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Clinton’s Latest Absurdity

If there is any doubt that Hillary Clinton is running her own campaign, her proposal to force drug companies to spend a certain percentage of revenue on research and development in order to reduce drug costs ought to put it to rest.

The political gurus, if such animals exist at Clinton’s Brooklyn campaign headquarters, must have been appalled when she cast herself as a problem-solver in anything having to do with applied science and technology. This is the woman who recently proclaimed, “I don’t know how it works digitally at all,” which may be the most forthright statement she has ever made on the topic of her notorious private email server. Her self-professed ignorance of technology has brought offers of help from many quarters, including the proprietors of Lenny’s Personal Computer Closet, which promised all the server-wiping cloths she would ever need, and whose motto is “We always put convenience first.”

(Disclosure: My daughter Ali Elkin, who works for Bloomberg Politics, co-wrote Lenny’s script. Neither she, nor Bloomberg, nor the fictional Lenny are responsible for anything in this column.)

Apparently, Clinton doesn’t know how things work economically at all, either. Drug companies often use their research and development spending - typically 15 to 20 percent for large companies, according to The Wall Street Journal - as a justification for their products’ high prices. They are constantly on the prowl for new formulations that can qualify for 20 years of patent protection, under which the makers or their licensees can charge monopoly prices. They need no coercion to spend money on promising research.

Yet Clinton’s proposal, supposedly designed to control costs, would pressure pharmaceutical makers to spend a set portion of revenue on research and development. Companies that didn’t meet the threshold, which is not yet specified, would risk losing federal research grants or a related tax credit.

If the threshold is at or below the level of research companies are currently funding, there’s no reason to imagine anything will change. So the only thing Clinton can accomplish with her proposed mandate is to make companies spend more money on less-promising research. And how will they pay for that unproductive spending?

Through higher drug prices, of course.

Another aspect of this latest Brooklyn brainstorm would force health insurers to limit out-of-pocket drug costs to $250 per year. This would eliminate almost all incentives for patients and doctors to consider cost-benefit tradeoffs when deciding between two similar drugs with widely varying prices. The costs of the choice would be borne by the health insurers. And how would the health insurers recoup those costs?

I’ll give you one guess.

There is a real and substantial problem with runaway prescription drug prices, abetted in part by abuses of the patent system and by the latest hedge-fund-inspired game of buying marketing rights and limiting distribution to create artificial scarcity. Turing Pharmaceuticals recently made headlines by raising the price of Daraprim, a treatment for toxoplasmosis and malaria, from $13.50 a tablet to $750 a tablet. Almost simultaneously, Rodelis Therapeutics walked back a similarly extreme price hike for a tuberculosis drug, returning it to the nonprofit organization that previously owned it.

Clinton is right to speak out about this problem, but her proposal for solving it makes no sense on any level.

There are obviously better options. One of them has been touched on by Clinton’s Democratic nomination rival Sen. Bernie Sanders. This is to allow importation of prescription drugs from other developed countries, where they are sold for far less than here. President Obama and his congressional allies made a deal with drug companies to retain the prohibition on such imports, in exchange for backing for the Affordable Care Act.

Americans therefore continue to pay far higher drug prices than almost anyone else in the world, in the interest of supporting research that benefits all of humanity. Here comes Clinton, proposing to mandate that this burden be made even heavier.

Importing drugs is not the only option, of course. Reforming existing patent laws and giving federal regulators more power to facilitate competition in out-of-patent generic drugs would also help limit the power of rent-seeking licensees, the pharmaceutical equivalent of patent trolls, from holding the health care system hostage for drugs that are essential to pools of patients that are too small to attract much competition.

We need a serious debate about pharmaceutical costs, and all parts of the severely distorted health care system for that matter. That debate won’t really be possible until after the next president takes office, since that person and the next Congress will determine the future of Obamacare, or its possible successor.

In the meantime, asinine ideas emerging from Brooklyn on the subject of research and development are about as useful as trying to wipe a server with a cloth.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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