Big Pharma following and its secret plan

by Timothy D. Terrell
Mises.Org
Analysis

In this article by economist Jeffrey Sachs, pharmaceutical company Gilead is taken to task for selling its hepatitis C cure, Sofosbuvir (sold as Sovaldi), at a price of $84,000 per course of treatment.
Sachs says that the actual production cost of Sofosbuvir is about $100.
Sachs says that Gilead is “bilking the taxpayer” by charging the government prices far above production costs — and government is probably paying for most of the Sofosbuvir drugs. Sachs further complains that people will die because of Gilead’s refusal to cut the price to something more affordable.
Gilead, Sachs says, bought the patent rights to Sofosbuvir for $11 billion in 2011, and took the drug through the last stages of FDA approval, which came at the end of 2013. Gilead made $12.4 billion in 2014 from Sofosbuvir, and Sachs says that first quarter sales of the drug brought in revenues of $4.6 billion.
Sachs quite rightly points out that patents are relevant to the issue. But he says that patents are “an important tool to incentivize R&D” which have been “abused” by Gilead, and argues that “life and death” patent holders should be subject to price controls by the federal government. He goes on to say that patients who are “denied access” (i.e., can’t afford the drug) should sue Gilead for reckless endangerment. And finally, Sachs suggests “public outrage and activism.”
In an August 6 tweet replying to me and to a physician who had briefly engaged him on this issue, Sachs said, “No way to regard the current arrangements even crudely efficient or equitable. Killing people senselessly.”
Sachs is being somewhat disingenuous in representing the production cost of Sofosbuvir as $100, and the markup as 800 times costs (as he did in an August 7 tweet). There are substantial fixed costs involved in R&D, trials and FDA approval, and the like. Any company incurring those costs expects to recover them by charging an above-marginal cost, and if trade secrets or other features of the market allow them to do so, they will. Sachs’s markup complaint applied elsewhere doesn’t make sense — authors of mass market paperback novels (and maybe Sachs himself, the author of several popular books) would also have to be regarded as terrible price gougers because the marginal cost of printing a paperback book is a few cents, while the retail price is $6 to $10. Of course, writing the manuscript is an extremely costly part of the production process. Once that is done, reproduction can be relatively cheap. This is true of a great number of goods and services for which there is a high up-front cost.
Problems with Patents
There are clearly some problems stemming from the intellectual property rules here. The government will prosecute any firm that competes with Gilead in the production of the particular chemical formula Gilead has acquired. Sachs is right, then, that IP is relevant here. But rather than see IP as part of the problem, he defends patents as basically beneficial and proposes using them as a way for a government to beat a company’s prices down. In contrast to the widespread notion of most of the public and most policy commentators, it is not at all clear that patents are essential to drug innovation. Even where new drugs could be reverse-engineered and copied, innovation could still be rewarded in a world without patent laws. See, for example, this article by Nathan Nicolaisen.

First-mover advantages may be important, as could the inevitable delays in ramping up generic drug production. Nicolaisen mentions a survey of R&D labs and company managers that indicated that they believed trade secrets to be more effective than patents in getting a return on an investment. For a more extensive treatment of a free-market view of IP, see Jacob Huebert’s article here, and for an application to a similar issue involving a life-saving drug, see this article by Stephan Kinsella.
The FDA’s Role in Denying Access to Health Care
Sachs — at least in this article — ignores the role of the FDA in causing death and suffering by keeping drugs off the market. When Gilead bought the patent to Sofosbuvir, it was running the risk that the drug would not be approved, or that approval would be delayed so long that the opportunity cost of its initial $11 billion investment would become quite large. Uncertain but potentially large profits after approval may be quite reasonable, given the risk Gilead took on. The FDA itself injects a politicized uncertainty into the drug research, production, and marketing process, and therefore drives up costs.
These costs can appear as death and suffering as well as dollars. The American public tends to think of the FDA as a protector against dangerous side effects, as we saw with Thalidomide decades ago. But how many Americans have died because of lags in approval? A five-year delay in bringing the antibiotic Septra to the US market may have cost 80,000 lives. A lag in the approval of beta blockers may have cost 250,000 lives.1 The FDA’s ban on advertising aspirin as an effective preventer of first heart attacks may have caused the deaths of tens of thousands of Americans every year. But because it’s easy to identify those harmed by side effects, and difficult to identify who might have been saved by earlier introduction of Septra to the marketplace, the FDA tends to be over-conservative in its regulatory process.
Some Regulation Begets More Regulation
But one of the most interesting features of Sachs’s diatribe against Gilead is how well it tracks with Ludwig von Mises’s explanation of the natural progression of socialism. In “Middle of the Road Policy Leads to Socialism,” Mises points out that a government facing milk shortages from its price controls on milk may add to its initial intervention a second intervention controlling the prices of the factors of production used in milk production, and then — if the government still refuses to acknowledge the fundamental problems of intervention —a third intervention controlling the prices of still other resources. The price system shrinks and is gradually replaced with central planning.
Sachs sees problems with the prices of Gilead’s new drug. And I do too — I don’t think for a minute that the free-market price of Sofosbuvir would be $84,000 per course. But rather than attack the State’s patent laws directly, as well as the costly FDA regulatory process and other interventions, Sachs wants price controls on life-saving drugs. This is a well-traveled path toward socialism, and it does not end well.

by Richard Pollock
Daily Caller

All Americans who bought health insurance policies this year – not just those enrolled in Obamacare – face a 41 percent increase in excise taxes because of hidden fees contained in an obscure section of the Affordable Care Act, according to an investigation by The Daily Caller News Foundation.
Virtually everyone who pays for health care insurance this year will be affected by the tax. The little-known tax was imposed on all consumers regardless of whether they obtained their insurance through Obamacare or through their employer or as individuals in the private market.
This year the tax will cost individuals more than $500 in extra premiums according to one actuarial estimate. Families who purchased insurance will see their premiums go up by more than $700.
The new tax also hits senior citizens who rely on Medicare Part D and Medicare Advantage. It will land on the nation’s poor who depend upon Medicaid-managed care programs.
The 41 percent sticker shock increase doesn’t stop in 2015, however. Over the next four years, the statutorily mandated Obamacare fees are expected to double again.
Over the next decade, consumers will pay more than $145 billion for the tax, according to the Congressional Budget Office. The levy will continue to go up each and every year into the future.
The tax was buried by congressional authors in section 9010 of the law and was envisioned as a way to raise future funds to pay for Obamacare.
The Obamacare fees were designed by the program’s authors to be delayed, kicking in only in 2014 at $8 billion and mushrooming into a $14.3 billion annual price tag on insurance policies by 2018.
Republican Sen. John Barrasso, who favors repeal of section 9010, said the tax “is another example of how the president’s health care law was designed so the most painful parts of the law kick in years later.”
CBO reported the fee was a “statutorily fixed” amount that must be collected each year from consumers, as opposed to a percentage rate.
The statute describes the levy is an “annual fee” but health-care economists say it has been commonly referred to as an excise tax.
The Joint Committee on Taxation said the Obamacare tax was “similar to an excise tax based on the sales price of health insurance contracts.”
The panel predicted the fee on insurance policies would be borne by consumers. The panel also told then-Sen. Jon Kyl in a June 2011 letter that, “an excise tax generally is borne by consumers in the form of higher prices.”
An actuarial review of the Section 9010 by the management firm Oliver Wyman for the health insurance industry predicted that individual policyholders will pay $514 more this year due to the Obamacare tax.
Those who use small group policies will see a rise of $688, while family coverage would rise by $719, the firm stated.
Ironically, the elderly and the poor — those who were supposed to benefit most from Obamacare — will be adversely affected by the new tax, as will financially hard-pressed state governments.
Section 9010 mandates that taxes must be paid for seniors who rely on Medicare Advantage and Medicare Part D.
Oliver Wyman estimated Medicare Advantage would cost seniors $360 more this year. Medicaid managed-care enrollees will be expected to face increases of $152, according to the firm.
Milliman, the national health actuarial firm, reported in 2014 that states will lose 52 cents for every dollar they receive from Medicaid because of the fee.
“The result is a transfer of $0.52 from state government to the federal government for every $1.00 of ACA health insurer fee,” the accounting firm said.
Milliman further said the Obamacare tax will cost states 1.8 percent to 2.8 percent more for Medicaid managed care, which is a low-cost way to offer medical services to the poor. Half of the nation’s Medicaid recipients are signed up by the states under Medicaid managed care, according to Milliman.
This fee, while seemingly low, can put many Medicare-managed care companies at great financial risk or perhaps out of business.
“Given Medicaid managed care profit margins were less than 2 percent in CY 2012, increases of this magnitude are meaningful,” Milliman said.
The actuarial firm estimated the Obamacare tax will cause the states that use Medicaid-managed care losses of up to $13.9 billion.
For years the health insurance industry has battled but failed to persuade Congress or the president to repeal the tax.
Earlier this year, Republican Sen. Orrin Hatch and Barrasso introduced legislation to repeal the excise tax. It has 38 Republican co-sponsors. No Democrats have backed the bill to date.
Hatch described the tax as “yet another hidden health care tax arbitrarily created to pay for Obamacare.”
Republican Rep. Charles W. Boustany introduced legislation in the House to repeal Section 9010. He has claimed bipartisan support among the 218 co-sponsors, a majority of the House.
The only group exempted from the tax are people who work in large corporations that “self-insure” their  workforce. In a self-insurance system, no insurance company is used, only the company assets.
USA Families, a non-profit group that vigorously supports Obamacare, did not respond to a TheDCNF request for comment on the tax.
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