David R. Henderson  

AARP on Drug Prices

More Ginis please... Reasoning from a price change ...

A few years ago I finally succumbed and became a member of the AARP. My reason is that it gave me a substantial discount on my eye glasses, a discount that more than paid for the annual fee. As a result I get the AARP Bulletin and occasionally read it.

In the May issue, the cover story was on drug prices and costs. Regular readers of this blog won't be surprised to know that there was little in it with which I agreed. The "investigate report" doesn't even mention the role of the Food and Drug Administration in withholding drugs from the marketplace.

I won't bother going into all the areas in which I disagreed with the story. But, because I'm a glass half full person, I'll mention two points on which I agree. They are these:

1. The report makes this statement: "Medicare and Medicaid, by contrast, are required to cover almost all drugs approved by the FDA, regardless of whether a cheaper, equally effective drug is available." This is true--and unfortunate. My view is that Medicare and Medicaid should be allowed to say no to particular drugs. It is this current requirement that gives the drug companies tremendous power to charge high prices to Medicare.

2. The report recommends that it be legal to import drugs from other countries. I agree. I have written about this, with co-author Charley Hooper, briefly here and more extensively here.
My guess is, though, the author, and, presumably, the AARP, want drug companies to be forced to sell unlimited quantities abroad in order to satisfy the huge demand for imports by Americans. That I don't favor.

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COMMENTS (26 to date)

I've bought about 10 pairs of glasses online with general success. Have never paid more than $50 as I recall. Most recently I'm happy with Zenni.

This is so much cheaper than state-government-licensed eyeglass production that I'm willing to risk the price to try a prescription. In addition to your prescription you need to know your Pupillary-Distance (PD).

TSB writes:

I think it would be more effective if Medi* could say yes to all effective drugs but no to particular prices.

Steve Brecher writes:

I've been eligible for AARP membership for 21 years, but I haven't succumbed. It's primarily a lobbying organization. I had always thought that, but then years ago I heard an AARP officer describe it thus on NPR.

Dylan writes:

I know I've mentioned this here before as well, but the FDA withholding drugs from the marketplace is accurate, but kind of misleading, and I don't know of anyone who thinks them going away would lead to cheaper drugs (at least not ones that are both cheaper and effective).

Here's chemist Derek Lowe on this subject.


"Normally, as a free-market capitalist guy, I would take exception to those scare quotes around “the marketplace”, but unfortunately, in health care they’re warranted. We have a very tightly regulated and opaque market indeed in this country for prescription drugs and every other form of health care, and it’s not a very good place to discover prices or utilities. You could imagine a system where these things could be done better than we’re doing them, but such a system would be pretty far from what we have going now.

And even in an idealized situation like that, I’m not sure how well “efficacy discovery” could ever work. How would one collect all the patient data? How could that be done in a way where the data themselves could be compared? Issues of patient selection, diagnosis, compliance, measurement of outcomes, and other issues would all get much more difficult and complicated. Dealing with all those variables and getting them out of the way is exactly why we run controlled trials in the first place, so tossing all that aside seems odd, to say the least. You might imagine a world in which you could say “Well, come on now, does this drug work or doesn’t it? Simple!”, but that’s not the world we’re living in. It really isn’t."

Jacob Egner writes:

Curses and drat! Richard O. Hammer beat me to the punch of mentioning Zenni Optical. I, and several of my friends, have also been very happy with the quality and price of Zenni Optical.

I have heard some people (Zenni's competitors) warn about the quality of lenses with strong cylindrical corrections, but I don't know of anyone who has actually had any problems on that front.

Considering you can order a pair of glasses for ~$20, it's very inexpensive to try them out.

David R. Henderson writes:

I don't know of anyone who thinks them going away would lead to cheaper drugs (at least not ones that are both cheaper and effective).
Actually you do.

Fred_PA_2000 writes:

I suppose I should read the AARP story first, but . . .
Isn't the importation of drugs a market-power / Robinson-Patman-Act / who-pays-the-fixed-costs story?

Isn't the situation that [foreign] government purchasers have great bargaining power, and thus get the pills at Variable-Costs plus delta? While the individual [U.S.] citizen has little bargaining power and thus pays Variable-Costs plus their proportionate share of the Fixed-Costs? (Fixed-Costs here including the R&D to develop the drug and the capital costs to build the manufacturing facility.)

Robinson-Patman (very roughly) said that, if you sold it to one customer for $X, you had to make it available to all customers for that same price: That The Great Atlantic & Pacific Grocery could not use their bargaining power to slough the Fixed-Costs off onto the Mom-&-Pop grocers while A&P got the canned goods for just Variable-Costs plus delta.

If (a big "if") you could apply Rob-Pat to drug sales, it would likely detectably raise the prices large buyers (e.g., government health plans) would have to pay, while somewhat reducing the prices to individual U.S. consumers.

Unfortunately, Rob-Pat proved to be notoriously unenforceable: There were just too many ways the seller could alter his product and then argue that it wasn't the same as what we sold for $X to the Big-Buyer.

Dylan writes:


Apologies, I had meant to append that with no one in the pharmaceutical industry thinks that. And I do realize there is a symbiotic relationship that can develop between regulator and regulated as a means of restricting competition, but I just don't see that happening in this case. As Derek mentions in my quote, there's just not really a good way to figure out if a drug actually works right now without spending a whole bunch of money to test it in a lot of people and see what happens. And mostly what happens is they don't work.

If it was the FDA that was holding back useful drugs from the market I would expect to see lots of innovation coming out of the "unregulated markets" (really, that should read less regulated, but unregulated is the term used). India has a ton of highly educated chemists, and some of the largest generic companies in the world, as well as lots and lots of smaller ones. They are also in a very lightly regulated environment for drugs, so if it was regulators holding back drug innovation I would expect to see a lot of it coming out of India, but the case is actually the opposite. There are some very small steps made towards developing more innovative drugs, but that is typically playing around the margins with different formulations, not true NCEs.

They do take advantage of the low regulatory barriers to sell useless stem cell therapies for tens of thousands of dollars to people without much hope, so there is that kind of innovation...just not the kind that actually leads to something that will cure people.

David R. Henderson writes:

Apology accepted.
Not that you knew of him before, but my co-author Charley Hooper, who makes a living in the industry, thinks that.

Dylan writes:


That is interesting. I write an occasional column for one of the industry magazines. Do you think Charley would be interested in an interview, as I'd love to understand his thinking in greater detail, and maybe turn it into the subject of a future column.

Ruth H writes:

I am 80 and have been on Medicare since I was 65. Today I read a notice I get from Medicare every quarter telling me what prescription medications have changed category. There is a tier system, and as soon as a generic drug is available it is the chosen one. Medicare ALWAYS goes for the cheapest drug. If you want the brand name you pay extra for it.
I'm not sure where AARP got their information but as a participant of Medicare I can tell you they are wrong if they say "Medicare and Medicaid, by contrast, are required to cover almost all drugs approved by the FDA, regardless of whether a cheaper, equally effective drug is available."

Charley Hooper writes:

@Ruth H,

Those on Medicare can choose to pay more for a Medicare Advantage plan, which operates like a regular HMO (health maintenance organization) or PPO (preferred provider organization). It sounds like you have a Medicare Advantage plan, which is why your plan has a formulary and drug tiers.

Regular Medicare does not have a formulary and drug tiers; regular Medicare pays for any and all drugs.

Charley Hooper writes:


If I understand your argument, you think that controlled clinical trials would be thrown out with the FDA. Why? We can have controlled clinical trials and no FDA, right? Clinical trials are a way to generate information about what works and what doesn't work. The need for good information will always exist.

Regarding my views, I'm writing a book at this moment. More to come...

Charley Hooper writes:

Medicare pays for every drug, visit, hospitalization, and procedure, which is why its administrative costs are so low but its overall costs are so high. There's some post-transaction fraud and abuse checking, but there's no pre-transaction filter.

If we were to change Medicare to make it more like an HMO with pre-transaction filters, Medicare would need to have a full drug formulary and refuse to cover some drugs. This would increase its administrative costs and raise some interesting questions: Would Medicare set up a "good" formulary? Would Medicare unnecessarily restrict useful drugs? What decision criteria would Medicare use?

kenB writes:
Regular Medicare does not have a formulary and drug tiers; regular Medicare pays for any and all drugs.

Regular Medicare doesn't pay for any and all drugs, just (via part B) drugs that would be administered in a hospital or doctor's office setting. For general prescription drug coverage under Part D, a Medicare Advantage plan (MA-PD or PDP) is the only option.

Dylan writes:


Appreciate you taking the time to respond. I can imagine some scenarios where insurance companies take on the burden of requiring clinical trials to get on their formulary, but I don't think that is assured, and even if it is, I think they would be under even greater pressure by patient groups than the FDA is to approve drugs that have shown little proof of efficacy (see Sarepta). Under the best case scenario I'd guess that insurance companies would band together to fund some 3rd party agency to make standards for clinical trials and what kind of data is needed for approval, which might end up looking a fair amount like the FDA does today.

But I think it's just as likely that we'd a hodgepodge of competing standards, clinical trials that are not powered enough to show true benefit, more clinical data hidden if it doesn't show the right result, and an increase in the trend of pharma companies towards a marketing focus and away from R&D.

But frankly I'm pretty pessimistic about the long term viability of any business model where 90% of your potential products fail between the time they get to the clinic and the time they can get to the market, and a heck of a lot more fail before they even get to that stage. There doesn't seem to be a change in business model, regulatory structure, pricing, etc...that can make up for that kind of fundamental failure rate.

However, I'm not at all an expert in this field, just a semi-engaged observer, and I'd love to hear the other side. So I look forward to reading your book.

Thomas Sewell writes:


I think one of the big ideas is that even if that's true (criteria looking like the FDA today), after a transition to a UL-like private model there would be some big differences:
1. Efficiency responding to the researching companies. Rather than being at the mercy of time frames from the FDA and their budget for whatever type of work is being done, the opportunity is there to just pay for whatever resources are needed to ensure drugs make it through the process as quickly as possible.
2. The opportunity to release drugs after safety-approval only and collect effectiveness data much less expensively. That may lead to some drugs being used which don't work as well, but typically that'll be after other better known drugs have been tried and failed for a specific patient. For effective drugs, it'll mean the possibility of recovering costs much sooner as well as saving lives much sooner. So marginal costs on drugs going down and better patient outcomes seem like a pretty good Pareto improvement.
3. The opportunity to release drugs which have been tested and in use for years, or even decades, but which the currently regulatory scheme requires a super-expensive process for a minor change. i.e. more competition in generics and "cheap" drugs which currently can't justify the cost of the FDA process.
4. The opportunity to use groups like the EMA as an approval proxy. i.e. insurance company payment certification body accepts these various groups as valid approvers for safety, effectiveness or both if a drug has passed them, reducing the need to duplicate work and testing for slightly differing bureaucratic standards.

One key would be the idea of multiple certification tracks, not just in agencies, but also in safety-only vs. safety+effectiveness. Some drugs need both, but many drugs would only need safety testing, which could really cut down on costs and time to market, increasing revenues and (here's the key) massively increasing the incentives to do the research to create new drugs to benefit patients, especially patients who under current drug certification costs can't have a drug produced cheaply enough to help their condition.

Dylan writes:


You raise some good points, but I'm not sure how much that really gains.

1. I think this is a valid observation, but note that we kind of have a backdoor into this now through the tradeable priority review voucher, where companies can sell off priority vouchers that they earned for getting certain orphan drugs approved. However, I'll grant you the high price that these vouchers can go for is indicative that there is probably more demand for these than is adequately supplied.

2. This seems to be the comment proponents of this approach make the most often, but I'm just not sure how to interpret it. Safety is always relative to efficacy, we tolerate a lot worse side effects for things like cancer than we would for a blood pressure medicine. So what's the benchmark for safe, the one we use for cancer or the one we use for BP, or something else? Remember we should assume that ~90% of the drugs will not be effective for the indication that they are going for. Which gets me to the next issue, if drugs are approved based on some safety standard that's to be determined, with the idea that we'll figure out efficacy later, how do we do that? As far as I know, there's still no substitute for the randomized placebo controlled trial for determining what actually works. Wouldn't that make enrolling such trials a lot more difficult, if the person knows they either have a 50% chance of getting an experimental drug, or 100% chance if they can just go buy it?

3. I think there is room for improvement here for sure. The FDA tried to put in place incentives for companies to do testing on just these kinds of old drugs to get real data on safety and efficacy, but those incentives have led to groups like Turing and others. Not sure what the best answer is here.

4. Again not an expert in this area, but my understanding is that companies for the most part don't duplicate trials (except for needing to do certain trials in specific patient populations for approval in certain regions, on the valid concern that not all humans are alike and some genetic mutations common in certain groups can make a drug more or less effective), but I do think there is room for streamlining here. However if we were to do that entirely we would essentially be freeloading off of Europe's regulatory system - which could be fair considering how they benefit from cheaper drug pricing because the U.S. allows for higher prices that helps fund the fixed costs of innovation, allowing Europe and others to negotiate marginal cost + type pricing.

I'm really open to considering new ways to improve efficiency, but I'd like to make sure that points like the above are at least considered before advocating for any major changes.

Eugene Hayward writes:

Will yesterday's Lexmark decision by the SC make a difference in #2? Genuine question. I have no idea. Thanks.


AlanG writes:

I appalled at the level of ignorance that has been posted about Medicare and drugs. Prior to the passage of the Medicare Part D program over a decade ago, there was not Rx benefit other than some under Part A (hospitalization). Part B covers doctor visits and not Rx drugs. I was still at PhRMA when the Part D legislation was being debated and passed. The PhRMA lobbyists did an exceptional job at getting this set up as a private sector program with no government interference.

It's not easy for the elderly to navigate this as they have to choose a provider who administers their particular program. The deductibles and co-pays can vary and most plans have a formulary. One also needs to scrutinize the plans yearly as some of this changes. As a PhRMA retiree, I get both my supplemental medical insurance and the drug benefit from PhRMA and have a plan that is far superior to any of the Medicare Part D plans on the market (for one thing it doesn't have a donut hole).

Just as with Part B, Part D premiums are means tested and have five categories based on one's AGI.

AlanG writes:

We have been around the bush on the FDA issue in previous discussions on this blog. I will only note (and Derek Lowe has pretty much said the same thing on his blog), regulatory costs and reviews don't delay good drugs. They do reject bad drugs (as they should) and marginal drugs with weak data packages tend to get hung up sometimes (usually requiring a second review cycle as the company has to answer some specific questions from the FDA).

Dylan's point #3 in the 1:24PM post is not quite right. There are a bunch of pre-1962 drugs that remained on the market but FDA didn't have time to require sponsors to go back and do the necessary studies to keep them on the market. these are usually efficacy studies as the safety of these drugs was already established and if there were any safety issues they were identified and the drugs pulled off the market if necessary.

This is changing and the Agency is exercising it's authority to require those studies.

Since I have a particular bias from a career in drug regulatory affairs, I'll not weigh in on the other issues.

Emerich writes:

AMAC, the Association of Mature American Citizens, is an alternative to AARP that is more respectful of markets and less of a blinkered lobbying organization. I plan to join when I return to the U.S. from Asia but I understand they too have special deals for members.

David R. Henderson writes:

I will only note (and Derek Lowe has pretty much said the same thing on his blog), regulatory costs and reviews don't delay good drugs.
Actually, AlanG, they do. All drugs, good, bad, and marginal, have to go through regulatory review.

Dylan writes:


The review period is 10 months, and 6 months for priority review drugs, and the FDA has been pretty good at meeting those timelines. In an alternative universe where effective approval was handled by insurance companies instead of a government regulator I could imagine that a private organization could make that process more efficient and shave some months off of the process, but it wouldn't become instantaneous. And all in all, of the roughly 12 years it takes to get a new drug from the lab to the market, regulatory review is a pretty small chunk. (There are other meetings with the regulator along the way, but I haven't heard many complaints about how long that process takes, and the FDA uses these meetings to give important about trial design, so those meetings probably shorten the overall time to market instead of increasing it)

David R. Henderson writes:

The review period is 10 months, and 6 months for priority review drugs, and the FDA has been pretty good at meeting those timelines. In an alternative universe where effective approval was handled by insurance companies instead of a government regulator I could imagine that a private organization could make that process more efficient and shave some months off of the process, but it wouldn't become instantaneous. And all in all, of the roughly 12 years it takes to get a new drug from the lab to the market, regulatory review is a pretty small chunk.
The review period is the wrong measure. Think about why.

Dylan writes:


I believe your implication is that the 12 years worth of studies are only done because of the regulatory burden, which might be true, but that brings us back to the basic question, can you figure out what works without taking all that time? The scientists that I read who are involved in drug discovery seem to think not really, at least not with our current understanding of biology.

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