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.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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