OVERDOSE

Vol. 17 No.4 (April, 2007) pp.290-293

OVERDOSE: HOW EXCESSIVE GOVERNMENT REGULATION STIFLES PHARMACEUTICAL INNOVATION, by Richard A. Epstein. New Haven, CT: Yale University Press, 2006. 296pp. Hardcover. $30.00. ISBN: 9780300116649.

Reviewed by Robert M. Howard, Department of Political Science, Georgia State University. Email: polrhh [at] langate.gsu.edu.

Recent surveys show significant dissatisfaction with the cost of health care. For example, a New York Times/CBS News Poll in late February 2007, and reported in the paper on March 2, 2007, showed that 59% of respondents were “very dissatisfied” and another 22% of respondents were “somewhat dissatisfied,” with the cost of healthcare in the United States. In contrast only 14% pronounced themselves satisfied with the current cost of health care. More than 50% of Americans were dissatisfied with their health insurance coverage and out of pocket costs and a strong plurality (47% to 38%) favored a national single payer system administered by the federal government over the current private health care system. A significant portion of this dissatisfaction lies with the cost of prescription medication. In a 2005 Kaiser Family Foundation Survey almost 70% said high drug company profits are a very important reason for high health care costs, and the same percentage said drug companies put “profits ahead of people. Finally the Kaiser survey revealed that 65% of respondents favor greater government regulation of the pharmaceutical industry.

Given the Democratic takeover of Congress following the 2006 midterm elections, many assume that the new Congress will revisit the Medicare law and impose greater governmental control over the health care industry and in particular seek greater regulation over the pharmaceutical business. Among others things, the legislation would undoubtedly call for some type of price regulation of pharmaceuticals. Based on the above survey results, such legislation would have broad public appeal.

Into this passionate and heated debate, Richard Epstein’s book, OVERDOSE, provides a very timely examination of the pharmaceutical industry, drug costs and government regulation. Sailing against the wind and public opinion upset with “Big Pharma,” Epstein argues, for less, not more, government regulation of prescription medicines and the pharmaceutical industry. The book is a thoughtful, dispassionate series of arguments to decrease, if not abolish, prescription medicine regulation. In fact a weakness of the book might just be the dry dispassionate tone of the manuscript. There are no fireworks. Instead, Epstein lays out in a methodical fashion following from economic principles to market analysis why drug regulation will lead to increased cost and less innovation. Eschewing complex figures or formulae, the book appears aimed at a general audience in addition to scholars and students interested in public policy and the intersection of law and economics. [*291]

The subtitle neatly summarizes the premise of the book. Epstein argues that there is a trade-off between regulation and innovation. Given the tremendous cost involved in developing and marketing pharmaceuticals, any regulation of drugs will increase the cost to the drug companies. This will in turn reduce potential profit and therefore the willingness of pharmaceutical companies to engage in the costly research and testing needed to bring new drugs to market. More regulation thus leads to less innovation and ultimately the public will suffer. Any one who believes, along with the majority of the American public, that greater regulation is warranted will have to confront and deal with Epstein’s analysis. The argument succeeds to the extent that, at various parts of the book, the reader actually starts feeling sorry for so called “Big Pharma.”

Epstein lays out his analysis in 18 chapters divided into six separate sections or parts. In the first, Epstein offers some introduction to basic market principles. He leads off his analysis by arguing that science is a victim of its own success. Such great advances were made in science and medicine in reducing mortality and increasing life expectancy, particularly during the first half of the twentieth century, that it is unlikely science and medicine will again match that success. However, the public still expects the same type of advances in the 21st century. This is a problem because, when the expectations are not met, the public inevitably blames the drug companies for valuing profits over public health and no longer understands or tolerates the risks inherent in researching and developing pharmaceuticals. Even the slightest risk is deemed unacceptable. Epstein then spends the next several chapters formulating the basis of his argument by discussing property rights, externalities, common goods, intellectual property and government regulation. Epstein uses this to lead to a discussion of patents, monopolies and rate regulations. Much of this is a primer in free market economic theory.

From this Epstein delves into the heart of his argument on government regulation and the pharmaceutical industry. Step by step he argues against price regulation, for putting limits on the FDA approval process, limiting drug company liability for consumer fraud, and letting consumers guided by their doctors determine whether to use a particular medicine. At each point he argues that the cost of such regulation exceeds the benefits. Moving beyond price regulation as a curb on innovation, he argues that, by relying on averages in determining the safety of drugs, the FDA prevents patients who might be helped and not hurt by such drugs. For example, just because three percent of patients suffer adverse reactions to a drug does not mean that many other patients might not benefit from it. Epstein argues that the decision to weigh risk versus benefit should be left to the patient and her doctor. Extensive marketing is necessary because, without it, the pharmaceutical companies would have no chance to recoup their investment in research and development. Thus, it all comes down to the large cost of developing and then marketing drugs versus the risks inherent in the process, not the least of which is [*292] the potential danger to a small percentage of users. As I said, at times one actually feels sorry for “Big Pharma.”

Of course the argument hinges on several assumptions about the purposes and benefits of advertising and marketing and on cost and expected return. For example, for Epstein advertising is critical, in that it is the only way drug companies can get their message out to doctors and consumers. This assumes perfect information and perfect knowledge. It assumes consumer manipulation does not happen, and it overlooks that fact that pharmaceutical companies expend significant advertising dollars on high profit drugs such as erectile dysfunction medications. The goal of advertising is to get consumers to ask for Cialis over Viagra (or vice versa) or to get doctors to recommend one over the other. Is the choice the best for the individual patient? Who knows? It is hard to argue that either of these choices is best for overall social utility.

In fact, the argument that the profit motive alone leads to innovation overlooks how profit motives can get in the way of innovation. One only has to examine the significant disparity in sales and advertising as compared to research and development. According to 2005 SEC filings of the nine Fortune 500 pharmaceutical companies, the companies spent, on average, more than twice as much for sales and advertising (32.2% of revenues) as they do for research and development (14.9%). The same SEC filings show that these nine companies reported, on average, extremely healthy profits of over 17% of revenue. A company has a right to make a profit, and each company has a right to make their own decisions on the allocation of revenue. If a company wants to sell an erectile dysfunction drug by showing two people sitting side by side in separate bathtubs looking out on the setting sun, well, that is the market system.

However, given this profit, and the disparity in marketing expense as compared to research and development expenditures, it is hard to argue that there is significant innovation occurring and that somehow the United States government, seeking to control escalating drug prices, is stifling this innovation. What will occur? Will companies reduce the already low percentage devoted to research and development? If profits are so high and there is already little innovation, how much more can be cut without a pharmaceutical company endangering its existence? Why assume innovation will suffer? Perhaps a company will spend less on sales and advertising and more on research and development.

That leads to another assumption – that of cost. Epstein assumes that it is extremely risky to bring drugs to the market given the cost of developing and marketing the drug and the potential liability. However there is no independent verification of the cost of developing and marketing pharmaceuticals. “Big Pharma” does not release this information. The companies claim these are trade secrets. One disputed study estimated the average cost of developing and marketing a drug [*293] at $802 million. This is an enormous sum, but there is no independent verification. Until we have such independent verification, we simply do not know how expensive it is to research and develop pharmaceuticals. Polling data suggest the public is highly suspicious, and as valuable a contribution as OVERDOSE is to the literature, it is doubtful that it will change many minds in the debate.

REFERENCES:

NEW YORK TIMES/CBS NEWS POLL. 2007. February 23-27, New York Times, March 2, 2007

KAISER FAMILY FOUNDATION. 2005. http://www.kff.org/spotlight/rxdrugs/index.cfm

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