An Odd Mix: Health Care Reform & Higher Rx Prices
12 CommentsBy Ed Silverman // November 16th, 2009 // 8:25 am
Even as drug makers promised to support health care reform by slashing $8 billion annually from drug costs, wholesale prices of prescription drugs rose by about 9 percent - and this can add more than $10 billion to the nation’s drug bill, which could exceed $300 billion this year, The New York Times reports.
We noted something similar last month - 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. The analysis was done by CreditSuisse (please see here).
Critics say the industry is trying to establish a higher price base before Congress passes legislation that tries to curb drug spending in coming years, the paper writes. “When we have major legislation anticipated, we see a run-up in price increases,” Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota, tells the Times. He analyzed pricing for AARP, which supports the House health care legislation that the drug industry opposes.
This year’s increases mean the average annual cost for a brand-name prescription drug that is taken daily would be more than $2,000 — $200 higher than last year, according to Schondelmeyer. But drugmakers say pricing increases are valid. “Price adjustments for our products have no connection to health care reform,” Merck spokesman Ron Rogers tells the paper.
Ken Johnson
Mark Twain once mused: there are lies, damned lies and statistics. Unfortunately, today’s New York Times only tells half a story, using selected statistics to make a flawed assumption that an increase in drug prices must somehow be tied to health care reform.
In truth, price increases are the natural result of market forces. All companies make their own independent pricing decisions based on many factors, including patent expirations, the economy, and the huge, sunk R&D costs which typically exceed $1 billion for a single medicine.
But here is a key part of the story that the Times ignored: this has not been an especially good year for drug companies. According to Forbes magazine, 58,000 jobs have been lost so far in 2009 because of the economy and sluggish sales, due – in large part – to a rapid increase in the use of generics. What’s more, financial results for a dozen of our companies show zero revenue growth in the third quarter and -3% year to date. And, one of the same studies cited by the Times forecasts only a 2% revenue growth over the next five years. Of course, that wasn’t reported. It’s those tricky statistics again.
So, focusing only on prices, as the Times did, can present a misleading picture of our sector. In some ways, it’s like trying to project annual U.S. auto sales by adding up sticker prices. That’s not reality. How many people in America actually pay full price for a car?
Similarly, drug manufacturers often offer steep discounts and rebates through negotiations with large payers such as insurance companies. In fact, government reports show that rebates in the Medicare prescription drug program average 20-30% for many brand name drugs and those rebates have actually increased in recent years.
Simply put, discounts and rebates can significantly lower the cost of many brand-name drugs, benefiting patients nationwide. But you wouldn’t know it by looking at pharmacy prices – or reading the New York Times.
Here is another important fact lost in the story. Every single one of the pricing reports cited by the Times relies solely on pharmacy transaction data, which do not capture off-invoice rebates. In other words, the Times is trying to do the political calculus by adding up sticker prices again. It’s wrong and it’s misleading. Today, prescription medicines account for 10% of health care spending in America – the same as it was back in 1960.
Finally, if our industry was doing so great, then why isn’t it reflected in pharmaceutical stock prices which remain depressed? Since the beginning of 2004, the AMEX pharmaceutical index has declined 16.1% while the Dow has decreased 7.2% and the S&P has dropped 5.8%. If health care reform, which we strongly support, had the potential to be a windfall for our industry, street analysts would be shouting “buy.” That’s simply not happening. Why? Well, according to IMS – in yet another study cited by the Times (but a key finding also ignored) – “market growth is expected to remain at historically low levels” through 2013.
As we enter the homestretch of the health care debate, there are going to be a lot of last-minute political attacks designed to sabotage reform. We believe smart, common-sense Americans will be able to differentiate between the lies, damn lies and statistics.
Ken Johnson
Senior Vice President
Pharmaceutical Research and Manufacturers of America
Washington, D.C.
Evelyn Pringle
Over the past month or so, I’ve been reviewing profits of the drug companies and CEO salaries and I don’t think anybody at the top is suffering too damn bad, including Mr Johnson.
Also, if the drug makers would knock off their illegal conduct and cut down on fines and penalties, they might do better as well.
But let’s hope Mr Johnson is right, and “common-sense Americans will be able to differentiate between the lies, damn lies and statistics,” and not buy into anything that comes from Pharma.
The Medicare Prescription Drug Act should still be fresh in everybody’s mind and serve as a warning to “beware” of drug companies bearing gifts.
atlex
Evelyn,
You may disagree with Ken Johnson’s comments, but he did include supporting data and you only included accusations. I have a couple of more thoughts regarding this report by the NY Times. As Mr. Johnson points out, the study that the Times looked at is “retail” based on only includes “gross” price increases (ie, change in list price) and not “net” prices increases (after accounting for contractual or legislated discounts/rebates). In fact, the Times included data that would make a casual observer skeptical of the numbers they cite. While noting a 9% increase in list prices, the Times also mentions that this 9% increase will generate roughly $10B in added annual revenue Given that the total annual revenue prior to this is roughly $300B, the actual “net” price increase is roughly 3%. Of course, this is probably low for a couple of reasons (eg, brands comprise only 80%-85% of prescription drug sales), but it is more accurate than the 9% number they cite in the article, particularly if they compare it to the CPI, which is a “net” inflation calculation.
Another fallacy in the article is the hypothesis that pharma is raising prices in advance of health reform. The article has one expert saying that pharma increases prices in “anticipation” of legislative changes. Then, later cites an expert saying that prices increased at a more rapid rate “after Congress added drug benefits.” Gross price increases have been consistently growing over the past 6-8 years, not in anticipation of or following legislation, but due to the need to reach immediate sales goals made more difficult by greater levels of rebating and discounting to private and government payers.
Atlex
Christopher
According to Forbes (quoted by KJ above) the 58,000 jobs lost so far in 2009 are due to the economy and sluggish sales due to increase use of generics. I would suggest that another reason for many of those job losses is the automatic reduction of staff numbers following each merger/consolidation of medium to large pharma companies. This inevitable downsizing is done in the name of ‘efficiencies’ and cost-cutting, but rarely do we see comparable increases in the top-line ie sales. I suspect that investors’ caution for pharma stocks will continue until senior pharma management can demonstrate similar success in growing sales as they have in cutting costs. Delivering profit that way can only last so long, and while that is the preferred method don’t expect to see the dramatic trend in downsizing to stop anytime soon.
Former Pharma Marketing Director
I will have more to say on this topic sooner than later, but for now, I put this comment in as a place holder….
Imagine that, Pharma complaining that results presented in an article in the NY times did not in fact contain all the data and the article seemed to be skewed to show something other than what is reality? I wonder what would have prompted them to do this?
Should we all be appalled that the NY times did not reach out to Pharma and ask them to validate the data with input from them? If they didn’t do this, then what is the possible reason for not wanting to get Pharma’s take on the numbers?
Hmm, what an atmosphere of distrust…..I wonder how that happened?
stay tuned…
instant sales
Thank you for sharing your analysis.
Robert
So, reforming the system actually INCREASES prescription drug prices? Nice work politicians!
Christopher
It’s also important to see what happens to the other 90% of healthcare costs that are not prescription drugs. (And despite previous discussions on whether drugs constitute 10 or 20% of total healthcare spending they are still a small part of a larger whole.)
Former Pharma Marketing Director
Mr. Johnson,
Your post was helpful in that it points out that there are still many factors one has to consider when analyzing and re-stating the data.
Just a couple of points, if you can answer them please…
In your 2nd paragraph you say that each company more or less does their own thing when it comes to price increases. Price increases are based on several factors. But, I have to be honest here, we also buy market reports and we do check and compare categories against each other. If company XYZ has the same asthma medicine as mine, all things being equal, I would take a price increase if they did….And it could be justified too…After all it is what the market will bear no?
The job losses; we do honestly have to factor in mergers and “restructurings”. It would be nice to have a complete analysis of what were the job losses. I do not have this complete analysis, but how much were lost as a result of shipping jobs overseas or on a positive note, streamlining efficiencies, or how many sales reps lost their jobs?
The article does talk about wholesale prices and retail prices, so I do not follow what you were saying about sticker prices. Yes, I do get that there are rebates that haven’t probably been fully allocated in the statistics. The IMS reports does refer to rebates increasing, but there is no supporting data. Can anyone direct us to the supporting data for this, how can we track this? I think you are right, if we are going to discuss any of this, we all need to have a look at all the data.
Regarding your 7th paragraph, why didn’t you point that out when the Times asked for your input?
CAGR for the pharma industry, while still historically low, will be from 4 - 7% through to 2013. Medical costs, which I guess includes all medical costs including drugs, went up 3.3% over 2008.
What sort of growth would you prefer to see, given that a record number of Americans are unemployed - 15.7 million, the highest rate since 1983. 5.6 million are in long term unemployment (probably without health care/insurance), 9.3 million are employed part time - probably no benefits, 2.4 million are marginally employed - no benefits.
To be fair, it would be very nice to know what medical costs really are, i.e. doctors fees, hospital costs, etc. What continues to push up those medical costs, given the cost benefits that can, in many cases be realized by drug therapies? Yes, patient adherent to drug treatment plans are important, but much of that problem is caused by access and the cost of drug prices themselves. What is the impact on overall health care costs increases because patients cannot afford their drugs? We SHOULD be comparing this, this is important information.
When we talk about price increases, we should also examine which company is taking what price increase, particularly in light of the serious fines that have been levied regarding criminal charges.
If anything, there definitely needs to be more transparent dialogue on all of these issues, and maybe the Times article will spark some of it.
At the end of the day, the pharma industry needs to take in money and patients need to spend it. No one has the money tree.
We all have responsibility on this issue. Pointing fingers across the desk at one another, get us nowhere.
Altex, just a few points: Evelyn mentioned CEO salaries, if you have been paying attention, a week or so ago, I published some information about CEO salaries. We can of course go back and re-post them, but it is rather current..
The article stated 9% growth and that the industry is expected to exceed 300B this year. It didn’t say it was at 300B last year, I do not believe they gave us the starting figure…If you see it let me know.
atlex
Former,
I think you may have missed something in the article that I mentioned in my comments. The article cited an almost 9% price increase and then quoted an analyst who said that the price increase would generate $10B in added revenue. Since according to the article that extra $10B send the industry over the $300B mark, the baseline must be >$290B. Well last I checked, a $10B increase on a baseline of $290B is ~3.4%. Feel free to correct my math.
Clearly, the NY Times didn’t have access to the information or chose to ignore data that didn’t fit its hypothesis. Since I am quite aware that PhRMA and individual companies did provide much of that information to the Times reporter, I believe that the latter must be the case.
Finally, there is no database or information source for rebates/discounts to commercial entities. These are part of private contracts and are not captured by IMS or others. The closest we have is a set of government reports concerning the Medicare drug program. As Johnson points out, “government reports show that rebates in the Medicare prescription drug program average 20-30% for many brand name drugs and those rebates have actually increased.”
Atlex
pharma PR hack
What this article didn’t actually note is that in the midst of job losses - there were also gains aside from profit to pharma by off-shoring and outsourcing at every turn. The price increases from most multi-nationals hit the US disproportionately because we are the only country that lets pharma sets the prices and we are also the country with the most job losses as pharma outsources and off-shores to Asian countries- just look at the Novartis R&D announcement that Ed posted last week - $1 billion. I’m pretty sure New Jersey where Novartis cut jobs would welcome the infusion.
The post earlier where Genentech and politicians to save “American Jobs”.. well, health care reform hasn’t passed and you know where Genentech’s newest plant is- try Singapore. And Genzyme can’t even run one in the US. What do you bet that biologic plant in Singapore may end up with similar issues we never find.
Mr. JOhnson carefully leaves out what American’s are getting for their price increases and sometimes from this industry, it isn’t innovation but the shaft.
Stephanie Hunter
Actually, the drug companies are a huge part of the problem too. After we finish cleaning up the health care industry we need to clean up the drug industry. The best way to move forward for both of these is to use a model that’s already working. http://cli.gs/23yYaM/