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They account for about 8 percent of
health care spending, and at their current rate of increase, they will soon
surpass spending for physicians' services and, for many health maintenance
organizations (HMOs), the costs of hospitalization.
The increase is due both to a greater use of drugs and to higher prices for
individual drugs. Patients feel drug costs keenly, because they pay much of
them out of pocket. Many private insurers tightly limit drug coverage, and
Medicare does not cover outpatient drugs at all.
The President and members of Congress on both sides of the aisle are
considering adding some sort of drug benefit to Medicare. Discussions of
this issue have drawn attention not only to the acceleration in drug
expenditures, but also to the apparent capriciousness of drug pricing and
other practices of the pharmaceutical industry.
Americans regularly pay up to twice as much as Europeans and Canadians for
the same drug. (3) Prices also vary widely within the United States, where
-- perversely -- they are highest for those in greatest need and least able
to pay. Medicare recipients with no supplementary insurance pay on average
twice as much for the 10 most commonly prescribed drugs as do favored
customers, such as large HMOs and the Veterans Affairs system. (4,5)
For example, a month's supply of Zocor (simvastatin) was reported last year
to be priced at $103.87 for Medicare recipients, as compared with $42.95 for
favored customers. (5) Chronically ill, older Americans may thus be hit with
annual drug costs of many thousands of dollars -- sums they simply cannot
pay. There are frequent stories of older Americans who play out their
prescriptions for as long as possible by taking reduced doses, or who share
drugs with their spouses, or who simply do without, choosing food and heat
over drugs.
The media have recently highlighted another inequity in drug access -- the
inability of people in the underdeveloped world to obtain the drugs they
desperately need. Some underdeveloped countries, overwhelmed by the human
immunodeficiency virus (HIV) epidemic and unable to afford brand-name
antiretroviral agents, have sought exceptions to patent protections, so that
they can manufacture or import generic drugs.
The pharmaceutical industry, with the support of the U.S. government, has
fought these efforts. (6,7) The industry has also been notably uninterested
in developing drugs to treat tropical diseases that afflict millions of
people with low purchasing power. A recent story in the New York Times
described the reluctance of manufacturers to maintain production of drugs to
treat trypanosomiasis in Africa. According to a spokesman for one of the
drug companies, "The industry has never been philanthropic. It has always
produced products with an aim to getting a return on investment." (8)
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How do the Drug Companies Respond to these
Criticisms? |
First, they point out that the American
pharmaceutical industry has, over the past two decades, produced remarkably
effective drugs -- drugs that not only extend life and improve its quality,
but also save money by holding chronic diseases at bay and averting
hospitalizations. High prices, according to this view, simply reflect high
value. As for the fact that Americans pay more for the same drugs than
people in other countries, the industry maintains that it needs to make up
for the depressed prices in countries that impose price controls.
Similarly, it is argued that differential pricing within the United States
is justified by the need to offset the steep discounts demanded by
high-volume purchasers of drugs. Supporters say that someone needs to pay
prices high enough to attract the investment necessary to sustain the
industry's extraordinary research and development costs. They frequently
remind critics that for every drug brought to market, there are innumerable
false starts -- drugs that never make it. Prices reflect the development
costs of not just a particular drug, but all the potential drugs that enter
the pipeline.
In sum, the industry contends that it leads the world in innovative drug
development because it functions in a free market where returns can be
commensurate with the very great risks. Yes, drug coverage should be
extended to everyone, but not at the cost of price controls or other
government interference that would stifle innovation. (That is why the
industry opposes a Medicare drug benefit unless it is administered through
the private sector.)
The case for the pharmaceutical industry sounds reasonable, but is it valid?
Some of it undoubtedly is. There is no question that the past 20 years have
seen the introduction of many new drugs that have changed the face of
medicine and improved the lives of millions. (Whether they have resulted in
net savings from averted hospitalizations is far less clear.) But much of
the case for the pharmaceutical industry is exaggerated or misleading, and
some of it is simply false. Let's look at the argument more closely.
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How Risky is the Pharmaceutical Business? |
For a small company pinning everything
on a few products, it may be immensely risky. But that is not the case for
the large drug companies that dominate the market. True, their research and
development costs are high, as compared with those of other industries.
The top 10 drug companies are reported to spend on average about 20 percent
of their revenues on research and development. (9) (Many critics charge that
marketing and promotional costs are misleadingly included in this figure.)
But the pharmaceutical giants have so many drugs in the pipeline at any
given time that they can count on being able to bring a certain number of
drugs to market regularly.
It is instructive to compare the research and development costs of the large
drug companies with their profits. The top 10 drug companies are reported to
have profits averaging about 30 percent of revenues -- a stunning margin.
(4,10) Over the past few years, the pharmaceutical industry as a whole has
been by far the most profitable industry in the United States. (9,11)
According to a recent issue of Fortune, in 1999 the pharmaceutical industry
realized on average an 18.6 percent return on revenues. Commercial banking
was second, at 15.8 percent, and other industries ranged from 0.5 to 12.1
percent. (11) An industry whose profits outstrip not only those of every
other industry in the United States, but often its own research and
development costs, simply cannot be considered very risky.
What about the picture of the drug industry as an exemplar of the free
market? That image is very far from the truth. On the contrary, the
pharmaceutical industry enjoys extraordinary government protections and
subsidies. Much of the early basic research that may lead to drug
development is funded by the National Institutes of Health. (12) It is
usually only later, when the research shows practical promise, that the drug
companies become involved.
The industry also enjoys great tax advantages. Not only are its research and
development costs deductible, but so are its massive marketing expenses. The
average tax rate of major U.S. industries from 1993 to 1996 was 27.3 percent
of revenues. During the same period the pharmaceutical industry was
reportedly taxed at a rate of only 16.2 percent. (13) Most important, the
drug companies enjoy 17-year government-granted monopolies on their new
drugs -- that is, patent protection. Once a drug is patented, no one else
may sell it, and the drug company is free to charge whatever the traffic
will bear.
Is it correct that the U.S. pharmaceutical industry is highly innovative?
Only partly. Some recently launched drugs do indeed fill important,
previously unmet medical needs. But it is hard to escape the conclusion that
many other new drugs add little to the therapeutic armamentarium except
expense and confusion. Consider the welter of very similar drugs to lower
cholesterol levels.
Developing genuinely innovative drugs is difficult and chancy. It is easier
to make "me-too" drugs or minor variants of established products. To be
profitable, the variation need only be sufficient to secure a new patent,
and the rest is marketing. Critics believe drug companies are doing far too
much of that sort of thing. They also charge that many industry-sponsored
clinical trials are designed more to find small advantages that can be
highlighted in promotional campaigns than to find clinically meaningful
effects. (14)
The industry has certainly been ingenious in finding ways to extend patents
on its bestselling drugs. For example, a recent Wall Street Journal article
describes a complicated business deal between Merck and Schering-Plough for
the marketing of two new drug combinations, one to lower serum lipid levels
and the other to relieve allergies.
Each combination will pair one company's "blockbuster" drug, whose patent as
a single product will soon expire, with a drug with supplementary action
owned by the other company. The combination drugs will have new patents, and
their profits will be shared by both companies. (15) This may be good
business, but the medical soundness of fixed drug combinations as opposed to
flexible combinations of separate drugs is debatable.
The marketing budgets of the drug industry are enormous -- much larger than
the research and development costs -- although exact figures are difficult
to come by, in part because marketing and administrative expenses are often
folded together and in part because some of the research and development
budget is for marketing research.
According to its annual report, Pfizer spent 39.2 percent of its revenues on
marketing and administration in 1999 (16); Pharmacia & Upjohn is reported to
have spent about the same. (12) The industry depicts these huge expenditures
as serving an educational function. It contends that doctors and the public
learn about new and useful drugs in this way. Unfortunately, many doctors do
indeed rely on drug-company representatives and promotional materials to
learn about new drugs, and much of the public learns from direct-to-consumer
advertising. (17) But to rely on the drug companies for unbiased evaluations
of their products makes about as much sense as relying on beer companies to
teach us about alcoholism.
The conflict of interest is obvious. The fact is that marketing is meant to
sell drugs, and the less important the drug, the more marketing it takes to
sell it. Important new drugs do not need much promotion. Me-too drugs do.
How about the claim that the American pharmaceutical industry is the world's
engine for drug innovation? The United States accounts for 36 percent of
global pharmaceutical research and development. Europe accounts for 37
percent, and Japan for 19 percent. (18) The U.S. fraction is certainly
large, but not greatly disproportionate to the country's population.
Innovative products come from the pharmaceutical industries of many
countries, including those that regulate drug prices, and most large
companies have global markets.
The pharmaceutical industry deserves recognition for the many truly
extraordinary drugs it has developed. Furthermore, it is hard to imagine any
other system for developing new drugs and bringing them to market. This is
clearly a job for the private sector.
But, in my view, an industry so important to the public health and so
heavily subsidized and protected by the government has social
responsibilities that should not be totally overshadowed by its drive for
profits. There needs to be a better balance between the interests of the
shareholders and those of the public.
This is not the place to propose detailed reforms that might right the
balance. My purpose here is primarily to describe the problems. But I would
like to suggest a few steps that could be taken.
Congress should modify its enabling legislation to permit the Food and Drug
Administration to require some pre-marketing trials to compare new drugs
with the best available drugs, not with placebos, and to make its approval
contingent on the results of those trials.
In some cases, the new drug should be compared with both the best available
treatment and a placebo. Requiring manufacturers to demonstrate that a new
drug is substantially better than anything available would help to stem the
rising tide of me-too drugs. Third-party payers might also link coverage to
the quality and outcome of trials, as suggested by Ray et al. (19)
To consider other reforms, I believe we need an independent national
advisory panel to study the pharmaceutical industry's practices thoroughly
and then make recommendations. There have been such panels in the past, but
the magnitude of the problems is greater now and a prominent panel would
accordingly have more influence. The panel should consist of distinguished
experts with no stake in the pharmaceutical industry. Although its
recommendations would not be binding, they would stimulate and inform a
public debate that would lead to reforms.
Among the most important questions belonging on the panel's agenda should be
whether some form of price controls is desirable, and if so, how it might be
implemented. This is an exceedingly difficult question that will require
careful study and analysis, but in my opinion, some method of constraining
prices will probably be needed. Just as public utilities are not permitted
to charge whatever the traffic will bear, neither should drug companies. It
is hard to take seriously the inevitable industry argument that price
controls would stifle innovation and frighten investors when profit margins
are so great and so much revenue is spent on marketing.
The panel might also consider whether some small fraction of the industry's
revenues should be set aside for social purposes. I believe it should. Such
funds might be used to subsidize HIV treatment in sub-Saharan Africa or the
purchase of drugs by the needy. The recent decision by five drug companies
to cut the price of HIV drugs in Africa was a good but small start.
There have been other generous actions by drug companies, notably Merck's
1987 decision to donate millions of doses of ivermectin to treat
onchocerciasis and lymphatic filariasis in underdeveloped countries. (20)
These are examples that the rest of the industry might do well to emulate in
an organized way.
Drug companies should also allow exceptions to patent restrictions that
currently prevent underdeveloped countries from manufacturing generic drugs
for humanitarian purposes or importing drugs from the countries where they
can be obtained most cheaply.
The pharmaceutical industry is extraordinarily privileged. It benefits
enormously from publicly funded research, government-granted patents, and
large tax breaks, and it reaps lavish profits. For these reasons, and
because it makes products of vital importance to the public health, it
should be accountable not only to its shareholders, but also to society at
large.
Marcia Angell, M.D.
The New England Journal of Medicine -- June 22, 2000 -- Vol. 342, No. 25
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