k you for allowing me to talk with you today. I share your concerns about th care reform. I am particularly concerned about research, cancer, and economic effects of health care reform. oduction ay of introduction, I am a kidney cancer patient. I am also President and f Executive Officer of the National Kidney Cancer Association. Before I ded the Association, I started five high tech companies. I hold a Ph.D. in gement from Northwestern University and I have been on the faculty at hwestern and at the University of Illinois. of my companies, Schonfeld & Associates, tracks research and development nditures and publishes statistical reference works on corporate financial ormance. These publications are sold to corporate research centers such as Labs, to Wall Street, and to government agencies such as the IRS, the rtment of Defense, and others. ve no financial interest in any health care company. The National Kidney cer Association is supported by patients, families, and doctors, and by vidual charitable donations. Besides providing information to patients and cors, the Association also has a small research program of its own. cial Comments earch has played an important role in the evolution of our health care Many of us would not be alive today if it were not for the success of = research. cem. ever, medical research is now threatened by health care reform. As shown in ure 1, health care R&D as a percent of health care costs peaked in 1982 and declined consistently since then. This graph shows one reason health care ts have not been contained. The United States has not invested enough money in medical R&D to control rising costs. If health care reform reduces research as a percentage of total cost, the U.S. will fall farther and farther behind its health care cost curve The reason is that research not only produces new drugs which cure disease and better medical devices for diagnosing and caring for patients, research also produces innovations which reduce costs. A For example, the development of laparoscopic surgery means less invasive and less expensive surgery, shorter hospital stays, and less risk to patients. new drug may keep a patient out of the hospital, and newer more sensitive X-ra film may uncover tumors when they can be removed without intensive chemotherap or other treatments. Research also reduces the cost of making many products used in our health care system. Much has been written about new medical technologies which are "expensive" while everyone has ignored the technical advances which have dramatically reduced costs. I think one of the problems is that CAT scan machines are highly visible capital expenditures for hospitals, while new surgical staples and pharmaceuticals are supplies. Financial accounting has steered many people to the wrong conclusions about the cost of health care technology. Sources of Health Care R&D Investment How much does the U.S. spend on health care R&D and where does the money come Health care reforms which reduce the rate of return on R&D by private industry will reduce total health care research. Some projects are not viable when rates of return drop. Also, the Federal government has already reduced its own share of R&D spending. Moreover, the Federal government cannot make up for any cutbacks in corporate research. The government faces huge deficits and has no money for long term research investments. The recent termination of the super collider project by Congress underscores this lack of funds. In Figure 3, R&D as a percent of sales for seven major drug companies is compared to Federal health care research spending as a percent of health care costs. This graph shows that major drug companies have doubled their R&D spending as a percentage of sales while Federal government R&D has barely kept pace with costs. In fact, real Federal spending has declined if you take One of out of every three living Americans will die of cancer. Currently, there are over 8 million cancer patients in the U.S. You can think of them as having tested positive for cancer. lk with hundreds of cancer patients every year. I get phone calls every and I know their problems with the health care system. First, and most, they haven't got a cure for their disease. The next time someone lains about the high price of drugs for a rare disease, remember that they fortunate that they have a drug at all. Many of us don't have any ctive therapy, and we are paying the highest price of all. rally paying with our lives. We are re 4 shows that this year, almost 1.2 million new cases of cancer will be nosed in the U.S. and over 500,000 deaths will be due to cancer. About 28 ent of health care costs are consumed during the last year of life. As a er, cancer is the single most expensive disease in the U.S. economy. ugh research by companies as well as by the National Cancer Institute, we about to see some major breakthroughs in the diagnosis and treatment of er. For example, conventional chemotherapy has been replaced by notherapy in kidney cancer. Gene therapy is a reality and it is now ible to have a patient's body produce the chemicals needed to fight his own ase. President's health plan calls for reimbursement of care during NIH sored clinical trials. This part of the plan will speed research and help ents get state-of-the-art care. ver, as shown in Figure 5, we have a long way to go. The R&D budgets of eral Motors and IBM have grown much faster than the budget of the National cer Institute... and these two companies are no longer competitive or ing the needs of world markets. In fact, both companies have lost billions Hollars and their boards replaced their CEO's during the past year. The ined R&D budgets of just these two companies exceeds the total NIH budget. ortunately, the National Cancer Act has not been enforced. Figure 6 shows : taking into account inflation and the number of new cases, Federal ding for cancer research actually declined 37 percent during the 1980's. a cancer patient, it is very clear to me that I should not count on the eral government to find a cure for my disease. The Federal government has been investing sufficiently in cancer research and it will not do so in the of huge deficits. refore, I must look to the private sector to provide for technical advances, cures, lower cost treatments, and other innovations. If health care reform ages private sector research, costs will go up, quality of care will be less n it could be, and many people will die needlessly. ce Controls ce controls are the single biggest threat to the private sector, ticularly pharmaceutical companies, medical equipment companies and other intensive suppliers. Price caps will be especially detrimental to R&D investment. As shown in Figure 7, biomedical research prices have been growing faster than the Consumer Price Index. Drug and equipment prices reflect costs, and this inflation index explains, at least in part, why consumers are seeing drug prices increase faster than other things. If prices of drugs and equipment are capped at the CPI, the cash flows won't be sufficient to support the real costs of research and development. The amount of research done will be less. Also, price controls discourage risk taking. No corporate manager or venture capitalist or company will put money at risk in an R&D investment program and develop products which may come to market 5 to 10 years in the future when a National Health Board of government bureaucrats will determine prices and profit margins. Managers and investors are willing to take business risks and financial risks. They are unwilling to take a political risk, particularly when they can make investments in other opportunities where there is no political risk. The reason is that R&D for new products is only one type of investment opportunity. Instead of risking capital on research, companies can make acquisitions, such as Merck buying Medco. Companies can expand marketing and move into more countries. Companies can launch new product lines which are free from price controls such as cosmetics or over the counter drugs. They can repurchase their own stock. They can modernize their manufacturing plants for existing products. Etc. Etc. In this regard, Congress and the White House must understand that the laws of economics are more powerful than the laws you enact. Companies will respond and adjust to whatever you do. If you reduce the rate of return on R&D investments through price caps, capital will be devoted to other, less risky or more profitable opportunities. Health care reform can produce unwanted, even dangerous, economic side effects. If the role of the National Health Board is to set prices or cap prices, it will destroy health care R&D and patients will feel the impact. Those patients who have a drug for their disease would pay lower prices, such as patients who are on chronic high blood pressure medicine. However, patients who don't have a drug for their disease may never get a drug which helps them. Diseases such as cancer and AIDS will go right on killing Americans. For example, I have kidney cancer. I had my kidney and tumor removed four years ago, but I have a 50 percent chance of recurrence. The most effective therapy currently available produces a complete remission in only 8 percent of patients. If my disease comes back, I face a 92 percent probability of death. Will there be a drug for my disease if the National Health Board has the power to control prices? And if it won't have the authority to set prices, why do we need to spend $ 2 billion on a new Federal bureaucracy? Our deficits prove that we can't pay for the bureaucracy we already have. e irony of this foolishness as shown in Figure 8 is that pharmaceuticals count for only 8 percent of total health expenditures. If all drugs were ee, it would barely matter to the overall cost of health care in the U.S. ivate capital is already moving away from health care research. As shown in gure 9, the market values of research intensive drug companies have dropped gnificantly. To produce this graph, I added up the monthly closing stock ces of seven research intensive drug companies: Abbott, Bristol, Lilly, rck, Schering, Smithkline, and Upjohn, and divided the total by the S&P 500 ock Market Index. These companies have lost almost 25 percent of their value lative to the overall market. ese companies compete for capital in the financial markets. Lower market lues mean that the cost of capital is going up and less capital is available. timately, capital flows are reflected in research budgets as well as in ices. I mentioned, I have been involved in several high tech ventures. Currently, ord on the street" is that capital for biotech start-ups has become basically available. Entrepreneurs can't get money for new research-based health care mpanies. rge companies are also responding. Managers are redirecting capital to nonsearch investments, such as acquisitions. Besides buying Medco, Merck is vesting in building a new generic drug division to make low-priced, me-too oducts. cently, in India where the government has capped drugs prices for some time, che withdrew from the market. American companies are cutting back on their erations in India. Capital is being redeployed to other, more profitable eas. There have also been massive layoffs at major drug companies. fear is that we are seeing the future of health care research right now. t this be an early warning sign to the Congress and to the White House. osing Comments need health care reform and there are many things which Congress can do to prove the situation. Let me mention several of the most important changes u can make, such as: 1. Make R&D tax credits permanent to encourage the development of innovations which reduce health care costs. 2. 3. Enact a capital gains tax for long term investments so capital is readily available to fund new health care companies and more new products. Repeal of the McCarren-Ferguson Act so we have competition and innovation in insurance, and pass a law prohibiting pre-existing condition exclusions. |