The New England Journal of Medicine -- June 22, 2000 -- Vol. 342, No. 25
Dr. Marcia Angell
The pharmaceutical industry is under mounting scrutiny because of rapidly increasing expenditures for drugs in the United States. Drug expenditures are now the fastest-growing component of health care costs, increasing at the rate of about 15 percent per year. (1,2) 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)
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.
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
References
1. Levit K, Cowan C, Lazenby H, et al. Health spending in 1998: signals of
change. Health Aff (Millwood) 2000;19(1):124-32.
2. Murray S, Lagnado L. Drug companies face assault on prices.
Wall Street Journal. May 11, 2000:B1.
3. Dose of reality: idea of having Medicare pay for elderly's drugs is roiling
the industry. Wall Street Journal. February 19, 1999:1.
4. Bernstein S. Drug makers face evolving marketplace. Los Angeles Times.
January 31, 1999:A1.
5. Knox RA. Drug-coverage crisis hurting elderly. Boston Globe. March 6,
1999:B1.
6. Hoffmann V. Health groups say poor nations need access to generic drugs.
Boston Globe. November 27, 1999.
7. McNeil DG Jr. Patent holders fight proposal on generic AIDS drugs for poor.
New York Times. May 18, 2000:A5.
8. McNeil DG Jr. Drug makers and the Third World: a case study in neglect. New
York Times. May 21, 2000:1.
9. Tanouye E. Drug dependency: U.S. has developed an expensive habit: now, how
to pay for it? Wall Street Journal. November 16, 1998:1.
10. The pharmaceutical industry. The Economist. February 21, 1998.
11. How the industries stack up. Fortune. April 17, 2000.
12. Gerth J, Stolberg SG. Drug makers reap profits on tax-backed research. New
York Times. April 23, 2000:1.
13. Anderson C. Drug firms said to pay less in taxes. Boston Globe. December 26,
1999.
14. Langreth R. Drug marketing drives many clinical trials. Wall Street Journal.
November 16, 1998.
15. Harris G. Drug makers pair up to fight key patent losses. Wall Street
Journal. May 24, 2000.
16. Annual report, 1999. New York: Pfizer, 1999.
17. Avorn J, Chen M, Hartley R. Scientific versus commercial sources of
influence on the prescribing behavior of physicians. Am J Med 1982;73:4-8.
18. PhRMA facts and figures. Washington, D.C.: Pharmaceutical Research and
Manufacturers of America, August 1997.
19. Ray WA, Griffin MR, Avorn J. Evaluating drugs after their approval for
clinical use. N Engl J Med 1993;329:2029-32.
20. Waldholz M. Merck, in unusual gesture, will donate drug to fight leading
cause of blindness. Wall Street Journal. October 22, 1987.
| The Links Below Jump To Pages On Whatever Web You Are In | |||
| Table Of Contents | Search This Web | Navigation Help Page | |
| Write To Karl Loren -- He Pledges To Answer EVERY Personal Message, Personally. Click here or on his name in the box below. | |||
| The Links Below Are To Various Web Sites Published By Karl Loren | |||
| Karl Loren Web | Vibrant Life Web | Karl Loren's Book | |
| Super Colostrum | Bulk MSM | Heart Disease | |
| Emmessar | Happiness | Arthritis | |
| Instead Of | Chelation Therapy | Super Colostrum (2) | |
| Karl Loren's Catalog Store | Central Page For All 12 Webs! | ||
|
I promise to answer your message -- click here to send me a personal message
|
SUBSCRIBE: The Wednesday Letter is a free electronic monthly newsletter written and published by Karl Loren. You can view more than 50 back issues of this publication by clicking here. The Wednesday Letter subscription list is maintained on a secure server, no name is ever given or sold to anyone, and it is never used except for this Newsletter. It is automatically published on the Tuesday night just before the first Wednesday of every month. You can subscribe to this free monthly electronic letter by entering your eMail address and name below. You will then automatically receive a request for confirmation, sent to whatever address you have entered. If you do NOT receive this confirmation request, then you will not be subscribed. There may have been an error with your address and you should resubmit. The letter is never sent twice to the same address -- so you do not have to worry about a duplicate subscription. When you receive this confirmation request you must reply to it, or your subscription will not become active. No one can subscribe your name, and address, without you being notified, and if you get an unwanted notice of subscription you only need to DO NOTHING and the subscription will NOT be active.
REMOVAL: You can remove yourself from the subscription list in several different ways. Click here to read about this entire newsletter system. Every edition of The Wednesday Letter is delivered to your address with YOUR name and address in view on the letter, with a link that allows you to remove THAT name from the subscription list. If you try to send this removal message from an address different from the one you used to send in your original confirmation, then you will get a warning notice first, sent to the subscription address, asking you to confirm that you want to be removed from the list -- by replying to THAT request for confirmation, you will then be automatically removed. Thus, no one else can unsubscribe you, from some other computer, without your knowledge. But, if you send in the unsubscribe notice from the same machine used to receive the Letter, then the removal from the subscription list is automatic.
Personal Message: When you send a personal message to Karl Loren, you will receive a personal reply as per his instructions. Karl pledges that every personal message will get a personal answer. When you provide your mail address, we will send you free information including our free catalog and a cassette tape lecture by Karl Loren about heart disease, no charge, by mail, even if outside the US. You can select particular information you would like to receive, along with the free cassette tape and catalog.
