In general we have too much governmental regulation and red tape. So why is Big Pharma an exception that needs more, not less regulation? The answer is their history of frequently unchecked greed and dishonesty.

As a physician, I prescribe medications every day and appreciate the remarkable impact that they have in treating diseases. Statins have dramatically reduced rates of heart attack. Diabetes drugs prolong and improve quality of life. Many more cancers can now be placed in remission or even cured. Arthritis drugs relieve pain and suffering. 

These drugs would not be available but for a tremendous expenditure of money and resources. In a free market, why shouldn’t Big Pharma recoup their costs and make a sizeable profit? Their argument is that new drugs should have enough patent protection to recover large development costs and we should recognize that few drugs that enter expensive clinical trials ever make it to market. As well, if we reduce drug profits, fewer venture capital dollars will be invested, resulting in less drug discovery. 

While these arguments have some validity, there is a troubling level of greed and conflict of interest that has affected drug research, marketing programs, and the schemes to extend patent protection and maintain high drug costs.

A recent paper in Nature indicated that global spending on prescription drugs in 2020 was expected to be $1.3 trillion, with $350 billion in the U.S. alone. The cost of cancer drugs in 2018 was estimated at $150 billion, increasing at more than 10 percent annually over the previous five years. Most new cancer drugs cost more than $100,000 per year for each patient in the U.S. alone. 

Greedy repricing of older drugs

Increased costs of drugs are not simply due to high development costs. Martin Shkreli is the poster boy for greed. As CEO of Turing Pharmaceuticals, he notoriously raised the price of Daraprim, an old drug used to treat parasitic infections such as in AIDS patients, from $13.50 to $750 per pill. His corporate greed in running the company resulted in him being sentenced to seven years in prison for fraud. He was also forced to pay a $64.4 million fine and barred from the pharmaceutical business for life. 

While he is an extreme example there are many other cases of old drugs becoming highly expensive without incremental producer cost.  

Why is insulin so expensive? It was discovered in Toronto in 1923, however, Frederick Banting declined to put his name on the patent and co-inventors Collip and Best sold the insulin patent to the University of Toronto for $1 so all could afford the lifesaving drug. Yet today in the U.S., a vial of insulin may cost $300 while it is only $30 to $40 in Canada. The answer is a combination of reformulation, expanded drug patents, and the inability of U.S. payers, unlike those in most of the rest of the world, to negotiate favourable drug pricing. Because of this many people have to forgo daily use and suffer the medical consequences of diabetic complications. 

A similar story relates to Mylan and their predatory pricing of EpiPens, critical for children and adults who need them to provide life-saving treatment for acute allergic reactions.

We need caps on price increases of older drugs that have more than recouped development costs.

How can drug prices be fair and price gouging avoided?

The Institute For Clinical and Economic Review (ICER) is a not-for-profit organization that determines the value of drugs based on need and performance. Other non-U.S. countries have value-based drug formularies and won’t approve drugs deemed not to be value for money. Such pricing schemes can determine fair profits for companies and preserve valuable health-care dollars for areas of greater need.

While greater use of generic drugs has reduced drug costs in most countries, a key driver of higher costs is the launch cost of expensive specialty drugs. These are used to treat complex or rarer diseases often with smaller markets. These drugs are often more expensive to produce and are harder to copy with generic formulations. Is their pricing fair? Let’s look at AbbVie which owns Humira a key drug in the treatment of inflammatory bowel disease and is the subject of a congressional probe for patent manipulation and price exploitation. The drug was launched in 2003 with a list price of $522 for a 40mg syringe.

The price has increased 27 times since the launch and now costs $2,984 a syringe, a 470 percent price increase. The drug cost was more recently tied to revenue targets and executive compensation, providing a corporate incentive for predatory pricing. Given sales of about $20 billion a year, it is hard to accept that the price increases are about recovering expensive development or production costs. 

Need for patent reform

Drug companies receive a fair number of years of patent protection to recoup costs and profit from their invention. All too often we now see minor tweaks made to extend a patent or “pay for delay” schemes used for payoffs to generic firms to delay their entry of cheaper copies into the market. Patents should not be extended for minor adjustments and pay for delay should be illegal. Other suggestions include faster approval of bio-similars which are the generic versions of hard-to-perfectly copy expensive biological drugs, in order to hasten their availability. 

Reduce conflicts of interest 

Currently, most expensive trials performed to demonstrate the safety and efficacy of new drugs are paid for by the sponsor company. While this is reasonable, the inherent conflict of interest in the reporting of these studies is unreasonable. The sponsor often has input into the study design, selection of participating recruitment sites, and manuscript preparation. Often they co-author the paper and most of the authors have declared conflicts of interest. Disclosure is voluntary and usually on the honour system. A study published in the Journal of General Medicine found that in 120 examined trials of new drugs, they discovered undeclared conflicts of interest in almost half the trials ranging from about $9,000 to $97,600 in author benefits.

There is concern that if authors don’t toe the party line and shade the discussion in favour of the drug, they will be excluded from future trials. Regulatory agencies need to be clear that sponsor input should be limited to trial funding and that there be no involvement in data analysis or manuscript preparation in order for the study to be used for drug approval. Journals need to impose serious consequences for authors who egregiously fail to report conflicts of interest. 

Penalize fraud 

It is shocking to discover that tens of billions of dollars have been imposed as drug companies’ penalties to settle fraud allegations. The penalties are to compensate for the promotion of unapproved indications, overbilling of service providers beyond negotiated pricing, kickbacks, and physician bribes. Billions of dollars have also been paid for patient harm resulting from promoting overprescribing of opioids and failure to prevent or disclose drug complications. Perhaps it is time to reduce executive compensation when criminal charges are settled and even to jail executives guilty of knowingly allowing serious patient harm. 

We need a dynamic free market to stimulate discovery and promote competition. Yet some sectors, such as the pharmaceutical business, enjoy a long-term monopoly on their drugs. Predatory pricing and greed all too often drive profit, with little compassion for the hardship it causes. When such a monopoly is abused, governments and regulators need to act vigorously and effectively to limit the abuse.

In its recent budget, Danielle Smith’s government in Alberta introduced a “new fiscal framework.” While it’s a positive step forward, the framework is based in statutory law, which means the current and future governments can easily ignore, change, or eliminate it at any time. Put simply, the new framework will only work so long as governments choose to follow it. 

Specifically, the new framework mandates balanced budgets (except when there’s an unexpected disaster or sharp decline in revenue including oil and gas revenue). It also limits annual increases in operating spending to the rate of population growth and inflation, and set rules for the use of future surpluses—at least 50 percent of any surplus must go towards paying off debt with the remaining deposited in a new “Alberta Fund” to be used to either pay down debt, save in the Heritage Fund or spend on one-time initiatives.  

In the past, the province has experimented with similar statutory rules intended to impose fiscal discipline on governments. The rules worked well during good times but unfortunately were easily discarded when times got tough, precisely the times the rules were intended to help manage. 

Consider the Heritage Fund, first introduced by the Lougheed government in 1976/77. Originally, the government was required to deposit 30 percent of resource revenue annually. If followed, this 30 percent rule would have helped governments spend more sustainably and avoid large deficits. But the rule was based in statutory law, which meant the provincial government (specifically, the Alberta legislature) could unilaterally change the rule.

And it did. Following an oil price collapse in 1982/83, the government reduced contributions to 15 percent. Following a second oil price collapse in 1986/87, the government ended mandated resource revenue contributions entirely. As a result, today all resource revenue is typically included in the budget and continues to create volatility in provincial finances.

The Alberta Sustainability Fund (ASF) was another attempt to use statutory rules to help Alberta’s finances. Established in 2003, the fund was meant to “stabilize” a specific amount of resource revenue for the budget, which would limit the amount of money available for spending while saving any excess resource revenue during the good times to be used when resource revenue fell below the stabilized amount. The logic was simple—save during good times to provide a stable level of resource revenue during bad times.

However, following the 2008 financial crisis, consecutive provincial governments disregarded the rule, drained the fund entirely to support the budget, and the ASF was officially eliminated in 2013.

Both the Heritage Fund and ASF started with well-intentioned rules and had the potential to help stabilize Alberta’s finances (just like the Smith government’s new fiscal framework). But in both cases, the fiscal rules didn’t last because they were statutory and therefore easy for governments to change.

To ensure fiscal rules are robust over time, they should be constitutional, which makes them much harder to bend or break. And contrary to popular opinion, it’s possible to change Canada’s Constitution for province-specific measures. First, the Alberta government must conduct a referendum in the province—in this case, asking Albertans if they agree to the terms of the new fiscal framework. If the majority of Albertans vote in favour of the proposal, the Alberta government then must pass provincial legislation to recognize the new rules and present this legislation to the federal House of Commons and Senate for recognition, resulting in a change pertaining to Alberta in the national Constitution.

After that, if a future Alberta government wanted to reverse the rule or ignore its requirements, it would need to reverse each step in this process. Specifically, it would have to seek public approval through another referendum, pass provincial legislation, then ask the federal government to approve similar legislation. That’s a lot of work to undo rules meant to spare Albertans from more deficits and government debt.  

To truly secure long-term fiscal stability, Alberta needs more robust fiscal rules. By making fiscal rules constitutional, they can’t be easily ignored, disregarded, or eliminated in the future.