I'm sure that consumers, medical policymakers and insurance companies are just oozing with joy. After all, we are rapidly heading for pharmaceutical paradise--a pharmacy packed with really cheap generics and not much else.

This will not only save tons of money, but also stick it to those bad boy pharmaceutical companies that invented the drug in the first place, and then sucked us dry by fighting off the noble generic companies for an extra two minutes of patent protection so they could suck us even drier.

Doesn't get any better than this. At least until you swallow the pill.

In today's "big surprise of the day," Ranbaxy Laboratories, India's largest generic manufacturer got a little $500 million slap on the wrist from the U.S. Justice department.

The company admitted that a few years ago that they manufactured and subsequently sold substandard drugs, which were made at two different facilities in India. Well, anyone can make an honest mistake. Except perhaps Ranbaxy, which as part of the settlement, admitted to lying about the problems by intentionally making false statements to the FDA.

Their guilty plea added up to three felony counts, $150 million in criminal penalties and another $350 million in civil penalties.

The drugs in question were for treatment of acne, epilepsy, neuropathic pain and one antibiotic-- ciprofloxacin.

This is hardly the first time that Ranbaxy has had problems with drug "quality"--a misplaced euphemism if ever there were one.

In 2008, the FDA prohibited the importation of 30 drugs from two of Ranbaxy's plants in India, and instituted a so-called "Application Integrity Policy," which stopped the review of any new drug applications from one of the company's facilities. The reason? Once again, fraudulent record keeping and reporting.

In a sane world, one might think that the company might be asked to take their business elsewhere, but sanity seems to have become, well, insane.

Despite the company's accomplished track record of incompetence and fraud, in November 2011 the FDA still gave permission for Ranbaxy (and only Ranbaxy) to sell the first generic version of the Lipitor. This was clearly well-deserved, as evidenced by the fact that in 2102, Ranbaxy was forced to recall multiple lots of the drug after the pills were found to contain glass particles.

One might think that this would be enough, but one would be wrong.

According to a recent Fortune report, the U.S. Dept. of Veterans Affairs recently signed a large contract to buy generic Lipitor from, who else? Ranbaxy. Two months ago.

OK. This stopped being funny quite a while ago. And the take home message is even less amusing--saving money is so important to our government and medical providers that they are going to look the other way while a bunch of hacks in India feed you a steady supply of crappy drugs.

And Ranbaxy's response doesn't exactly inspire confidence. According to CEO Arun Sawhney "While we are disappointed by the conduct of the past that led to this investigation, we strongly believe that settling this matter now is in the best interest of all of Ranbaxy's stakeholders; the conclusion of the DOJ investigation does not materially impact our current financial situation or performance."

Which is about as comforting as in February, when the company also issued a statement that "[I]t was confident in the continuing safety and quality of its products."

Which begs the question, "what would happen if they weren't confident? "Oops- you swallowed a hand grenade instead of a cipro? Please hold."

And if you think this is an isolated incident, you perhaps ought to consider a little Wellbutrin therapy. Except last year, Teva, Israel's giant generic manufacturer was forced to recall all of its Budeprion XL, their version of Wellbutrin XL, (the generic name is bupropion). The problem? Its U.S. manufacturer, Impax Laboratories had a little problem with the time-release formula.

This is no laughing matter with bupropion, since the 300 mg time-release pill released the drug much too soon putting patients at risk for seizures, and cardiac arrhythmias. The maximum immediate-release dose for the drug is 100 mg, which was exceeded by the failure of the time-release formulation, leaving patients susceptible to side effects early on and sub-therapeutic blood levels later.

These are two of the biggest generic companies around, which makes me wonder what will happen when Joe's Pharmaceuticals starts making generic heart drugs in a U-Haul in Newark.

These are our future medicines, and inevitably most of us will eventually run into one. The FDA has shown little ability to catch this until after the problem has already occurred, and the cheap prices are simply too enticing.

This is just getting started. Open wide folks. There's going to be a lot for you to swallow.

I'm going to have a little fun with Josh Bloom's recent posting, not because I don't respect him or his writing--I do--but because we can use it to illustrate an important point.

His posting was about Merck and Liptruzet and he asked how Merck could look itself in the mirror when "Merck is trying something that is as good an example of marketing without innovation as you'll ever see." He went on to say, "Liptruzet behaved, as expected, just like Vytorin. It reduced LDL cholesterol more [than] for patients who took Lipitor alone, but it did not reduce patients' chances of developing heart disease. Not surprisingly, this left some doctors to wonder why it was approved at all."

In other words, if Merck can't prove that Liptruzet does more than just reduce LDL, then it's just a big marketing scam. For fun, let's gain some perspective by substituting Merck with Ford and Liptruzet with the F-150 pickup.

"The Ford F-150 pickup carries workers and tools to jobsites around the country. It has been used for carpentry, masonry, steel working, HVAC, concrete, logging, plumbing, and roofing, but, at least so far, Ford has been unable to prove that the F-150 can do other, even more amazing things. With the F-150 pickup, Ford is trying something that is as good an example of marketing without innovation as you'll ever see."

Perhaps Ford has not proven the F-150's ability to do other amazing things because those things are difficult or expensive to prove. Or perhaps the study is underway, as is Merck's IMPROVE-IT study of Vytorin. Maybe down the road someone will show that F-150's can be used for other, important things. Or, maybe not. In the meantime, the stuff the F-150 does is still impressive and, by being on the market, it gives consumers a choice and provides competition for Dodge, Chevy, and Toyota.

If customers did not see the value in F-150's, they wouldn't buy them. The fact that they do buy them shows that they see value. And these are the people who are most directly affected by owning a new pickup, as opposed to outside "experts" who might have different values and preferences, and certainly have less skin in the game.

Pharmaceuticals are somehow seen as different. The opinion that Liptruzet shouldn't be given a chance on the market shows little respect for the ability of patients, physicians, and payers--the real people who take, prescribe, and purchase drugs--to form their own opinions based on their own experiences. I, for one, would prefer the pharmaceutical market to be more like the automotive market.

At the end of last night's Intelligence Squared debate, 53 percent of attendees thought so - up from 24 percent at the beginning.

So what is it that swayed a room of oncologists, physicians, and even celebrities like the father of DNA, Jim Watson? Arguing for the motion were former FDA Deputy Commissioner and American Enterprise Institute Resident Fellow, Dr. Scott Gottlieb, and Manhattan Institute Senior Fellow, Peter Huber. The duo made a compelling, if somewhat wonky (try explaining the difference between Bayesian and frequentist statistics in under a minute), case that the FDA's aging clinical trial requirements are ensuring that the most needed medicines - those that treat diseases like Alzheimer's, antibiotics that are effective against resistant bacteria, and many others - will either never make it to market, or will take years longer than what is reasonable.

Indeed, listening to Dr. Gottlieb and Huber, it becomes evident (as we've discussed on MPT numerous times) that the large population requirements and the onerous statistical certainty that the FDA requires are keeping drug development from progressing - moving from treating the average patient to treating the individual. A glimmer of hope, however, remains. The FDA has demonstrated its ability to be more innovative in the past - its fast track and accelerated approval designations helped get cancer drugs and HIV/AIDS drugs to market in record time. As Huber put it, the very existence of a fast track designation, indicates that there is something patently wrong with the standard trials.

But what about the other side? Surely there is an argument to be made in favor of the FDA's caution. Arguing against the motion was Dr. Jerry Avorn of Harvard Medical School, and Dr. David Challoner, VP for Health Affairs Emeritus at the University of Florida. The crux of the rebuttal, however, was not quite as compelling - in essence, Avorn and Challoner believe that the FDA is approving drugs fast enough, and requiring them to do so any faster would be very risky. The statistical certainty demanded by the FDA is a necessity for an agency charged with ensuring the safety of our food and our medicines. In years that few drugs were approved, they argued, the fault lies with the pharmaceutical industry for not coming up with enough new drug candidates.

The problem with this line of reasoning is twofold: first, Huber's point on the fast track designation is on the money. The fact that fast track and accelerated approval designations were necessary to get urgently needed drugs on the market is in and of itself an indictment of the clinical trial process. Certainly, cancer drugs often do much harm to the patient, and AIDS cocktails were notoriously rife with side effects. But it's hard to imagine that anyone would have preferred having these two drug classes go through the decade-long development process of FDA clinical trials.

The second problem with Avorn and Challoner's reasoning is that it ignores an important class of drugs - antibiotics. Over the past two decades, antibiotic resistance has become a growing public health problem, and many of our last-line antibiotics are beginning to fail (cephalosporins are often not effective against gonorrhea, for instance). New antibiotics are hard to come by, however, because of a variety of reasons (an important one is that the "low-hanging fruit" has already been picked), but chief among them are the stringent requirements for antibiotic trials set by the FDA - these requirements are designed to meet a level of statistical certainty, but this often make antibiotic development impractical or prohibitively expensive.

Nevertheless, this is a debate that is likely to continue. While the FDA has acknowledged that some of its guidelines may need to be updated, the agency has been slow to issue definitive and easy-to-follow guidance to guide the development of personalized medicine. Hopefully, officials at the agency were paying attention to last night's debate.

The discovery of a new drug-resistant strain of gonorrhea - now being called a "superbug", should worry policymakers. This is only the latest (and certainly not the last) instance where antibiotic-resistant bacteria threaten public health. The last line of antibiotics that treat gonorrhea - cephalosporins - are beginning to fail worldwide (a recently developed antibiotic in this class ceftobiprole medocaril, however, has shown some efficacy against a methicillin-resistant staphylococcus aureus (MRSA) - though the FDA rejected approval in 2008). 

Among all drug classes, antibiotics are known to have among the lowest risk-adjusted net present value (NPV: the discounted future revenue minus discounted costs) - around $100 million; compare this to an estimated $300 million NPV for cancer drugs or $1.15 billion for drugs treating musculoskeletal conditions. In effect, this means that antibiotics fall fairly low on drug companies' lists of new projects. Though there are many reasons for antibiotics' poor value for companies, it is widely agreed upon that FDA clinical trial regulations (particularly as they affect antibiotic development) contribute significantly. 

Just like any other drug candidate, when a new drug application (NDA) is filed for an antibiotic, there needs to be supporting evidence demonstrating its safety, correct dosage, and efficacy using the FDA's 3-phase clinical trial approach. But antibiotics have to face yet another hurdle - traditionally, drugs are tested against a placebo to establish efficacy. However, when it comes to putting antibiotics through clinical trials (usually patients are signed up in a hospital setting) using a placebo in the control arm of the study presents an ethical dilemma of offering someone with a serious infection a simple placebo (more importantly, the point of a placebo is to verify that particular conditions won't clear up on their own - while simple upper respiratory infections very well might, it's hard to argue that a MRSA infection will). Because of this, antibiotics are put into what are known as "non-inferiority" trials; drug sponsors have to show that new antibiotics are - within a certain margin - no worse than existing treatments.

The problem here is twofold - first, the FDA's clinical trial designs require very large patient samples, and place restrictions on previous antibiotic use (the patient can't have taken another antibiotic within a certain time period before being entered into the trial). For antibiotics, which have very specialized markets (these markets tend to have higher than average mortality rates because they are usually in a hospital setting), large sample sizes are often unrealistic, and neither is the expectation of no prior antibiotic use (because patients are often given an antibiotic immediately when being admitted for an infection). Second, while the FDA has (thankfully) moved away from imposing pre-defined non-inferiority margins and has given investigators more discretion in doing so, the guidance is still relatively stringent and has not helped spur antibiotic development. In particular, the guidance still favors a "fixed margin" approach, where the non-inferiority margin is identified based on historical placebo trials (the alternative, the "synthesis" method is less conservative but more nuanced - it combines estimates for effect versus a comparator drug as well as versus a placebo). The preference for placebo-focused trials undoubtedly causes confusion when placebo trials are unavailable or impractical.

Besides the FDA regulations, other issues with antibiotics development are inherent to the market - antibiotics are short-term therapies, with a course of therapy typically lasting around a week. By contrast, cancer therapies can last for months, or statins for a lifetime, giving drugmakers a much longer time frame to recoup their costs and generate profits.

But is there really a pressing need for new antibiotics? Or is the drug-resistant strain of gonorrhea a one-off finding? A few statistics should answer this:

• More Americans die from MRSA every year than from AIDS. 
• Growing antibiotic resistance has led to doctors using old, highly toxic antibiotics like collistin, which may often kill the patient just as well as the infection.
• The number of new antibacterial agents approved in the U.S. is at an all-time low.

The need for antibacterial drugs is undeniable. A growing number of pathogens are becoming resistant to all but the most toxic antibiotics in our armamentarium - many of these (like gonorrhea) used to be highly susceptible to available antibiotics but developed resistance over time. All is not doom and gloom however - the reauthorization, last year, of the Prescription Drug User Fee Act (PDUFA V) included a provision known as the GAIN Act. This established an additional five years of Hatch-Waxman exclusivity for antibiotic NDA-filers, resulting in a total of 10 years of market exclusivity with or without a patent. The law also gives antibiotics priority review and fast track status to reduce the review period and speed up the path from Phase I testing to NDA filing. While there may be marginal benefits for drugmakers, because the market exclusivity runs concurrently with patent life, the impact of an additional five years of Hatch-Waxman exclusivity is unlikely to be a game-changer.

Even more importantly, however, the law mandated that the FDA create a new pathway for approval of antibiotics. A specialized designation (with complete and thorough guidance) for antibiotics that simplified the development process and peeled back unnecessary regulations would be the best step that the FDA could take in helping spur antibiotic development. Since PDUFA V, the Infectious Diseases Society of America (IDSA) and the President's Council of Advisors on Science and Technology (PCAST) have proposed a "special population, limited medical use" pathway, which has received some FDA support. However, antibiotics approved under such a pathway would be very restricted to only the subpopulation for which trials establish an adequate benefit-risk ratio (though at the same time, this would hopefully make approval more predictable). Nevertheless, this seems to be a moot point for the time being, since no official draft guidance has been issued from the FDA, and the idea is still in the discussion stages with industry groups.

An adequate supply of antibiotics, and the ability to fend off ever-evolving bacteria is crucial to a future rife with chronic diseases and a generally "older" population. FDA regulations are hampering the ability of pharmaceutical companies to provide this supply. Policymakers should pressure the FDA to make good on its PDUFA obligations and to re-examine its antibiotic trial guidance. The limited use designation, when FDA takes action on it, may be valuable for the industry - a streamlined, focused pathway would help justify higher prices for antibacterial drugs, increasing the class's NPV for drugmakers. And while some may clamor about pharmaceutical companies profiteering from people's sickness, think of it this way - if we're willing to pay tens of thousands (even hundreds of thousands) of dollars for a cancer treatment that offers a few extra months of life, we should be willing to pay at least as much for an antibiotic that unquestionably saves a life.

The pharmaceutical industry does many wonderful things, yet most people regard it as one step below head lice on the food chain.

This week, Merck, with some questionable help from the FDA, gave more ammunition to industry critics, who typically maintain that the industry contributes little innovation, and is simply concerned with profits.

For the most part, this criticism is biased and uninformed, but this time I'm siding with the critics. Because Merck is trying something that is as good an example of marketing without innovation as you'll ever see.

The company just received approval for the cholesterol-lowering combination drug Liptruzet-- a functionally similar (identical?) version of their own Vytorin, which is a combination of their statin Zocor and Schering's (now part of Merck) cholesterol absorption blocker Zetia (ezetimibe).

Liptruzet, ironically happens to be a combination of Zetia and atorvastatin (generic Lipitor). Yes--Merck is substituting a former Pfizer drug for their own Zocor with combining it with Zetia to make a "new" medication with additional patent protection. This is innovation?

Worse still, both Vytorin and Liptruzet are of questionable use. In 2009, studies showed that Vytorin, despite lowering LDL and total cholesterol did nothing to prevent cardiac events. In fact, a 2009 New England Journal of Medicine article concluded that not only did Vytorin fail to reduce heart disease, but "the use of ezetimibe led to a paradoxical increase in the degree of atherosclerosis in association with greater reduction in LDL cholesterol, an effect we hypothesize may stem from unintended biologic effects of this agent."

Liptruzet behaved, as expected, just like Vytorin. It reduced LDL cholesterol more for patients who took Lipitor alone, but it did not reduce patients' chances of developing heart disease. Not surprisingly, this left some doctors to wonder why it was approved at all.

Dr. Steven E. Nissen, chairman of the department of cardiovascular medicine at the Cleveland Clinic commented "This is extremely surprising and disturbing."

This sentiment is echoed (and then some) by Philip Gelber, M.D., Chief Cardiologist at Cardiovascular Consultants of Long Island. "It is surprising to me that the FDA approved this combination drug. The modern movement requires that drugs not just be safe and effective in their immediate goal, but to also show efficacy in improving outcomes. Cardiac medications should not just reduce the cholesterol count, but reduce the risk of heart attack and stroke as well." He continues, "There was, I'm sure, pressure by big pharma to get this approved, which by pairing it with another drug, would in effect restore blockbuster Lipitor back to branded status. A tricky move, but one which doesn't make folks any healthier."

So, why on earth would we need a virtually exact copy of a drug that doesn't even work? This is for Merck to answer.

I also don't understand what the FDA was thinking here.

Are they under so much political pressure to approve new drugs that they will accept just about anything? Because it sure seems that way right now.

This past January, FDA Commissioner Margaret Hamburg bragged about the improved performance at the agency, which approved 39 new drugs last year compared to 30 in 2011, and 21 in 2010. She said, "Not only have we been able to approve more new drugs that have real benefits for patients but also classes of drugs that signal where we are going in areas like personalised medicine, where we've been able to use diagnostics to target sub-populations of responders."

But last week's approval of Liptruzet makes me wonder whether they are simply playing a numbers game for the sake of public perception. Because if there is any drug that does not have any obvious benefits for patients, it is Liptruzet.

This is a sentiment shared by Dr. Nissen. He said, "It seems like the agency is just tone deaf to the concerns raised by many members of the community about approving drugs with surrogate endpoints like cholesterol without evidence of a benefit for the disease we are truly trying to treat--cardiovascular disease."

This episode just plain smells bad on many levels. I get the feeling that just about everything except science is driving this, and this will be a black eye that Merck will be inflicting on itself and the rest of the industry.

This piece is cross-posted at the Manhattan Institute's state and local issues blog, PublicSectorInc.org

Fiscal instability is not only an issue nationally - driven largely by health care spending - but at the state and local levels as well. A new GAO report illustrates the magnitude of the fiscal challenges facing states, and identifies the (unsurprising) culprit:

The [simulation] show[s] that [state and local] health-related costs will be about 3.8 percent of GDP in 2013 and 7.2 percent of GDP in 2060...[t]he model projects that the [state and local] non-health-related costs will be about 10.5 percent of GDP in 2013 and about 7.7 percent of GDP in 2060.

The ever-growing burden imposed by health care spending means that by 2060, the national state and local fiscal gap will be around 4 percent of GDP - in nominal terms, that's about $5 trillion based on CBO projections. Because health care costs - enshrined in promises to government employees and retirees, as well as Medicaid spending on the poor - will drive this fiscal growth, which is unlikely to slow down (health care spending on current employees and retirees is governed by contracts, which makes it difficult to pare back; Obamacare's Medicaid expansion ensures that in the states that undertake it, many more residents will be covered making it more difficult to slow down its growth) other state and local outlays will fall on the chopping block. This phenomenon of "crowding out" is nothing new; because localities operate with limited funds (revenue must be raised through taxes, bond issuance, or from federal grants), each slice of the pie has to get smaller.

Indeed, the GAO report also acknowledges that wages paid to state and local employees will likely fall as a share of GDP (this phenomenon may ironically increase retirement promises that localities make to employees).

For states that are expanding their Medicaid programs under Obamacare, the expansion may seem like a reasonable way to shift costs to the federal government. At first, the federal government picks up the full cost of new enrollees, while later on, states will only be responsible for 10 percent of the costs. For the majority of states, however, this will still mean an increase in spending.

Reports like this underlie the need to drastically reform government health care spending - Medicare (on the federal side) and Medicaid (on both the state and federal side) are seen, unambiguously, as eating up an ever growing share of revenue going forward. Obamacare expanded Medicaid, shifting some costs to the federal government, while bringing "productivity adjustments" to Medicare in the form of provider cuts. Neither approach represents actual reform, however; analysts in the private sector and at the CBO routinely note that government health care spending is on an unsustainable trajectory.

Worse still, the latest FY14 budget from the White House drew a line around Medicaid, taking it "off the table."

Perhaps the one silver lining for Medicaid is that it remains largely a state-administered program that simply has to operate according to federal guidelines. Because of this, states have become testing grounds for new approaches to offering the poor affordable health care. Managed care penetration for instance, where tight networks of providers are often given financial incentives to provide more efficient, outcome-based care, varies significantly among the states. New York has more than three-quarters of its Medicaid population in managed care contracts; Maine, on the other hand, has less than half. Other innovative approaches have also taken hold - the Healthy Indiana Plan took a "consumer-driven" approach, offering Medicaid beneficiaries an HSA product that was partly funded by the state, to help keep down unnecessary health care spending - the results have largely been positive.

Just because one reform worked in Indiana doesn't make it ideal for other states, however. State medical needs vary greatly, and no amount of central planning will change that - basic demographic differences like income and age distribution can drastically affect a state's health care spending. Fortunately, states can request waivers from the federal government to experiment with new ways of paying for Medicaid services or administering the program.

Whether these waivers will continue to be issues as regularly as they have in the past is unclear - a uniform Medicaid program is essential to Obamacare's coverage expansion, and HHS may choose to approve fewer and fewer waivers as a way of better controlling the program. Other, more drastic approaches are likely only pipedreams for now - Medicaid block grants based on the successful welfare reform of the 90s would create a natural cap on future spending growth, as my colleague Paul Howard has written.

Real reform to Medicaid would take advantage of states' abilities to be "laboratories of innovation"--the current administration could take the first step by assuring states that even with a Medicaid expansion, HHS would continue to consider even the most drastic waivers. 

Estimates of Americans without health insurance hover between 15 and 20 percent - depending on the source (much of this is a difference in whether you ask about being uninsured presently or being uninsured at any time during the past year). According to the CBO, Obamacare will expand coverage to some 25 million people through exchanges and 12 million people through Medicaid expansion (a net of 27 million fewer uninsured because some people will lose employer coverage and others will lose existing non-group coverage). By CBO's estimates, this cuts the number of uninsured down to around 10 percent - about 30 million people.

This coverage expansion, however, masks some confusion about what health insurance really is. Beth Haynes, Executive Director of the Benjamin Rush institute points out the underlying problem:

Think about your auto, life and homeowner's insurance. Each of these is designed as a means to pay for unexpected, unpredictable, very expensive occurrences outside of the control of the policyholder... So what is it we have that we call health insurance but isn't? We have the prepayment of medical expenses. We expect our "insurance" to cover predictable, relatively inexpensive events like health maintenance checks, minor illnesses and injuries -- and to pay for them with minimal out of pocket spending.

Unfortunately, almost none of the discussion about America's health care woes attempts to clarify the point that insurance is designed to protect against catastrophic events - not cover every day, basic expenses. As Paul Howard and I have written previously, there isn't much logic in forcing "Cadillac" coverage (comprehensive coverage with little out-of-pocket spending) on a person that only needs coverage for the most catastrophic events (a young, healthy person, who can afford to cover a basic doctor's visit once a year but wants to hedge his bets against an unexpected cancer, for instance).

Because insurance companies are required - currently by states, and come 2014 by federal regulations - to cover basic expenses with minimal cost to the individual, the only place to shave costs remains in covering catastrophic episodes - the ones that tend to cause medical bankruptcies.

The problem is rooted in the idea that we can cut costs while offering more expansive coverage - you can't have your cake and eat it. More expansive coverage by definition means spending more money, regardless of who is paying. The fact that many people under Obamacare won't bare the full weight of their medical costs doesn't change the underlying price being paid for an inflated "insurance" product.

Think of it this way: you can get cheap auto insurance for under $100 a month; it will likely have a high deductible (say, $2,000) and no auto insurance covers maintenance like oil changes and tire rotations. But if your car gets totaled in an accident (which shouldn't happen often), you shell out the $2,000 deductible and the insurance company pays for the rest. That's how insurance works - except in the health care sector. Subsidies under Obamacare will mask the true cost of the law, but won't fundamentally change the fact that American health insurance isn't real health insurance at all.

Every year, the Bureau of Economic Analysis (BEA) makes some revisions to the National Income and Product Accounts (NIPA) - these include changing the base year for chain-weighted indexes, adjusting benchmark years for input-output accounts, as well as different estimation and accounting methods for international accounts and other components of GDP. In what is truly a rare moment, however, the new revisions will increase US GDP by around 3 percent - roughly equivalent to the GDP of a country like Belgium.

Two-thirds of that increase will come from an idea that's been a long-time coming and long overdue - counting research and development as "fixed investment" in the national accounts. It's worthwhile to first understand what "fixed investment" really means.

Gross Domestic Product - GDP, as it's commonly known, is the sum of all economic activity in a particular country. Though it can be measured either as income or as expenditures, the latter approach is generally seen as more valid. Under the expenditure approach, there are 4 primary components of GDP (rough approximations of GDP contribution are given in parentheses).

(C) Consumption (70.8%): Everyday spending on goods and services by businesses and consumers.

(I) Investment (13%): This is generally thought of as spending on new equipment, construction of factories, or household spending on housing. (This category sees the biggest change in the new revisions).

(G) Government Spending (19.5%): Essentially, government spending on all final goods and services including salaries for public employees, but excluding transfer payments like social security and unemployment benefits.

(NX) Net Exports (-3.5%): Gross exports minus gross imports - the net amount that a country sells to the rest of the world (negative if a country is facing a trade deficit).

Under the new revisions, private investment and government investment will add an extra $300 billion to GDP - so what does this mean for the American economy?

First, at the macro level, private investment is historically almost perfectly inversely correlated with the unemployment rate: in other words, the more we invest in developing new goods and services, the lower the unemployment rate drops in the long term.

Ultimately, GDP is really just an estimate for economic activity; the goods and services we provide deliver the actual value.  Still, with BEA's revisions to GDP, private investment (and government investment) will become more important in GDP calculations. This may help policymakers better understand the value of encouraging private investment and developing policies that maximize it (and in turn help reduce unemployment).

But there's much more to the BEA's change of heart than statistics. By virtue of counting domestic R&D as investment in the GDP accounts, R&D will now be given much more weight in terms of its value to the country's economic growth.

For industries that are very R&D intensive - like the pharmaceutical sector - this may be a much needed boon. As it has become ever more difficult and expensive to get a drug to market, the pharmaceutical industry (including academic researchers that rely on agencies like the NIH) will be better able to justify projects that require public investment; the benefits of expenditures on what may be relatively intangible (at least in the near future) will now become more clear.

Justifying blue sky research budgets in a climate of austerity is difficult; but it would seem that this new classification will help policymakers better  understand the "social value" of these investments. Other reforms such as making the research and experimentation credit permanent (as President Obama's FY14 budget does) should also become easier to justify with this new accounting scheme.

What is happening to health care in America? I doubt that anyone really knows and here is why.

(1) Consider the alphabet soup of acronyms that are part of health care reform: PQRS, ACO, VBPM, ESRD, MSSP, PCMH, MCN, NCQA, HEDIS, VBP, OQR, IQR, CMMI, EMR, HDHP, PHS, PDP, MA-PDP, OOP, TrOOP, IDN, RAC, COE, QHP, EHB, FEHBP, SGR, CO-OPs, SHOP, and SCHIP.

Did I forget any? Can anyone keep these acronyms straight and does anyone really understand them all? And it's not like the field of medicine was simple to begin with.

Imagine that the Internal Revenue Service just popped into being. Who would have really understood all the implications? For instance, who would have anticipated tax withholding? Who would have anticipated such a complicated tax code, with over 500 different IRS tax forms? Who would have anticipated the IRS busting Al Capone, when other government agencies found it so hard to implicate him in other crimes? It is difficult for us to make such predictions when there are so many moving parts.

(2) Things are still in flux with health care reform. The government is still writing the rules and the government may change the rules later. For instance, the CLASS Act was scrapped after it was found to be unsustainable.

(3) There are multiple levels of rules and multiple players and interdependencies galore. Some of the rules apply to some of the players while other rules apply to others, but what happens to one player affects other players. For instance, whether employers decide to drop their employee health insurance coverage will affect health insurers and employees, who then will affect physicians and pharmaceutical companies. And so on and so on.

(4) Health care is being reformed via the government with input from industry and other interested parties. Did they understand the situation? How deeply did they look into their proposed solutions? Did they consider both intended and unintended consequences? When considering the federal government's track record, I am reminded of a famous Milton Friedman quote:

"If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand."

(5) Policies and rules are frequently described in terms of intents and objectives, using fluffy words like "coordinating patient care" and "managing quality and costs" and "accountable provider." What do these really mean? More importantly, what situations will they create and what incentives will face the people in the trenches? What behaviors will these rules create that are the exact opposite of the government's intentions? What new scams will these rules breed?

(6) Many of the changes are being imposed from the top-down instead of from the bottom-up.
Does that remind you of a particular Cold War adversary? If we are smart, we can learn from the Soviet Union's demise. In the old Soviet Union:

"The fact that factories were judged by rough physical quotas rather than by their ability to satisfy customers--their customers were the state--had predictably bad results. If, to take a real case, a nail factory's output was measured by number, factories produced large numbers of small pin-like nails. If output was measured by weight, the nail factories shifted to fewer, very heavy nails." [David R. Henderson, The Joy of Freedom: An Economist's Odyssey, Prentice Hall, 2002, p. 37.]

As the Soviets found out, operating an economy in a top-down mode is not only difficult, it is inefficient and it doesn't address the real needs of the people. So I think we can safely predict that the government will find that its latest foray into health care will be more problematic and expensive than anticipated.

What will happen to our American health care system? I am not sure and I doubt that anyone, especially Nancy Pelosi, who was unsure what the bill contained when she voted for it, fully understands. Buckle your seat belts, folks, because we are in for an interesting ride.

In testimony before the Senate Appropriations Subcommittee, FDA commissioner Margaret Hamburg defended the agency's FY 14 budget - calling it a "true bargain among Federal agencies." Indeed, as Dr. Hamburg frames it: "at two cents a day [per-person]" Americans get quite a bit of value out of the agency. With tens of drugs approved each year (last year was a 10-year record, with a number of innovative drugs like Kalydeco) and a food supply that is among the safest in the world, the FDA appears to do a great job (and the 20% budget increase in the FY 14 budget is mostly made up of industry fees).

And to be fair, the agency falls between a rock and a hard place - ensuring that medicines and foods meet minimum safety requirements while at the same time encouraging innovation can put the agency in a situation where it just can't win. With that said, given the current climate of budget austerity, we should ensure that we are getting maximum value out of the agency.  Unfortunately, there's reason to think that we aren't.

For starters, although the agency has ensured that dozens of cancer drugs and AIDs drugs have been brought to market through its accelerated approval, fast track, and priority review pathways, they are less effective for primary care indications where there may be fewer "surrogate endpoints" that the agency trusts, or where reviewers are hesitant to approve drugs that may have benefits for sub-populations, like morbid obesity, but where the benefit-to-risk ratio is less in large populations (people who are merely overweight.)  Personalized medicine is another potential bright point at the agency, with voluntary genomics submissions soaring, but there are still complaints that the pathways for companion diagnostics are murky.   

A recently developed "breakthrough" designation, contained in the last PDUFA reauthorization, shows some promise - last year's cystic fibrosis drug, Kalydeco was the first to receive it; Pfizer's new breast cancer therapy combining palbociclib with letrozole recently received the designation as well.

The problem? These niche pathways, welcome as they are, don't eliminate the need for lengthy and expensive Phase III trials for the majority of indication, which can deter drug development (for instance, for neurological diseases, and antibiotics).

Better clinical trial designs (like more flexible, Bayesian trials), faster uptake of new surrogate and clinical endpoints beyond irreversible mortality and morbidity, and a focus on collaboration with scientific experts beyond the agency's walls would all markedly improve the status quo. And the agency knows this.  

Nonetheless, reform is slow. In her testimony, Dr. Hamburg notes that with the agency's limited resources, some of these responsibilities may be difficult to accomplish - she may be right; a $4.7 billion annual budget isn't very much given the overall size of the federal budget. But does this mean that we should increase the FDA's budget even further?

Maybe not. The FDA is designed to deal with food and drug safety - ensuring that drugs have the compounds that the label says, that nutritional counts on food labels are accurate, and that clinical trials are conducted accurately and meet the minimum threshold for approval. When it comes to dealing with innovation more broadly, or personalized medicine specifically, the FDA shouldn't be on the front line. Rather, other agencies, like the National Institutes of Health - with a roughly $31.1 billion budget, and much more experience with research across various disease categories - may be in a better position to drive translational science forward.  Other, disease focused organizations, like ASCO, may be in a better position to validate new clinical endpoints and trial designs for cancer. . Rather than trying to do everything under one roof, maybe the FDA needs to recognize where - like every other modern organization - it should outsource non-key functions and responsibilities. The FDA's core expertise - reviewing data and ensuring that companies follow best practices - doesn't mean that the agency has to or should develop all of those standards itself.  Far from it.

Notably, in the White House's latest budget, however, the NIH budget stays roughly flat.  And the NIH's National Center for Advancing Translational Sciences , NCATS, has very little funding to accomplish its stated goals - just $666 million for FY 14 (just 2 percent of NIH's total budget).  Considering it can take billions of dollars to develop a new drug, this is a pittance (the American pharmaceutical industry spent $280 billion on R&D in 2011).

Likely, for NIH and other organizations to make the critical leap we need to modernize drug development, industry, academic medical centers, and NIH will need to pool resources, rethink existing research silos, and develop new ways of sharing - and valuing - data.

Those topics are well beyond this post. But to answer the basic question of whether the FDA is a bargain, the answer is probably yes.     The social value of having a safe food supply and non-contaminated medicines is likely in the trillions of dollars. But paying for drug innovation on the cheap, and asking the agency to do things that strain its organizational capacity and expertise, is pennywise but pound foolish. 

The age-old debate about pharmaceutical patents, novelty, and money will probably never end.

While some people want to abolish pharmaceutical patents altogether (and good luck ever seeing a new drug again), most other pharma critics are at least somewhat rational. Yet, many still maintain that drug companies overuse patent protection as a tool to maximize profits, while providing no real innovation.

The first opinion is, of course nonsense--without patents to protect their inventions, no drug company in its right mind would spend a billion dollars to develop something that other companies (that incurred none of these costs) could sell for a fraction of the price.

And although the second opinion is frequently misguided--this is not always so.

There is a gray area where the concepts of novelty and advantage are blurry and can be open to a wide range of interpretation-- issues that are frequently fought in court.

Operating within this gray area are line extensions and "copycat" drugs--those with just enough difference to get a patent, while providing little or no real benefit to patients (Prilosec vs. Nexium is probably the best example of this). Additionally, new patents can be obtained for older drugs by simply tweaking the formulation, which may offer an advantage (sometimes small) relative to the old pill. It is this type of case where criticism is the most persuasive.

It is hard to argue with this. As I wrote here earlier this month, I believe that there are egregious cases where patents are granted to drugs or formulation changes that have questionable value, are used solely as line extensions for drugs that will otherwise lose patent protection. Economics over science.

But these are the exception, not the rule. Most patents are for new drugs, or new uses for older drugs. They are legitimate and necessary.

Every so often, an old drug can become quite innovative, simply by significantly changing a formulation, and the difference in properties can be profound.

Purdue Pharma, the makers of OxyContin did just that.

OxyContin is a very important drug for treatment of serious chronic pain. It is a time-release formulation of oxycodone (the narcotic in Percocet) but contains a much larger amount of the drug, which is gradually released providing prolonged pain relief and (at least theoretically) a lower addiction potential. Also, the time-release formula was designed to make the drug less prone to abuse (although users got around this).

Purdue persevered, and it paid off. But choosing a very clever formulation, they managed to make OxyContin so abuse-proof that abusers could no longer crush up the pill and smoke it. This worked so well that frustrated narcotic addicts quickly switched to heroin instead. These unintended consequences will undoubtedly not be lost on fans of irony.

So in this case, common sense by the FDA-- often two mutually exclusive terms-- prevailed, and because of this, other companies are banned from selling their generic version of OxyContin. Which I think is perfectly fair, considering what Purdue was able to accomplish after years of formulation research.

The FDA hit the potential generic competitors with a double whammy. The agency announced that it would not approve any generic versions of OxyContin. Additionally, they also approved new label for the reformulated OxyContin, based on the "tablets' physical and chemical properties make them more difficult to crush, meaning that abuse is less likely than with the original."

Good for them.

Purdue worked long and hard to solve some really difficult problems. They have earned the right to profit from their work.

In a recently released report for the Manhattan Institute's Center for Medical Progress, my colleague, Paul Howard, and I grade the Affordable Care Act on its predicted impact on the cost of providing health care. Based on available evidence from CMS, CBO, and other analysts, we found little evidence that the law would reduce health care spending; indeed, most evidence indicates that individual and family premiums, as well as total national health care spending will grow unabated (and possibly faster).

However, given that implementation of the ACA is still in progress, we acknowledged that our findings may change as new evidence surfaces, and that we will track and report on new findings as they are released. This is the second in a series of updates.

While the latest White House Budget (for FY 14) brought a few welcome reform ideas (switching to Chained CPI for government programs, for instance) and some less welcome (price controls in Medicare Part D) one side of the budget may have received less attention than it deserves.

The estimated cost of the exchange subsidies under the law has increased roughly 27 percent.

Cost Estimates of Exchange Subsidies (in millions of dollars)

Sources: CBO, FY 13 Budget, FY 14 Budget

The Office of Management and Budget at the White House now projects the cost of the subsidies to total $605 billion from 2014, when they first begin, through 2021 - in the FY 13 budget, the estimate was $127 billion less at $477 billion. Still, these estimates are both below CBO projections for the subsidies which stand at an ominous $882 billion for the eight years - some of this may have to do with CBO including spending for high-risk pools and premium review activities - but it likely indicates different estimates (between OMB and CBO) of the number of people who will qualify for subsidies as well as their health status.

That OMB's costs are closing in on CBO's estimates seems to bode poorly for the fiscal implications of the health care law, however.

H/T to Brett Norman for spotting these numbers.

Paul Howard, Senior Fellow and Director of the Manhattan Institute’s Center for Medical Progress, offers his perspective on disruptive innovation as its being discussed in San Diego for #PhRMA13. To learn more, tune in to the live stream now.

I’m at the PhRMA 2013 Annual Meeting in San Diego, where a panel is discussing disruptive innovation and the new challenges and opportunities it opens for the biopharmaceutical industry. It’s a great topic.

Medicines have always been disruptive innovations. Take the polio vaccine, which helped eradicate polio in the U.S., and also made polio wards and iron lungs obsolete virtually overnight. Or look at how anti-retroviral drugs have transformed AIDS from a deadly illness into a manageable chronic disease. Ideally, new drugs displace other less effective or more expensive technologies by allowing physicians to manage, treat, and even prevent illnesses before they become debilitating or deadly.

Still, we’re just scratching the surface of how new technologies – like genomics, proteomics, gene therapy, nanotechnology, and “Big Data”-driven predictive analytics – will revolutionize health care in the coming years. As Eric Topol noted in his recent book, emerging medical technologies will be very disruptive to old ways of practicing medicine, and unleash a (much needed) wave of “creative destruction” across the U.S. health care system.

That’s about to be just as true for the biopharmaceutical industry.

When we think about the lifecycle for biopharmaceutical medicines, we think of research and development, FDA approval and manufacturing medicines as a “one way” pipeline that makes new products available to patients. Industry tests and develops the medicines under FDA regulations, and then the FDA is responsible for the review and approval of new medicines, assessing their safety and efficacy.

But, thanks to some of those emerging “disruptive” new technologies I mentioned earlier, we have an opportunity to look at the drug lifecycle as more than just a linear process culminating with FDA approval.

New technologies should allow us to start the lifecycle for a new medicine by pinpointing specific patient needs, beginning with how a patient’s own molecular profile can determine the best treatment for them (and for other patients who share a similar molecular profile). Molecular medicine will break down the invisible walls between clinical trials and real world outcomes, accelerating innovation cycles.

Researchers have always tried to keep the patient in mind when developing new treatments, but new social media tools also allow patients to enter into a more collaborative dialogue with regulators and industry.

What is it about a potential new treatment that patients would value most? Is it increased productivity and the ability to enjoy everyday activities? What side effects are they willing to tolerate for a given sent of benefits? How do patient’’s treatment preferences and tolerance for risk change with disease progression – say late stage versus early stage cancers? How can we get more patients involved in clinical trials?

These are questions patients, regulators, and industry should join together to discuss as early as possible in the R&D process. Asking them at the beginning of the process may change the way a treatment is developed and valued as the drug moves toward regulatory review.

Disruptive innovation for the industry is not only going to mean operating more collaboratively with other stakeholders and regulators in pre-competitive forums. It’s also going to mean thinking creatively about how new therapies can help to “bend the curve” of health care costs, empower patients and physicians to make smarter treatment decisions, and reduce the burden of disease on patients and caregivers.

The biopharmaceutical industry has always been in the better health business. But the unique position of the industry – at the cutting edge of molecular medicine and new digital tools – has the potential to advance medical breakthroughs that “disrupt” the entire sector, benefitting patients, payers and physicians.
If this sounds interesting and you would like to learn about disruptive innovations in the industry, tune in now to PhRMA.org to watch the annual meeting now.

One of the many objections to President Obama's health care reform law echoed philosophical beliefs rather than explicitly appealing to empirical evidence; the refrain is that Obamacare is a government takeover of our health care system, and as such, infringes on our freedom. While the reality isn't quite that gloomy, the law does significantly increase government involvement in health insurance - through subsidies, Medicaid expansion, and new regulations for health care providers and insurers.

In a recent column, Paul Krugman argues in his usual lofty tone that these concerns are little more than typical conservative attacks, trying to dismantle the benefits that the underprivileged truly need. Indeed, Dr. Krugman flips the conservative point around in defense of Obamacare:

Over time, as people come to realize that affordable coverage is now guaranteed, it will have a powerful liberating effect.

This line of reasoning argues that those at the bottom rung of the income ladder, particularly those stuck in a job because they fear losing health care coverage, are far from free now. Insuring access to affordable coverage liberates people to make life decisions - such as changing jobs - without worrying about losing the valuable (and possibly life-saving) health coverage. The solution is, of course, to subsidize expansive, one-size-fits-all coverage for the poor-to-middle-income population.

There are, of course, merits to this argument. However, the reasonable conclusion is far from where Dr. Krugman arrives.

Addressing Obamacare within the context of freedom - particularly freedom to work where you please - requires going back half-a-century to the Economic Stabilization Act of 1942. This Executive Order, signed by FDR, forcibly "stabilized" wages and salaries, preventing companies from raising or cutting workers' salaries (it explicitly excluded insurance from this regulation). So, in order to attract workers, companies began offering health insurance and deducting its cost from their taxes as they did with wages. 

Ironically, it's precisely this situation that creates what economists call (and what Obamacare would fix, according to Dr. Krugman) "job lock." When health insurance coverage is contingent on a particular job, an employee would be less likely to leave that job for another that may not have the same level of coverage, if any. Because of this, workers can be stuck in a situation with a job they'd like to leave, but are unable to because they would lose their health care coverage (this is especially a problem with lower-income households that may not qualify for Medicaid).

Dr. Krugman's reasoning is that because Obamacare effectively creates a market for nongroup health insurance (by mandating coverage and providing subsidies), people are liberated from having to stay in a job simply for the health coverage. This is certainly one way of looking at it, and it's very possible that Obamacare may marginally remedy job lock.

Let's consider another perspective, however. If the goal was really to "liberate" people from job lock, a more effective and direct approach would be to eliminate the very deduction that creates job lock. Not only would this nullify the incentive to remain at a job because of insurance coverage, it would likely increase actual wages as companies would shift compensation away from benefits and towards salary. With this extra money, along with basic reform to create a truly national health insurance market (think Obamacare exchanges, but on a national rather than state level, with one set of fairly unobtrusive regulations for the country as a whole and a focus on catastrophic coverage paired with HSAs), individuals could very well purchase coverage that is appropriate for them without the massive subsidies under Obamacare.

Under this second perspective, people have more money in their pockets at the end of the day, have more control over their health insurance, and are free to work where they want without fear of losing health insurance.

While we don't yet know exactly what impacts Obamacare will have, portraying it as liberating workers is at best a stretch. It merely substitutes reliance on a job for reliance on government subsidies - not exactly "liberating." 

While Republicans and Democrats can't agree on much these days, there is one unimpeachable fact on which the two sides can agree: Medicare (and indeed government health care spending) is on an unsustainable trajectory. Last year, Medicare spent a total of $551 billion - around 3.4% of GDP. This grows to 4.1% of GDP - over $1 trillion - by 2023 in CBO's latest projections. Continuing to implement the "doc fix" every year adds over $100 billion more to this number.

So, yes - Medicare is a huge problem. But what to do about it?

On one side (the right) premium support has been proposed as an option - future retirees would be given a set dollar amount (that grows every year) to purchase private insurance, while retaining the option to remain in fee-for-service (traditional) Medicare. On the other (the left), solutions have mainly revolved around cutting provider payments (which Medicare actuaries have noted will likely have to be undone) and attempting to use Accountable Care Organizations to improve quality and reduce costs. While premium support is off the table for the time being, ACOs are being rapidly implemented through Obamacare. However, because evidence on ACOs is mixed, it is unlikely that accountable care will be a panacea for Medicare.

One other option floated every few administrations (it came up during the Clinton years and under Bush Jr.) would raise the Medicare retirement age to 67 (up from 65 now) to match the full Social Security retirement age. A CBO analysis found that, on net, this would reduce federal spending by $113 billion over 10 years (this accounts for potential increases in Medicaid spending etc.), and would reduce Medicare spending by about 5 percent through 2035. It appears that in recent talks between Republican and Democrat lawmakers, this idea has cropped up once more, albeit with a new flavor - offsetting costs on those without Medicare through a buy-in.

Essentially, anyone 65 or 66 (though some proposals bring the lower end down to 62) would be allowed to "buy-in" to the Medicare program by paying actuarially adjusted premiums. The idea would be to help offset the cost shift to those who are unable to receive Medicare benefits at 65/66, and their employers who may have to pay more in retiree benefits because of this. In 2005, the Urban Institute released a thorough analysis simulating the impacts of raising the Medicare eligibility age coupled with a buy-in program. The findings were somewhat nuanced:

Increasing the Medicare eligibility age to 67 will not solve the program's growing cost crisis. Eliminating 65- and 66-year-olds without disabilities from the Medicare rolls will not save very much money because they do not tend to be particularly heavy users of Medicare services. Moreover, it will be almost impossible to design a cost-neutral buy-in option. The buy-in plan will disproportionately attract people with health problems who are expensive to insure. And to be effective, the option must include some subsidies.

Certainly, as CBO's analysis found, the actual savings to Medicare will be modest, and because a subsidized buy-in is necessary to ensure that the elderly aren't left out in the cold, the cost savings would further be moderated by the increased spending. Also, some of the impact on the low-income population would be moderated by current Medicaid expansions as well as the availability of subsidies on exchanges. But ultimately, the specific parameters of raising the eligibility age along with a buy-in program could vary significantly - for instance, if employers are allowed to subsidize a worker's buy-in into Medicare, the cost to the government would be reduced, and the impact on workers could be moderated.

In its final point, the study notes a powerful dynamic of the Medicare eligibility age - the labor force participation rate - which is arguably more important than Medicare spending in and of itself. With Medicare benefits unavailable at 65, workers may be incentivized to keep working longer - two extra years of working at a median salary of $50,000 helps grow the economy quite a bit more than two years receiving Medicare benefits. The impact of more people delaying retirement and working longer (and paying more in taxes), could theoretically offset any increase in costs for the sicker, low-income population.

So while raising Medicare's eligibility age is far from a panacea for Medicare's spending problems, it can be an important symbolic change spurring more people to delay retirement and contribute more to the economic growth that America needs now more than ever. 

The recent story about the decision of an Indian court denying Novartis' application to patent Gleevec (Glivec) in India was covered from a number of different angles. The headlines and analyses were sweeping and impassioned. And all wrong.

Predictably, The New York Times framed the issue as a big victory for the poor over the rich drug companies. Their headline, "Low-Cost Drugs in Poor Nations Get a Lift in Indian Court" makes it sound like the issue is the long-overdue redistribution of wealth from the US to poorer countries.

The Huffington Post really missed the point. Their splashy headline "Strong Medicine: Why India's Rejection of Drug Monopoly is a Lesson for America" has virtually nothing to do with the decision. Perhaps HuffPo needs its own lesson on how to read a science story.

On the other side of the opinion aisle, PhRMA, the trade association for the pharmaceutical industry, contributed its own hysteria. "PhRMA is very disappointed with the Indian Supreme Court's decision to deny a patent on Glivec," said Pharmaceutical Research and Manufacturers of America (PhRMA) President and CEO John Castellani. "This decision marks yet another example of the deteriorating innovation environment in India."

Well, I'm sure that they are disappointed, and the innovation climate in India is certainly far from ideal, but they also missed the point. This partlcular case does not address these broad issues.

In reality, the Indian court ignored all of these factors (although it did throw out the ridiculous argument that the patent should be denied because of another law that forbids patents for inventions that "offend public order or morality.")

What really happened was a smart and fair, science-based decision where the court got to the bottom of the issue. And it had nothing to do with any of the above headlines. It was based solely on their interpretation of a grey area in patent law, which determines whether a drug is novel or not. In this case, the court chose a strict interpretation of novelty. And, I believe, a fair one.

It's not sexy, but the guts of the decision came down to something called crystalline polymorphism--a fairly common phenomenon with solid chemicals.

Without putting you into a coma, polymorphism means that certain solids can form different types (shapes) of crystals, depending on how they are purified. Sometimes, even though the chemical/drug is by definition compositionally identical, the different crystal forms can have different properties--especially with regard to the solubility of the drug, which can affect its biological properties.

Novartis was trying to patent a different crystal form of Gleevec by arguing that it would provide an advantage over the original form, and thus, novelty--the basic requirement for a new patent. But the court wasn't buying it, and neither do I.

Novartis was clearly seeking patent protection in India, which would allow them to exclusively sell the drug. But in terms of actual innovation, what they were offering is near the bottom of the barrel. Indeed, the Indian court found that the difference between the first and second crystalline forms of the drug was too small to permit the patenting of the "new" crystalline form.

I agree completely. Although there are cases where switching to different crystal forms of a drug can create differences in blood levels of the drug, I believe that it is a stretch for a company to be granted a new patent based solely on this. Others may disagree, since novelty and innovation are to some degree subjective.

In the end, this case had little to do with the disbanding of international patent law, theft of legitimate patents by rogue countries or the responsibility of drug companies to provide medicines for poor countries.

Contrary to all the hype and headlines, the court's decision was based solely on pharmaceutical science and the interpretation of patent law. In considering whether to grant a patent for a slightly modified Gleevec they needed to decide whether to treat it like a new drug, or an obvious modification to extend patent life?

The court chose the strictest interpretation of novelty and innovation. I believe they were dead on.

You have probably heard of the Indian Supreme Court's ruling regarding Novartis' Glivec patent in a case that was supposedly a struggle between public health interests and intellectual-property rights. In essence, the Indian Supreme Court said, "Patents? We don't need no stinking patents."

The argument of some is that intellectual property rights lead to expensive drugs, which prevent appropriate patients from taking their medicines. Weaken the intellectual-property protection and drugs become cheaper, resulting in more patients being treated and better public health. But is this true?

What if a drug company charges too high a price for a drug like Glivec? If Novartis charges too much, Novartis won't make any money because it won't have any customers and it is hard to stay in business without customers. Companies have a strong built-in incentive to price their medicines appropriately. Because of this, drugs are usually plenty cheap for poor people in India. Novartis reports that 95 percent of patients in India receive Glivec free of charge. You cannot get much cheaper than free.

What weakening intellectual-property rights does in the short-term is make drugs even cheaper because there is more competition from producers. What this does in the long-term is dissuade drug companies from investing in the research and development that will give us tomorrow's miracle drugs. Why invest a billion dollars if you have no hope of getting a return on your investment? Pharmaceutical companies are dedicated, but they are not stupid. So to prevent five percent of its population from paying "a high price" for Glivec, the Indian Supreme Court has created a situation where there will be fewer Glivecs in the future.

Of course, the pharmaceutical industry is a global industry and the return on research and development from other countries, notably the United States, still ushers many new drugs to market. Where does this leave India? As a free rider. India is trying to take advantage of the R&D that you and I pay for.

It is in everyone's interest to give drug companies an adequate incentive to invest in new drugs. To do so, drug companies must be able to price their drugs well above production costs to a large segment of customers to cover the expense of R&D. However, each individual government's narrow self-interest is to seek a low price on drugs--closer to the manufacturing cost--and let people in other countries pay the high prices that generate the return on R&D investments. Each government, in other words, has an incentive to be a free rider. And that's what India is doing.

This is not that complicated. Bandy about concepts like public health and people lose their ability to think clearly. As a thought experiment, take anyone who cheered the Indian Supreme Court's ruling--like The Times of India--and turn their very arguments back on them. Would The Times of India invest money in reporting the news if anyone could take its stories and distribute them for free? No. But it would be fun to try and get a "cease and desist" letter from The Times' lawyers. The Times believes that it owns its stories just as much as Novartis owns Glivec. There is no difference, and if you take away the ownership, you take away the reason to invest. And that hurts us all.

If you've read anything I've ever written, you certainly know that I'm unapologetically pro-pharma.

But even I'm having a tough time swallowing this latest development.

Biogen-Idec's Tecfidera, a new, first-line therapy for multiple sclerosis--a very bad disease by any measure, was just approved by the FDA. This is really great news for MS sufferers, who have had a number of rather poor choices to control progression of the disease.

And it seems to work.

Tecfidera reduced the number of patients who relapsed by about half over the course of a year, and by about one-third over the course of two years. The drug also reduced lesions in the brain compared to placebo, as measured by magnetic resonance imaging (MRI). All in all, pretty impressive.

But as a chemist, one thing really bothers me. The chemical name for Tecfidera is dimethyl fumarate--a very common chemical found in most organic chemistry labs. It costs almost nothing to make. Even at retail, you can buy a 100 gram bottle of the stuff from Sigma-Aldrich for $56.

Biogen-Idec's price? Fifty four thousand dollars per year for a once-daily 480 mg capusule.

The annual cost if you just drank it from the bottle (not recommended)-- $130-- a markup of more than 400-fold.

Yes, of course I'm aware that in most cases the cost of the active pharmaceutical ingredient (API) is only a small part of the overall cost of the drug. But still, a truly new drug has to be discovered (typically selected from 10,000 chemical compounds made in search for that one drug), a process that can take ten years. And the synthesis must be optimized for large scale and the drug highly purified. Of course, the much bigger costs of pre-clinical work, and very expensive clinical trials represent the bulk of the expense.

But this chemical was first synthesized well over 100 years ago, and has been tried for several autoimmune diseases since 1959. For whatever reason, this doesn't sit all that well with me.

The development expenses notwithstanding, $54,000 per year seems like an awful lot for something that was invented in the 1800s--about the same time as ether.

Pricing of new drugs is a black box. After 27 years doing research I learned almost nothing about how this is done, so my opinion on this should be taken with a grain of ignorance.

But still, there is something that bugs me about this. Fifty four thousand dollars a year for something that is cheaper to make than apple sauce simply sounds like way too much.

In a recently released report for the Manhattan Institute's Center for Medical Progress, my colleague, Paul Howard, and I grade the Affordable Care Act on its predicted impact on the cost of providing health care. Based on available evidence from CMS, CBO, and other analysts, we found little evidence that the law would reduce health care spending; indeed, most evidence indicates that individual and family premiums, as well as total national health care spending will grow unabated (and possibly faster).

However, given that implementation of the ACA is still in progress, we acknowledged that our findings may change as new evidence surfaces, and that we will track and report on new findings as they are released. This is the first in a series of updates.

The nation's leading risk analysts, the Society of Actuaries (SOA), have just released a report projecting an average national premium increase of 32 percent once the ACA is fully implemented. Pre-ACA, the group estimates a national non-group monthly premium of $314 per-person; with full implementation (which the analysts peg at 2014 - an important assumption), and with all states expanding Medicaid, the cost will rise to $413. Further, this increase only represents projected growth in the cost of medical claims (because of the newly insured, increased utilization due to reduced out-of-pocket spending, changes in the composition of risk pools [some states will have healthier newly insured, most will not] and other factors) but does not directly address premiums. The study notes that the analysis "excludes other important items that are needed to model premium, including admin, taxes, and subsidies." Total premiums paid will likely be greater than the medical claims cost.

Interestingly, the projections also indicate significant variation among states - five states (Massachusetts, New York, New Jersey, Rhode Island, and Vermont) will see decreases in average medical claims costs - averaging a decline of 9.4 percent for the five states. These decreases can be due to a healthier uninsured population in these states, but also may point to the fact that these states are already heavily regulated, even in the non-group market - thus additional regulations, would have little impact. Excluding these five states raises the average increase to 35 percent nationally; 43 of these states are projected to see double-digit increases averaging 37 percent. At the upper end, Wisconsin is slated to see the greatest increase in claims costs - about 80 percent relative to the non-ACA baseline.

While the study's results underscore the point that the ACA will necessarily increase health care costs and spending, there may be a silver lining. The national variation in medical claims costs, though increasing in the model, will become more uniform.

The table above is based on SOA's national results and offers three common measures of variation. The range is simply the highest average claims cost minus the lowest; the sample variance is the average of the squared deviation of the values from the sample mean (how much the observations differ from the expected value of the sample); the standard deviation is simply the square root of the variance.

For every measure, there is less dispersion after the ACA is implemented; though it may be difficult to see the forest for the trees, less variation in health care costs nationally may at least help to paint a more accurate picture of the state of health care in the U.S. This can help lead to a more national market for health care and health insurance - where insurers would worry less about meeting each localities individual mandates, and instead concentrating on managing costs through networks, cost sharing, and other incentives. The ACA, however, "handcuffs" the industry through stringent MLR requirements, limits on catastrophic plans, and unnecessary "essential" health mandates, so that the benefits from a national market may be limited.

Overall however, SOA's results simply echo what every credible source has been indicating over the past three years - health care spending will grow, and so will health care costs. 

NOTE: discussion edited and revised for clarity and accuracy.

MR. PAUL HOWARD: Today, I'm talking with Christopher J. Conover, a Scholar at Duke University's Center for Health Policy and Inequalities Research and an Adjunct Scholar at the American Enterprise Institute. He's also News and Notes Editor for the Journal of Health Politics, Policy and Law and the U.S. Health Policy Gateway. We're going to be talking about recently published and extraordinarily informative book, American Health Economy Illustrated. If you're looking for a single, easy to understand compendium of facts on the American health care system, look no further. For a health policy wonk, it's a real joy to read. Chris, thanks for joining us today.

MR. CHRISTOPHER CONOVER: Thank you, Paul.

PH: Chris, I'd like to talk about a few of the more interesting tables in your book, and how they debunk some of the common myths that both the public and policymakers often repeat about the U.S. health care system.
To start with, I think that one of biggest myths or misunderstanding is that if the U.S. was just to become more like our European cousins in terms of how the government pays for health care, many of the woes of our current system would just go away.
It is certainly true that there is a lot of waste in the U.S. system. But when you look at the U.S. system compared to our OECD competitors, there's a very interesting wrinkle in terms of how the U.S. compares in terms of out of pocket spending Could you talk about that for a moment?