today dominates the headlines and drives major regulation by all three branches of government at all levels. Federal drug pricing proposals by candidates in Campaign 2000 are now central in the national political debate as we approach the November elections. Both George W. Bush and Albert Gore recently announced their proposals. The issue has international implications, as advocates for domestic U.S. price ceilings argue that, because of our free market economy, American consumers are indirectly financing lower prices in Europe, Canada and Mexico, given the availability of our pharmaceutical products abroad and pervasive government price controls in those countries. We have to monitor these developments carefully. They challenge one of our most important business sectors: the New Jersey pharmaceutical industry. A total of 18 states introduced laws last year intended to force down the price of prescription drugs; as of this month, that number hit 22. In May 2000, the state of Maine enacted legislation imposing actual price controls; other states are close to enacting such proposals, most prominently, New York, Nevada and Illinois. This may only be the tip of the iceberg, according to Richard Cauchi, the senior policy specialist on health issues for the National Conference of State Legislatures. Most states are considering proposals, some more Draconian than others. A few have adjusted eligibility for Medicaid, with its prescription drug benefit, to cover additional people. For example, in 1999, California enacted SB 393, which requires pharmacies that serve Medicaid beneficiaries to provide a similar discount price to Medicare beneficiaries. The Massachusetts fiscal year 2000 budget includes authorization for a state bulk purchasing program for pharmaceuticals for an eligible population estimated at up to $16 million. A Minnesota law, signed on March 31, 2000, regulates and restricts pharmacy discount card plans. Even the less market-intrusive of these proposals are questionable, given their random mix of indirect, cost-restrictive effects on retail prices. Generally, these bills seek to use the current “lowest available price” or Medicaid-style rebates or discount rates as a ceiling for a retail price, instead of providing a direct state-funded subsidy. New Jersey already has proposals in the pipeline. The issue has also been joined in the least appropriate forum for setting the early stage of health-care/economic policy: the courts. A number of class-action lawsuits by retail pharmacies and individuals alleging a price-fixing conspiracy by pharmaceutical manufacturers have been filed. These litigations represent transparent, backdoor restraints on pharmaceutical prices; their randomness and diversity directly conflict with the emphasis on consistency and predictability so vibrant in contemporary tort reform jurisprudence and so reassuring to the business community. Finally, the Maine act, which became effective on Aug. 12, has been challenged on constitutional grounds that the price control statute is violative of interstate commerce. The other shoe has dropped in the doorway of interminable litigation. At a superficial level, the issue requires us to reconcile higher drug prices, improved industry profits and the needs of our most vulnerable population, the elderly. But the problem really turns on the inadequacies of a failing government program, Medicare. Even more prominent in this controversy is the importance of preserving the vitality of that feature of our economy that has made the entire question possible — research and development in a pharmaceutical industry that produces miracles every day all over the world. What has emerged as a solution, although in some cases indirectly, is a failed economic tool, price controls, an approach with a proven track record of failure in America. THE PHARMACEUTICAL INDUSTRY Consider the recent address offered by Vice President Albert Gore at the Democratic Convention. After pledging that “I will fight for you,” Gore recited a litany of presumed enemies of the average American citizen against which the war must be waged, including “big tobacco, big oil, big polluters, big pharmaceutical companies …” Pharmaceutical companies? Has the debate now become so distorted that the extraordinary contributions of pharmaceutical companies are deemed morally equivalent to the deleterious effects of tobacconists and even polluters in society? The pharmaceutical industry is today a victim of its own extraordinary success in bringing sophisticated, life-saving medicines to the public. Almost half the important new medicines in the world have been discovered or developed by the U.S. pharmaceutical industry. American industry stands above that of other countries in its production of superior goods and services, but pharmaceuticals truly represent its premier contribution to the world. In the 35 years since the creation of Medicare during the Johnson administration, prescription medicines, once a minor segment of the commercial drug market, have assumed a predominant share, particularly for the elderly. While such medicines were once used primarily in medical crises to treat pain and fight infection, they are now frequently applied daily to maintain the lives of millions of Americans. Enhancement of the quality of life for Americans as well as its improved longevity are in large measure attributable to the development of innovative prescription medicines. Statistics published by the Pharmaceutical Manufacturers Association, a research group with a primary commitment to pharmaceutical research, are telling. In 1900, the average life expectancy was 42 years for Americans. Today, the average child born can expect to live almost twice as long, until age 80. In fact, every five years since 1965, roughly one year has been added to average life expectancy at birth. By the year 2005, nearly 30 percent of the U.S. population will be 50 years or older. Today, the fastest-growing age group in America consists of seniors over age 85. The National Center for Health Statistics announced on Oct. 5, 1999 that HIV/AIDS mortality has declined more than 70 percent since 1995 and that AIDS cases are no longer among the top 15 causes of death, a fall from eighth place in 1986. Since 1965, drugs have helped cut emphysema deaths by 57 percent and ulcer deaths by 25 percent. Indeed, prescription medicines have improved health outcomes, reduced total health-care costs and had the broader effect of keeping people out of hospitals, emergency rooms and nursing homes and on the job. Employers have better workers and improved productivity and avoid additional, expensive health services. It is almost impossible to estimate the overall positive effect of prescription medicines on the American economy. Our pharmaceutical companies spend more than $20 billion annually on research and development, a figure that has doubled every five years since 1970. Through a recent wave of mergers and acquisitions, our prescription drug industry is now global in presence and impact. But it is beyond question that international companies do most of their basic research in the United States. America is the world leader in pharmaceutical research and development. Pharmaceuticals are the predominant answer to our society’s health problems, despite being shackled by an outmoded distribution system and support program. While the Medicare program, as originally conceived, covered certain hospitals and inpatient services, it has never included an outpatient drug benefit, an enormous deficiency at a time when outpatient treatment for our homebound seniors and hospice services have become crucial alternatives for eldercare. Thus, the roots of the present riddle of prescription drug pricing lie in the problems of the governmental program that sponsors coverage of Medicare. The current program is based on a 1960s-style, “one-size-fits-all” model that already relies on centralized price controls and Byzantine regulations. The result is a program that is confusing for patients and providers to understand, difficult to administer, outmoded, and completely inadequate to meet the health-care needs of the new millennium. According to the National Academy of Social Insurance, while about two-thirds of the Medicare population has some form of prescription drug benefit, the remaining one-third or so has no outpatient drug coverage, presumably because they are unwilling or unable to purchase insurance or pay cash for medicines. Clearly, the immediate answer is to modernize Medicare so that the elderly and the disabled have a financially sound and pragmatically solid program. More to the point, solutions should dovetail with existing trends in the health-care industry, including participation by the elderly in the development of managed care programs and related access to benefits available under those programs. Indeed, a range of factors must be considered in proposed public reforms. Should broader Medicare coverage include our large number of wealthy seniors? Should not new formulas involve consideration of the great number of drug companies offering free medicines to indigent patients with proper physician authorization? Should we not attempt to simplify the maze of premiums, deductibles and co-payments presented by Medicare? Don’t the diverse needs of Medicare patients require more choices, options and flexibility in the program? Yet, the unlikely, simple-minded target of government regulation has been medicine pricing within the industry itself. The debate over pharmaceutical prices has already hurt our research institutions. For example, the National Institutes of Health are now in the crossfire. The medical agency is under political pressure to cap or recover profits on drugs whose development was based on publicly funded research. Recently, intensive lobbying by the pharmaceutical industry helped to defeat two amendments to the Senate finding bill for the NIH. These would have forced radical changes in the rules for the transfer of technology from universities to corporations resulting from publicly funded research. Under the current system — implemented through the landmark Bayh-Dole Act, a truly bipartisan piece of legislation — companies already pay licensing fees to the institution that patented an innovative product. But neither the companies nor the universities have had to pay the government anything. The Bayh-Dole Act was intended to allow corporations the freedom to patent and profit from publicly supported university research without entering into complex legal agreements with the government. The incentives created under this act are credited by economists as the key to the success of U.S. biotechnology, the engine of future pharmaceutical development, which has grown much faster than its counterparts abroad. STATE LEGISLATION Recent legislative proposals in New Jersey should trigger concern, but Maine is where the action is. The Maine act, a “compromise” bill, will reduce the prices of prescription medicines by 15 percent for state residents who are not covered by private insurance or Medicare. The move would arbitrarily reduce prescription drug prices in the state to the levels paid under Medicaid and the Veterans Administration. Maine proved to be a predictably ripe venue for such price restrictions, given its proximity to Canada and the temptation for its residents to cross the border and purchase medicines in a country heavy with price controls. But the issue does not turn on geographical proximity; foreign countries now aggressively market their pharmaceutical products within our shores and offer them by mail order. Sometimes these are the same products available within our borders at higher prices. The constitutional infirmities of the Maine act open the door to extensive, wasteful litigation that may duplicate itself across the country as other states, following Maine’s example, pursue equally dubious legislative strategies. As a policy answer, the Maine act sets a terrible precedent. First of all, existing federal Medicare legislation on the scope, limits, process and standards for benefits at least impliedly occupies the field with respect to several provisions of the Maine Act, making certain provisions potentially vulnerable to pre-emption challenges. Of more practical import, access to health care is a national problem that requires a federal solution, not a hodgepodge response that varies from state to state. Second, the Maine act suffers from pervasive ambiguity, entirely entrusting to state government bureaucrats important decisions as to price standards. It is hard not to believe that pressure will exist for Maine to act in concert with price ceilings imposed across its borders in Canada. Many Medicare enrollees are aged, blind and disabled. They have unique and disparate needs for prescription drugs. They will be at the mercy of bureaucrats in Maine, who will make unilateral decisions largely on the basis of cost and Canadian prices. In that respect, the Maine legislation is again constitutionally vulnerable — as arbitrary and capricious. The Maine law is also overbroad — it would impose controls not only on major drug manufacturers but on the very vulnerable corner druggist. Of no less concern is the probable effect on industry in Maine. For business, the message of the Maine act is that the state is an unpredictable place to invest. It suggests that innovation not be rewarded in a way commensurate with its risk. Maine’s citizens, no doubt, will feel the effects of declining investment at precisely the wrong time — as the baby boomer generation retires and faces increasing need for these products. And then there are the other even more direct risks to American citizens. Without careful monitoring, the import of foreign drugs may undermine the ability of the Food and Drug Administration to protect patients from substandard, poorly manufactured or risky drugs from abroad. No one considers the deleterious effect of historical price controls in foreign countries on the development of quality drugs in these countries. No one can confirm that such pharmaceuticals are not counterfeit or not equal to U.S. dosages. While the U.S. government should never supersede the market in the determination of retail prices, its role in ensuring safe medicines for Americans is another matter. The Maine act will hurt that state’s economy, hurt its patients and impair its vital pharmaceutical industry. NEW JERSEY The safety net that New Jersey provides to its Medicare population is the Pharmaceutical Assistance to the Aged and Disabled program. Funded principally through the Casino Revenue Fund, the PAAD offsets and absorbs drug cost increases, but price trends raise doubts about its capacity to continue in its role as a buffer. Despite a steady decline over the past five years in the number of PAAD recipients (down 15 percent since fiscal year 1995), program costs have actually soared 46 percent during the same period. The cost increase has principally been driven by a 38 percent cumulative increase in the number of prescriptions filled. A dramatic increase in the use of new drugs that test high blood pressure, heart disease and cholesterol explains the paradox of more prescriptions for fewer recipients. New Jersey also stands apart in the number of its citizens eligible for benefits. New Jersey counts more than 200,000 people receiving benefits, while 30,000 Michigan residents qualify for that state’s pharmacy assistance program. Such programs are funded strictly with state dollars, and often require some degree of cost-sharing from the participant. As the state with the reputation as the nation’s medicine chest, New Jersey can take pride in its national eminence as corporate home to some of the world’s largest and most successful pharmaceutical companies. But even beyond its visibility in producing cost-effective and medicinally superior drugs that save lives, New Jersey, buoyed by a $10.3 billion pharmaceutical economy that employs 55,000 workers, risks much in this controversy, unless our political leadership seeks careful, deliberative solutions — with industry at the table — for closure in what promises to be an intense public policy debate. In the words of the Oxford philosopher, George Santayana, those who cannot remember the past are condemned to repeat it. During the early 1970s, the American economy was virtually brought to its knees by an economic policy adopted by the Nixon administration that most contemporary economists had hoped today was a memory safely in the past: price controls. Yet, today, in response to the growing debate over prescription drug prices, that same mistaken policy has returned to haunt us. This bad policy outcome can only create disincentives for innovation and research, limits in the supply of medical services, higher costs for consumers, a decline in the availability of badly needed prescription medicine for all of us and potential economic reversals for a state so uniquely dependent on the health of its pharmaceutical industry. Frederick T. Smith is a partner in the product liability group of the Newark office of McCarter & English. Jay Greenstone, an associate with the firm, provided helpful research.

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