UNDERSTANDING THE DISPARITY IN AV All.ABILITY OF PRESCRIPTION DRUGS IN THE UNITED STATES: COMPROMISE MAY BE tHE ANSWER Natalie J. Tanner• INTRODUCTION The issue of pharmaceutical drug affordability has moved to the fore­ front of political and public health concerns over the past decade. The increas­ ing prices of prescription drugs in the United States have denied a class of people access to medication. This problem is not limited to the United States; similar and often more acute dilemmas can be seen in many developing countries. The high prices of pharmaceuticals in the United States can be attributed to several factors. The two most prevalent are the tempQrary monopolies large pharmaceutical companies gain upon receiving patents for their products, and the stringent standards which those drugs must meet under Food and Drug Administration (FDA) regulation.• The monopoiies granted tO the patenting companies are not without justification because those companies must invest millions of dollars in research and development (R&D) of these new drugs.2 The patent monopolies act to fulfill the companies' investment-backed • J.D. Candidate, 2005, Indiana University School of Law-Indianapolis; B.S. in Biomedical Science, 2002, Texas A&M University, College Station, TelaJ. I would like to give a special thanks to my family, Professor William Bradford, and Professor Richard Wright for all of their much appreciated advice and support. 1. See Mark B. McClellan, Commissioner, Food & Drug Administration, Speech at the Fifth Annual David A. Winston Lecture (Oct. 20, 2003) [hereinafter McClellan FDA Speech], available at http:/lwww.fda.gov/oc/speechesl20031winston1020.html. 2. See Michele L. Creech, Comment, Make a Run for the Border: Why the United States Government is Looking to the Intenu:ztional Markel for Affordable Prescription Drugs, lS EMORY INT'L L. REV. 593, 600-04 (2001) (indicating that patents are granted to originator products to allow developers to recoup R&D expenieS); see also Robert Lenzner, The Effects Could Be Devastating, FORBES, Nov. 27, 2000, at 156. But cf. Lawrence A. Sullivan, Antitrust: New Economy, New Regime Second Annual Symposium of the American Antitrust Institute: Is Competition Policy Possible in High Tech Markets?: An Inquiry Into Antitrust, Intellectual Property and Broadband Regulation as Applied to "The New Economy," 52 CASE W. REs. L. REv. 41,63 (2001)(arguingthatR&D grantscannotcontinuetorisepercompanywithoutan accompanying oppressive effect on· competition in that· madc.et). See generally PHARMACEUTICAL RESEARCH& MFG. OF AM., WHY DO PREscR1PTIONDRUGSC0ST SO MUCH? .•• AND OTHER QuESTIONS ABoUT YOUR MEDICINES (2000) [hereinafter QuEsTioNS ABouT MEDICINES] (explaining the different factors affecting the rising costs ofpbatmaceutical drugs), available athttp:/lwww.phrma.48 Because the United States pharma­ ceutical companies must also satisfy the prerequisite of FDA approval to bring their new drugs to market, their expenses are increased all the more. Another key contributing factor to the high price of pharmaceutical drugs in the United States is direct-to-consumer (DTC) advertising. Over the past decade, pharmaceutical companies have steadily increased their budgets for marketing, advertising and public relations.49 Accompanying the addi­ tional marketing expenses that pharmaceutical companies must account for in their drug pricing, DTC advertising has improved consumer awareness and placed . pressure on physicians to prescribe the medications consumers request. so Advertising increases the costs consumers must cover when paying for their drugs and promotes the shift of the medical field from a service to a business. Such a shift naturally promotes the pharmaceutical company's attempt to maximize profits, therefore increasing product prices in accordance with increased demand. In addition, consumer demand is relatively inelastic in relation to the price of prescription drugs because such drugs are often necessary to the 44. Mark H. Beers et al., Inappropriate Medication Prescribing in Skilled-Nursing Facilities, 117 ANNALS INTERNALMED. 684 (1992). 45. Id 46. QuEsTIONS ABoUT MEDICINES, supra note 2. 47. DEP'TOFHEALTH&HUMANSERVS.,FOOD&DRUGADMIN.,PuB.No.FS01-3,JUST THE FACTS IMPROVING PuBUC HEALTH: PROMOTING SAFE AND EFFEcTIVE DRUG USE (Aug. 2003) [hereinafter IMPROVING PUBuc HEALTH], available at http://www.fda.gov/opacom/ factsheets/justthefilcts/3cder.pdt; Michelle Meadows, The FDA 's Drug Review Process: Ensuring Drugs Are Safe and Effective, FDA CoNSUMER, July-Aug. 2003, available at http://www.fda.gov/fdac/features/2002/402_drug.html. 48. IMPROVING PUBUC HEALTH, supra now 47. 49: Creech, supra note 2, at 607. 50. Tamar V. Terizian, Notes and Comments. Direct-to-Consumer Prescription Drug Advertising, 25 AM. J. L. & MED. 149, 157 (1999). 2005] THE DISPARITY 1N Av AILABJLITY OF PRESCRJPTION DRUGS 275 person's ability to function. 51 Often very few realistic drug substitutes exist and in certain cases, once prescription drug use has begun, it must be con­ tinued for a continuous period of time (e.g., anti-depressants). Moreover, numerous prescription drugs can be highly addictive, which can affect such a drug's demand as well. Where consumer demand is inelastic to price, phanna­ ceutical companies can charge more for a product than they could in a· market where consumer demand fluctuates in response to drug price. 52 With such a strong and stable consumer demand in addition to the limited governmental regulation in this area, pharmaceutical companies ultimately set the price of prescription drugs in the United States. 53 A. General Pricing Structure of Pharmaceutical Drugs in the United States As mentioned above, pharmaceutical manufacturers operate in a free market system and are able to price products in the United States at whatever level they wish, subject to minimal structural restrictions. 54 Most of these firms are engaged in all phases necessary to bring a prescription drug to market, including the "[R&D] of different compounds, pushing new medicines through clinical trials, obtaining FDA approval, and the advertising and mar­ keting of new drugs. "55 Because these pharmaceutical manufacturers are involved in every aspect of bringing a drug to market, they have broad dis­ cretion in setting prices. 56 R&D expenses are the chief component behind the high costs of phar­ maceutical drugs. To bring a new drug to market requires a substantial invest­ ment of time and resources. In addition, many of the costs associated with this process are sunk costs and therefore, largely unrecoverable once spent. 57 Studies indicate that the average new drug costs $800 million to develop and bring to market, 58 a process which takes an average of fourteen years. 59 While this high cost seems unreasonable at first glance, it is necessary to consider that "of every 5000 potential new drugs tested in animals, only five are 51. PATRICIAM. DANZON, PIIARMA.CEUTICALPRICE.REoul.ATION: NATIONALPOUCIES VERSUS GLOBAL INTERESTS 11 (1997). 52./d. 53. Trudy Lieberman. Health Matters: Why Health Costs Sting Again, L.A. TIMEs, Jan. 21,2002, at Sl. 54./d. 55. Creech, supra note 2, at 598; Stanton, supra note 41, at 153. 56. Stanton, supra note 41, at 155. 57. /d. ("Sunk costs are those incurred in preparing to bring a product to market .... "). 58. The Ballooning Price Tag, TUFfs E-NEWS, Dec. 4, 2001, at http://www.tufts.edulcommunications/stories/120401BallooningCosts.htm(lastvisitedApr.17, 2005) (on file with the Indiana Health Law Review). · 59. WHLIAM C. STEERE, JR., 'DIOUGHI'S TOWARD A MEDICARE DRUG PLAN (Center for the Study of Am. Bus., CEO Series Issue No. 35, Sept. 1999), available at http ://we. wustl. edu/ csab/CSAB %2 Opubs-pdf01o20 fi les/CE0%2 0 Series/ceo 35%20medicare%20drugs.pdf. 276 INDIANA HEALTH LAW REVIEW [Vol. 2:267 promising enough to be tested in humans. Only one of those five is eventually approved for marketing.'>60 Logically, the revenues derived from successful medicines must not only cover the R&D expenses involved in their own development; but also the R&D costs of the unsuccessful medicines as well.61 Moreover, a pharmaceutical company must have the financial resources in place to develop and test thousands of compounds, knowing that very few of them will ever reach consumers and thereby potentially reap a profit 62 Thus, the profits from the successful drugs must be high enough to cover the R&D expenses of the drugs that never reach the market.63 If drug manufac­ turers charged only the marginal cost of drug production-the cost of making each new pill-they would never recover their research costs, and the drug business would not be profitable. 64 While critics concede developing and introducing a new drug into the market is an unquestionably expensive process, they have pointed out''that the billions of dollars spent on R&D do not come out of the drug companies' pockets alone.'>6s In 1994, the United States federal government contributed fifty-five percent ofthe total amount spent on pharmaceutical drug R&D.66 The National Institutes ofHealth (NIH) is the main source of most federally provided health care R&D funds. 67 NIH funds have been used to develop one third of the most important drugs developed between 1965 and 1992.68 While federal funding does exist, pharmaceutical companies invest tremendous amounts of their own money on R&D as well. It is not uncommon for large pharmaceutical companies to invest several billion dollars annually in R&D, over and above any federal aid they may receive.~ If pharmaceutical 60. The Ballooning Price Tag, supra note 58; see also QUESTIONS ABouT MEDICINES, supra note 2, at 2 (providing graphical depictions of the R&D costs and stating, "[t]he average cost ofbringing one new medicine into the market is $500 million ... [and] takes an average of twelve to fifteen years to discover and develop.;. Note the $500 million cost to bring to market was the statistic as of June of2000, which subsequently increased to $800 million by December of2001. Abbot Laboratories estimates it costs $900 million to carry one drug all of the way through to market. JOHN LEONARD, ABBoTr LABoRATORIES. NEW DEvELoPMENTS IN MEDICINE IN THE 21ST CENTURY (Oct. 2, 2003), available at http://abbott.com/citizenship/pdf/GPAI.pdf(on file with the Indiana Health Law Review). 61. QuESTIONS ABoUT MEDICINES, supra note 2. 62. Sarah E. Burek. Hatch-Waxman Reform and Accelerated Market Entry of Generic Drugs: Is Foster Necessarily Better?, 2003 DuKE L. & TEcH. REv. 18 (2003). 63. /d. 64. Latham. supra note 17, at 147. 65. Creech, supra note 2, at 601; Michael B. Moore, "Open W'uie" (Your Pocketbook That Is!)- Call for the &tablishment in the United States of a Prescription Drug Price Regulatory Agency, 1 Sw.J.L.&TRADEAM.149, 156(1994). 66. Creech, supra note 2, at 601. 67. Moore, supra note 65, at 157. 68. Id. at 156. 69. On the high end, Pfizer, Inc. budgeted $7.1 billion for R&D in 2003. Pfizer Inc., How We Help: Research and Development, at http://www.pfizer.com/help/index.html (last visited Apr. 17, 2005) (on file with the Indiana Health Law Review). Additionally, Eli Lily spent $2.15 billion on R&D expenditures in 2002. Ell LnLY & COMPANY, ANNuAL REPoRT 2002 (2003), 2005] THE DISPARITY IN AV All..ABILITY OF PREsCRIPTION DRUGS 277 R&D relied solely on subsidies from the federal government, the level of innovation currently seen in the United States pharmaceutical industry would be reduced, simply because the government could not afford to fund the current level ofR&D expenses. However, as long as individual companies are spending their own money on R&D, they will be at liberty to set their prices (absent government price caps or other limitations). B. Effects of Increased Pharmaceutical Prices in the United States Two main effects have resulted from the increased costs of United States phannaceuticals. The high profits in the American drug industry create strong incentives for United States pharmaceutical companies to promote research of new drugs. Thus, high prices ensure that Americans will continue to promote the development of, and have access to, the most innovative drugs in the world.70 Increased United States innovation is made apparent by the sub­ stantially longer wait international consumers must endure for access to new medicines as compared to American consumers. 71 On the other hand, cutting edge medicines are of no use to consumers who cannot afford to purchase them. 72 An increasing number of people in today's society are finding themselves unable to afford their prescriptions and are consequently being forced to seek similar pharmaceuticals from more affordable sources outside of the United States.73 While this problem is not limited to the elderly, the increase in the number of elderly people in the United States has added to the gravity of this problem. "Everyday millions of Americans ... must choose between buying food or medication or between [sic] taking the fully prescribed dosage of medicine[,] or cutting their pills in half because a refill is too expensive."74 It is for this reason that American consumers are turning to the less regulated, cheaper foreign markets. When http:/llilly.com/investor/annual_reportllillyar2002financial.pdf(lastvisitedApr. 17, 2005) (on file with the Indiana Health Law Review). Abbott Laboratories reports it spends more than $1 billion annually on R&D. Abbott Laboratories, Corporate Overview, at http://abbott.com/ corporate/corporate_ overview.html (last visited Apr. 17, 2005) (on file with the Indiana Health Law Review). Merck & Co. reported spending just under $3.2 billion in 2003 on R&D which was a nineteen percent increase from their 2002 R&D expenses. MERCK & CO. INc., ANNuAL REPORT 2003 (2004), http:/lwww.merck.com/financelannualreport/ar2003/fmancial _sectionlmerck2003_ar_financials.pdf(last visited Apr. 17, 2005) (on file with the Indiana Health Law Review). 70. Creech, supra note 2, at 603. 71. NPR Broadcast, supra note 40. 72. Jd. According to Rep. Sanders ofVermont, foreign countries value innovative drugs as well. but they also realize innovative drugs are only useful if their citizens are able to afford them. Id 73. McClellan FDA Speech, supra note 1. 74. Creech,supranote2, at 593 (citing 146CONo.R.Ec. 87193, (dailyed. July 19, 2000) (statement of Sen. Jeffords)). "In a study by the AARP, it was revealed that seven out of ten elderly Americans surveyed did not take the medicines prescribed to them because of the high costs." ld (citing Moore, supra note 65, at 152 n.20). 278 INDIANA HEALTH LAW REviEW [Vol. 2:267 forced to choose between poor quality of life and the risk of possibly using counterfeit, contaminated, or ineffective foreign pharmaceuticals, these con­ sumers are deciding to take their chances. A balance must be struck between the consequences of increased prices of United States pharmaceuticals and the promotion of prescription drug inno­ vation. While the United States asserts that it produces the world's leading drugs, there is no assurance that the people who need these drugs will be able to afford them. 75 Advocates of the current pharmaceutical system could argue that the Supreme Court has held there is no constitutional right to health care,76 and therefore, there is no legal basis for prescription drug policy reform. On the other hand, it could be contended that a moral obligation exists to assist the disadvantaged. 77 If viewed from a purely business perspective, United States phar­ maceutical companies are merely creating a product and selling that product for a profit. Such companies are provided protection for their patent rights under the United States Constitution.78 While some believe companies have a moral obligation to make their drugs affordable, patent protection makes no distinction between products functioning as necessities versus luxuries. 79 75. Creech, supra note 2, at 594. 76. DeShaneyv. WmnebagoCountyDep'tofSoc.Serv.,489U.S.189, 198-204(1989) (holding the United States government is not obligated or liable to providing any affirmative social guarantees); Youngberg v. Romeo, 457 U.S. 307, 317 (1982); Cont'l Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405, 423 (t 908) (holding the United States Constitution evinces no public policy that states a patent holder has to cede the use or benefit of his invention to the United States); Wideman v. ShalloWford Cmty. Hosp., 826 F.2d 1030,1031 (llth.Cir. 1987). 77. While one could not be punished in the United States for a moral violation absent statutory codification of the specific offense, the majority ofUnited States law and policy is grounded upon moral prlriciples. Health care is an area where mQral principles are weighing more and more heavily into policy decisions. The establishment of Medicare and Medicaid constitutes a clear expression of the American public's willingness to assist the disadvantaged, even at significant taxpayer expense. NORMANDANIEI3BT AL., BENCHMARKS OFF AIRNESSFOR HEALTH CARE REFORM 17 (1996); Thomas H. Murray, Genetics and the Moral MISsion of Health Insurance, HAsTINGS CTR. REP., Nov.-Dec. 1992, at 12, 16-17. Likewise. the Emergency Medical Treatment and Active Labor Act (EMTALA), 42 U.S.C. § 1395dd (2004), is another example of American society's growing concern about moral fairness in the health care arena. Sharona Hoffman. Unmanaged Care: Towards Moral Fairness in Health Care Coverage, 781ND. L. J. 659, 672-73 (2003). EMTALArequires hospitals to screen all patients who arrive in their emergency departments and stabilize their conditions regardless of the patient's ability to pay for those services. 42 U.S.C. § 1395dd(a)-(b) (2004). 78. U.S. CONST. art. I, § 8, cl. 8. (''The Congress Shall have Power ... To promote the Progress ofScience and useful Arts, by seeming for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries .... "). It shoUld be noted that the Constitution only provides for a monopoly over the patented product, it does not guarantee a profit from those patent rights. 79. 35 U.S.C. § I 0 l (2004)("Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title."); see also U.S. CONST. art. I, § 8, cl. 8. 2005] THE DISPARITY JN AVAILABILITY OF PRESCRIPTION DRUGS 279 ill. FOREIGN PHARMACEUTICALS AND QUALITY ISSUES Because of the pricing discrepancy between United States and foreign pharmaceuticals, many Americans have turned to importing foreign manu­ factured drugs.on their own.80 The potential savings are hardly trivial, given that an estimated "$90.7 million a year could be saved if drugs for state employees and retired employees were bought across the border in Canada. •.St While American consumers claim this is the only way they can obtain the medicines they need, the safety of such a practice is questionable. Above aU, foreign pharmaceuticals are not subject to regulation by the FDA, leaving much to chance in terms of the drugs' safety.82 One example of the risks posed by consumer importation of foreign drugs is provided by a 2001 Congressional study. The report found that the large amounts of drugs that had been re-imported into the United States have created health and safety risks to American consumers. 83 The analysis focused primarily on American drugs that have been re-imported into the United States as American goods returned (AGRs). A major problem presented by re­ imported drugs lies with the improper handling and shipping by foreign countries, which introduces the possibility that the drugs may have become subpotent or adulterated. 84 The Congressional report also revealed that re­ importation of American drugs acted as a catalyst and cover for the foreign counterfeit drug market 85 When a pharmaceutical manufacturer is granted a patent for its new drug, the chemical structure of that patented drug, and frequently its chemical synthesis, can be found in either the patent application or in subsequent phar­ maceutical literature. 86 "Pharmaceutical peddlers are taking advantage of regulatory gaps to move millions of prescription drugs, including controlled 80. Jennifer Rak, Note, An Rxfor Reform: A Medicare Prescription Drug Benefit, 12 HEAL1HMAtRJX 449, 449 (2002). 81. Monica Davey, Illinois Seeks Permission to Buy Drugs, N.Y. TIMEs, Oct. 27, 2003, atA12. 82. Michelle Meadows, Imported Drugs Raise Safoty Concerns, FDA CONSUMER, Sept­ Oct. 2002, available at http://www.fda.gov/fdac/features/2002/502 _ import.html. 83. U.S. FOOD & DRUG ADMIN., DEP'T HEAL1H & HUMAN SERVS., THE PRESCRIPTION DRUG MARKETING ACT REPORT TO CONGRESS 2 (JWle 2001) [hereinafter FDA PREsCRIPTION DRUG MARKETING ACT REPORT], available at http://www.fda.gov/oc/pdma/report20011 4228tpt.pd£ 84. Id. "Adulterated" is defined as a foodstuff containing "any poisonous or deleterious substance which may render it injurious to health •.. [or] if it bears or contains any added poisonous or added deleterious substance •.• that is unsafe within the meaning of section 346 of this title." 21 U.S.C.A. § 342(a)(l )-(2) (2004). A foodstuff is also termed adulterated "if it has been prepared, packed, or held Wlder unsanitary conditions whereby it may have become contaminated with filth, or whereby it may have been rendered injurious to nealth." Id. 85. FDA PRESCRIPTION DRUG MARKETING Acr REPoRT, supra note 83. 86. Glenn Law, Note, Liability Under the Process Patent Amendments Act of 1988 for the Use of a Patented Process Outside the United States, 60 GEO. WASH. L. REv. 245, 247 (1991). 280 INDIANA HEALTH LAW REviEW [Vol. 2:267 substances, into the United States from Mexico, Canada, and elsewhere."87 With advancing technologies, the Internet providing easy access to informa­ tion, and the ability to set up web ventures, counterfeiting pharmaceuticals has become an increasingly more prevalent and serious problem. 88 Frequently, such counterfeiters do not even need access to the drug's chemical structure.89 Canadian drugs are not FDA regulated, providing no guarantee for their safety or efficacy. 90 Therefore, when Americans travel to Canada to purchase cheaper pharmaceutical drugs they cannot be sure what they are buying. In addition, it is possible that· such consumers could be unknowingly buying counterfeit medicines which could cause substantial hann to their health and livelihood. Thus, it is necessary for the United States to adopt a solution which caters to keeping drugs both affordable and safe. IV. CANADIAN. PATENT LAW Only forty years ago, the high costs of pharmaceutical drugs were causing problems in Canada similar to the dilemma facing the United States today.91 Canada was unable to promote the public welfare due to the extensive prices of pharmaceutical drugs. At that time, the prices of Canadian pharma­ ceutical drugs ranked among the highest in the world. 92 In 1968, the Canadian government responded by enacting legislation that mandated the licensing of the patented drugs to generic manufacturers in order to have the effect of price control.93 Nevertheless, twenty years following the 1968licensingmandate, Parlia­ ment decided an unreserved compulsory system excessively encroached upon patent holders' rights, effectively diminishing incentive for innovation among researchers.94 While the compulsory licensing system was effective in decreasing the costs of phannaceutical drugs to the public, it also decreased the monetary incentive for Canadian pharmaceutical manufacturers to invest in ongoing research in pursuit of novel drugs and, therefOre, new patents. Moreover, the United States was exerting pressure on Canada to reject the compulsory licensing system because it enabled individuals or corporations 87. McClellan FDA Speech, supra note 1. 88./d 89. Harrison, supra note 3, at 494. 90. Meadows, supra note 82. 91. Stanton, supra note 41, at 160. 92. Id. 93. Id Such mandatory licensing of patented dmgs to generic manufacturers is also referred to as compulsory licensing. Compulsory licensing was not a new concept in Canada, as their use of compulsory licensing can be seen as far back as the 1923 amendments to the Patent Act. Joel Lexchin, Pharmaceuticals, Patents, and Politics: Canada and Bill C-22, 23 INT'LJ.IIEALTH SERVS. 147, 148 {1993). 94. Patricia I. Carter, Federal Regulation of Pharmaceuticals in the United States and Canada, 21 LoY. L.A INT'L& COMP. L. J. 215, 242 (1999). 2005] THE DISPARITY IN AVAILABILITY OF PREscRIPTION DRUGS 281 to obtain a compulsory license from the Canadian Commissioner of Patents and use a United States patented process to manufacture a drug in Canada.95 In effect, the compulsory licensing system was facilitating the misappropria­ tion of United States patents. The United States opposition to the Canadian licensing policy was so powerful and widespread that by October of 1985, the United States Trade Representative complained in his annual report ''that Canada's compulsory licensing policy was costing U.S. companies 'hundreds of millions of dollars .... 96 Pharmaceutical companies in the United States were among the loudest voices heard in favor of using the United States' political force to encourage Canada to abandon its compulsory licensing system. Influenced by interior concerns as well as political pressure from the United States, the Canadian Parliament implemented a compromise by granting the patent holder an exclusive term for at least seven years, after which mandatory licensing could be imposed.