E-drug: Is Big Pharma the next target for attack?
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[Interesting that the article below isn't from a health activist group,
but from this weekend's The Economist! Copied as fair use. HH]
The Drugs Industry: Where The Money Is - Is Big Pharma the next
target for attack?
The Economist, 26 April 2003, pp51-52.
BIG Tobacco, Big Banking-and now Big Pharma? It seems fanciful to
speculate during a week in which Pfizer reported profits, for its latest
quarter, of $4.7 billion, that America's mighty pharmaceuticals giants
might find themselves vulnerable to the political attacks that have
tormented some of America's other large industries.
Yet the parallels mount. Like the tobacco firms and investment banks
before them, drugs firms face a dynamic, grassroots movement,
centred on the states and driven by powerful economics, that
bypasses their well-financed defences in Washington, DC. Disarmed
of their lobbyists and friends in Congress, they appear to have no
compelling answer to these attacks. And their billions of dollars in
profits, of course, are precisely what makes them such tempting
targets.
The attack on the tobacco industry (worth $za billion in settlement
payments so far to the states alone) focused on smoking's harmful
effects, and made full use of the courts. The post-bubble assault on
investment banking is highlighting sales and marketing practices, and
is using the court of public opinion as much as lawsuits. (New York's
attorney-general, Eliot Spitzer, won a $1.4 billion settlement without
ever bringing formal charges against banks, nor hinting at what such
charges might be.)
The campaign against Big Pharma borrows some of these earlier
tactics. States such as Connecticut and (inevitably) New York, thanks
to Mr Spitzer, are filing suits against drug firms that challenge sales
and marketing practices which the industry says have gone on for
years. Connecticut's, for instance, claims that the state "has been
scammed by drug companies seeking to make a profit off our
neediest citizens". But so far, these lawsuits seem designed more to
harass and distract the drugs industry with bad publicity than to
deliver a knockout punch-though that may change. The real battle
involves state governors and their budget officers, and centres on the
vexed question of drug pricing.
America spends more money on drugs ($149 billion in the year to
February, according to IMS Health, a research firm) than Britain,
Canada, France, Germany, Italy, Japan and Spain put together. This
is partly because Americans consume more drugs. But prices in
America are also much higher. The market has more freedom to set
prices than governments allow in Canada, Europe or Japan.
For the drugs companies, the politics of these arrangements have
become increasingly toxic. One problem is that voters personally bear
more and more of the cost of expensive, branded drugs in America -
and hence feel those high prices directly. The lack of a comprehen-
sive prescription-drug benefit for the elderly means that nearly half of
elderly Americans lack prescription-drug coverage at some point in
the year, according to AARP, a lobby group. Private health insurers,
such as Blue Cross Blue Shield, are increasingly shifting the cost of
expensive new drugs on to consumers, by introducing higher
"co-payments" for branded drugs. Fewer and fewer employers,
meanwhile, offer prescription-drug benefits to retired workers. The
uninsured tend to pay particularly high prices for their drugs.
At the same time, the internet is making more Americans aware of
the high prices they pay for drugs compared with shoppers in other
countries. Some have begun to shop for cheaper drugs online from
Canadian internet pharmacies which have sprouted along the border.
What cure?
The states, which face the biggest hole in their budgets since the
second world war, are finding ways to harness this anger. Although
they do not contribute to Medicare, a federally-financed health-care
scheme for elderly Americans, the states pay a large chunk of the
costs of Medicaid, which provides coverage for the poorest. Medicaid
also foots much of the bill for drugs for the elderly because Medicare
does not cover prescription drugs.
Some states are following Michigan's pioneering use of
approved-drug lists to wring discounts from drugs firms. (Because
exclusion from such lists means that doctors must obtain special,
hard-to-win approval to prescribe a drug, the industry argues that
such tactics amount to holding patients hostage.) Michigan says it
saved $45m on its drugs bill last year by demanding discounts from
the "average wholesale price" (a reference price for bureaucrats) in
order to be included on its list.
Michigan now says it wants the same discount of up to 70% (partly
government mandated) enjoyed by the Veterans Health
Administration, another big, public-sector buyer, and is inviting other
states, such as Wisconsin, South Carolina and Vermont, to join
hands. Vermont and Maine, meanwhile, hope to extend the benefits
of discounted purchases beyond Medicaid to state employees and
other beneficiaries.
So what are the drugs firms to do? The industry used to thwart such
tactics by citing "patients' access": everyone has a right to the best
drugs, and doctors must remain in charge of prescribing. But as the
politics sour, the industry increasingly finds itself having to justify, in
more fundamental ways, the prices it charges Americans. Its answers
are not wholly convincing.
One handy appeal is to the benefits of the free market. Thus, Big
Pharma maintains that America's liberal pricing system stimulates
world-beating innovation, as firms spend their R&D dollars more
freely in the hope of winning the fatter profits that America offers.
Thus, the creeping price controls pursued by the states harm
innovation and new-drug development.
Several things undermine this defence. For a start, even America's
system is a hybrid mix of free-market liberalism and price controls.
The worst-off sometimes get the worst deal because bulk purchasers
can negotiate discounts. That may be a political problem, but the
industry offers apologetic programmes that dish out free drugs to
impoverished Americans. Likewise, many people regard it as unfair
that Canadians pay much less money for the same drug than
Americans do. American consumers, in effect, subsidise Canadian
ones-another political problem that the drugs firms can do little about.
Another problem is the perception that drugs firms somehow rig the
market, by bribing doctors with free, or cheap, drugs and spending
billions of dollars on advertising to persuade consumers of the virtues
of expensive and unnecessary therapies. Connecticut's lawsuit claims
that seven drugs firms sold their drugs to doctors and pharmacies at
prices well below the rates at which the state reimbursed these
customers-and that the drugs firms marketed the "spread" between
the two sets of prices as an inducement to buy.
The industry argues that such practices are a way of reimbursing
doctors for costs they cannot claim from the states, and that free
samples go to the poor. But "the public used to think of us as the men
in white coats," says one lobbyist. Now, he says, they are seen as
ugly, sales-and-marketing giants that use lawyers, lobbyists and ad
men to profit from the public.
In fact, as a percentage of sales, drugs firms spend no more on
marketing (10.6%, according to PhRMA, an industry lobby) than they
did in 1997- (Spending on R&D is also unchanged, at about 18% of
sales.) What has changed is direct-to-consumer advertising, which
rose from $1.1 billion in 1997 to $3 billion in 2001. It is this sharp
increase that seems to be changing the way Americans regard drugs
firms.
If that is right, the industry's problems could become much worse. As
the strains on state, federal and corporate budgets grow heavier in
the next year or two, the bulk purchasers will want to shift even more
of the cost of branded drugs on to the shoulders of consumers - or
simply discourage their use altogether by promoting cheap generic
alternatives. Big Pharma will no doubt respond by increasing own
advertising to consumers.
The industry still thinks it has a good story to tell: using more drugs, it
says, lowers the overall health-care budget by reducing more costly
outlays, such as surgery, as well as getting people back to work
faster. But why should politicians such as Mr Spitzer care about the
long-term economics, when the short-term opportunities are so
enticing?
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