by Jacquelyn Horkan, Editor
March 2002

Where Do Little Pills Come From Part II

The first part of this ongoing story about the fecklessness of critics of pharmaceutical companies (January 2002) detailed the battle over Bayer AG’s right to charge market prices for Cipro, its antibiotic that is used to treat exposure to Anthrax.

According to conventional wisdom, U.S. patients pay much higher prices for prescription medicines than do our counterparts in other countries. Patricia M. Danzon, an economics professor at The Wharton School at the University of Pennsylvania discovered, however, that the price differentials are grossly exaggerated. Some drugs are cheaper here, others aren’t. Danzon found that comparing pharmaceutical prices among nations is complicated by several factors; for example, there are differences is dosage forms, strengths, and consumption. In addition, prices for one medication may vary within a specific country.

For those drugs that are more expensive in the United States , however, the blame cannot be laid on profiteering by the manufacturers, but rather on price controls by foreign governments, particularly those in Europe and Canada . There are three basic forms for artificially suppressing costs: price controls, reimbursement limits, and controls on corporate profits. Each is used to varying degrees in one or more of the developed nations, leaving the United States as the only member of the Organisation For Economic Co-Operation And Development that does not exert some form of  coercion over the prices of prescription medicines. Critics of the pharmaceutical industry cite what they call high-profit margins as proof of the need for U.S. regulation of drug costs. According to Fortune magazine, in 1999 drug companies realized a median profit margin of 18 percent, a respectable but hardly extravagant achievement compared to other leading companies. Nabisco, for example, had a profit margin of 36 percent; media conglomerates Gannett and Tribune made 17 percent and 46 percent, respectively. The drug companies plow an average of 21 percent of their profits back into research and development, a much higher percentage than some high-tech companies that reported higher profits.

The profits the companies realize provide the venture capital for medical progress. According to one industry estimate, only one in every 5,000 chemical compounds developed and tested by the companies ever makes it to the market. That one successful medication has to cover the cost of all the 4,999 failures. And the competition is fierce; no drug company controls more than 7.2 percent of the U.S. market.

According to a January 2, 2002, Wall Street Journal report, two pharmaceutical firms, Pfizer and AstraZeneca, have begun making clear their displeasure with European price controls, threatening to pull certain drugs out of those markets if those governments don’t review their policies.

 

A New Year Dawns on Deregulation

On New Year’s Day, Texas forged ahead with deregulation of its power industry, less than a year after the collapse of the California experiment. Foolish, brave, or sensible? The future will tell, but there are major differences between the methods applied in the two states.

California never really deregulated its electricity market; it simply reorganized and centralized the marketplace while levying price controls on retail charges for energy. The state also prohibited the construction of new power plants for most of the 1990s. Between 1996 and 1999, demand grew 12 percent while supply grew two percent. The system was stretched to its limits, unable to cope with unforeseen circumstances such as unseasonably hot summers and the spike in oil and natural gas prices that caused wholesale prices to jump right after the California restructuring went into effect. Because of the price caps, however, energy retailers couldn’t increase prices to cover their increased costs. Texas is taking a more cautious approach to deregulation, allowing for a five-year phase-in of deregulation of the wholesale market. Neither does it mandate retail price caps. Most importantly, however, Texas has allowed the construction of power plants; supply for electricity now exceeds demand by 32 percent.

California pursued the deregulatory model favored by Enron, which demanded unbundling of all facets of the energy industry, from meter-reading to electrical generation. Wall Street Journal columnist Holman W. Jenkins, Jr., described that approach as “a dogma, one that contradicted a market economy’s central virtue of letting various business models contest to show their virtue.” California and Enron insisted on one business model and it didn’t work.

Can Texas repair the sullied reputation of deregulation? We’ll have to watch Ñ and perhaps learn.

 

High-Speed Drain

In the 2000 general election 53 percent of Florida voters dreamt a dream -- or inflicted a nightmare Ñ by placing in the state’s constitution a mandate to begin construction of a high-speed rail system by November 2003.

The 53 percent approval rate, however, is a little misleading since 631,017 of those who showed up at the polls cast no vote for or against the mandate. In other words, 47 percent of the voters said yes, 43 percent chose no, and 10 percent either couldn’t decide, didn’t care, or simply gave up on the crowded ballot before they got to the part with constitutional amendments.

Nevertheless, the yeas won the contest among those who did vote, and now lawmakers will be in violation of our state’s constitution unless they start appropriating funds to finance the bullet train. Now for tough question: Where will they find the money? Floridians didn’t anticipate a recession or a devastating terrorist attack on our country when they went gung ho on this huge public-works project. They never guessed that 13 months after enacting a bullet-train mandate lawmakers would be cutting funding for education, social services, and public safety.

Sen. Ron Klein ( D-Delray Beach ) is offering us a way out of this mess. He has a bill before the Legislature that would give voters a chance to repeal the bullet train amendment 

A bullet train connecting Florida ’s population is an exciting idea. Let’s wait, however, until private-sector investors are willing to put their own money on the line, so to speak, instead of asking the taxpayers to bear most of the risk.

 

In the Same Mold

The ambulance chasers are at it again, playing the old game they’ve perfected. The one where failure breeds success. Where publicity leads to litigation, which leads to more publicity, which leads to more litigation, which leads -- well you get the picture.

The latest target? Mold.

The creeping fungi made a comfortable home on this planet long before mankind appeared. Its current apotheosis into public enemy began in 1993, when eight newborn babies in Cleveland died of a rare lung disorder that caused them to suffocate in their own blood.

That crisis passed from consciousness until 1997 when a group of medical researchers released a report linking the babies’ deaths to the presence of fungi in their homes, particularly a nasty little specimen call Stachybotris. The Centers for Disease Control gave its stamp of approval to the study but later backed off when other scientists began poking holes into the researchers’ methodology and conclusions. The damage, however, had been done.

Fast forward to June 2001: New York heiress Melinda Ballard and her husband Ron Allison win a $32-million settlement against their insurance company for not taking seriously enough the threat posed by mold in their 22-room Texas mansion. Ballard and Allison had earlier been the subjects of a two-part story on the CBS news show 48 Hours, which included footage of them donning space suits before entering their home. Ballard now operates a litigation database on mold cases to help plaintiff lawyers. Some of the thousands of cases she lists date back to the 1980s but most have been filed in the last two years. So the familiar pattern emerges. An appalling tragedy appears in the news. A group of scientists come up with an explanation. The lawsuits follow even though the scientists’ conclusions are later invalidated. Plaintiff lawyers lose the first batch of lawsuits, but eventually a case comes along that piques media curiosity. As the story gains steam, more frightened citizens run to the lawyers who benefit by familiarity among the jury pool with the superficial facts of the matter. The panic gains in momentum and the lawyers start winning hefty awards, which draws new lawyers into the latest legal fad.

In the mold litigation, the facts are not on the side of the plaintiff lawyers and their clients because there is little scientific understanding about the actual dangers of mold. The plaintiff lawyers aren’t arguing their cases on science, however. Instead, they rely on anecdotal evidence and blame insurance companies and construction contractors for willfully ignoring the potential dangers and for creating the possibility of a mold infestation.

Although the toxic-mold legal phenomenon is flourishing mostly in Texas and California , sooner or later it will be exported to Florida . Insurers who sell homeowners’ policies here have asked the Florida Department of Insurance to specify their obligations in mold claims.

The Florida situation represents less danger to home insurers because, unlike Texas , Florida ’s homeowners’ policies already include specific limits on coverage for mold damage. The requests before the insurance department are a first step in keeping trial lawyers from importing their mold-litigation factories from the Lone Star State , where a slew of insurance companies have stopped issuing homeowners’ policies.

As of this writing, the insurance department is still gathering information on requests to clarify what kinds of mold damage are and aren’t covered by a homeowner’s policy, to institute caps on damages for covered events, and to allow policyholders to purchase additional coverage.

Jacquelyn Horkan is editor of Florida Business Insight, Associated Industries of Florida’s on-line magazine (e-mail: jhorkan@aif.com).