With the State AGs

The National Association of Attorneys General met in Chicago this week to discuss issues behind the litigation pitting many states against the pharmaceutical industry. I was invited to participate on a panel discussing industry research and development issues. Here are my prepared remarks:

I want to address my remarks this morning primarily to the question of the use and accounting for drug industry R&D expenditures, which account for about 20 cents of every consumer dollar spent on prescription drugs. I want to focus here because if, as I will argue, a large portion of this R&D is wasted, and if this waste is a major driver of the marketing expenditures by drug companies, then taking steps to curb wasteful R&D is critical to any long-term solution to the drug pricing crisis.

Drug industry R&D is a classic glass half full-glass half empty story. When drug companies are on their best behavior, they play a critical role in bringing new drugs and therapies to market; they have extraordinary skills in the design, formulation and manufacturing of chemicals and proteins that can do extraordinary things for human health. They also play a large role in financing important clinical trials.

But that describes less than half of what the pharmaceutical industry does with its research and development budgets. Industry R&D departments are subservient to the companies’ marketing arms and the marketing imperative dictated by what it takes to remain the nation’s most profitable industry. Most new drugs emerging from industry’s labs today add almost nothing to physicians’ armamentarium for fighting disease.

Here’s just one example. Amgen is the largest and most profitable biotech company in the world. It developed recombinant human erythropoietin, sold as Epogen or EPO, in the 1980s based on a university’s scientist’s two-decade-long search for this naturally occurring molecule, which stimulates red blood cell production. It was a godsend to patients on dialysis, who no longer need blood transfusions, and cancer chemotherapy and AIDS patients, who have their red blood cell production suppressed by other drugs. Three years ago, Amgen introduced Aranesp for the very same condition. Is Aranesp a radical new treatment for these problems? No, it does precisely the same thing. But by modifying the protein slightly, they came up with a version that stays in the body three times longer than a comparable amount of the original molecule. Does this help dialysis patients, who are hooked up to machines three days a week and get their EPO through that process? No. But it did enable Amgen to go after J&J’s cancer and AIDS market, which Amgen had sold away in the 1980s. And what did J&J do to fight back? They sponsored a clinical trial that proved that giving a triple shot of the original molecule gave the same long lasting effect as Aranesp. Bottom line: tens of millions of dollars was spent on developing a drug that added nothing to patient welfare.

When university economists funded by the drug industry came up with the total of $800 million to develop a new drug, since raised to more than $1 billion, they never considered the true medical value of new drugs. The list of drugs coming out of industries labs that are like Aranesp is quite long: Nexium for Prilosec; Clarinex for Claritin; the fourth or fifth ACE inhibitor, the sixth or seventh statin. The Blue Cross-funded National Institute of Health Care Management looked at all drugs approved by the FDA between 1989 and 2000. It found just 24 percent of the 1,035 new drug applications were deemed a priority by the agency, the designation given to significant new drugs. If one looked at just new molecular entities – the new drugs that are most likely to be innovative – just 42 percent got the priority designation and if one looks at the latter half of that time period, the figure dropped to 38 percent. If there is any inflation in the FDA distinction, it is in the drug industry’s direction. The priority drugs included best sellers like Viagra, Vioxx and Celebrex.

The second great inflator of industry claims about R&D is its capitalization of that cost. R&D is an annual expense and paid out of current revenue, which comes from consumers. It other words, it is a deductible cost, not an investment. Capitalizing expenses like R&D is precisely why Bernie Ebbers is on trial right now. Now, it is a perfectly legitimate internal exercise for industry officials to construct a net present value of total projected expenditures for a drug development program in order to compare it against anticipated revenue to determine if that project is worth pursuing. But this planning exercise has nothing to do with actual costs incurred, which are deducted from present revenue year by year and even subsidized by the government with the R&D tax credit.

By discounting the industry’s claims by these two factors – the waste and the fraudulent capitalization – you come up with a total for the cost of developing a new drug, even after taking failures into account, that’s about one-fourth of industry’s claim.

Industry officials argue that high prices in the U.S. are necessary to support this inflated R&D budget. They also claim that Europe and the rest of the advanced industrial world , which negotiate lower prices for drugs, are free riding on U.S. R&D. In a sense they are right, but not the way the drug industry would explain it. The U.S. accounts for 51 percent of total global drug expenditures, but 58 percent of all R&D expenditures. But that includes all government, non-profit and industry funding combined. But it is important to remember this is a global industry. Many of those companies spending here are European or Japanese. Why do they want to be here? Because no country on earth spends more on basic and applied biomedical research than the U.S., primarily though not exclusively through the National Institutes of Health. The insights and breakthroughs generated by this vast public enterprise, mostly conducted at our leading universities, are the primary source of major medical innovation. But because of the workings of laws like Bayh-Dole, a company must be present here to gain access to that innovation. That’s why they locate here. Yet when you look at the output, as measured by significant new molecular entities, what you find is that U.S.-based firms discovered just 43 percent of significant new drugs. To quote Donald Light, a bioethicist at Princeton University who has studied this issue, “other countries are helping to pay for the large, inefficient U.S. R&D enterprise,” not the other way around.

Do the me-too drugs that are the products of these inefficiencies improve public health? No doubt some do. But the vast majority are like Nexium, Aranesp and Clarinex, chemical manipulations to avoid patent extinction. Or they are like the Cox-2s, a non-solution to a minor problem that in the end caused more problems than they solved.

Significant new drugs can indeed reduce other medical system costs. But the argument put forward by some drug-industry funded economists that all newer drugs have that effect does not hold water on closer inspection. A more likely explanation is that cost-conscious hospitals with formularies treat much sicker patients with older drugs while detailer influenced physicians treat much healthier people in their offices by prescribing the latest, pricier medicine.

Why don’t drug companies devote their substantial resources to legitimate breakthroughs? The answer cannot be found in an economist’s arguments or an accounting spread sheet. The fact is that medical innovation is rare, and depends on scientific understanding the biological causes of disease and developing validated biochemical approaches to affecting their natural histories. That doesn’t happen every day. It doesn’t even happen every year.

But when it does happen, the work is almost always done in the public sector – by scientists working on public payrolls or at universities on government grants. The evolution of understanding that leads to medical innovation almost always takes decades, and is usually the product of dedicated scientists who very often are not just close to the laboratory bench, but have intimate involvement with patients at the bedside. Industry almost never funds those kinds of careers. Its scientists move from project to project depending on what holds the most promise for the bottom line in the short run.

The issue of R&D remains pertinent because it is the justification for high drug prices. Like the soup Nazi on Seinfeld, drug industry officials and their lobbyists tell us that without high prices, no new drugs for you. Yet what we’ve seen in recent years that over a prolonged period of steadily rising prices and profits, innovation slowed down. Throughout the 1990s until today, the number of new applications to the FDA for new molecular entities and new biologics steadily declined (there was a short blip after passage of user fees in 1997 which cleared up a backlog).

Why has innovation slowed? Numerous people who honestly appraise this field – including many industry scientists – use the same phrase to sum up the situation. The low-hanging fruit has been picked. We’re now up against the tough nuts. Just one example: The government has spent over $50 billion since President Richard Nixon declared war on cancer in 1971 (and more if you go back to the formation of the National Cancer Institute, the first institute at what later became NIH, in 1937). Yet our progress against many forms of that disease remains marginally incremental, the improvement in life expectancy measured in months, not years. And this includes many of the new targeted drugs that received so much hype like Iressa and Erbitux.

My message to the states this morning is that you should feel free to negotiate lower prices in your Medicaid programs without fear of jeopardizing innovation. The answer to the medical mysteries of life will be found where they have always been found: in science, in humanitarian concern, in the work of dedicated scientists and clinicians, and in the unpredictable serendipities of basic and applied research. Industry plays a role, but it is subservient to these larger realities. The idea that we can gain more innovation by pouring more money into industry’s coffers simply makes no sense.

Shocking

Top officials at Medicare – the retirement program that unlike Social Security really is going broke – today announced a $3 billion to $5 billion expansion in annual benefits. The decision will double or triple the number of patients with congestive heart failure (but no previous history of heart attacks) eligible for implantable cardioverter-defibrillators (ICDs), which send a massive electric shock to the heart after a serious coronary incident. Each device costs $30,000 to $40,000. The eligible population now totals more than half a million.

Despite the fact today is inauguration day (and a holiday here in the nation’s capital), the Washington Post gave this story the front page coverage it deserved. The New York Times buried it inside and the Wall Street Journal covered it with wire reports, which was odd given the financial implications for Medtronic, Guidant and St. Jude Medical, the three publicly-traded medical device manufacturing companies with the most to gain from the decision.

The ICD story is a classic case of medical bracket creep. Once a medical intervention is proven effective in some patients, the companies that make the drug or device support clinical trials to expand it to groups where there will be diminishing, even if still positive, medical returns. While the latest trial of ICDs, reported in today’s New England Journal of Medicine, was primarily funded by the government’s National Heart Lung Blood Institute, the device industry’s fingerprints were all over the study. Lead author Gust H. Bardy of the Seattle Institute for Cardiac Research received research support from Medtronic and serves as a consultant for Guidant. Alan Kadish, the Northwestern University medical professor who wrote the accompanying editorial, received research support from all three manufacturers.

At first glance, the trial’s results seemed impressive. ICDs reduced the death rate from 29 percent to 22 percent over four years. In other words, instead of 7.2 in 100 patients with congestive heart failure dying each year, only 5.5 died with the implanted defibrillators.

But the trial raised as many questions as it answered. The trial’s architects deliberately included less sick individuals measured by either the ability of their left ventricle to pump blood or by their performance on standard measures like a stress test. Yet the sicker patients in this latter group showed no benefit!

Moreover, inappropriate firing is emerging as a major issue for the tens of thousands who now have these devices stuck in their chests. Only 31 percent of the patients in the trial had their ICDs go off during the study period, but one in three of those events (or about 10 percent of all firings) were inappropriate. Cardiologists tell me their patients compare it to being kicked in the chest by a mule. That’s something even a liberal like myself wouldn’t wish on Vice President Dick Cheney, the nation’s most famous ICD patient.

Expanded ICD usage is also raising ethical issues about end of life care. Admittedly, these are anecdotal reports. But in the wake of the last Medicare expansion of ICD reimbursement in 2003, aggressive marketing by the manufacturers and physicians specializing in implantation resulted in many older patients with deteriorating hearts – including some who were demented – getting ICDs. Some of them later experienced defibrillation storms that left them begging to be released from their agony, according to some cardiologists with whom I’ve talked.

Most of these issues were discussed at the last Medicare Payments Advisory Committee meeting that discussed this issue. A number of industry consultants sat at the table at that February 2003 meeting, which considered evidence from a previous industry-funded trial. The Center for Medicare and Medicaid Services (CMS) hired a consultant from Johns Hopkins to poke holes in the data, but the physicians with conflicts of interest dominated the discussion.

CMS’s response to this latest trial was to grant the expanded coverage but demand reports via mandatory registration so it knows how ICDs are used in the general population. It also wants to know the medical results. The Post article suggested this raises a tricky ethical question, comparing it to requiring people to participate in a clinical trial to gain access to approved medical care.

But that gets the question exactly backwards. Reporting medical outcomes is like reporting adverse events. It provides critical information so that future patients (and the taxpayers) may be spared paying for inappropriate, expensive care down the road. In this case, CMS is on the right track.

Blowing the Whistle

Two recent government whistleblower cases reveal the extent to which we now depend on individual bravery to protect the public’s health and safety. Unfortunately, they also reveal how vulnerable public employees become when they go public about government’s failure to do its job. Indeed, the legal landscape has become so tilted against public employees that it’s a miracle anyone blows the whistle at all.

Last month, the National Institutes of Health tried to fire AIDS research coordinator Jonathan Fishbein after he revealed gross misconduct in an African clinical trial of nevirapine, which is manufactured by Boehringer-Ingelheim. Johns Hopkins researchers claimed the drug was effective in preventing mother-child transmission of the HIV-AIDS virus and, based on that evidence, NIH officials advised President Bush to include it in his $15 billion AIDS initiative.

Fishbein alleged that senior officials at NIH conspired to alter the conclusions of his internal audit of the trial, which turned up thousands of instances where researchers failed to report adverse events including some deaths. Their goal in suppressing his findings, he said, was to spare the reputations of the researchers, Johns Hopkins and NIH, which funded the work. The Food and Drug Administration backed the essence of his charges when it rejected Boehringer-Ingelheim’s petition for U.S. approval of the drug for preventing mother-child transmission, which had rested largely on the African trial.

The second case involved David Graham, the FDA safety official who blew the whistle on Vioxx. Merck pulled the painkiller from the market after a cancer study showed it raised the risk of heart attacks. But as early as 2001, researchers had pointed out data suggesting the deadly side effects of the drug. Graham, working in the understaffed and overlooked safety office, spent three years pulling hundreds of thousands of records from a west coast health maintenance organization to prove the connection.

When he brought his results to the attention of senior FDA officials, they tried to prevent him from publishing. When Congress held hearings to determine why the FDA didn’t act sooner, agency officials tried to stop him from testifying. When he sought legal help, those same officials tried to scare the lawyers off the case by calling his professional competence into question.

There’s a law that is supposed to protect government workers when their agencies retaliate against them simply for doing their jobs. It’s called the Whistleblower Protection Act, passed unanimously by Congress in 1989 and signed into law by the first President Bush (after President Reagan had pocket vetoed a similar law a year earlier). The Sarbanes-Oxley Act of 2002 extended that right to corporate employees who blow the whistle on their employers’ accounting shenanigans.

But according to Tom Devine, an attorney with the Government Accountability Project, legal rulings over the past decade have turned the public employee law into its opposite – a whistleblower dismissal act. The Justice Department, which defends the government agencies, has won all but one of the 95 cases that have reached the U.S. Court of Appeals, which is the final arbiter of whistleblower cases. One of the judges who sits on that panel, Robert Mayer, was dismissed from his post in the Reagan White House for tutoring then Interior Secretary James Watt in how to dismiss whistle-blowing employees.

The track record at the Merit Systems Protection Board, where public employees must first turn, isn’t much better. Last month, the board (formerly known as the Civil Service Commission) ruled that Fishbein had no whistleblower protection act rights because he was a special hire under a law that gives agencies like NIH salary flexibility to recruit highly-skilled employees. The 1,400 physician/researchers at NIH hired under that provision – in essence, anyone in a position senior enough to know what is going on – now have no protection if they go public with negative information about the agency.

“Whistle blowers don’t get a day in real court, they get a day before a board of hearing officer who don’t have any judicial independence,” said Devine. “Only one whistleblower has saved his job under the law – a maintenance worker who blew the whistle on inadequate lighting at his workplace. Anybody whose dissent created a headline was dead meat. That’s why we see the law as a trap rather than a shield.”

Even many Republicans in Congress realize something is out of whack. Sen. Charles Grassley (R-Iowa) has provided bipartisan leadership toward passing a whistleblower reform bill, which would create a real judicial review for whistle blowers. He also warned the FDA not to retaliate against Graham. But the Republican leadership blocked votes on the bill in the House and Senate last year after pressure from John Ashcroft’s Justice Department. Alberto Gonzalez is unlikely to champion the issue in the new Congress.

Still, about 50 government workers who are potential whistleblowers contact organizations like the Government Accountability Project every month. About a third, in Devine’s view, are legitimate cases – where the government actions, if left unexposed, would leave some segment of the public unprotected from unsafe drugs, dangerous food or defrauded by military contractors. What does he tell them? For most, “we tell them that their legal rights are so weak that they might prefer to just tell their supervisor and try to maintain a supportive work environment.”

Dr. Fishbein has chosen to work outside the system. He recently set up a website called HonestDoctor.org for NIH-funded researchers who want to report evidence of misconduct in clinical trials.

Don't Mess With Success

The following item appeared in the January 2005 AARP Bulletin:

There’s nothing wrong with Social Security that a few changes can’t fix

By Merrill Goozner

After 65 years Social Security is, like America, facing the challenges of aging. Fewer workers will be paying into the system to support those who receive benefits. By 2040 there will be just two workers for each retiree, compared with more than three today, seriously affecting the solvency of the system. But just how dire is the financial picture? Will Social Security be there for our grandchildren?

Designed to provide a basic income for retirees and their families, Social Security has done remarkably well in achieving that goal and is considered the most successful government program in the nation’s history.

Despite some problems, many analysts maintain there is no crisis and that moderate adjustments can keep the system sound. The most recent Social Security trustees’ report shows that the system can pay all scheduled benefits until 2042. That year, if no changes have been made, benefits would have to be cut about 30 percent to bring payments in line with incoming payroll taxes.

While 2042 may seem far off, experts agree that it’s better to make moderate changes earlier rather than later to avoid the "cliff" of a drastic benefit reduction or a hefty tax increase. Here are some ideas being discussed:

TAXES
The simplest adjustment would be a slight increase in the payroll, or FICA, tax. According to the Social Security trustees, if the tax on wages today were raised by less than 1 percent each for employee and employer (from the current rate of 6.2 percent each), Social Security would be solvent through 2077.

Another proposal is to "pop the cap"—to raise the point at which wages are no longer subject to Social Security taxes. Congress set the level in 1983 to cover 90 percent of all wages. The wage cap today is $90,000. But top earners today have a larger share of the income pie, and the portion subject to tax for Social Security has fallen to 84 percent. Using the projections of the Social Security trustees, raising the wage cap to about $140,000 would provide almost one-third of the requirement for solvency for 75 years.

It’s worth noting that a recent report by the Center on Budget and Policy Priorities, a Washington-based research group, concludes: "If the 2001 and 2003 tax cuts are made permanent, as the Administration has proposed, their cost over the next 75 years [using Congressional Budget Office projections] will be more than five times the Social Security shortfall over this period."

Another source of payroll taxes could be newly hired public employees. Edith Fierst, a lawyer who was a member of President Clinton’s Social Security Advisory Council, says that currently nearly 7 million local and state employees are not covered by Social Security but rather by employer-operated retirement funds. Bringing new workers into Social Security would help fund the system.

BENEFIT CHANGES
Some adjustments have been made, and more are likely. The rise in the normal retirement age from 65 to 67 already constitutes a benefit cut. And more people are paying taxes on their Social Security benefits. Other changes to benefits could include modifying the cost-of-living adjustment, raising the normal retirement age even higher and calculating a person’s initial benefits using price increases rather than wage increases.

PRIVATE ACCOUNTS
President Bush has declared that he intends to make Social Security reform a priority of his administration, because "the system is not going to be whole for our children or our grandchildren." His solution is to let workers create private accounts using part of their Social Security payroll taxes. Though few specifics have been released, the hope is that private plans invested in the market will generate equal or greater benefits than the traditional Social Security benefits. The risk is that they won’t.

At a time when fewer people have pensions and most individual retirement accounts are already subject to stock market risk, many question if private accounts are a good idea.

"All private accounts do is transform the nature of the benefit," says Robert D. Reischauer, president of the Urban Institute, a nonpartisan research group. If taxes and benefits stay the same, he says, "there’s still a problem." In fact, he and others say that private accounts will only make things worse because they would require benefit cuts and run up huge federal deficits in order to finance the transition.

Proponents of private accounts point to 2018 as the year when Social Security benefits will exceed revenue from FICA taxes and taxes on benefits. That’s when the system will have to use interest earned on its Treasury bonds to pay benefits.

To prepare for this, Congress passed legislation in 1983 that would create a surplus in the Social Security trust fund to help pay for the boomers. As a result, by 2018 the trust fund’s holdings will balloon to $3.7 trillion, up from $1.5 trillion today. This is the boomers’ nest egg.

Backers of private accounts say these trillions aren’t a real asset, since future taxpayers will have to repay the Social Security trust fund . "We don’t pay any attention to the trust fund," says Michael Tanner of the Cato Institute, a libertarian group in Washington. "We only care about the actual cash flows from the government."

Others disagree. They maintain that the Treasury bonds owned by the trust fund are assets. Says Reischauer, "If Social Security were run like other quasi-governmental agencies like Fannie Mae, which also buy Treasury bonds, there would be no question about repaying the loans."

John Rother, AARP’s director of policy, adds: "Redeeming the trust funds is a sacred commitment, since they represent prior contributions from workers to fund their own benefits. Failing to do so would break the intergenerational compact that’s the foundation of Social Security."

Indeed, if current workers divert some of their Social Security payroll taxes into private accounts, the government would have to make up the difference to cover benefits. Estimates for such transition costs range between $1 trillion and $2 trillion over 10 years.

At a time when the government is already running record deficits, many economists worry what the transition costs could do to the overall economy. Says Christian Weller, senior economist at the Center for American Progress, a nonpartisan research institute based in Washington: "It will lead to higher interest rates that hurt households directly—not abstractly in the future but immediately. You are hurting people today and cutting benefits in the future."

Eugene Steuerle, a senior fellow at the Urban Institute, says private accounts may have a role to play. But, he adds, they’re getting too much attention and detracting from other Social Security issues.

"Social Security could do a much better job," he says. "With or without private accounts, it needs to be better targeted to those who are most elderly and truly needy."

Barbara B. Kennelly, head of the National Committee to Preserve Social Security and Medicare, says private accounts change the intent of Social Security. "What the president’s plan does is take Americans out of the community pool, where we share the risk, and put each of us into our own pool of one to fend for ourselves," she says. "That’s fine if you’re rich.

"Of course, we have to make changes in years to come. What we don’t have to do is dismantle the current program to do it."

Merrill Goozner, a Washington-based writer, covered economics for the Chicago Tribune. He wrote The $800 Million Pill: The Truth Behind the Cost of New Drugs. Carol Simons and Susan Crowley contributed to this article.