What Health Care Reform? Drug Prices Are Rising
43 CommentsBy Ed Silverman // October 13th, 2009 // 8:04 am
During this year’s third quarter, eight of the biggest drug makers undertook hefty price increases - the average among this group was 8.7 percent, easily outdistancing the core Consumer Price Index of 1.4 percent, according to a recent research report by Credit Suisse analyst Catherine Arnold.
Who led the pack? Schering-Plough (soon to be bought by Merck) with a 12.8 percent hike, while Abbott imposed a 4.4 increase (Abbott’s price hikes have, in fact, been declining over the past year, the report notes). What about the others? Merck upped the ante by 9.9 percent; Wyeth (soon to be part of Pfizer) drove prices higher by 9.3 percent; Lilly was at 9.1 percent; Bristol-Myers Squibb prices rose 8.9 percent; Johnson & Johnson increased prices by 7.8 percent, and Pfizer prices rose 7 percent.
Of course, this isn’t surprising. Drug makers are scrambling to bolster their top lines as best sellers lose patent protection, lower-cost generics arrive and pipelines run dry. And raising prices - in any industry - is a tried-and-true strategy, whether or not there is a need to compensate for lost business.
Still, there is some irony in that brand-name drug makers are winning praise for cooperating with the White House on health care reform by giving back some $80 billion over a 10-year period by way of discounts. Price hikes may not amount to $80 billion, but they do add up and can help replenish the givebacks a little, yes? And it may also pay to raise prices now before any deal is really done.
Christopher
Good points. Remember though that in the US drugs account for only about 10% of total healthcare expenditure.
atlex
Christopher is correct. And, brandname drugs account for roughly 8% of the healthcare dollar. Also, what’s not considered is the fact that <10% of prescriptions are purchased at “retail.” The vast majority are paid for through health plans, PBMs, government programs (Medicaid, VA, DoD, etc.) where there is quite often a discount, sometimes, as with Medicaid, a substantial legislated discount.
Jaynesday
Christopher and alex, you both miss the point. Why is there a unilateral increase in prices at this time?
At time of universal economic pain, we have price excessive increases from pharma.
Could it be that this is a way to begin the pre-payment for the $80 Billion pharma give back and the $150M healthcare advertising job promised by Billy T.(PhRMA)?
Certainly you could call it a smart move by pharma at this time couldn’t you?
Certainly you could call it a number of other things too.
Justice in Michigan
As cited here in the old days, the 8% figure is inaccurate. According to Shondelmeyer, at U-Wisconsin, if you factor in Medicare/Medicaid expenses, the figure is closer to 20%. Glad to send again the citation from the Chemical & Engineering News on this.
But the core point, in my view, is that there simply is no rational basis for drug pricing besides “what the market will bear.” In this case, the “market” means primarily Medicare, which has already agreed not to _be_ a market, and private insurance, which cuts whatever deals.
So the market notion is largely illusory. And, in a product like drugs, especially serious ones, the pricing model as we have it is almost certainly not sustainable.
So it mostly comes down to when we go over the cliff.
Christopher
JiM - would like that citation please. Most figures quote ~10%. Here’s a recent article quoting the same rate: http://tinyurl.com/ykjh7cs
Do Medicare/Medicaid expenses include administrative costs or are they purely drug costs?
Agree that the pricing model is hard to sustain - and one might also struggle to justify vis a vis other countries - but disagree that the market notion is illusory. What they are competing in_is_ the market and its composition is whatever elements define it. How they (pharma) deal with it is I think what is in quesiton, not economic theory.
Good to be back isn’t it?
atlex
Justice, I don’t think you are accurate here. In fact, I’m not clear at all how you even speculate a 20% price increase. As part of the pricing process in pharma, I can attest that the “sticker prices” went up relatively closely to what Ed cites.
In addition, your comment about Medicare and Medicaid is inaccurate. First, by statute, price increases in Medicaid are limited to CPI. Anything greater than that is returned to states and CMS via a rebate; thus the impact of these price increases to Medicaid is roughly 3% to 4%. As for Medicare…the same private insurers which cut deals for employers also cut deals for Medicare Part D. The system works exactly the same. Given the high satisfaction rates (approaching 90%), I’d say that this is a market that works.
Condor
Hate to be a burster of bubbles here — but the old saw that “branded retail drugs are only 10 percent of the US spend” is simply disingenuous.
Fully 52 percent of all spending occurs in hospitals, and doctors off-site locations — and at each of these, drug costs are a significant factor.
To simply point to retail, standalone pharmacy sales, and claim there isn’t much wood left to chop - is insulting to anyone who can read a pie chart.
Do see this pie-chart:
http://tinyurl.com/ykjh7cs
Namaste
Condor
As the non-partisan Congressional Budget Office points out (2008 Report, at page 4):
“. . .Prescription Drugs.
For much of the past 40 years, spending on prescription drugs contributed only modestly to overall spending growth. The growth of spending on prescription drugs accelerated sharply around 1980, but its relatively small share of total spending at that time limited its effect on total spending. Since the mid-1990s, however, spending on prescription drugs has been a much more prominent component of growth in total spending. From 1995 to 2005, it grew by an average of about 10 percent per year. . .”
Full URL:
http://www.cbo.gov/ftpdocs/89xx/doc8947/01-31-TechHealth.pdf
Namaste
Christopher
Condor,
Try a slice of this pie: http://www.kaiseredu.org/topics_im.asp?imID=1&parentID=61&id=358#
atlex
Jaynesday, I think your rationale is off a bit. Here’s why. The 2009 price increases are in line with previous years’increases. There’s not been any new attempt to increase prices due to health reform; price increases are simply part of the business model. There’s simply not enough potential impact from the uninsured to push pharma to make changes in pricing policy. Plain and simply, pharma is increasing price in order to hit certain financial commitments. As more and more of the marketplace becomes immune to price increases (Medicaid, etc.) or has protection from price increases (many private plans, PDPs, etc.), price increases will have to be high, but will affect fewer and fewer people.
atlex
Condor, you’ve made this tired and unsupported argument forever. The added drug expenditure associated with in-patient and physician delivered drugs is a small percentage of overall drug spend and and an even smaller percentage of overall health expenditures. Moreover, over the past two years and into the foreseeable future, physician and hospital expenditures are climbing at a more rapid rate than drug expenditures (maybe you aren’t aware that $80B in annual brand drug sales will disappear due to loss of exclusivity over the next 3 years).
Justice in Michigan
Hi Folks,
Christopher–You’ll notice the 10% figure in the pie chart applies to “retail rx drugs.” I do think I probably miswrote when I referred to Medicare (have to go back to the original piece), but rather the percentage that includes hospital spending on drugs. Anyway, I will pass along the Chemical & Engineering News link later. It is not “speculation,” just what I read there.
Justice in Michigan
OK, here is the excerpt from Chemical and Engineering News, June 19, 2006, 84:25, pp. 30-55. Sorry I don’t have the direct link; they take issues off line after a year or so:
“The 10% number is based on old data and does not include drugs dispensed in hospitals, clinics, and other nonretail settings,” says Stephen W. Schondelmeyer, an economics professor at the University of Minnesota who studies drug pricing. “The data today show that prescription drugs in all settings account for about 19% of total health care dollars.”
Clearly, the pricing issue is part of a much wider context of considerations about the industry–all those issues about which we have so often discussed: cost of new drug devel., role of marketing in the current environment, the blockbuster model, yadayada. Not the place to go now, but, by “sustainability,” I intended to refer to all those interlocking pieces as they have evolved.
Christopher
My original comment was really intended to place drug costs within the broader context of overall healthcare expenditure, not to start a debate about absolute percentages. What interests me is the relatively low amount spent on drugs (although it’s increasing quickly as noted) and the surprisingly high amount on less obvious items.
Here’s an interesting read: http://www.oecdwash.org/PDFILES/Pearson_Testimony_30Sept2009.pdf
This provides an interesting comparison between amounts spent on healthcare in the US versus other ‘developed’ countries and the respective return as measured by various metrics.
Justice in Michigan
Christopher–Yeah, I agree about context, of course. But since the thread started on pricing, it is at least worth noting that the numbers recurrently invoked are certainly contested. And Schondelmeyer is no slouch:
Stephen W. Schondelmeyer, Pharm.D., Ph.D.
Director of the PRIME Institute
Head of the Dept. of Pharmaceutical Care & Health Systems
Professor of Pharmaceutical Economics
Century Mortar Club Endowed Chair in Pharmaceutical Management
Low-balling pharma costs sometimes _seems_ to suggest we can comfortably leave the issue out of the national debate on healthcare reform. Like many other important things to be considered, I do not believe drug pricing is a “sideline” issue.
Condor
I’m with JiM here — the ACTUAL spend on drugs in the US is a classic “bob and weave” by Billy Tauzin, et al., in PhRMA. . . .
I think the fact that most pharma stocks fell today — and at almost the exact moment Olympia Snowe announced her support for the Baucus/Senate Reform Pagckage — is a powerful, objective, market based sign that a bullseye is being painted on pharma’s pricing models.
To Ed’s original point, then, it looks like JNJ lost on volume what it tried to gain on price, this past quarter (it realsed earnings this morning, premarket). We’ll know much more as Sanofi, Merck, Schering and Pfizer report next week.
Namaste, one and all.
Christopher
JiM - I wasn’t addressing my comment to you specifically, and haven’t read Dr Schondelmeyer’s work so cannot comment. And I am sure that statistics and reports can be retrieved to support all points of view, but whether it’s 10% or closer to 20%, it remains that drugs costs account for a smaller piece of the whole. I don’t think that there’s the remotest chance that anyone could exclude drug costs from the debate on healthcare reform: it’s too contentious and politicized for that, and there are too many politicians currently scoring points off the pharma industry to imagine it could somehow get away from the spotlight.
Drug pricing is not a sideline issue but other aspects need to be examined as closely. Nowhere else is there so much money spent on defensive medicine. Some estimate that 30% of all US healthcare spending (ie $700 billion) goes towards tests and procedures that do not improve the health of the patients. The tests are done to avoid liability claims down the road. To me that issue is as urgent as drug pricing, and if fixed, arguably could return much-needed funding to be used more productively.
I would be delighted to see our politicians go after this industry as aggressively as they chase pharma.
Condor
Christopher — I mean no disrespect, but if you haven’t noticed, doctors are under fire here, just as insurers are. Talk about the per-procedure rates going south is littered all over the med journals.
so, no, Obama is by no means singling out pharma — in fact, many say he went “too easy” on pharma, extracting only $80 billion over ten years.
It is certain they have it to give — else, they. . . wouldn’t have.
Namaste
BTW — Didja’ see that the RNC has declared Olympia Snowe a. . . Kenyan; and Barack has won CMA’s Country Music Entertainer of the Year, too.
Snort!
Justice in Michigan
I appreciate what you say, Christopher.
As for 30% going to “defensive medicine,” I would certainly like to see the data. As you know, lawyers have an even longer history of being demonized than pharma (going back before Shakespeare), so it would not be surprising if there was not at least as much spinning going on.
Again, I think disaggregating is relevant. Of pharma’s contribution to healthcare costs, we know that certain treatments, in certain contexts, constitute a “disproportionate” (value question) piece. Re: liability costs, my understanding is that is also “disproportionately” true for certain specialities rather than across the board.
In the meantime, we know that about 98% of meritorious potential med mal cases are never brought. Perhaps there is some parallel number that can be be found that would suggest the relationship between drug costs and actual benefit for X number of pts.
And then we go to really complex analyses, in both arenas, that involve somehow weighing ethical as well as econonomic considerations.
Christopher
JiM,
One ref from PWC on defensive medicine costs: http://www.pwc.com/us/en/healthcare/publications/the-price-of-excess.jhtml
Of course there are others that refute: http://www.justice.org/resources/Medical_Negligence_-_Defensive_Medicine.pdf
but I’ll stick with the first ref.
Chris
Justice in Michigan
Chris,
I appreciate both references. Why go with either until we have better data?
The PWC piece mentions “defensive medicine,” but makes no quantitative assessment (as it does of “waste” in general) and–at least in the link–makes no reference to tort liability at all.
Why else be “defensive”? Perhaps, as the second peace suggests, to prevent your hospital getting a lousy reputation and losing customers. In the academic med. center in which I have the most direct experience, it certainly seems that concern with rankings trumps liability concerns by a wide margin.
Anyway, I don’t think either piece helps us rank the causes of what we all know is true–lots of costly medical stuff happens in the U.S. that doesn’t need to.
Justice in Michigan
Addendum: Here is the closest thing that I find to a quantitative estimate in the full PWC report. Note that the “waste” includes unnecessary drug treatment. In any event, I don’t find anything resembling 30%:
According to a PricewaterhouseCoopers’ study with America’s Health Insurance Plans (AHIP), 10% of health costs are attributed to too much
care in the form of defensive medicine and associated legal costs.16 The study suggested that the costs stretch across physician, outpatient, hospital, drugs and other medical services. However, too little care bears
a cost as well. For example, a pregnant diabetic mother whose care is not managed properly can end up delivering a premature baby, which carries emotional and financial costs. Studies show that the clinical basket of
inefficiencies has numerous examples of over utilization, under utilization and wrong treatments as shown in Exhibit 5.17, 18, 19, 20, 21, 22, 23, 24″
PharmaMarketer
Nice post!
Medical-brochures.blogspot.com
atlex
JiM, Schondelmeyer is hardly a credible source. First, and foremost, he calls himself an economist yet has no degree in economics. That, by itself, makes me suspicious of anything he says (but, of course, that along doesn’t make him wrong). However, other economists, as noted when he testified in front of Congress don’t take him seriously.
As for the argument, remember, the 10% number cited by the government overestimates pharmaceutical company sales since “retail sales” includes wholesaler and pharmacy mark-up. Obviously, pharma companies don’t receive the who retail amount. Moreover, the “retail sales” number doesn’t factor in back-end discounts and rebates to insurers and the government. When you back these out and you add back in non-retail sales you end up at roughly the same point–10% to 11% of total healthcare expenditures.
BP Watch
Not a surprise. After all, the CEOs and their gangs need to protect their outrageous bonuses!
Jaynesday
Sorry for this long post but I found it interesting. And because of a shortage of time I will post this summary of Fortune magazine’s report on industry, provided in Web Answers.com by “Brain”. The question was - What is the most profitable industry in America?
“In a year that saw a drop in employment rates, a plunge in the stock market and symbols of America s economy literally come crashing down, the pharmaceutical industry continued its reign as the most profitable industry in the annual Fortune 500 list. While the overall profits of Fortune 500 companies declined by 53 percent the second deepest dive in profits the Fortune 500 has taken in its 47 years the top 10 U.S. drug makers increased profits by 33 percent. Collectively, the 10 drug companies in the Fortune 500 topped all three of the magazine s measures of profitability, according to Fortune magazine’s annual analysis of America s largest companies.
These companies had the greatest return on revenues, reporting a profit of 18.5 cents for every $1 of sales, which was eight times higher than the median for all Fortune 500 industries and easily more than the next most profitable industry, commercial banking (13.5 percent return on revenue). The drug industry also dominated others by realizing a return on assets of 16.5 percent almost six times the median (2.5 percent) posted by all industries. Pharmaceutical companies completed the sweep with a return on shareholders’ equity (33.2 percent) that was more than three times the median of all Fortune 500 industries (9.8 percent).
Fortune 500 drug companies attained this triple crown, in part, by hiking pill prices, advertising some medicines more than Nike shoes and spending much less than the industry has suggested on R&D.
In addition, through its huge lobbying presence in Washington, D.C. the drug industry staved off congressional efforts to moderate rising drug prices. In fact, the industry went on the offensive last year in Congress, fighting for lucrative extensions of monopoly patents on drugs like Cipro, the antibiotic used to treat anthrax. Congress was all too willing to help, as it approved a patent extension program for pediatric drugs that will give drug companies $592 million a year in added profits, according to the U.S. Food and Drug Administration (FDA). (The FDA acknowledges that this is a conservative estimate based on a limited sample of drugs. Public Citizen has identified 15 drugs that alone could net an additional $2 billion in profits from the six-month patent extensions.)
No wonder Fortune says that the pharmaceutical industry “showed some impressive gains.”
These gains are nothing new. The latest figures reflect a trend that has been continuing for three decades. (See Graph 2) In the 1970s and 1980s, profitability of Fortune 500 medicine merchants (measured by return on revenues) was two times greater than the median for all industries in the Fortune 500. In the 1990s, when the intellectual property protections of the landmark Hatch-Waxman Act kicked in, the drug industry’s profitability grew to almost four times greater than the median for all industries in the Fortune 500. The industry begins the 21st century with even better prospects an aging population and annual increases in national spending on pharmaceuticals makes the future for top drug companies look healthier than ever.”
So regardless of whether pharmaceuticals are 10% or 20% of the cost of healthcare, they continue to write their own ticket to prosperity on the backs of an ever more burdened public.
Christopher
Interesting post Jaynesday. Your comment at the end “So regardless of whether pharmaceuticals are 10% or 20% of the cost of healthcare, they continue to write their own ticket to prosperity on the backs of an ever more burdened public.” doesn’t acknowledge a couple of important points: the pharma industry is made up of commercial enterprises that exist in part to satisfy shareholders ie to make profit. So they will increase prices until and unless someone prevents them from doing so. US pharmaceutical prices are significantly higher than in comparable western markets. Why? Because the government here refuses to negotiate aggressively and impose price controls. The last administration prevented Medicaid from negotiating prices. The UK Govt has just seen NICE expand its operations across Europe (not that NICE is a perfect model, but grudgingly I have to admit it is effective.) SO don’t blame pharma for doing what it is meant to do, take issue with your elected government for not doing what it should be doing.
Whether pharmaceuticals are 10% or 20% of healthcare costs does matter, because 90% or 80% are not pharmaceuticals and I would argue that there are many other elements that place more burdens on the back of the public. Start with defensive medicine and insurance companies and look at the impact - direct and indirect - on the public’s purse.
Justice in Michigan
Hi Atlex–If you see this, and you have time (I realize, unlikely!), I would be interested in any study/analysis that specifically takes apart Schondelmeyer’s conclusions. If it’s credible–or even if it isn’t–I would use it in a course. The whole issue–its uncertainties, politicization, how it interplays with other issues, etc.–is a “learning opportunity.”
Justice in Michigan
Just a general thought that the whole “dance” between the pharma/devices, insurance, lawyers, pols, propagandists (Fox/MSNBC), et. al–and the various alliances and sometimes unlikely bedfellows that emerge–is fascinating; certainly, as much for those of us not in one of those arenas as for those who are.
RBHM
Why aren’t we having this same argument over oil and gas?
atlex
JiM, I have something buried in my files. I’ll see if I can find it. By the way, I saw your article on the Michigan law (I think you wrote it, yes?). No surprise, I disagree with your premise since to-date Michigan or its residents have not received differential treatment from Pfizer’s settlement. In addition, your statement as to why Pfizer or any other pharma settles is not fully correct. A very important hammer that the government has is the ability to eliminate a manufacturer from all government programs. When a pharma company gets involved in one of these case, there is a very high motivation to settle rather than take that risk.
Justice in Michigan
Atlex–Bottom line is that Michigan citizens will not be able to bring suit, making use of materials unearthed by the DOJ, and that will not be affected by Pfizer’s self-confessed felony fraud. Your company, yes?
As far as the “hammer,” you will know that Pfizer was specifically warned that if they engaged in Neurontin type promo again–even while shmoozing with DOJ about “corporate integrity”–they would, indeed, have lost government contracts.
As usual in such cases, that would have punished more people than it would have punished Pfizer, a consideration with which I agree.
Let’s go to the bigger question: What do you think it will take, for Pfizer or the other companies who promote off-label for indications specifically rejected by FDA, to cease and desist? Corporate integrity agreements clearly are not enough. Do you foresee any change as a result of this case?
atlex
JiM, I’ve never said that I work for Pfizer, but have only said that I work at a major pharma company. I’ll leave it at that. I don’t know if there is ever a way to eliminate off-label promotion. In my company and in the others I am familiar with, there are multiple layers of review processes, where everything emanating from the headquarters is reviewed and approved. While there are a few cases at Pfizer and other places where the transgressions came from HQ, for the most part they came from rogues in the field who go unchecked by their management. Often, despite hours of education, managers make very poor decisions which are exacerbated by sharing of bad practices as “best practices.” It has happened at my company and at Pfizer.
One other note, I noticed that no one from Pfizer’s senior management was indicted or implicated. The highest level person indicated was a sales regional manager. I have to think the government did their best to make a link and simply couldn’t. To me, that’s supports my statements above.
Justice in Michigan
Atlex–Fine with me to “leave it at that.”
Re: who was indicted, my understanding accords with yours that DOJ worked hard to identify those individuals most responsible. As many have described, most corporations have folks in the role of “Vice President in Charge of Going to Jail” in order to provide plausible deniability to those higher up the chain.
Whether that was the true in this latest Pfizer case I don’t know.
Atlex
JiM, based on published reports, one district manager (the lowest layer of management) and one regional manager (the next layer up) were convicted. As in every case, the justice department had access to all internal documents and could not find linkages to more senior managers. It is important to remember that these are all large companies and many, if not most tactical decisions are made at lower levels. Despite training programs (many hours per year for all employers at my company), threats and the like, bad behavior does happen in big pharma, just like it happens in society as a whole. It doesn’t excuse the bad behavior, but it is important to note, that a very pissed off justice department that would have loved to make an example of a CEO of a major pharma company couldn’t find anyone indictable above a sales middle manager.
Justice in Michigan
I understand what you’re saying, Atlex. But a range of considerations go into who ends up being indicted, including DOJ’s own resources, time, quality of evidence, and other considerations.
I do not mean that higher level people were, therfore, involved. But I also do not take it to mean they were not. There are just too many variables besides how “pissed-off” the DOJ might be.
There are also instances when CEOs have been fined, even served time, when they did not have knowledge. Buck stops, etc..
Chris
Senior executives are typically smart enough to know what is damaging to have in their files and take steps to avoid this.
Justice in Michigan
Agree, Chris. What I meant about conserving “plausible deniability.”
Atlex’s earlier post may also be relevant. If the DOJ even hinted they might move toward the gov. not doing business with Pfizer, it could suggest they had more “on them” than a few rogue middle managers. Likewise, the enormous size of the criminal and civil penalties. In a more limited case, they more typically would have focused on those specific people–without penalizing the entire company to that extent.
Again, I’m not suggesting I know. I’m suggesting there are many plausible scenarios. All this also happened at a time when this sort of promotion had become pretty common, and companies assumed competitors where doing it, whether they were busted or not (as has come out in court documents related to other cases). That, in turn, coincided with the downsizing of FDA investigation/enforcement during the Bush admin.
atlex
Chris, the problem with your point is email. Emails are sent from one person to another and usually have others copied. If a senior manager had knowledge of an activity at a lower level, in this day and age, that would likely come from emails. It would do a senior manager little good to get rid of emails, when electronic copies remain in a variety of internal databases.
By the way, JiM, I don’t think that FDA investigators were part of this investigation. It was the US Attorney’s office out of Boston. That office handles most all pharma investigations.
Jaynesday
See the P/lot article -A Mere $2.3 Billion Later- where Pfizer’s Jeffs states -
“Our creation of the Executive Compliance Committee will serve as an important addition to our compliance infrastructure, and ensure the dedicated involvement of our senior-most leaders in our continuing efforts to fully integrate compliance and integrity into all that we do at Pfizer,” Jeffs intones in the statement.
Remember this statement because if per chance there is another indiscretion at Pfizer, the fact that the senior-most level is now/finally dedicated to and “involved” in compliance and integrity they should also be involved in the punishment when we see non-compliance and ethical failures in the future.
Justice in Michigan
Atlex–The FDA’s Office of Criminal Investigation was involved, which is their link with the DOJ.
Justice in Michigan
p.s. This from the DOJ summary that Ed posted on the other thread about Pfizer’s “compliance committee.” It summarizes which offices were involved. One of the reasons for the big press conference was so HHS could note its own role.
“The U.S. Attorney’s offices for the District of Massachusetts, the Eastern District of Pennsylvania, and the Eastern District of Kentucky, and the Civil Division of the Department of Justice handled these cases. The U.S. Attorney’s Office for the District of Massachusetts led the criminal investigation of Bextra. The investigation was conducted by the Office of Inspector General for the Department of Health and Human Services (HHS), the FBI, the Defense Criminal Investigative Service (DCIS), the Office of Criminal Investigations for the Food and Drug Administration (FDA), the Veterans’ Administration’s (VA) Office of Criminal Investigations, the Office of the Inspector General for the Office of Personnel Management (OPM), the Office of the Inspector General for the United States Postal Service (USPS), the National Association of Medicaid Fraud Control Units and the offices of various state Attorneys General.
atlex
JiM,
Yes, all true. But, the Boston US Attorney did almost all the work. That office has specialized in pharma off-label cases.