Obama's Blue Pill and Red Pill—Choose Wisely!

Yesterday, President Barack Obama went to a townhall meeting in New Hampshire to clear up some "misinformation" about his health care reform plans. During that session, the president excoriated the health insurance companies for "rationing" care. According to the president:

…right now insurance companies are rationing care.  They are basically telling you what's covered and what's not.  They're telling you:  We'll cover this drug, but we won't cover that drug; you can have this procedure, or, you can't have that procedure.

Well, that's true. But if a company or consumer doesn't like the restrictions that their current health insurer is imposing, they at least have the possibility of switching to another insurer whose formulary is more to their liking.

In any case, after the president condemned stingy insurance companies for limiting drug choices, he probably wasn't expecting this question from the audience:

Q. Good afternoon, Mr. President.  Bill Anderson from New Hampshire.  In reference to what you just said—I'm presently under the New Hampshire Medicaid system and I have to take a drug called Lipitor.  When I got onto this program they said, no, we're not going to cover Lipitor—even though I'd been on that pill for probably 10 years, based on the information my doctor feels is right for me. 

And I had to go through two different trials of other kinds of drugs before it was finally deemed that I was able to go back on the Lipitor through the New Hampshire Medicaid system.  So here it is, the Medicaid that you guys are administering and you're telling me that it's good—but in essence, I'm dealing with the same thing, and you're telling me the insurance companies are doing.  Thank you.

The government health care program doing the same thing that the president accused private insurance companies of doing? Hmmm. The president answered in part:

THE PRESIDENT:  Well, I think that's a legitimate point.  I don't know all the details, but it sounds to me like they were probably trying to have you take a generic as opposed to a brand name.  Is that right?  And it turned out that you did not have as good of a reaction under the generic as the brand name, and then they put you back on the brand name.  Is that what happened?

Q   Correct, to save money.

THE PRESIDENT:  Well—right.  Look, there may be—in nine out of 10 cases, the generic might work as well or better than the brand name.  And we don't want to just subsidize the drug companies if you've got one that works just as well as another. 

The president has famously delved into the intricracies of pharmaceutical formularies before:

What I've proposed is that we have a panel of medical experts that are making determinations about what protocols are appropriate for what diseases. There's going to be some disagreement, but if there's broad agreement that, in this situation the blue pill works better than the red pill, and it turns out the blue pills are half as expensive as the red pill, then we want to make sure that doctors and patients have that information available to them. 

Gosh, why don't private insurers think of that? Oh, they did? Who knew? Oh, of course, the president calls that "rationing" when insurers create and use tiered formularies, but it's not "rationing" when government health care programs do the same thing. 

And what about innovation? One way that private health insurers compete for consumers is by offering different formularies and providing access to newer drugs. Last week, Hoover Institution fellow Henry Miller and associate director of the American Council on Science and Health, Jeff Stier, published a sharp op/ed in the Los Angeles Times on the effect that President Obama's proposed health care reforms will have on pharmaceutical research. But first they point out: 

Drugs often improve the span and quality of life in a remarkably cost-effective way, a fact of crucial significance not only to the individual patient but to society as a whole. Innovative new medicines, for example, have helped many patients avoid costly hospitalization. Between 1980 and 2000, the number of hospital days fell by 56% and, as a result, Americans avoided 206 million days of hospital care in 2000 alone, according to Medtap International, which provides health economics and outcomes research services. And a study in 2000 sponsored by the Agency for Health Care Policy and Research concluded that increased use of a blood-thinning drug would prevent 40,000 strokes a year, saving $600 million annually. A 1997 study by the National Bureau of Economic Research found the costs of treatment per episode of major depression fell by 25% from 1991 to 1995.

Another sign of progress is that, in general, new drugs confer an advantage over older ones in reducing mortality. A 2004 National Bureau of Economic Research study of patients who took drugs between January and June 2000 found that a higher percentage of those who took newer medications were still alive in 2002. The estimated mortality rates were directly related to the time that had elapsed since each drug was approved.

However, the climate for drug development is deteriorating. Research and development investments per new drug introduction approximately doubled between the early 1980s and early 1990s, and only about three in 10 drugs approved by the Food and Drug Administration for marketing recoup their development costs.

So what happens when the government prescribes the blue pill? As Miller and Stier explain:

Once the cheap blue pill has been anointed as the one eligible for federal reimbursement, there will be little incentive for companies to pour millions of dollars into developing a new generation of drugs that might in fact prove to be better—but perhaps only for a small subset of patients. Quite justifiably, the drug industry's trade association, the Pharmaceutical Research and Manufacturers of America, fears "that the federal government will wind up rationing healthcare and dictating what medicines doctors can prescribe to their patients. This may well prevent patients from gaining access to the critically important medicines they need to fight diseases such as cancer, diabetes and heart disease."

Politicians seem determined to squeeze the drug industry, but it is patients ultimately who will feel the pinch. 

Whole depressing LA Times op/ed is here. 

Disclosure: I own a bunch of biotech and drug pharmaceutical stocks that I bought with my own money and are in my retirement accounts. Sadly that sector's stock values have suffered during the recession too. I was also paid for researching and writing a peer-reviewed report on research conflicts of interest for the American Council on Science and Health.