The Price of Drugs OpEd by John Mack

A recent AARP study indicates that manufacturers’ prices for prescription drugs rose nearly 3 times the rate of inflation. PhRMA counters that prescription drug prices increased at a lower rate than other health services (see “AARP Study Finds Brand Name Drug Price Increases Accelerate in First Quarter,” AARP Press Release, 6/30/2004). Besides, chides PhRMA, AARP should spend more effort signing up as many seniors as possible for the Medicare-endorsed discount cards.

Another argument often heard from industry supporters on the issue of drug prices is: “If we cut drug profits [by lowering drug prices], research will slow down and breakthroughs won’t be there when we (or our children or grandchildren) need them.” [See the PHARMA-MKTING thread at end of this piece.]

People should be thankful that they have effective drugs, say supporters, and they should keep that in mind when they complain about drug prices. In other words, stop complaining about drug prices and be thankful we do this for you!

These and other typical pharma industry responses to criticism about rising drug prices may make economic sense, but they do not resonant with consumers’ perceptions and emotions. In fact, sometimes it seems more like a slap in the face than a consoling pat on the back.

I think pharma is being caught off-guard by consumerism. In general, pharma doesn’t seem to understand consumers and how to deal with consumer issues although they spend lots of money advertising to consumers and thus are partly responsible for creating the problem.

As more and more consumers pay higher co-payments for drugs (or don’t have any Rx coverage at all — the Census Bureau found last year that almost 44 million Americans had gone without health insurance for the previous year. That number has been increasing by roughly 2 million a year.), more and more consumers will be complaining about drug prices and demanding action from their representatives in Congress.

Pharma needs to realize that it just can’t “win the argument.”

The industry should stop arguing about drug prices, especially trying to make the price of drugs seem insignificant compared to other healthcare costs, and actually do more to lower prices while maintaining the profits they need.

Is it possible? A few members of the PHARMA-MKTING online discussion group think so. [See the PHARMA-MKTING thread at end of this piece.]

There is a 500-lb gorilla lurking here: the executive order by the president calling for the widespread deployment of health information technology within 10 years.

At a recent National Health Information Infra-structure conference I attended in Washington, DC, Dr. Mark McClellan, administrator of CMS, said that the new Medicare Law gives the government “new authority to move forward” with the rapid deployment of ePrescribing and other technologies that will reduce costs by allowing Medicare to pay for results. The pharma industry, in other words, will need to guarantee results worth the higher price of their products and the government will be able to use technology to accurately measure outcomes and hold drug companies accountable.

PHARMA-MKTING online discussion group thread

PM-THREAD 0704-1

AUTH: John Mack
DATE: July, 2004

I’ve heard the argument that people should be thankful that they have drugs and to keep that in mind when they complain about drug prices. In other words, stop complaining about drug prices and be thankful we do this for you!

It may be a typical pharma industry response, but I know of no other industry that uses such an argument. For example, I am also thankful for the beef industry for bringing me food, but as a consumer I will complain about the beef prices and other practices of the industry (e.g., how it tests for mad cow disease).

I think pharma is being caught off-guard by consumerism — in general, pharma doesn’t seem to understand consumers and how to deal with consumer issues although they spend lots of money advertising to consumers and thus are partly responsible for creating the problem.

As more an more consumers pay higher co-payments for drugs (or don’t have any Rx coverage at all), this situation — consumers complaining about drug prices — is going to get worse. You just can’t deal with this using numbers (i.e, money spent on marketing is just a fraction of what is spent on research) or PSAs to win an argument.

The industry has to do less arguing about prices. less posturing about how they save lives andactually do more to lower prices or guarantee results worth the higher price (pharmacoeconomics and outcomes research anybody?).

AUTH: Myriam
DATE: July, 2004

I would agree with John on this matter. I have been in and around the pharmaceutical industry for 15 years and have always been proud to be a part of it. My mother, a nurse for 40 years, is on medications that cost her out of pocket $1500 per month. What saving she spent her life collecting is nearly depleted and she is soon to go on welfare. I am disappointed in my industry that cannot find a way to help those in need, despite searching from company to company and assistance program to assistance program. It is hard watching someone who has been self sufficient her entire life lose everything she has saved for in a matter of a few years due to drug costs. I appreciate the drugs that keep her alive. Should my family settle for this however? I don’t claim to have answers as to why the cost of medication is so high despite being involved within this industry for so long. I believe it is much more complex than one answer. However, we are at a point of going over the border to Canada, something I swore to never do, in order to find a way to help maintain what little nest egg she has left. Does why really matter at this point? Defending pharma is obviously not helping as more and more people are abandoning the support of an industry that they previously respected. The fact is individuals cannot support the cost of brand drugs, period. Few companies are listening. We as an industry have received and should continue to receive harsh criticism for this.

AUTH: Harry Sweeney
DATE: July, 2004

Before this topic really takes off, I would like to provide — not a defense of the industry, but — a perspective. The pharma industry is a target because 1) some individual prescription drug costs have risen to unsustainable levels, 2)all Rx drugs are one of the few elements in healthcare that are paid for out-of-pocket (not counting the insurance and, now, Rx copays), and 3) Some people just don’t like Big Companies that make Profits. This isn’t the place to debate #3. So let’s consider the drug costs issue

On a national basis, Rx drug costs amount to about 12% of the healthcare dollar; physician fees (22%) and hospital costs (32%) are much larger segments. Of the 12 cents that goes for Rx drugs, about 5 cents is kept by the local pharmacy and the wholesaler who delivered the drugs to the pharmacy, and the manufacturer gets to keep about six cents. Of that six cents, about 25% (a penny and half) represents drug profits.

Does anyone doubt that if the profits are taken away, that research expenditures will suffer? Does anyone in our industry not understand that US consumers have been paying for research that benefits the rest of the world, enabling them to enforce price-controls within their own borders? Does anyone consider that you can buy a $25,000 Ford (or many other US brand autos) across the Canadian border from Detroit for $5,000 less that its US price; is it any surprise that drugs will cost less there?

Money spent on “marketing” drives information through the system; a McGraw-Hill study a few years ago showed that high-tech industries generally(including the pharma industry) spend more on marketing than on R&D because it is hard to “sell” new ideas. But when your mother (or members of my family) have trouble paying for their medication, who cares about these arguments? A larger problem, in my view, is that we have been sold a bill of goods by our politicians for two generations now that all healthcare costs should be free (or at least paid for by somebody else) — now there’s a real “free lunch”.

If we cut “marketing” budgets, the uptake and use of new drugs will slow down so our prescribers may not even know about newer meds in a timely fashion. If we use older, generic drugs, the costs may be somewhat less but the side-effect profiles are more troublesome than newer meds. If any manufacturer would complain about Pharmacy profits or Doctor fees as a way of cutting overall costs, a silent (or not so silent), backlash boycott is likely to occur. The list of trade-offs goes on and on, but, carping about lunch costs (even as a metaphor for what some may perceive as “unnecessary” spending)just isn’t productive.

I don’t presume to have the solution at hand to these problems. But I do know that most people — including, unfortunately, too many in our industry — do not begin to understand the complexity of the underlying issues.

Harry Sweeney

AUTH: Terry Nugent
DATE: July, 2004

The people don’t understand because the demagogues who aspire rule them don’t explain the economic verities to them. Instead, they demonize pharma in a manner which equivocates it with tobacco, tossing the angels along with the devils into the pit.

On one hand they rail against outsourcing, on the other they export jobs to Canada when they push reimportation. They bewail the failure to create high wage jobs while they seek to shackle the one industry which creates more of them than any other. If only there were a pill to cure hypocrisy.

The people are more to willing to blow huge sums at casinos and other trifles, but balk at paying $1,200 a year to save their lives.

All that having been said, the industry is not without sin. There is a need for more rational marketing, including all 4 Ps–pricing (avoid lightning rod percentage increases), product (stop merging and start innovating), promotion (100M reps is 50M too many, and when the reps go down so does expensive, sales cannibalizing sample saturation–also DTC is going to be a huge hot button if Kerry-Edwards win), and distribution (more Rx to OTC may keep generics at bay).

Ultimately, though, the government is at risk of doing more harm than good. If I were running a campaign for the industry it would feature the golden goose–with a plea to the powers that be “don’t kill it”. I am hoping for Rx products to improve the quality and extend the length of my life. I along with billions of fellow humans may be cheated of that so some politician can get the power he or she craves by destroying the finest industry in the world.

Terry Nugent

AUTH: Harry Sweeney
DATE: July, 2004

The worst of this situation is that the “industry” cannot get together to even attempt to develop a collective resolution because of Antitrust law. And, any individual company that tried, likely would have their stock savaged by Wall Street. If companies could get together, perhaps enabled by an advance waiver of AntiTrust threats on the part of the Justice Department and/or Congress (fat chance!), some reasonable solution might be hammered out. In the absence of that kind of high level deliberation, it’s likely that our children’s children will be grappling with the same problems. Too many agendas; no one with a big enough stick to force a common sense solution.


AUTH: Terry nugent
DATE: July, 2004

Two thoughts on moderating prices:

1) The feds could help by extending patent life. Disney has a 99 year lease on Mickey Mouse but the pharmcos are lucky to get seven fat years before generics turn their coach into a pumpkin. Longer product life would moderate pressure to make the fast buck.

2) The industry is going to have to stop marching to the Wall Street beat at some point. By putting hyperpressure on the pharmcos, the Street really drives the kind of behavior that may kill the goose that laid the golden egg. The dot com explosion and Enron perp walks show the perils of the Street’s siren song, and they’ll just move on to the next hot category if the feds ruin our industry. As Dr. Vagelos says, put patients before profits. =20


AUTH: Scott
DATE: July, 2004


You are quite right – this is a very complex issue. It is very hard to just discuss drug prices in isolation. There are some fundamental flaws that exist in the overall structure of our health care industry. Drug prices are an easy target because the rate of increase in drug costs has been high relative to the other health care costs and because big pharma companies are an easy political target. But in reality, there are much bigger industry problems to address such as the current inability to evaluate of the quality of care and the lack of choice for care at the patient level.

In the June issue of the Harvard Business Review, Michael Porter had an interesting article on the health care industry: “Redefining Competition in Health Care” by Michael E. Porter and Elizabeth Olmsted Teisberg. It provides a good perspective of what is wrong with our industry and some potential ways to address the various issues. I recommend this article to folks who have not read it yet.


AUTH: Terry Nugent
DATE: July, 2004

Another thing the feds could do is put a leash on the trial bar. I have a friend who makes more in aa year than most doctors do in a lifetime. Lawsuits such as phen-fen enrich the trial bar and increase the risk of pharma business to an absurd degree, and their obscene profits are passed on to customers (including the taxpayers) but nobody complains about the incomes of the trial bar except businesspeople.

In part his is due to the naivete of the elctorate, but the government gives them a pass because the federal and state legislators are dominated by trial lawyers.

But the bowing to Wall Street also drives the litigiousness to the extent that risky products without compelling benefit are brought to market to satisfy the insatiable demand for blockbusters.

Terry Nugent

Vol. 3, No.7: July/August 2004
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