03 Nov Pharma makes a pragmatic left turn in this election
Reversing trends where drug makers routinely throw their financial support behind the Republicans, this year big pharma decisively backs the Democrats and their presidential nominee, Barack Obama. Pharma has given the Obama campaign more than three times the money they have given to Republican John McCain.
Compare that to four years ago, when drug makers gave Bush twice as much as Kerry. Indeed, over the last decade, the drug industry has spent millions to keep Republicans in the White House as well as in Congress, according to a report in Politico.
Even more revealing about the industry’s left turn is how poorly McCain has fared since the primaries began. As of the end of September, drugmakers gave $758,724 to Obama, $632,219 to Clinton (whose campaign ended months ago), and a paltry $284,900 to McCain—just 20 percent of the Democrats’ total.
This trend is repeated in the Congressional races where, for the first time in six election cycles, House and Senate Democrats revel in receiving the lion’s share of pharma campaign donations. Clearly, the industry prefers donkeys over pachyderms this election year.
Does all this reflect a love affair with Obama and the Dems, disappointment with McCain and the Republicans, or both? Factoring into all of this is McCain’s ongoing feud with the pharmaceutical industry, which he famously tagged “the big bad guys.” McCain likes to boast about “taking on the drug industry,” which certainly can’t sit well with pharma executives.
But are hurt feelings enough to reverse historical trends? The evidence suggests that the issue is deeper and more complicated and is, in fact, tied to a significant shift that is underway in the healthcare market in this country.
Both candidates favor similar drug policies
When looking at the two candidates’ policies, it is hard to understand pharma’s Obama obsession. For instance, recent headlines declare the following: “Obama plan could whack Big Pharma,” “Big Pharma could be big loser under Obama health plan,” …neither candidate loves pharma” and this, “Barack Obama and John McCain go to war with Big Pharma.”
According to the Boston Consulting Group, Obama favors letting a federal agency set discounted drug prices, which will cut the drug industry’s revenues by a whopping $10 billion to $30 billion a year. And the Wall Street Journal’s Health Blog speculates that this would be further exacerbated if private insurers, following the government’s lead—and why shouldn’t they—also insist on paying less for prescription drugs. To make matters even worse, the Dems’ favorite son also favors the importation of cheap drugs from abroad. These are issues that are hotly opposed by the drug industry.
Meanwhile, according to the BCG study, John McCain is “officially silent” on the issue of negotiating drug prices. But, a few years back, he voted against President Bush’s Medicare drug benefit plan partly because it didn’t allow the government to negotiate drug prices. Furthermore, just like Obama, McCain favors the re-importation of prescription drugs to save money. Both candidates also endorse increased use of generic drugs and favor making the exclusivity period of biological drugs as short as possible, all of which pharma steadfastly opposes.
Clearly pharma doesn’t feel the love from either candidate, so what explains their swoon for Obama? Are they just closing their eyes while kissing up to the presumptive winner?
What are the stakes?
In order to answer this question, we first need to understand basic economics of healthcare in the US. This country has long favored a free market model for health care, believing that this leads to increased consumer choice and promotes the production of new medicines. A big new drug costs about $800 million to develop, and the drug giants argue that they need the higher profits from the United States’ comparatively free market in order to drive the R&D required to develop these expensive new drugs and therefore protect their revenue pipelines.
They say that scientific research follows the money, and this is no more evident than in Europe, which is not free-market driven and regulates drug prices. Europe also is simultaneously steadily losing its pharmaceutical edge to U.S. labs, which generated two-thirds of the new drugs launched in the world over the past five years. So while the U.S. produces most new drugs, its free market also almost entirely subsidizes the cost of their development from high consumer drug prices. It follows that any reduction in U.S. drug profits will diminish the ability of pharma companies to support future R&D for new drug development.
Thus, as Motley Fool analyst Charly Travers often points out, any U.S. government policy that caps drug costs will reduce both the number of drugs that can be developed as well as the profits for already approved drugs.
Unfortunately, this argument is tempered by the troublesome fact that drug prices in the U.S. are rising at a rate of seven percent a year, which is difficult to continually absorb. Hence, the political pressure for price controls on drugs in the U.S. has increased to the tipping point where, for the first time, presidential candidates from both parties favor price controls on drugs — a move away from the free market.
A health care “monopsony” that favors Obama
It seems that big pharma is looking into a gathering perfect storm: blockbuster drugs are coming off patent protection, drying up current profits; a thin product pipeline imperils future profits and the unprecedented specter of government regulated drug prices, which further threatens future profits. However, there is a glimmer of hope that explains their leftward lean in this election cycle and, ironically, we can thank President Bush’s profligacy for this political realignment.
Historically, insurers have picked up most drug costs, but now the heaviest burden falls on the federal government, which currently picks up about half the tab. In the U.S., there is a growing shift in the healthcare market away from private insurers and toward federal healthcare programs — a shift accelerated by Bush’s expensive Medicare drug plan for senior citizens. It truly is ironic that this erosion of the healthcare free market is driven by a Republican President.
The word economists use for a market in which goods or services are offered by several sellers, but purchased by only one buyer, who can dictate prices, is “monopsony.” It is a word that too often comes with the antecedent modifier “government.” Despite the tremendous purchasing power of the growing government monopsony, U.S. taxpayers right now get no pricing leverage like they do in most European countries and Canada, where the governments negotiate and regulate drug prices. Clearly, this is going to change regardless of who is elected President. The government monopsony will invariably lead to regulated drug prices in the U.S., moving us away from the current free market, and as explained above, this worries the pharmaceutical industry enormously.
It light of these shifting market forces, it makes perfect sense that drugmakers are beginning to view the U.S. government as their future market and, for this reason, they understandably want to make sure that government-run health programs are robust and bountiful. They know that Dems are more likely than Republicans to deliver on this, which explains why pharma is currently cozying up to Obama and Congressional Democrats, both of which favor more government-run healthcare.
No one ever accused drugmakers of not being pragmatic, and it is in the sprit of such pragmatism, coupled with an eye to the future, that accounts for pharma making nice to Obama. But with liberal Democrats ruling Washington and Republicans likely relegated to passive observer status after the election, pharma’s leftward lean this year could quickly return to the right if the liberal “monopsonists” take too big a bite out of U.S. drug profits.
Get more details
Both candidates answered a series of science and healthcare-related questions from the group, ScienceDebate2008, a coalition of several thousand individuals and organizations — including the National Academy of Sciences, the Institute of Medicine, and the American Association for the Advancement of Science — that want science policy to be part of electoral decisions. The candidates’ verbatim answers, listed side-by-side for comparison, can be found here.
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