Pharmaceutical Fornication – Part I

We’re being screwed!  It’s as simple as that.  If you did not get the chance to listen to my interview with Dr. Jeffrey Lobosky, you missed a fascinating discussion about the pharmaceutical industry.  Here are some of the highlights, or perhaps I should say, lowlights!

The $802 Million Controversy

Following World War II the pharmaceutical industry took off.  The cost of drugs began to rise, especially for seniors.  Seniors have always been a powerful lobby because seniors vote.  Congress threatened to regulate the pharmaceutical industry.  So the industry held a conference and explained, and this is true, that in the development of medications there are very few successes.  Research and development (R & D) did not guarantee the creation of new medications.  If the price of drugs was regulated, so they claimed, there would not be enough money to develop new drugs.  Everyone backed off and the matter was dropped.

Well, not everyone backed off.  The editor of the New England Journal of Medicine decided to research the claims made by the pharmaceutical industry and, specifically, the claim that it cost $802 million to develop a drug.  What she discovered was that in their calculations they neglected to deduct the cost of R & D which is tax exempt.  Moreover, their research focused on the 68 most expensive drugs that were developed in the year on which the research was based.  Additionally, the pharmaceutical industry factored in what is called the “Cost of Opportunity” which means the money that the company would have made had they invested the money in, for example, the stock market, and not used it for R & D.  (Feel free to read that sentence again.)  For her part, the good editor looked at all of the drugs produced in the same year and, deducting the cost of R &D and ignoring Cost of Opportunity, she came up with the price of $260 million for the development of a drug.  A lot of money, but far less that $802 million!

The Price of Drugs and Medicare

The grandparents are going to love this one!  The price of drugs is determined by the manufacturer, the insurance company and the pharmacy.  The more bodies the insurance company can deliver to the manufacturer, the lower the price.  Good ole’ fashioned capitalism at it’s best.  However…

The largest health insurance provider in the country is Medicare with 50 million members.  Medicare is forbidden, by law, to negotiate the price of drugs with pharmaceutical companies.  According to the Prescription Drug Act which passed during the second Bush administration, not only is it illegal for Medicare to negotiate prices, but it is also illegal to import less expensive drugs from Canada.  And it gets worse…

When the Republicans took over Congress after the debacle of the health care insurance attempt of the Clinton Administration, Representative Billy Townsend, a Democrat from Louisiana, switched to the Republican party.  When George W. Bush was elected president, he picked Townsend to shepherd the Prescription Drug Act through Congress.  Townsend worked closely with the pharmaceutical industry and, after the law passed, he resigned and became the head of the pharmaceutical industry lobby at an annual salary of $2 million.   (Don’t scream yet; I’ll tell you when I’m finished!)

When Senator Obama was running for president, he used Townsend as the example of what was wrong with the system.  When he became President Obama and wanted his own health care legislation passed, he sent for Townsend.  They came to an agreement.  The pharmaceutical company would agree to give back $80 billion over a 10 year period to Medicare and to sponsor ads supporting the president’s health care plan, and Medicare will still be forbidden to negotiate prices.  The problem is that it is estimated that if Medicare could negotiate with the pharmaceutical companies the price of medications, they would save between $70 and $100 billion annually!  (You may now scream.)

The Bayh-Dole Act

Historically, if research was conducted at a public institution using public funds, the results of that research were in the public domain.  In other words, if the research resulted in a new process or a new substance, a private manufacturer would not be able to get a patent if it were to commercially develop the substance.  In 1980 Senators Bayh and Dole sponsored legislation that enabled researchers to obtain patents on their discoveries and to license those patents to private industry.  In other words, tax payer money goes to a team of researchers at a university who develop a new drug.  They get the patent and license it to a pharmaceutical company that then manufacturers the drug at the normal high price of a medication that the company develops on its own.  So not only do tax payers pay for the research, they don’t benefit monetarily from the fruits of that research – they pay full price and the pharmaceutical company makes huge profits.

Direct-to-Consumer Advertising

Before 1997 only New Zealand allowed pharmaceutical companies to advertise.   Then the US joined them!  Between 1997 and 2006, with the birth of television, radio and print advertising of medications, the average price of a drug went from $30 to $68 and the average amount of money spent annually for medications rose from $72 billion to $300 billion.  The advertising budgets (and this would be a component in the price of a drug) rose from $780 million to $5 billion.

Academic Journals

Pharmaceutical companies have formed a relationship with medical journals.  It’s really simple:  the pharmaceutical companies pay for ads and the journals publish articles that downplay side effects or exaggerate the benefits of certain drugs.  It’s a clear conflict of interest.  Questionable science is being supported by major advertisers forcing editors to choose between staying in business or academic/scientific credibility.

Ad-Induced Diseases

Because of the ads seen by the public, mild medical complaints have become diseases.  Simple maladies are now complex conditions.  Heartburn is now acid reflux.  Instead of just taking a couple of Tums, people were prescribed Tagamet.  When Tagamet’s manufacturer lost their patent, the new drug was Prilosec.  And, of course,  each new drug is more expensive than its predecessor.  But it’s not just heartburn.  A runny nose is now allergic rhinitis requiring Claritin.

Managed Care

Physicians are now in the hands of the insurance companies.  When the new system began, if they wanted the insurance companies to send patients their way, the doctors had to agree to lower fees.  In order to make up for lost revenue, that meant they had to increase volume.  So they hired physician assistants and nurse practitioners to see patients, or they simply sent patients to the emergency room.  And when they do see a patient, and the patient asks for a drug they have seen advertised, it takes less time to simply write the prescription than to explain to the patient why the cheaper generic alternative is just as good.

Robert Torricelli

Torricelli used to be a senator from New Jersey.  (He decided not to run for reelection following a campaign finance scandal.)  In 1999 he was chair of the Senate Democratic Reelection Committee.  It was his job to raise money to get Democrats reelected (or elected) to the Senate.  The manufacturer of Claritin was going to lose its patent on the drug.  They went to the Senator, gave him a check for $50,000, and the next day he introduced legislation extending their patent.

You have my permission to scream again!  And you are invited to listen to my next program on the pharmaceutical industry, on Monday, June 27 at 2:00 PM.  My guest will be Tom Loker, author of The History and Evolution of Health Care in America: The Untold Backstory of Where We’ve Been, Where We Are, and Why Health Care Needs More Reform.

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