Healthy Skepticism Library item: 1078

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Publication type: news

The Drugs Industry: Where The Money Is - Is Big Pharma the next target for attack?
The Economist 2003 Apr 24

Full text:

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 $22 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 knock-out 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 comprehensive 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, these 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 its 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?