management

Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access to Business Ethics Quarterly.

http://www.jstor.org

Priceless Goods: How Should Life-Saving Drugs Be Priced? Author(s): Ian Maitland Source: Business Ethics Quarterly, Vol. 12, No. 4, Health Care and Business Ethics (Oct., 2002), pp

. 451-480 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/3857995 Accessed: 18-02-2016 04:20 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

PRICELESS GOODS:

HOW SHOULD LIFE-SAVING DRUGS BE PRICED?

Ian Maitland

Abstract: This article examines the ethical issues raised by the pric?

ing of priceless goods. Priceless goods are defined as ones that are

widely held to have some special non-market value that makes them

unsuited for buying and selling. One subset of priceless goods is

prescription drugs?particularly life-saving and life-enhancing ones.

Drug makers are under pressure to price their medicines responsibly, which means to restrain their prices (and profits). However, this article

argues that it is precisely because life-saving and life-enhancing medicines are priceless that it is especially urgent to leave compa? nies free to charge market prices for them.

In

this article I examine the ethics of pricing what I call priceless goods. By

"priceless" I mean a class of goods and services that is widely perceived as

having some special non-market value that allegedly makes those goods un?

suited for trading in the market.

Why are priceless goods unsuited to the market? Sometimes (it is claimed) the goods or services in question are supposedly cheapened or defiled by being

bought and sold. Sometimes they are necessities to which people are entitled as

a matter of right and without regard to their economic condition. At other times

they are services owed to society as a civic duty which citizens may not pay someone else to take on in their place. In addition, there are certain classes of

people who may be deemed too vulnerable to be left fully exposed to the rigors of the market.

For one or more of these reasons, most societies seek to block certain ex?

changes and to regulate others. Our society prohibits the sale of babies, eyes and kidneys, high military draft lottery numbers, and more. In many advanced

societies, the market is either supplemented (say, by food stamps and legal aid) or regulated (as in the case of rent control) or even largely superseded by pub? lic provision (as in the case of public schooling or Britain's national health

system). We don't leave consumer safety, occupational safety, conservation of

scarce natural resources, or basic necessities like food, shelter, and utilities en?

tirely to the mercies ofthe marketplace. In some other societies, notably European welfare states, the list of such goods is much longer.1

2002. Business Ethics Quarterly, Volume 12, Issue 4. ISSN 1052-150X. pp. 451-480

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

452 BUSINESS ETHICS QUARTERLY

Nowhere, perhaps, is the taboo against commercialization or commodification

stronger than in the case of health care where some fear that the profit motive is

driving out the traditional ethic of care and is creating inequities in access. Many observers are alarmed at what they see as the incursion of economic forces into

medicine or the emergence of what Arnold Relman calls an American "medical-

industrial complex." Relman, editor emeritus of the New England Journal of Medicine, argues that we need to "accept the notion of health care as a social

good rather than an economic commodity."2 Other physicians have deplored the

fact that healing is being transformed "from a covenant into a business contract."3

These fears plainly resonate with ambivalence in the larger culture about

turning health care over to the market. This ambivalence may have a number of

different sources. First, as I have noted, there is the view that health care is a

right. Access to that care should depend on a person's need, not on their ability to pay. We may be prepared to tolerate wide inequalities in access to luxury or

discretionary goods, but not when it comes to the basic necessities of life?or

life itself. Second, there is the sense that something precious is lost when (or rather if) the profit motive drives out the traditional ethic of care. Richard Titmuss

famously argued that the creation of a market for blood in the United States has

crowded out the altruism embodied in giving blood, as compared with England.4 Third, if we ration access to life-saving treatment, or to treatment that controls

health conditions that blight people's lives, according to ability to pay, then we

are in effect permitting life itself to be bought and sold like a commodity. Some

scholars contend that "certain things should not be bought and sold because

doing so diminishes their value."5 Human life, as Immanuel Kant said, is "above

all price." Fourth, it is seen as indecent to profit from the misfortunes of others.

The blunt truth is that health care providers are making money (and what ap?

pears like a lot of it) from desperately ill people. Finally, it may be objected that

a voluntary exchange in the market presupposes some rough equality of bar?

gaining power. That condition manifestly is not met in the case of the seriously ill and dying. They are forced (so it may be said) to engage in what Walzer calls

"desperate exchanges."6 Because of their acute vulnerability, any transaction

between such unequal parties appears to be inherently exploitative. This list is far from exhaustive.

Prescription Drugs

One member of the class of priceless goods is prescription drugs. While drug makers7 remain free (if only in the United States) to price their products so as to maximize their profits, that freedom has come under intense fire. The industry's critics openly appeal to the public's sense that prescription drugs?particularly life-saving ones?are special. Here is a sample of such appeals culled from the last few years' debate about drug prices: "Drugs save lives. They can't be treated as normal products."8 "Competition simply doesn't work in the market for pre? scription drugs."9 "This is not like lipstick or perfume. These are drugs that

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 453

people need to live."10 "There's a limit to how much we should play the mar?

ket."11 "It's obscene to see that excess profits should be made on the misery of

others."12 "[Drug makers are] taking advantage ofthe fact that people need their

products."13 "[W]hat is going on is greed on a massive scale."14 "[W]hen [an] innovation is an essential drug, we cannot allow private enterprise to price sick

people out of the market."15

Claims like these form the basis for demands that drug makers exercise re?

straint in their pricing decisions. In turn, these demands have been backed up

by thinly veiled threats that if the companies cannot make voluntary price re?

straint work, then government will have to step in and impose restraint on the

industry, by price controls or other means.16

But it is striking that not even the drug industry's harshest critics go so far as

to advocate its wholesale socialization. The United States' profit-driven indus?

try leads the world in creating key medicines.17 Whatever the public's misgivings, it shows no signs of being willing to forgo the benefits of the market. It may sense that there is a connection between the industry's remarkable productivity and the freedom with which we allow it to operate?including the freedom to

set its prices. The result is that drug makers are whipsawed between conflicting public

expectations. On the one hand, they are expected to maintain the flow of new

life-saving and life-enhancing medicines. On the other, they are exhorted to

price their products "responsibly" and ensure that they are affordable. We rely on the profit motive to mobilize vast resources to fight disease, but we are

shocked when new drugs earn "excessive" or "obscene" or "windfall" profits. We enjoy the fruits of capitalism, but we expect firms to behave a little less

capitalistically. The argument of this article is that, if certain goods are special, that fact may

call for greater?not lesser?reliance on market forces. If the stakes are so high, then it is perverse to leash what Keynes called the "animal instincts" of busi?

ness instead of putting them to work for us. If our overriding goal is (as I think

it morally has to be) to relieve suffering and prolong life, then the critical ethi?

cal question is one of efficiency. What arrangements are most likely to generate new life-saving and life-enhancing medicines? Our current "mixed-economy" where substantial basic research is performed with the support of public funds

but applied R&D is predominantly conducted by the private sector appears to be highly successful. Other nations have substantial public research programs. But they lack vigorous private sectors. The critical difference appears to be the

freedom of American drug makers to make their own pricing decisions. If my argument is persuasive, then that may imply that our fear of the commodification of health care is a harmful vestige of (to invert Kari Polanyi's phrase) our obso-

lete anti-market mentality.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

454 BUSINESS ETHICS QUARTERLY

Background

The Irresistible Rise ofDrug Prices

In the past two decades or so, drug makers have become a pariah industry, second only to big oil and defense contractors as the villains of contemporary

populist folklore. The merchants of life, as it were, have become almost as re-

viled as the "merchants of death" formerly were. It is often noted that the drug

industry is a victim of its own success.18 Had drug makers not introduced large numbers of powerful new medicines, the nation's bill for prescription drugs would have been smaller. Prescription drug price increases have significantly

outstripped increases in the Consumer Price Index and have been a major factor

driving runaway health care costs. They are the fastest growing component of

the nation's health care bill.19 Politicians of both parties now run against drug

price increases.

A major reason for the political sensitivity of drug price increases is that the

industry has earned the antagonism of the powerful gray lobby. Medicare does

not cover drugs except in hospitals. As a result, seniors (like other uninsured

consumers) end up paying full price for their prescription drugs. Studies show

that seniors without coverage may pay more than twice, and in some cases up to

four times, as much as the prices paid by bulk buyers like government and HMOs

that are able to negotiate large discounts and rebates.20

Other factors have fed anti-industry sentiment. One is that the pharmaceuti? cal industry has consistently ranked as the most profitable in the United States.21

Another is the anomaly that Americans pay some of the world's highest prices for their prescription drugs. While other governments usually impose price con?

trols to help consumers, the United States has traditionally let companies decide

for themselves what to charge. According to one study, Americans pay an aver?

age of 54 percent more than Europeans for 25 commonly prescribed drugs.22 As

a consequence, senior citizens have organized bus trips to Canada and Mexico

to buy prescription drugs. Another result has been a surge in imported prescrip? tion drugs both from traditional mail order pharmacies and new Internet

pharmacies.23 Public distrust of the industry has also been inflamed by its noto-

rious secretiveness about its research costs24 and by some of its marketing

practices (on which more later). Besides putting a strain on senior citizens' pocketbooks and state treasuries

(which partially fill the gap), the prospect of continuing double-digit inflation has put the viability of proposed health care reform plans (like the Clinton plan in 1993) in serious doubt. The goal of universal coverage is dead on arrival

without some strategy for containing cost increases. And one of the keys to cost

containment is restraining drug price increases. Consequently, recent health care

reform proposals have been accompanied by a sharp escalation of the rhetoric

against the industry. Criticism reached a crescendo during the political campaign over Clinton's health care plan in 1993. Hillary Clinton attacked pharmaceutical

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 455

companies for "price gouging, cost shifting and unconscionable profiteering."25 Clinton ally Sen. David Pryor (Dem., Arkansas) said, "Greed has become exces?

sive. The elderly are the most vulnerable and [manufacturers] know the elderly have to have these drugs to survive."26 "They are so greedy," he added, "they are the robber barons of the health care system."27 Bioethicist Arthur Caplan, who was a member of Hillary Clinton's health care task force, charged that "the

pharmaceutical industry in the United States is getting away with extortion."28

He called the story of one drug, Depo-Provera, "an incredible tale of profiteer?

ing, greed and avarice."29 Drug makers' stock market value tumbled by one-third

following Clinton Administration's criticisms in 1993.30 In the 2000 congres- sional elections, attacks on the industry become bipartisan with Republicans up for re-election joining in. Sen. Slade Gorton (R.,Wash.) called drug makers the

"new health care villains" and charged that American consumers are being

"ripped off by their pricing practices.31 One case of alleged price-gouging that has attracted notoriety is Burroughs

Wellcome's anti-AIDS drug AZT or azidothymidine.32 AZT was the first and, for a several years, the only effective anti-AIDS drug on the market. When the

drug was introduced in 1987, it was priced at an estimated $10,000 per patient

per year. That made it among the most expensive drugs ever sold for use on a

continuous daily basis. Burroughs Wellcome refused to say how it arrived at

this price, but analysts estimated that it far exceeded the drug's manufacturing costs. The company immediately came under intense pressure to roll back the

price. An editorial in the New York Times denounced the price as "extortion-

ate."33 A coalition of advocacy groups mounted a national boycott of Wellcome

products. Members of the gay activist group, Act-Up, invaded the holy of holies

of American capitalism, the New York Stock Exchange, where they chained them?

selves to a balcony overlooking the Exchange floor, unfurled a banner saying "Sell Wellcome," and sounded a horn to drown out the opening bell.34 Protest-

ers invaded pharmacies, pasting other Wellcome products with stickers reading "AIDS profiteer."35 According to the Economist magazine, activists were "quick to smear blood on the head office of any firm that they suspect of profiteer?

ing."36 The price of AZT also came under fire on Capitol Hill: Company officials

were asked to justify the price: "How did you arrive at a price of $10,000? Why didn't you set it at $100,000?"37 And Burroughs Wellcome's patent was chal-

lenged in the courts on the grounds that there had been an important public role

in the development of the drug.38

Burroughs Wellcome quickly became a poster boy for the heartlessness of

the drug industry. The case starkly pitted the needs of desperately sick people

against corporate avarice. It also had undertones of homophobia.39 But despite the idiosyncrasies and colorful plot twists of the AZT case, there is no reason to

believe that it was an anomaly or outlier, or that the pricing of AZT departed from industry practice. As the dean of public health at Yale's School of Medi?

cine said, "It's easy to pick on Wellcome, but I can't say that the same thing wouldn't happen today with Merck or Bristol-Myers Squibb or La Roche."40

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

456 BUSINESS ETHICS QUARTERLY

And bioethicist Arthur Caplan commented that, "death and disability resulting from an inability to pay for drugs is hardly limited to those with AIDS. It is a

daily nightmare for millions of Americans. We all need to learn the lesson that

AIDS is teaching about the high cost of health care."41

On its face, skyrocketing drug prices are another proof (if any were needed) of corporate callousness, putting profits before people, wealth over life, favor-

ing property rights over human rights, greed versus need, and so on. It is easy to

rail against the heartlessness of a system that forces patients "to choose be?

tween paying the rent, buying food and taking expensive medicine."42

But is the story quite so simple? The rest of the article takes up that question. The next section summarizes the basic case against pressing drug makers?either

by moral suasion or coercion?to exercise price restraint. Subsequent sections

critically examine some familiar objections to the case against price restraint.

This article does not enter into the recent controversy over how to make anti-

AIDS drugs available in developing countries.43

The Benefits of Pharmaceutical Innovation

It hardly seems necessary to recite the benefits provided by the drug indus?

try. Even the industry's critics acknowledge that U.S. drug makers lead the world

in the rate of introduction of new products.44 The industry's performance is

suggested by the following statistics: "The average number of new drugs ap-

proved by the FDA each year doubled between 1980 and 1998, from 19 to 38.

Some of these are entirely new categories of drugs, treating conditions that were

largely untreatable even a few years ago. Many of the new drugs are targeted at

major diseases, like the 339 AIDS medications that became available between

1987 and 1999. Others, like Pfizer's Viagra, enhance the quality of life. Sales of

the drug topped $660 million in 1999."45

What does this mean in human terms? Marilyn Serafini describes how suf-

ferers from rheumatoid arthritis lived before Immunex Corp. started marketing Enbrel in 1999. Rheumatoid arthritis is a debilitating disease that attacks every

organ of the body. Until the drug was available, the disease's victims had two

choices: "They could spend their days in extreme pain, maybe motionless, and

eventually have joint replacement surgery on their hips, fingers, or elsewhere.

Or they could submit to chemotherapy and steroids, knowing that they would

be likely to throw up, suffer hair loss, experience gastrointestinal troubles, and

eventually see their organs damaged by toxins." With Enbrel, Serafini reported, an 8-year-old was able to walk a mile and go to school, and her parents were

confident that she would lead a relatively normal, productive life.46 Enbrel's

price tag is $12,000-13,000 a year. Enbrel isn't the only drug working wonders, says Serafini. "Herceptin is

shrinking tumors in patients with advanced breast cancer, Avonex is slowing the progression of disability resulting from multiple sclerosis, and Crixivan is

slowing the progression of human immunodeficiency virus. And the future holds even more promise. The National Institutes of Health is on the verge of mapping

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 457

all of the genetic material in the human body, and many drug developers are in

the final stages of testing potential miracle drugs?maybe cures?for devastat-

ing illnesses. Breakthrough gene therapies are also on the horizon."47 "New drugs have revolutionized the treatment of ulcers, stroke, and various psychiatric con?

ditions. They have dramatically improved the quality of life for asthma sufferers."48

Without pharmaceutical innovation, according to an econometric study by Frank Lichtenberg of Columbia University, in the period 1970-1991 there would

have been no increase and perhaps even a small decrease in mean age at death

in the United States, and new drugs have increased life expectancy, and lifetime

income, by about 0.75-1.0% per annum over the same period.49 Lichtenberg

says that "[s]ome of the more conservative estimates imply that a one-time R&D

expenditure of about $15 billion subsequently saves 1.6 million life-years per

year, whose annual value is about $427 billion."50 If these estimates are correct,

they imply an extraordinarily high rate of return to society from investment in

drug research.

One overlooked contribution of drug innovation is the cost-savings it cre?

ates. A National Institutes of Health study, for example, found that treating stroke

patients with clot-busting drugs saves $4,400 per patient by cutting the need

for a lengthy hospital stay.51 Another study by Lichtenberg found that, on aver?

age, a $1 increase in spending on drugs reduced hospital care expenditures by $3.65.52 According to one pharmaceutical economist, we "should be happy that

pharmaceuticals are the fastest-growing component of the health-care budget, because it means that other components aren't growing as fast as they other?

wise would."53

Moreover, the benefits we currently receive from new drugs (and the tab for

them) are, by many accounts, likely to be dwarfed by advances over the next

twenty years made possible by the revolution in molecular biology. This revo?

lution is transforming the process of drug discovery from a random one to a

guided or science driven one.54

Arguments about Drug Pricing

The Basic Case against Drug Price Restraint

Drugs save lives, relieve suffering, and enhance the quality of life. That fact

simplifies and clarifies the moral issue at stake here. It gives us an overriding criterion for evaluating different drug pricing regimes (i.e., whether we leave

companies free to charge what the market will bear or whether we demand that

they exercise restraint in pricing drugs). Other things equal, whatever regime saves the most lives, relieves the most suffering, and brings the greatest im?

provement in the quality of our lives, is the morally superior one. Because of the importance of the stakes involved, results are trumps.55

This criterion is plainly consistent with Rawls's Difference Principle, which

requires maximizing the advantage of the worst-off (in this case the dying or

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

458 BUSINESS ETHICS QUARTERLY

suffering or those whose quality of life is seriously impaired by health condi?

tions). The criterion is probably also broadly consistent with utilitarianism, which

requires maximizing the sum of total utilities as well.56 (It is not clear how non-

consequentialist moral theories would view this criterion, but it is not obviously offensive to them.)

On its face my criterion may appear to violate some commonsense notions

of equity. Thus it might be held that medications should be available on the

basis of need rather than ability to pay.57 (Arguably, that is already the case in

the United States, where the indigent receive publicly subsidized health care; but obviously the gap between the treatment available in rich and poor coun?

tries is immense.) In any case, I argue in due course that the economically

disadvantaged are better off when drug prices are set by the market. That is

because the rich subsidize the development of medications that, within a rela?

tively short time, become available in perpetuity to the rest of the world at little

more than the cost of manufacture. In the United States, drug makers are granted

twenty years during which they are free to charge whatever the market will bear.

After that their drugs are in the public domain.58

If it is agreed that maximizing the number of lives saved (or minimizing suf?

fering) is our goal, then it might appear that a regime of price restraint fits our

criterion better. Requiring drug makers to set their prices at zero would presum?

ably minimize the chance that anyone might die (or suffer) because he or she

cannot afford a medicine. We would have achieved our goal?at least so long as

stocks lasted. In the words of a Burroughs Wellcome executive: "It would be

theoretically possible for us to give away all our [anti-AIDS] drug. Everyone would get it for a while, and then we'd go bankrupt."59

Price controls notoriously create shortages because they take away incen?

tives to invest in producing more of an existing product and/or in developing new products. As surely as rent control leads to shortages of rental units60 and

price controls on gasoline lead to long lines of cars at the pumps, so price con?

trols on drugs will slow the development of new drugs. If price restraints reduce investors' expected returns, that will reduce the

supply of investors' dollars to drug makers. And that in turn is likely to mean

fewer drugs down the road a few years. In a market economy a decision to re-

strain prices (it makes no difference whether by government edict or moral

suasion) is simultaneously a decision to reduce investment in the affected goods or services. Today's drug profits are tomorrow's drugs.

The effects of price restraints don't show up right away. Even if drug makers

are forced to sell their product at prices below their average costs, they will

continue to sell existing products and introduce products well-advanced in the

pipeline. That is because most of their costs (notably R&D) are sunk. As a con?

sequence, their revenues on each additional sale will exceed their marginal costs.

But investment in new drugs will slow or stop. (Price restraints are tempting to

politicians precisely because their benefits are felt immediately but their costs are delayed for several years.)

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 459

Since our goal can't be limited to providing maximum relief in the here and

now for those dependent on medicines, the solution to the ethical dilemma of

pricing drugs requires a trade-off between current needs and future ones. It is

not clear that the balance our society has struck is an unfair one.61

In addition to these largely consequentialist considerations for resisting re?

strictions on drug makers' freedom to price their products, there are additional,

rights-based arguments (like drug makers' moral claim to the fruits of their la?

bor or inspiration or investment) that are introduced later in this article.

Objections to Market Pricing

Few critics of the drug industry mount a frontal attack on the economic case

against price restraint that I have just outlined, but they still find fault with the

way the system operates and/or argue that drugs are somehow special. Allowing the market to set prices may work when it comes to satisfying wants, but drugs are necessities. It is intolerable to let producers charge what the market will

bear for necessities.

The principal objections to market pricing can be summarized as follows: In

the first place, market pricing may place certain medicines out of the reach of

people who desperately need of them. Alternatively, it means that people who

need expensive medicines have to subject themselves to the degrading process of divesting themselves of their personal assets to qualify for Medicaid. Sec?

ond, there are market failures that arise from the special nature of drugs. Unlike

other products, where there may be a rough parity of bargaining power between

consumers and producers, drugs are necessities. The sick may (literally) not be

able to live without a particular medicine. Or their ability to lead full lives may be seriously impaired. In these circumstances, there is virtually no limit to what

the sick are willing to pay. Drug makers take advantage of this desperation to

charge extortionate prices. As a result, drug makers have consistently been the

most profitable industry in the United States. Third, the evidence indicates that

drug prices are grossly inflated and far in excess of what is needed to finance

the industry's R&D. Drug makers spend more on promotion, some of it frivo-

lous and possibly corrupt, than they do on R&D. And drug makers continue to

sell their medicines abroad at regulated prices that are considerably lower than

prices for the same products in the United States. Fourth, drug makers benefit from massive public subsidies (like support for basic research) that help to swell their profits. That entities society to demand some sort of reciprocity, perhaps in the form of lower drug prices or some share of the industry's profits. The

upshot of these arguments is that if drug makers are to be left unregulated, then

they must exercise restraint in their pricing. The rest of this article critically examines these familiar objections to leaving the pricing of prescription drugs to the market.

Aren't the sick entitled to medicines at an affordable price? One reason why the case for price restraint is so intuitively appealing is that the alternative appears

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

460 BUSINESS ETHICS QUARTERLY

to be so harsh. Without it, a drug may not be affordable by people who desper-

ately need it. Or it may be available through Medicaid only if people have first

impoverished themselves. As Congressman Henry Waxman says, because new

drugs can mean life or death, "the people have no choice but to pay."62 We are

rightly scandalized if the ill and dying are denied access to medicines neces?

sary to save their lives.

But there are two entirely distinct issues here. The first is whether the sick

have a right to medicines at affordable prices. Let us stipulate that they have

such a right. Then there is the quite separate issue of whose responsibility it is

to make the medicines accessible. It doesn't follow from the fact that the sick

are entitled to medicines that drug makers have an obligation to make drugs available at affordable prices. Requiring companies to lower prices is only one

way of making medicines available. Another way is for the community as a whole

to take responsibility for guaranteeing that the sick have access to the medi?

cines they need (e.g., by subsidizing their purchases). Just because Burroughs Wellcome discovered AZT, to return to our example,

does not mean that the company has a special responsibility to make the drug affordable, even at the expense of its own profits. Burroughs Wellcome is no

less entitled to its profits on AZT (if they were earned fairly and by playing by the rules) than the Ford Motor Company is to its profits on its line of pick-ups

(or a tenured professor of business ethics is entitled to his salary). It is morally irrelevant that the company developed and produces AZT. If people with AIDS

are entitled to an affordable price, then that is an obligation all of us share

equally, and one best met by taxing us all according to some fair formula. The

auto manufacturer, no less than the drug maker, shares that responsibility. To de?

mand that Burroughs Wellcome shoulder a burden that rightly belongs to all of us

is compassion on the cheap. It makes moral free-riders out of all the rest of us.63

It might be argued that sometimes a moral obligation to help arises from the

fact that one happens to be in a unique position to provide that help.64 Call this

the proximity theory or Good Samaritan theory of moral obligation. If a child is

drowning in a shallow pond and you happen to be passing by, then (given cer?

tain assumptions)65 it is your obligation to save that child. It may not "fair" in

some cosmic sense that the burden fails on you. It is an accident that it happens to be you rather than someone else who is on the scene at the time. But the fact

that you are uniquely able to save the child makes it your duty. But the proximity theory of moral obligation doesn't apply to drug makers

because it is no accident that they own medicines that are uniquely able to help the sick. Drug makers are not passersby. They deliberately place themselves in

situations where they can help the sick. That is their business. If we assign a

special responsibility to drug makers to help the sick, because of their proxim?

ity to them, then drug makers will stay away from the sick. Their survival will

dictate that they find some other line of business.

For this reason, Robin Hood policies are often self-defeating. One recent

example concerns the prospects for developing a vaccine for malaria. Even if a

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 461

vaccine were scientifically within reach, drug makers would hold back (or are

holding back). For one thing, since malaria is a disease of the Third World, there

may be no market for the vaccine. But, as Jeffrey Sachs notes, "[e]ven if [compa?

nies] spend the hundreds of millions, or perhaps billions, to do the R&D and come

up with an effective vaccine, they believe, with reason, that their product would

just be grabbed by international agencies or private sector copycats. The hijackers will argue, plausibly, that the poor deserve to have the vaccine at low prices?

enough to cover production costs but not the preceding R&D expenditures."66

Why shouldn't drug makers be limited to reasonable profits? While critics don't

contest drug makers' right to profit from their products, they do charge that

those profits are excessive. As previously noted, the industry's profitability has

consistently exceeded that of other companies.67 In the case of AZT, for ex?

ample, analysts estimated that Burroughs-Wellcome had already recovered all

its development costs by the late 1980s. Since manufacturing, administrative, and selling costs are a small part of its cost structure, virtually all of the

company's earnings since then have been pure profit. Accordingly, one line of

criticism of drug industry pricing holds that companies should be limited to

"reasonable" profits. This will leave intact the incentives for developing new

drugs while preventing some of the abuses of the current system. Critics have proposed various yardsticks for determining fair prices for drugs.

Dr. Peter S. Arno, a health economist, has suggested that prices could be set to

cover the cost of drug development "plus a reasonable rate of return." Such

cost-plus pricing has been used to establish reasonable rates in many regulated industries and to reimburse defense contractors.68 Similarly, Dr. Alan J. Garber, an economist and internist at Stanford University, has proposed that govern? ment and companies should negotiate a price based on a company's actual costs

of R&D and production.69

However, it is not clear that these proposals are workable. The main problem is, of course, that there is no consensus on what reasonable profits are or how

we identify them. (More on that point presently.) But even if we could agree on

how to determine the "excess" or unreasonable portion of a company's profits, that would still leave daunting practical obstacles. Assume that we agreed that

any return on equity or investment that was 200 percent or more of the national

average for manufacturing industry was "unreasonable." Would the excess prof? its be computed for each drug or on the basis of a company's overall profits?

Presumably we would choose not to limit profits for a particular drug. A bo-

nanza on one drug may be overshadowed by possibly dozens of "dry holes," or

failed drug investigations. We would want to allow companies to offset these

losses against the profits from their successful drugs. If a company's profits are

relevant at all, then it is presumably the company's overall profitability that is

key?and whether that is somehow out of line or aberrant.

So we might, instead, choose to cap companies' total profits at 200 percent of the national average. That in turn would create a new set of problems. If

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

462 BUSINESS ETHICS QUARTERLY

companies' profits are capped, then presumably companies are entitled to ask

that their losses be capped as well. Otherwise we have a situation of "heads

consumers win, tails drug makers lose." Quite apart from the obvious unfair?

ness of such an arrangement, there is the predictable practical result that firms

and investors will choose to shun drug research because the expected rate of

return will be lower than in other, less socially valued uses (since there are caps on profits and no downside to losses).

Capping losses or requiring cost-plus pricing would be problematic. It would

mean publicly subsidizing the least efficient companies. The public would have

to pick up the tab for failed drug R&D?with all sorts of attendant moral haz?

ards. As Sam Peltzman, an economist at the University of Chicago, has pointed out, "If you tie the price of the drug to the cost of developing just that product,

you miss the essence of pharmaceutical development, where nine out of ten

products fail.... If we say we're going to pay for all the losers, that encourages waste in the system and mediocre research."70

Under the proposals to limit companies to "reasonable" profits, then, drug makers would be transformed into something like public utilities. Some regula?

tory body would presumably oversee the industry and fix prices to reflect some

"fair" rate of return?probably on a cost-plus basis. Under such a regime of

perverse incentives, it is highly probable that innovativeness would be hurt.

The record of other countries, where price controls are the rule and drug devel?

opment trails that of the U.S. drug industry, is not encouraging. There is no obvious yardstick or benchmark that will permit us to improve

on the market in judging what is a "just price" for drugs or what is a reasonable

profit. Because what is a "reasonable" profit is in the eye of the beholder, inves?

tors are understandably quick to take fright at charges of "unreasonable" or

"windfall" profits. Such charges are invariably a prelude to attempts to confis-

cate those profits. Investors are understandably likely to shy away from investing in companies or industries that have become political footballs.71

It makes little difference if price or profit restraints permit "reasonable" prof? its. The result will be to chill investment in drug research?especially risky research with large potential payoffs. It is precisely the prospect of unreason?

able profits that induces investors to accept unreasonable risk. Politicians or

critics who advocate the politically popular course of price restraint are not

leveling with the public if they don't acknowledge that its likely effect will be

to slow the availability of drugs. "Drug companies undertake these massive searches knowing there will be a big payoff if they hit a winner. We can have

lower drug prices if we accept less of that searching. That's the choice we face."72

Patents don't work for drugs. The drug industry's profits are of course possible

only because the government grants companies temporary monopolies (in the

form of patents) on the products they develop. The drugs then cannot be copied

by rival firms unless the patent holder agrees to license the drugs to them. As

monopolistic suppliers, the companies are able to charge far higher prices than

they would be able to in a competitive market.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 463

Some critics of the industry argue that patents don't work for drugs. Alan

Garber says that "[i]n health care none of [the] conditions [necessary to get fair

price] exist."73 Steven Salbu argues that awarding patents (what he calls "mo-

nopolies") on drugs is different from awarding patents for other products (like

mousetraps). Drugs can be a matter of life and death. According to Salbu,

demand for the [mouse] trap is moderate because the utility of superior pest control is of moderate importance to most people. People are willing to pay somewhat more, but not much more, for a better mouse trap. Compare this mouse trap with a hypothetical cure for AIDS. Demand for the latter prod? uct is enormous because most [people with AIDS] are willing, if necessary, to devote virtually all existing assets to gaining access to the product. If identical monopolies are awarded for both of these products, the mouse

trap will be moderately profitable, whereas the AIDS cure will be wildly profitable.74

Salbu is undoubtedly right that a monopoly on the cure for AIDS would gener? ate huge profits. But isn't that precisely the trade-off our patent system envisions? If the prospect of a "wildly profitable" product mobilizes private resources in the pursuit of a cure for AIDS?rather than a better mousetrap? then arguably the patent system isn't broken but is doing what it was intended

to do. We have got our priorities exactly right. It is undeniable that life-saving drugs are special. But it does not follow from

that fact that it is reasonable to cap profits on life-saving or life-enhancing drugs while allowing unlimited profits on, say, mousetraps or drugs to treat baldness.

Again, if we allow investors to keep all the profits they make on drugs (or other

products) of trivial value but confiscate the "excess" profits on life-saving and

life-enhancing drugs, then investors will rationally avoid high-risk but high-

potential drug research.

Why not attach conditions to companies' patents? Industry critics have also

argued that patents are not (or should not be) unconditional. Peter Arno says that "[a] monopoly is not a gift. It is a social privilege. We confer it for the sole aim of stimulating innovation."75 Steven Salbu says that patent monopolies are a "creation of public policy, an attempt to rectify a market failure that results in

inadequate incentives to innovate."76 According to Ronald Bayer, a professor of public health at Columbia University, "[i]n a monopolistic situation [like

Burroughs Wellcome's patent on AZT], the grounds are created for a public re? view of the pricing mechanism."77

Specifically, it is advocated that drug makers' patents should be conditional on their pricing their products responsibly. Government should revoke drug makers' monopoly and/or to regulate drug prices if drug makers abuse their

monopoly by charging extortionate prices. What society gives, society may take

away. "If Bill Clinton and Congress are going to help provide affordable health

care, they must curb the excesses of the country's last unregulated monopoly, the pharmaceutical industry."78 One option is for the government to break the

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

464 BUSINESS ETHICS QUARTERLY

drug makers' monopolies by compelling them to license their drugs to other

companies. Competition will then drive drug prices down.

We have already considered the obvious objection to the proposal that com?

panies' continued enjoyment of their patents be made conditional on restraint

in their pricing. It is that investors will choose to invest in developing better

mousetraps instead of cures for AIDS or Alzheimer's disease.

There are other objections too. One is that if soeiety revokes or weakens a

company's patent protection, then it has reneged on a commitment. After all,

drug makers undertake their drug development in reliance on government's

policy of granting patents. Soeiety accepts the benefits of created by the com?

panies. If government substantially weakens patent protection, then it has

unilaterally abrogated the contract it has with drug makers. Arguably, it has

broken a promise.79 It is true that patents are a creation of public policy that is intended to pro?

vide incentives for useful innovations. But it does not follow that patents are

gifts that soeiety is morally free to grant or to withhold. A company's (or for

that matter anyone's) moral right to the fruits of its discovery is independent of

and antecedent to patent law. On the Lockean argument that people are entitled

the fruits of their labor, patent law simply recognizes and gives legal effect to

the company's prior moral claims. (Put another way, as a matter of morality, the

company would have a right to profit from its discovery even if the law did not

enforce that right. If the law failed to guarantee the company's rights to the

fruits of its discovery, then the law would be morally at fault.) Of course, actual patent lives only crudely reflect the moral entitlement of

the inventor or discoverer. A company's property right in its discovery is obvi?

ously not unlimited. Eventually someone else would have made the same

discovery. As a consequence, as Robert Nozick has recognized, "This suggests

placing a time limit on patents, as a rough rule of thumb to approximate how

long it would have taken, in the absence of the invention, for independent dis?

covery."80 Nozick acknowledges that, in the event of a catastrophe, owners' property

rights may have to be overridden or curtailed. He says that "a person may not

appropriate the only water hole in a desert and charge what he will. Nor may he

charge what he will if he possesses one, and unfortunately it happens that all

the water holes in the desert dry up, except for his."81 This is of course an im?

portant qualification to the firm's moral entitlement to exclusive rights to the

discovery. But it does not apply in the case of life-saving or life-enhancing

drugs. That can be shown by revisiting the case of Burroughs Wellcome's AZT.

The AIDS crisis did not create a windfall for Burroughs Wellcome. Rather the

company responded to the crisis by developing AZT, over which it was granted a monopoly. That is a quite different situation from one in which a monopolist has appropriated the total supply of a scarce resource or finds itself the owner of the scarce resource by some act of god. In the example of the water hole, as Nozick explains, the "situation would be different if [the person's] water hole

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 465

didn't dry up, due to special precautions he took to prevent this."82 Similarly,

"[a] medical researcher who synthesizes a new substance that effectively treats

a certain disease and who refuses to sell except on his terms does not worsen

the situation of others by depriving them of whatever he has appropriated."83 There is no violation of what Nozick calls his "Lockean proviso" because the

situation of others has not been worsened.

The effective life of a drug patent averages 11.2 years compared with an

average of 18 years for the products of other industries.84 Within the next five

years the blockbuster drug Prozac comes off patent, along with some of the

most lucrative drugs in history, among them Prilosec, the ulcer medication;

Claritin, for allergies; and Zocor, for high cholesterol.85 In 1984, fewer than 20

percent of all prescriptions were filled with generic drugs. By 1996 generics had captured 43 percent of the market and were saving consumers $8 to $10

billion annually, according to the Congressional Budget Office.86 It is not clear

that our patent system is a bad bargain for society.

Doesn't price regulation work abroad? It is well known that Americans pay some

of the world's highest prices for their prescription drugs. Critics of the drug

industry in Congress and outside it have seized on the disparity between U.S.

and foreign prices to support their argument for price restraint here. "The smok-

ing gun, for some critics, is what drug makers charge outside the United States."87

Thus bioethicist Arthur Caplan says, "[n]o other nation in the world gets stuck

with a tab anywhere near the size of the one we pay. . . . There is no reason why

except that these other nations regulate the prices of drugs and we do not."88

While other governments, like Japan's, Canada's, and France's, usually nego? tiate prices, the United States has traditionally let companies decide for

themselves what to charge.89 Nominally, foreign governments "negotiate" prices with the companies. But in practice they pretty much dictate what prices com?

panies may charge. "If the price isn't considered right, the implicit threat is that

the government, which pays the bulk of individuals' health-care costs and has

great incentive to contain costs, may be able to block or delay a drug's entry."90 The fact remains that drug makers still eagerly sell their products in foreign mar?

kets. If they are willing to settle for lower prices in, say, Canada or France, then

doesn't that show that they can live with lower prices in the United States too?

What this conclusion ignores is that drug makers may continue to sell their

products abroad even if they lose money on each sale. That is because (as dis?

cussed earlier) R&D costs are "sunk" costs. Even if the price fixed by the foreign

government doesn't allow a company to recover its R&D costs, it is still ratio?

nal for the company to sell its product, so long as the price exceeds the company's

marginal costs. Many foreign governments exploit this logic. Gina Kolata of

the New York Times reports that "[m]ost European governments bargain prices down to levels that cover companies' manufacturing and distribution costs, but

much less of their research."91

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

466 BUSINESS ETHICS QUARTERLY

But drug makers' R&D has to be paid for somehow. That's where U.S. con?

sumers come in. They furnish most of the profits that finance drug research and

pay for cheaper drugs elsewhere. "[CJompanies earn most of their profits, and

do most of their basic research, in the United States, the last drug market free of

price restraints."92 Without the unregulated American market, the flow of drugs to the rest ofthe world (and to U.S. consumers) would be much smaller. "Obvi?

ously, we subsidize the world," said Richard Zeckhauser, an economist at Harvard

University.93 "We Americans fund the bulk of the research for the rest of the

world, so everyone else can mooch,"94 says Princeton health care economist

Uwe Reinhardt.

If companies engaged in the behavior that foreign governments do, we would

call it intellectual piracy. The fact that other some countries enjoy access to

life-saving and life-enhancing drugs and pay lower prices does not prove that

the United States can have it both ways too. Other countries are able to get away with it only because the higher prices paid by American consumers finance the

development of the drugs in the first place. It should be noted that other countries are not entirely immune to the conse?

quences of price controls. Americans enjoy quicker access to drugs than

Europeans. "[T]he uptake of new medicines is slower than in the US. . . ,"95

Survival rates for lung cancer and colon cancer in men, and for breast cancer in

women are higher in U.S. than Europe.96 An industry-funded study found that

99.9 percent of patients with advanced breast cancer in the United States re?

ceived treatment with a taxane (either Taxol or Taxotere) compared with 48

percent in the Netherlands and only 25 percent in Britain.97

Don't drug profits finance more promotion than research? While the drug in?

dustry spends more on R&D than any other industry, it appears that it spends more on promotion than on R&D. Not only are more and more of the industry's revenues going to increasingly elaborate promotions, but an undetermined

amount of the spending on promotion takes the form of ethically questionable inducements to get doctors to prescribe their drugs.98 These practices have drawn

fire from Congress: "Conferences in the Bahamas. Isn't that part of your mar?

keting and detailing costs? And flying doctors there on jet planes?"99 Other

practices include gifts for patients who take their drugs, free samples to doctors,

consulting fees for doctors, and large donations to non-profit hospitals. There is

a growing trend for companies to market their products directly to consumers.

These abuses have hurt the industry's reputation. Some health economists

who admire the industry's record of innovation have reacted with skepticism toward drug makers' claims that research would decline but for high prices. One has drawn the following conclusion: "The industry spends more on promo? tion than on research and development, so when they say they don't have enough

money to develop new drugs, I don't believe them."100

But it is not true that if the money were not being spent on promotion it would be available for R&D.101 Companies spend large sums on promotion because

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 467

that is what it takes to sell their products. If companies spent the money on

research instead of promotion, with the result that promising new therapies sat

on the shelf waiting for the medical community to awaken to their potential,

companies would have smaller revenues, and so less to spend on research. Pa?

tients would be worse off. More critically still, investors would shun the

companies. As a consequence, their cost of capital would increase to the detri-

ment of their research programs. If that is true, then less money spent on

promotion would mean less drug research, not more. In order to fund R&D, a

company must first run a successful business.

Moreover, if excessive promotion is the problem, then price restraint on im?

portant new therapies is the wrong cure. Price restraint would punish research-intensive companies for the sins of companies that specialize in pro?

ducing me-too drugs, with trivial or no added therapeutic value, which they then promote heavily.102 Breakthrough drugs are presumably more likely to

generate their own "free media" and so are less reliant on promotion. In that

case, restraining prices on breakthrough drugs may actually aggravate abuses,

by lowering the return to risky research and by making it relatively more attrac?

tive to play it safe by investing in run-of-the-mill projects. That is not to say that reforms are not urgently called for. I think that much

promotion is wasteful and borderline corrupt. But so long as third-party payers

pick up much of the tab for medicine, doctors (and their patients) have no in?

centive to be cost-conscious shoppers. If doctors are indifferent to price (because

they don't hear grumbles from their patients) then they may be more easily in?

fluenced by gifts or all-expenses-paid trips to Hawaii to attend seminars put on

by Merck or SmithKline Beecham.103

Isn't there a drug price crisis? Only an ostrich would be in denial about a drug

price crisis. But recognizing the problem is a far cry from correctly diagnosing its causes. The cure of price restraint would be worse than the disease. As we

have seen, that would amount to implicitly trying to solve the problem of rising

drug costs by limiting the development of new drugs. In other words, we would

be protecting patients from having to pay high prices by denying them the medi?

cines that would prolong their lives or alleviate their suffering or restore their

ability to function socially and economically. Politicians hardly ever acknowl?

edge this trade-off.

In a widely cited study, the Congressional Office of Technology Assessment

(OTA) concludes that it is "the health insurance system and its failure to de?

mand lower prices?not the drug industry?[that is to blame] for rapidly rising

drug costs."104 Our insurance system provides few incentives for drug makers to compete by offering lower prices. "Instead, drug makers compete by pouring large sums into marketing, often trying to differentiate very similar products."105

According to Dr. Stephen Long, an economist at the RAND Corp. in Washing? ton, "[d]octors, assuming that their patients want the best and fearful of

malpractice suits if they recommend anything less, may disregard prices when

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

468 BUSINESS ETHICS QUARTERLY

they prescribe drugs. Doctors sometimes prescribe an expensive drug when a

cheaper one is better. Cardiologists continue to prescribe TPA, a drug that dis-

solves blood clots, for $2,000 a dose, even though studies have shown that

streptokinase, at $200 a dose, serves heart attack patients even better."106

When consumers are exposed to prices, they do make cost-conscious pur?

chasing decisions. A famous RAND experiment randomly assigned different

cost-sharing plans to individuals and found that the total expenditure (to all

parties) on prescription drugs was greater for patients with higher insurance

coverage. According to the study, the participants' "expenditures on drugs av-

eraged $65 (in 1991 dollars), ranging from $82 on the free care plan to $46 on

the 95 percent co-insurance plan."107 Our current system of (predominantly) third-party payment removes the in?

centive for physicians and patients to be cost-conscious shoppers for medicines.

If those incentives are restored (say, by medical IRAs or savings accounts),

drug makers will presumably respond by focusing on cures that give the con?

sumer more value for his or her money, something that doesn't pay today. Unlike

price restraints, moreover, more cost-conscious drug buying won't injure phar? maceutical innovation. That is because a breakthrough drug will find willing consumers largely irrespective of price. It is the me-too drugs, or drugs with

trivial therapeutic value, that will find their prices squeezed if they want to

keep their market share.

Isn't the public paying twice for drugs? Some critics have argued that drug makers

enjoy windfall profits because their R&D is directly and indirectly subsidized

by the taxpayer. Alan Garber claims that the public pays twice when drugs are

developed with help from the Federal Government. It pays first for the compa? nies' R&D and then again to help patients buy the drugs developed with this

R&D.108 The National Institutes of Health's (NIH) $16 billion budget represents about 29 percent of total health R&D in the United States. Bristol-Myers Squibb's cancer drug, Taxol, was developed using basic research funded by NIH.109 Steven

Salbu goes so far as to argue that the public role in drug research is so "substan?

tial and ubiquitous . . . that private patents for products such as AZT are a legal fiction."110 The public support for R&D justifies giving the public (including

prospective patients) "a voice in decisions regarding the sale and marketing of

those products."111 The story of AZT is often cited by those, like Salbu, who want to give gov?

ernment a role in drug pricing decisions, so I examine it in some depth in an

Appendix to this article. For the present I simply note that the courts squarely addressed Salbu's claim and rejected it. When two generic manufacturers pro?

posed to produce AZT on the theory that the NCI should have shared in Burroughs Wellcome's patent, the courts upheld the company's patent saying that "the evi?

dence in this case is overwhelming and conclusive that the Burroughs Wellcome Co. inventors, first conceived of the idea of using AZT as a therapy for treating persons infected with AIDS."112

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 469

Still, even if the public contribution to the development of AZT was not de-

cisive, it was a substantial one. Unquestionably, too, publicly funded basic

research and education play a role in the pharmaceutical industry's research

productivity, and will probably play a still larger one in the future.113 Does this

mean that the public is entitled to have a say in drug makers' pricing decisions?

I don't think that this conclusion obviously follows, either on moral or pruden- tial grounds.

The government is of course free to insist on any contractual terms it wants

?for example, royalties, licensing fees, a liquidated sum, or a say in pricing? in return for making its research available to the private sector. The fact that it

generally reluctant to attach conditions to the use of its research probably re?

flects its fear that onerous terms will slow the development of promising

technologies. So the predominant trend has been toward liberalizing access to

publicly funded research, as I discuss shortly. The case for a public role in drug pricing rests in part on the view that drug

makers are apparently earning private returns from public investments in basic

research. But it likely that consumers rather than companies are the primary beneficiaries of such investments, for at least two reasons. First, the results of

publicly funded basic research generally enter the public domain where they are free for any individual or company to make use of. (Alternatively, as in the

cases of Taxol and Xalatan, NIH invites bids from companies to develop the

drugs.) If there are a number of companies that are in a position to exploit a

discovery, then competition will mean that the economic value of the discovery

may be wholly or substantially passed on to consumers.

In the second place, public subsidies are generally used to direct private investment into activities that increase social welfare but are otherwise not prof? itable enough for private actors to engage in. As in the case of orphan drugs, the

market may be too small for it to be economic to develop drugs to address a rare

condition and/or the prospect of success may be too remote. In other words, the

government subsidy doesn't enable companies to earn above-normal profits. Instead, it levels the playing field, by making the return commensurate with

that available elsewhere. Without the subsidy, private actors would have no in?

centive to solve public problems. Sometimes companies will make bonanzas from drugs they have developed

with the help of publicly funded basic research. That was true in the case of

AZT. But that doesn't mean the system of public support is malfunctioning. The

public support was critical in getting the desired result of bringing a treatment

for AIDS to market in record time. If we ask the private sector to bear the risk of

failure (which we do when we ask it to bid on a commercially unproven com-

pound), then it will be necessary to balance that risk with the inducement of

potentially large profits. Take the case of Xalatan, a best-selling eyedrop for

glaucoma. The basic research that led to the medicine was backed by $4 million from the NIH. When the patent for Xalatan was first put on the market, no drug company in the United States would touch it. Even after Pharmacia of Sweden

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

470 BUSINESS ETHICS QUARTERLY

had purchased the patent, one of Sweden's leading eye experts gave the drug

only a 5 percent chance of success. Today some patients are angered over its

price.114 Even if further analysis revealed that drug makers do enjoy windfall profits

thanks to publicly funded research, it still might be counterproductive for gov? ernment to demand some leverage over drug prices. After all, if the public

subsidy is intended to enlist the private sector's help in addressing some press?

ing public need (like fighting AIDS), then it would be self-defeating to drive

firms away by attaching burdensome conditions to their use of public R&D. The

prospect of eventually haggling with the government over the resulting profits

(if any) is likely to have a chilling effect on companies' willingness to make use

of that research.

This is not just armchair speculation. There is a natural experiment that tests

this proposition. In response to protests over the pricing of AZT, the NIH in

1989 adopted a policy requiring that drug makers charge a "reasonable price" for products developed with public research. Dr. Bruce A. Chabner, director of

cancer treatment at the NIH, reported that several companies backed out of agree? ments to produce taxpayer-developed AIDS and cancer drugs because of fears

of pricing disputes.115 In 1995 the NIH announced that it was dropping the pric?

ing requirement. NIH Director Harold Varmus said his agency had found that

the "pricing clause has driven industry away from potentially beneficial scien?

tific collaborations" with government scientists "without providing an offsetting benefit to the public."116

Conclusion

He that first. . . made public the virtue and right use of kin kina

[quinine], . . . saved more from the grave than those who built

colleges, workhouses and hospitals. ?John Locke117

A well-known put-down of economists says that they know the price of every?

thing and the value of nothing. The lampoon is on target, but it betrays a basic

confusion about what prices do?or rather what prices don't do. Prices do not

reflect society's estimation of the "value" of a good. Still less does anyone actu?

ally hold that the value of something is determined by its price. The fact that

(until recently) air was free did not mean that it had no value. Prices are in part a function of scarcity. Therefore "priceless" goods that are in abundant supply are assigned low prices (or no price at all) by the market. Seen in this light, it is not degrading or profane to put a price on something of priceless value. And it is a fallacy to conclude that, because something is "priceless," it is unsuited to

exchange in the market.

Once we have demystified prices, then we can get down to the real moral

challenge of pricing medicines. That is to determine how pricing medicines helps or hinders getting them to people who need them. As Edmund Burke put it, "What

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 471

is the use of discussing a man's abstract right to food or medicine? The ques? tion is upon the method of procuring, and administering them."118

The case that I have made for leaving drug makers free to set prices rests

(almost) entirely on judgments about the efficacy of the market at discovering and delivering medicines to more people who need them. Given the moral ur?

gency of that task, the sole or overriding test is results. If a better way is found

(say, one that dispensed with drug companies), then that would become morally

mandatory, because in the case of saving lives, relieving suffering, and restor-

ing people's ability to lead normal lives, results are trumps. This conclusion goes against the grain of our intuition that health care should

be driven by an ethic of care rather than the profit motive. I don't see the two as

mutually exclusive. There is still room for the occasional magnificent gesture like that of Jonas Salk who refused to take any royalties from his polio vaccine.

And there may be a growing role for publicly funded basic research. But it is

inconceivable that we can rely on random acts of altruism to match the produc?

tivity of our for-profit drug industry. So long as we rely primarily on private

enterprise to provide us with medicines, that means that (some) firms will be

making profits, occasionally big ones, from the sick. It is precisely because

life-saving and life-enhancing medicines are priceless that it is especially urgent that we leave companies free to charge market prices for them.

Appendix

The Development of AZT

The genesis of AZT has been the source of a lot of controversy. So far as I

can reconstruct the facts, they are as follows. Dr. Jerome Horwitz of the Detroit

Institute had first synthesized AZT in 1964 for Cancer Research. (His labora-

tory was partially or entirely supported by federal funding.)119 Horwitz was

looking for a drug that was effective against cancer. When AZT proved ineffec?

tive as a chemotherapy drug, he left it unpatented. For a decade it languished on

the shelf until it was acquired by Burroughs Wellcome and studied as a possible antibacterial agent.120

In the mid-1980s, at a time when drug makers were hesitant about trying to

develop drugs to treat AIDS, Dr. David Barry, head ofthe Burroughs Wellcome's

Department of Clinical Investigation, started work on identifying compounds that might be active against the disease.121 Burroughs Wellcome was one of the

few organizations with a significant antiviral research program.122 Because the

company did not have laboratory conditions that were safe enough to permit work with the AIDS virus, Barry used animal retroviruses to screen for antiviral

activity. In the fall of 1984 he started sending promising compounds to labora-

tories at the Food and Drug Administration and Duke University for testing

against the AIDS virus itself.123

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

472 BUSINESS ETHICS QUARTERLY

One of those compounds was AZT. The initial testing of AZT resulted in a

split decision: The FDA reported that the compound was ineffective, but Duke's

laboratory found that it was active against AIDS.124 Burroughs Wellcome then

sent AZT to Samuel Broder at the National Cancer Institute (a unit of the Na?

tional Institutes of Health [NIH]). Broder had publicly invited companies to test

compounds in his laboratory. Broder reported back that AZT was by far the most

effective compound tested by the NCI to date,125 The rest is history. Burroughs Wellcome obtained a patent for the drug as well as exclusive rights under the

Orphan Drug Act.126 When AZT was introduced in February 1987, it was priced at an estimated $10,000 per patient per year. That made it among the most ex?

pensive drugs ever sold for use on a continuous daily basis.

It is well known that critics of Burroughs Wellcome charged that the price of

AZT should have been lower because public research had contributed to its de?

velopment. The New York Times virtually accused the company of "grabbing the drug from the NCI."127 Two generic manufacturers used the theory that the

NCI should have shared in Burroughs Wellcome's to challenge Burroughs Wellcome's patent. But the courts decisively ruled in Burroughs Wellcome's

favor saying that "the evidence in this case is overwhelming and conclusive

that the Burroughs Wellcome Co. inventors, first conceived of the idea of using AZT as a therapy for treating persons infected with AIDS."128

Notes

1 For an exhaustive catalogue of such "blocked exchanges" see Judith Andre, "Blocked

Exchanges: A Taxonomy," Ethics (1992), 103(1): 29-47. An anonymous referee brought this article to my attention. I am grateful to that person and to three other referees for the care they took in reviewing this article. I am entirely responsible for any errors that remain.

2 In Jonathan Cohn, "Cosmetic Surgery," The New Republic, August 17/24 (1998): 25. 3 A group of Massachusetts physicians published a "Call to Action" in the Journal of

the American Medical Association, July 1, 1997. 4 Richard Titmuss, The Gift Relationship: From Human Blood to Social Policy (Lon?

don: George Allen & Unwin, 1970). 5 Steven Kelman, "Cost-Benefit Analysis: An Ethical Critique," Regulation, January-

February, 1981. Some environmentalists oppose pollution taxes because clean air and water are inalienable rights, not to be bought and sold in the marketplace. "[A]ir is not a

commodity . . . to be entrusted to the mercies of the free market. . ." (Susan J. Tolchin and Martin Tolchin, Dismantling America: The Rush to Deregulate [New York: Oxford Uni?

versity Press, 1985], 261). Robert E. Goodin claims that "material incentives destroy rather than supplement moral incentives," Political Theory and Public Policy (Chicago: Univer?

sity of Chicago Press, 1982), 113. 6 Michael Walzer, Spheres of Justice: A Defense of Pluralism and Equality (New York:

Basic Books, 1983). 7

"Drug makers" refers to both pharmaceutical and biotechnology companies. 8 Dr. Bernard Pecoul of Medecins sans Frontieres, quoted by Ken Silverstein, "Research

Money Goes to Profitable Lifestyle Drugs," The Nation, July 19, 1999.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 473

9 U.S. Rep. Henry Waxman (D., Calif.), quoted in Philip J. Hilts, "U.S. Study of Drug Makers Criticizes 'Excess Profits,'" The New York Times, February 26, 1993, p. DI.

10 Neil A. Lewis with Robert Pear, "U.S. Drug Industry Fights Reputation for Price

Gouging," The New York Times, March 7, 1994, p. Al. 11 Dr. Paul Meier of Columbia University. Quoted in Elisabeth Rosenthal, "Exploring

the Murky World of Drug Prices," The New York Times, March 28, 1993, section 4, p. 3. 12 Sen. Paul Wellstone (D., Minn.), quoted in Steven Thomma, "Wellstone Launches

Attack on Major Drug Makers," St. Paul Pioneer Press, December 12, 1990. 13

Congressman Henry Waxman (D., Calif.), in Michael Waldholz and Sonja Steptoe, "Congressional Hearings Slated to Examine Big Increases in Prices of Consumer Drugs," The Wall Street Journal, April 21, 1987, p. 1.

14 Waxman, in Irvin Molotsky, "Panel Democrats Assail Prescription Drug Prices," The New York Times, April 22, 1987, p. D26.

15 Waxman in a speech on June 25, 1987, in "Notable and Quotable," Wall Street Journal, July 20, 1987, section 1, p. 18.

16 Robert Pear, "Drug Industry Under Pressure from President," The New York Times, December, 25, 1999, p. Al.

17 Over 85 percent of the biotechnology blockbusters currently in the marketplace are of U.S. origin. Mean while European biotechnology has had limited success, "as demon? strated by the relatively poor results of public and private basic and applied research." Julian Le Grand et al., "European Pharmaceutical Research, Development and Innova? tion: Assessment of the Socio-Economic Impact of New Drugs," March 1997. Report available at http://www.jrc.es/pages/ourrole/policy/pharma/Pharma_i.html. By 2002, no fewer than 20 of the world's top 25 selling drugs will be marketed by U.S. companies, according to EvaluatePharma, "The World's Top 50 Best Selling Drugs?Executive Sum?

mary," at http://www.evaluatepharma.com/top50.htm. 18 "The Cost of Drugs: Hard to Swallow," Economist, April 18, 1992, p. 76. ("[T]he

irony is that pharmaceutical companies would be facing fewer attacks if they had been less successful at developing new drugs.") Robert J. Barro, "Attention Consumers: Cre?

ativity Never Comes Cheap," Business Week, October 2, 2000, p. 36. David Noonan, "The Real Drug War," Newsweek, May 8, 2000.

19 Robert Pear, "Rise in Health Care Costs Rests Largely on Drug Prices," The New York Times, November 14, 2000, p. A18. Between 1995 and 1999, drug expenditures in the U.S. more than doubled, from $65 billion to $125 billion. One study predicts prescrip? tion drug spending will reach $243 billion by 2008. David Noonan, "Why Drugs Cost so Much," Newsweek, September 25, 2000.

20 David Noonan, "The Real Drug War," Newsweek, May 8, 2000, p. 28. These esti? mates may be inflated. A Clinton Administration survey released in April 2000 pegged the average difference at 15 percent. Juliet Eilperin, "Medicare Patients Pay 15% More for

Drugs: HHS Study Finds Growing Gap in Prescription Costs for the Insured and Others," The Washington Post, April 10, 2000, p. A5.

21 This appears to hold true for the major drug companies but not, at last reckoning, for the biotechnology industry. "[An Office of Technology Assessment] study says that the rates of return on investments in the drug industry have been two to three percentage points higher than other industries, after adjusting for differences in risk among them." Alex Barnum, "New Study on Drug Prices: U.S. Says Health Insurance?Not R&D? Behind High Costs," The San Francisco Chronicle, February 25, 1993, p. DI. However, authorities are divided on the issue of the industry's profitability. Edward Lotterman, for- merly an economist at the Minneapolis Federal Reserve has written that "over the long

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

474 BUSINESS ETHICS QUARTERLY

term, most studies show that these firms' returns on equity, assets or sales are not mark-

edly different from those in other industries," St. Paul Pioneer Press, September 3, 2000. As for the biotechnology industry, it has been losing money. "The biotech industry lost

$5 billion [in 1999], and company executives complain that because of the uncertainties of the patent process, attracting investors is difficult," Marilyn Werber Serafini, "The Price of Miracles," The National Journal, March 25, 2000, p. 348.

22 Gina Kolata, "Why Drugs Cost More in U.S.: Other Governments Negotiate Prices," The New York Times, May 24, 1991, p. Dl.

23 Chris Adams, "Prescription-Drug Seizures from Abroad Surge," The Wall Street Jour? nal, January 11, 2000, p. B4. Adam Nagourney, "Mrs. Clinton Favors Access to Canada's

Cheaper Drugs," The New York Times, February 9, 2000, p. B5. 24

"Drug makers have generally refused to explain how they price individual drugs, but cite high research and development costs as well as the savings new drugs offer in

explaining their charges," Elisabeth Rosenthal, "Exploring the Murky World of Drug Prices," New York Times, March 28, 1993, section 4, p. 3.

25 Robert Pear, "First Lady Sets Aggressive Tone for Debate on Health Care Plan," The New York Times, May 27, 1993, p. Al.

26 Sen. David Pryor in Kathleen Day, "Study: Drug Makers Broke Promise; Senate Committee Told Price Increases Outstripped Inflation Rate," The Washington Post, Febru?

ary 4, 1993, p. Dll.

27Marlene Cimons, "Hurting over High Drug Costs," The New York Times, April 11, 1991, p. Al.

28 Arthur Caplan, "Depo-Provera Price-Gouging Illustrates Industry Habit," Saint Paul Pioneer Press, January 18, 1993.

29 Id. 30

Craig Torres and Michael Waldholz, "Battered Drug Stocks Dive: Bargain Hunters Are Leery," The Wall Street Journal, February 17, 1993, p. Cl.

31 Robert Pear, "Drug Price Issue Catching Fire in Senate," The New York Times, April 6, 2000, p. A20. Gorton's switch did not save his Senate seat.

32 See infra at footnote 119 for sources. The Appendix to this article gives a fuller account of the genesis of AZT.

33 Editorial, "AIDS, Drugs, Need and Greed," The New York Times, September 29, 1989, p. A34.

34 Philip J. Hilts, "Wave of Protest Developing on Profits from AIDS Drug," The New

York Times, September 16, 1989. 35

Marilyn Chase, "Burroughs Wellcome Reaps Profits, Outrage from Its AIDS Drug," The Wall Street Journal, September 15, 1989.

36 Economist, "The AIDS Industry: The High Cost of Living," October 12, 1996, p. 70. 37

Marilyn Chase, "AIDS Drug Comes to a Worried Market," The Wall Street Journal, March 23, 1987, p. 6.

38 See the Appendix to this article. 39

According to Arthur Caplan, "AIDS has revealed many messy truths about our soei?

ety. Bias and bigotry against gays is alive and well in too many quarters." "Drug Firms Want a High Ransom," St. Paul Pioneer Press Dispatch, October 2, 1989.

40 Larry Kramer, "A Good News/Bad News AIDS Joke," The New York Times Maga-

zine, July 14, 1996, p. 26. 41

Caplan, "Drug Firms Want a High Ransom," St. Paul Pioneer Press Dispatch, Octo? ber 2, 1989.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 475

42 Dr. Harry Quigley of the Wilmer Eye Institute at Johns Hopkins University, in Jeff Gerth and Sheryl Gay Stolberg, "Medicine Merchants, Cultivating Alliances: With Quiet, Unseen Ties, Drug Makers Sway Debate," The New York Times, October 5, 2000, p. Al.

43 Nor is it clear that the lessons drawn here apply to the pricing of anti-AIDS drugs in

developing countries. For the argument that drastic price discounts in African countries

may be a "win-win" solution see John Carey, "What's a Fair Price for Drugs?" Business Week, April 30, 2001, p. 105. On the other hand, bargain-basement drug prices overseas may create a backlash in developed countries. According to an analyst at Lehman Broth? ers, Inc, "The humanitarian effort could come back and hit [drug companies] in the eye," id. See also Gardiner Harris and Michael Waldholz, "AIDS Drug Plan Spurs Call to Cut

Drug Prices Elsewhere," The Wall Street Journal, May 12, 2000, p. Bl, and Donald G. McNeil, Jr., "Drug Companies and Third World: A Case Study in Neglect," The New York Times, May 21, 2000, p. Al. Drug makers are also concerned that the drugs they make available at cost in the developing world will be smuggled back into the United States where they will undercut the companies' pricing structure.

44 See, for example, Mary T. Griffin, "AIDS Drugs and the Pharmaceutical Industry: A Need for Reform," American Journal of Law & Medicine, 17 (1991): 369. Griffin's article advocates price controls on anti-AIDS drugs.

45 David Noonan, "Why Drugs Cost so Much," Newsweek, September 25, 2000, p. 22. 46

Marilyn Werber Serafini, "The Price of Miracles," The National Journal, March 25, 2000, p. 348.

47 Serafini, "The Price of Miracles." Since Serafini's article appeared, of course, Celera, Inc. and NIH have published a virtually complete sequencing of the human genome.

48 Ian M. Cockburn and Rebecca M. Henderson, "Publicly Funded Science and the Productivity of the Pharmaceutical Industry," an article prepared for the NBER Confer? ence on Science and Public Policy, Washington, D.C., April 2000, p. 1.

49 Frank R. Lichtenberg, "Pharmaceutical Innovation, Mortality Reduction, and Eco? nomic Growth," NBER Working Article 6569 (http://www.nber.org/articles/w6569), ? 1998 by Frank R. Lichtenberg. Lichtenberg's article is a National Bureau of Economic Re? search working article. I am not aware if it has been subsequently published in a refereed journal. Suggestive evidence concerning the contributions of drug innovation to medical progress is available from clinical trials and from anecdotal evidence about particular drug therapies. There is also econometric evidence that suggests that medical expenditure in general does not translate into extended survival. Jonathan Skinner and John E. Wennberg, "How Much Is Enough? Efficiency and Medicare Spending in the Last Six Months," in David M. Cutler (ed.), The Changing Hospital Industry: Comparing Not-for- Profit and For-Profit Institutions (Chicago: University of Chicago Press, 2000). But I am not aware of a comparable econometric study that evaluates the average or aggregate contribution of pharmaceutical innovation to mortality reduction and economic growth.

50 Lichtenberg, "Pharmaceutical Innovation."

51 David Noonan, "The Real Drug War," Newsweek, May 8, 2000, p. 28. 52 Frank R. Lichtenberg, "The Effect of Pharmaceutical Utilization and Innovation on

Hospitalization and Mortality," NBER Working Article 5418 (January 1996), ? 1996 by Frank R. Lichtenberg. Lichtenberg's research was supported by Pfizer, Inc.

53 Eugene Mick Kolassa at the University of Mississippi, quoted in John Carey, "What's

a Fair Price for Drugs?" Business Week, April 30, 2001, p. 105. 54 Cockburn and Henderson, "Publicly Funded Science and the Productivity of the

Pharmaceutical Industry," NBER Conference on Science and Public Policy, Washington, D.C., April 2000, p. 11.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

476 BUSINESS ETHICS QUARTERLY

551 grant that I am lumping together very different outcomes (i.e., saving lives, relieving suffering, and improving the quality of life). A more complete analysis than I can provide here would need a calculus for assigning weights to the different outcomes as well as ac?

counting for possible trade-offs between them and with other non-health-related values. For present purposes my criterion is limited to medications that save lives, relieve great suffering, and/or ameliorate substantial degradations in quality of life.

56 I say "probably" because strict utilitarians might disapprove of substantial invest? ments in developing medicines to treat rare diseases.

57 "The proper ground of distribution of medical care is ill-health: this is a necessary truth." Bernard Williams, "The Idea of Equality," in P. Laslett and W. G. Runciman, Phi?

losophy, Polities and Soeiety, 2d series (Oxford: Blackwell, 1962), 121. 58 The reality is messier. Because of the time consumed by the regulatory approval

process, drugs typically have a much shorter effective patent life (11.2 years by one

estimate). On the other hand, some companies have devised strategies for prolonging their monopolies after the patents have expired. More on this point later.

59 Dr. David Barry, in Marilyn Chase, "Burroughs Wellcome Reaps Profits, Outrage from Its AIDS Drug," The Wall Street Journal, September 15, 1989.

60 Alan Blinder has written that "rent control ranks second only to bombing as a way to destroy a city." Alan S. Blinder, Hard Heads, Soft Hearts: Tough-Minded Economics

for a Just Soeiety (Reading, Mass.: Addison Wesley, 1987), 14. Blinder was head of the Council of Economic Advisors under President Clinton.

61 My caution here is due to the fact that locating the right balance presupposes some

theory of intergenerational justice, which I don't have. See, for example, Brian Barry, "Circumstances of Justice and Future Generations," in R. I. Sikora and Brian Barry, Obli? gations to Future Generations (Philadelphia: Temple University Press, 1978).

62 Andrew Pollack, "High Cost of High-Tech Drugs Is Protested," The New York Times, February 9, 1988, p. Al. Note, however, that even if people with life-threatening condi? tions are forced into these tragic exchanges, they are better off with this choice than they would be without it.

63 The Supreme Court has said that the purpose of the takings clause of the Constitu? tion is "to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." Armstrong v. U.S. 364 US 40 (1960).

64 See Mary Ann Glendon, Rights Talk (Free Press: New York, 1991), 78-89, "The (missing) duty to rescue."

65 For example, that you are aware of the child's plight, that you can swim, or that the water is not to deep for you wade to the child, etc.

66 Jeffrey Sachs, "Helping the World's Poorest," Economist, August 14, 1999, pp. 17-

20 at 19. 67 On the industry's profitability, see citations at note 21 above. 68 Elisabeth Rosenthal, "Exploring the Murky World of Drug Prices," New York Times,

March 28, 1993, section 4, p. 3. 69 John Carey, "How Many Times Must a Patient Pay?" Business Week, February 1,

1993, p. 30. 70 Sam Peltzman, in Elisabeth Rosenthal, "Exploring the Murky World of Drug Prices,"

New York Times, March 28, 1993, section 4, p. 3. 71

Craig Torres and Michael Waldholz, "Battered Drug Stocks Dive: Bargain Hunters Are Leery," The Wall Street Journal, February 17, 1993, p. Cl.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 477

72 Sam Peltzman, in Elisabeth Rosenthal, "Drug Makers' Profits Finance More Promo? tion than Research," New York Times, February 21, 1993, section 1, p. 1. However, as Peltzman notes, if prices are restrained it is the projects that show the least promise that will be abandoned first.

73 Elisabeth Rosenthal, "Drug Makers' Profits Finance More Promotion than Research," New York Times, February 21, 1993, section 1, p. 1.

74 Steven R. Salbu, "AIDS and Drug Pricing: In Search of a Policy," Washington Uni?

versity Law Quarterly 71: 707-8. 75 Gina Kolata, "U.S. Is Asked to Control Prices of Drugs It Develops," The New York

Times, April 25, 1993, section 1, p. 36. 76 Salbu, 708. 77 Milt Freudenheim, "One Hope for AIDS Patients Is Hostage to the Market," The New

York Times, September 3, 1989, section 4, p. 5. 78

Harvey F. Wachsman, "Regulate the Drug Monopolies," Letter, The New York Times, January 16, 1993, section 1, p. 21.

79 This is the position taken by our patent jurisprudence: "As a matter of contract

theory, patent grants constitute an agreement between the government and the inventor, wherein the inventor agrees to reveal the discovery and the means to use it in return for the government's promise of a seventeen-year monopoly on the production of the idea. Under this view, compulsory licensing may be interpreted as a failure of consideration on the part of the government, or even a breach of contract should a compulsory license be

granted retroactively. If contract principles are highly valued, then this theory emerges as a strong theoretical basis for opposing compulsory licenses. If a patent is considered the property of its owner, the patentee becomes free to use or not use, or license or assign, at will. Under this theory, compulsory licenses may constitute a taking" (footnotes omitted). Cole M. Fauver, "Compulsory Patent Licensing in the United States: An Idea Whose Time Has Come," Journal of International Law & Business, 8 (1988): 680-1.

An anonymous referee has pointed out to me that patents may carry the implicit quali- fication that they may be overridden in certain cases. I think it is foreseeable that in the event of a national emergency (like war or a highly contagious epidemic) the government would seize private property essential to protecting the public welfare. But Congress has declined to give itself the power to override patents, say by means of compulsory licens? ing, except in very limited circumstances. "Compulsory Licensing Is a Rarity in Our Patent System," Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S. 176 (1980). Emergency powers run the risk that, since every life-threatening condition is an emergency to per? sons who have it, the exceptions will eventually swallow the rule.

80 Robert Nozick, Anarchy, State, & Utopia (New York: Basic Books, 1974), 182. This article does not take sides in the debate over how long drug patents should last.

81 Nozick, 180. Cf. also Henry Sidgwick on how it is unfair to take advantage of a "transient monopoly produced by emergency." Cited by Alan Wertheimer, Exploitation (Princeton, N.J.: Princeton University Press, 1996), 235.

82 Nozick, 180, footnote. 83 Nozick, 182. Cf. also Alan Wertheimer: "Because it is important to encourage people

to invest in the acquisition of information . . . [commonsense morality] dictates that we let them reap the rewards of such investments." Also see Andrew Pollack, "High Cost of High-Tech Drugs Is Protested," The New York Times, February 9, 1988, p. Al: "Human growth hormone . . . was once extracted from cadavers and was in such short supply that thousands of children were unable to obtain it. Now because of genetic engineering, it is abundant?and the product is safer. . . . However 'the product wound up being much

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

478 BUSINESS ETHICS QUARTERLY

more expensive than any of us expected' said Carl Coussan, executive director of the Parent Council for Growth Normality. . . . Still, Mr. Coussan said parents were grateful that the drug was available."

84 Patents run for 20 years from the date when the patent application is filed. But after a patent is secured there, the FDA must approve drugs for safety and effectiveness. All the

while, the patent clock is ticking toward the 20-year mark, and the longer the FDA takes, the shorter the patent becomes. The average drug patent is 11.2 years, compared with an

average of 18 years for products of other industries. Breakthrough products such as Enbrel and other biologics often get even less than the 11.2-year industry average. Marilyn Werber

Serafini, "The Price of Miracles," The National Journal, March 25, 2000, p. 348. 85

Sheryl Gay Stolberg and Jeff Gerth, "In a Drug's Journey to Market, Discovery Is Just the First of Many Steps," The New York Times, July 23, 2000, p. 15A.

86 Stolberg and Gerth, "In a Drug's Journey to Market." 87 Jolie Solomon, "Drugs: Is the Price Right?" Newsweek, March 8, 1993, p. 38. 88 Arthur Caplan, "Depo-Provera Price-Gouging Illustrates Industry Habit," Saint Paul

Pioneer Press, January 18, 1993. 89 Britain controls drug company profits. Sheryl Gay Stolberg and Jeff Gerth, "In a

Drug's Journey to Market, Discovery Is Just the First of Many Steps, " The New York Times,

July 23, 2000, p. 15A. 90 Laurie McGinley and Rachel Zimmerman, "High U.S. Drug Prices May Give Phar?

maceutical Makers a Migraine," The Wall Street Journal, July 21, 2000, Bl. Price curbs are enforced in France through mandatory, secret contracts with drug makers following marathon negotiations. Stephen D. Moore, "Hopes Dwindle that EU Will Dismantle Dra- conian Price Controls on Medicines," The Wall Street Journal, December 7, 1998, p. A26.

91 Gina Kolata, "Why Drugs Cost More in U.S.," The New York Times, May 24, 1991, DI. 92

Sheryl Gay Stolberg and Jeff Gerth, "In a Drug's Journey to Market, Discovery Is Just the First of Many Steps," The New York Times, July 23, 2000, p. 15A.

93 Gina Kolata, "Why Drugs Cost More in U.S." 94 Quoted in Sheryl Gay Stolberg, "A Drug Plan Sounds Great, but Who Gets to Set

Prices?" The New York Times, July 4, 2000, section 1, p. 1. 95 David Pilling, "Patchwork Markets Erode Prices: Europe," Financial Times, April 6,

2000, p. 3. 96 Sarah Lyall, "In Britain's Health Service, Sick Itself, Cancer Care Is Dismal," The

New York Times, February 10, 2000, p. Al. 97

Stephen D. Moore, "In Drug-Cost Debate, Europe Offers U.S. a Telling Side Effect," The Wall Street Journal, July 21, 2000, p. Al.

98 Elisabeth Rosenthal, "Drug Makers' Profits Finance More Promotion than Research," The New York Times, February 21, 1993, section 1, p. 1.

99 Waxman in Irvin Molotsky, "Panel Democrats Assail Prescription Drug Prices," The New York Times, April 22, 1987. "The audience laughed when Mr. Waxman said that he knew this to be so because he had been on such trips himself." Waxman says that industry spending on marketing shows that "[r]ecent price increases are not producing new drugs, they are filling corporate coffers," quoted in "Notable and Quotable," Wall Street Journal, July 20, 1987, section 1, p. 18.

100 Dr. Barry Bleidt, a professor of pharmacy administration at Xavier University of Louisiana, quoted in Elisabeth Rosenthal, "Drug Makers' Profits Finance More Promotion than Research," The New York Times, February 21, 1993, section 1, p. 1.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

HOW SHOULD LIFE-SAVING DRUGS BE PRICED? 479

101 There is no a priori reason why advertising should increase prices. On the contrary, the evidence suggests that it should do the opposite. In a classic study, in 1963, Lee Benham found that people paid more for eyeglasses in states that restricted advertising for eyeglasses than in those that permitted it. Douglass C. North and Roger LeRoy Miller, The Economics of Public Issues (New York: Harper & Row, 1983), 71-7.

102 FDA officials say that of the 90 new drugs approved in 1992, only about 40 percent were significant advances over medicines already available. "[M]uch of the research by drug makers is aimed not at innovation but at developing medicines that have the same function as similar drugs made by rivals . . . ," Elisabeth Rosenthal, "Drug Makers' Profits Finance More Promotion than Research," The New York Times, February 21, 1993, section

l,p. 1. 103

Mary T. Griffin, "AIDS Drugs and the Pharmaceutical Industry: A Need for Reform," American Journal of Law & Medicine, 17 (1991): 369. "[P]hysicians typically do not consider price differentials when prescribing." "In these circumstances, much promotion and advertising, and its use of drug company representatives or 'detail men,' have been directed at encouraging brand name practices by physicians. This is reinforced by the

costly and time-consuming nature of the information gathering process. Free samples create brand loyalty," id.

104 Alex Barnum, "New Study on Drug Prices: U.S. Says Health Insurance?not R&D? Behind High Costs," The San Francisco Chronicle, February 23, 1993, p. DI.

105 Alex Barnum, "New Study on Drug Prices." 106 Gina Kolata, "Why Drugs Cost More in U.S.: Other Governments Negotiate Prices,"

The New York Times, May 24, 1991, p. DI. Regina E. Herzlinger of Harvard Business School describes what happened when she called a hospital to correct a mistake on her bill. The response was: "Why are you bothering to do this? You're not paying for it." "The

Quiet Revolution," The Public Interest, spring, 1994. 107 Newhouse, Joseph P. and the Insurance Experiment Group, Free for All? Lessons

from the RAND Health Insurance Experiment (Cambridge, Mass.: Harvard University Press, 1993), 165.

108 Gina Kolata, "U.S. Is Asked to Control Prices of Drugs It Develops," The New York Times, April 25, 1993, section 1, p. 36. See also Chris Adams and Gardner Harris, "When NIH Helps Discover Drugs, Should Taxpayers Share Wealth?" The Wall Street Journal, June 5, 2000, p. Bl; Jeff Gerth and Sheryl Gay Stolberg, "Drug Firms Reap Profits on Tax-Backed Research," The New York Times, April 23, 2000, p. Al.

109 David Noonan, "The Real Drug War," Newsweek, May 8, 2000. 110 Salbu, 724-5. 111 Salbu, id. Drug and biotechnology companies already pay fees and royalties to the

government for license options on federal research. Marlene Cimons, "Health Agency Drops Reasonable-Price Rule on Shared-Research Drugs," Los Angeles Times, April 12, 1995, part D, p. 1.

112 Burroughs Wellcome Co. v. Barr Laboratories, 828 F. Supp. 1208, 1213. See infra at footnote 128. 113 See, e.g., Cockburn and Henderson, "Publicly Funded Science and the Productivity of the Pharmaceutical Industry," NBER Conference on Science and Public Policy, Washing? ton, D.C., April 2000. 114 The case is reported in Jeff Gerth and Sheryl Gay Stolberg, "Medicine Merchants, Cultivating Alliances: With Quiet, Unseen Ties, Drug Makers Sway Debate," The New York Times, October 5, 2000, p. Al.

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions

480 BUSINESS ETHICS QUARTERLY

115 John Carey, "How Many Times Must a Patient Pay?" Business Week, February 1, 1993, p. 30. 116 David S. Hilzenrath, "NIH Drops Its Policy on Drug Prices: Agency Had Required 'Reasonable' Charge," Washington Post, April 12, 1995, p. Fl. The Bayh-Dole Act of 1980 allows recipients of government grants to retain title to their inventions. According to Dr. Wendy Baldwin, deputy director at NIH, "The current policies [under Bayh-Dole] are actually bringing drugs to market. It's a huge advance, a wonderful accomplishment." Jeff Gerth and Sheryl Gay Stolberg, "Medicine Merchants, Cultivating Alliances: With Quiet, Unseen Ties, Drug Makers Sway Debate," The New York Times, October 5, 2000, p. Al. 117 John Locke, An Essay concerning Human Understanding, 2 vols. (New York: Dover, 1959), vol. II, 352. 118 Quoted in Alexander Bickel, The Morality of Consent (New Haven: Yale University Press, 1975), 21. 119 This account is based on Philip J. Hilts, "Wave of Protest Developing on Profits from AIDS Drug," The New York Times, September 16, 1989; Marilyn Chase, "Burroughs Wellcome Reaps Profits, Outrage from Its AIDS Drug," The Wall Street Journal, Septem? ber 15, 1989, p. 1; Bruce Nussbaum, Good Intentions: How Big Business and the Medical Establishment Are Corrupting the Fight against AIDS (New York: Atlantic Monthly Press, 1990); and Harvard Business School Case 792-004, "Burroughs-Welleome and AZT"

(revised 1993). 120 Harvard, "Burroughs-Welleome and AZT," 472-3. 121 The reluctance seems to have been due to two factors. First, the potential market for anti-AIDS drugs appeared to be small (Nussbaum, Good Intentions, 26). Second, there was widespread skepticism that viruses could be treated. 122 Harvard, "Burroughs-Welleome and AZT," 472; Nussbaum, Good Intentions, 38. In the early 1980s, the company had brought out Zovirax, a drug that stops herpes infec- tions. Zovirax had been the first antiviral drug to make a large profit. 123 Nussbaum, Good Intentions, 39. 124 Id., 40-1. 125 Harvard, "Burroughs-Welleome and AZT," 473. 126 The Orphan Drug Act provides tax subsidies for companies that do research on drugs that treat rare diseases (i.e., up to 200,000 people). The Orphan Drug Act of 1983 pro? vided additional incentive in the United States for the development of new drugs for rare diseases by awarding tax incentives grants, and guaranteed seven-year marketing exclu- sivity to firms for products applicable to patient groups numbering up to 200,000. Harvard Business School, "Burroughs-Welleome and AZT," 471. 127 Nussbaum, Good Intentions, 5. "There was a vaguely criminal innuendo in that," says Nussbaum, id. See Editorial, "AIDS, Drugs, Need and Greed," The New York Times, Septem? ber 29, 1989, p. A34; and Editorial, "AZT's Inhuman Cost," The New York Times, August 28, 1989, p. A16. 128

Burroughs Wellcome Co. v. Barr Laboratories, 828 F. Supp. 1208, 1213. As noted, there were two points at which there was critical public involvement with AZT. (1) Dr. Jerome Horwitz first synthesized the compound; and (2) the NCI did some clinical testing of the drug that confirmed its effectiveness against AIDS. But neither of these can be called the decisive contribution. That came when Burroughs Wellcome identified AZT as a potential anti-AIDS drug. (To put the issue of priority in synthesizing a compound in perspective, it should be noted that Burroughs Wellcome synthesizes [or did at the time of these events] some 15,000 compounds annually. [Nussbaum, Good Intentions, 39]).

This content downloaded from 130.191.17.38 on Thu, 18 Feb 2016 04:20:44 UTC All use subject to JSTOR Terms and Conditions