Saying No to the Drug Crisis


In a recent essay, VIVIO Health’s CEO Pramod John guides us through four sensible drug policy changes and supporting rationales that could make drug pricing much fairer. Reading through it, one is struck by the magnitude of the drug manufacturing industry’s influence over policy, profoundly benefiting that sector at the deep expense of American purchasers. As Mr. John points out, the U.S. has the world’s only unregulated market for drug pricing. We have created a safe harbor provision that allows and protects unnecessary intermediaries like pharmacy benefit managers. We have created mechanisms that use taxpayer dollars to fund drug discovery, but then funnel the financial benefit exclusively to commercial interests. And we have tolerated distorted definitions of value – defined in terms that most benefit the drug manufacturers – that now dominate our pricing discussions.

The power of this maneuvering is clear in statistics on health industry revenues and earnings. An Axios analysis of financial documents from 112 publicly traded health care companies during the 3rd quarter of 2018 showed global profits of $50 billion on revenues of $636 billion. Half of that profit was controlled by 10 companies, 9 of which were pharmaceutical firms. Drug companies collected 23% of the total revenues during that quarter, but retained an astounding 63% of the profits, meaning that the drug sector accounts for nearly two-thirds of the entire health care industry’s profitability. Said another way, the drug industry reaps twice the profits of the rest of the industry combined.

Pfizer, the top performing publicly traded company in Q3, generated $4.1 billion in profits on $13.3 billion in revenue, for a 31% quarterly margin and a 45% increase in profitability over Q3 2017. (By comparison, the 2nd and 3rd top performers, Johnson & Johnson and United Health Group, seemed meek, with Q3 2018 margins of 19.3% and 5.6%, respectively.) Convinced that significantly more can be extracted from the market, last week the organization thumbed its nose at the American people and announced another price increase, this time 5-9% on 41 drugs or 10% of its product portfolio, starting January 15, 2019. This action, of course, gave cover to other manufacturers wanting to do the same thing.

The drug industry has, in the main, been too smart to perpetrate this kind of price gouging over the short term. Instead, they’ve preferred to slowly ‘boil the frog,’ with relentless and predictable increases two to three times per year. While complaints abound, nobody has yet refused to pay. These increases have been reliably absorbed by U.S. taxpayers, employers and unions, conveying that there’s probably room for higher pricing still.

These bold business and profit-taking behaviors have been lubricated by a steady stream of pharma lobbying dollars to both parties of Congress – $280 million in 2017 alone, as reported by Open Secrets – which has been directly complicit in creating this economic albatross hung around the necks of the American people. Worse, we’ve come to consider this situation as acceptable and business as usual.

One question now is whether Congress can rise above simply being bought off and take actions for the common good rather than the industry’s financial interests. There’s some reason for optimism, with drug price management proposals from both sides of the aisle. In a Washington Post piece this month, Zeke Emanuel, one of the Obama Administration’s key architects of the Affordable Care Act, wrote:

… the Republican plan demonstrates that even conservatives are feeling pressure to regulate drug prices. The ideological challenge is how to regulate them. It is going to be difficult for Republicans to repudiate their president and stonewall on the issue over the next few years. Perhaps, with more than 90 percent of Democratic and Republican voters supporting regulation, a bipartisan compromise might emerge.

 Let’s hope he’s right, but until our lawmakers stop taking money from pharma, let’s not hold our breath.

One thing is clear. The actions of Pfizer and other powerful drug industry players have repeatedly demonstrated a willingness to test the limits of what captured regulation and a dominated market will bear, as well as a blatant disregard for the larger societal implications of those actions. This is also true for other health industry sectors, but because the numbers are so much higher within pharma, the ramifications are much more serious. Congress’ continued avoidance of meaningful remedies effectively abets an open threat to our national economic security.

While we hope that Congress comes through, so far that’s been a pipe dream. The drug industry is playing a game of chicken with America’s taxpayers, but also with its employers and unions, daring them to take the heat that would come from saying no. What we need is for America’s largest firms to collectively come together, refuse to pay exorbitant drug prices, and demand changes to the drug companies’ business models.

Our paralysis, our refusal to respond to the predatory forces within our borders, is the irony. If and when the reckoning comes, pharma can retort that its actions were transparent, and that we did it to ourselves by not saying no.

Brian Klepper is a health care analyst and the EVP of the Validation Institute.

15 replies »

  1. Dr. Palmer — Until relatively recently doctors didn’t consider knowing or caring about the cost of drugs or anything else as part of their job unless the patient brought it up as an issue. In some therapeutic drug classes like hypertension and cholesterol control, there are numerous comparable drugs that work quite well. Are we supposed to pay whatever the drug companies price them at as long as the docs think their drug of choice is the best one for the patient in front of them?

    Relatively small differences in formulary copays from one tier to the next can help to steer patients toward less costly drugs. The whole point of PBM’s is to bring some price discipline to the drug market. The point of distribution channels like wholesalers and retail as well as specialty pharmacies is to conveniently deliver drugs to patients. There are many thousands of different drugs in the marketplace today. What alternative distribution system would you propose to get needed drugs into patients’ hands?

  2. The total expense for advertising by big PHARMA is second to one other industry: BEER ! Irony’s abound when the dollar dominates.

  3. I hope penetrating queries about the smell in Pharma:

    Money should flow from the plans and hospitals to the PBMs. they are paying to get the service of purchasing power and drug discounts. Why does money flow the other way in rebates?

    There is a lot of money flowing to PBMs and to hospitals and plans from manufacturers to get drugs on the formularies. Why shouldn’t physicians be in charge of formularies? We are the ones that know drugs the most intimately. Why doesn’t SnapOn tell mechanics what tool to use? Illogical.

    How is money flowing to and from big distributors?…McKesson, AmerisourceBergen and Cardinal Health? They pay money to the large Group Purchasing Organizations, Vizient, Premier Inc., HealthTrust and Intalere. Why?

    Hospital executives often receive money from GPOs–a lot. Why doesn’t this go back to the patient?

    When GPOs contract to receive all their sterile IV parenteral solutions from Baxter, eg, doesn’t this discourage potential competitors?…and cause shortages? and raise prices?

    Why can Adam Fein, PhD, editor of Drug Channels, get $8500 for a yearly report of the drug industry? What kind of information is so valuable therein?

    Why did Congress give GPOs–in the mid 80’s–a “safe harbor” exempting them from laws against taking kickbacks from supplier?

    Why did GPOs lie about Hurricane Maria damaging Baxter’s plants in Puerto Rico?

  4. A related issue, speaking of safe harbors, is the ability of any physician to prescribe any drug for any purpose, whether on-label or not. There are good reasons for this, of course, but could not some of the important allowances for clinical judgement come with at least some accountability? Right now, there’s none. Nor is post-market surveillance enforced. In other words, the pricing issue is compounded by the appropriate use issue.

  5. You’re wrong about drug prices skyrocketing. Certain drugs that have increased substantially in price garner outsized publicity. The major drug companies report that their volume weighted net realized prices after rebates range from a slight decrease to a low single digit increase. Average Part D premiums are surprisingly stable and my own Part D plan premium will decline by 14% for 2019.

    At least when my doctor prescribes a drug for me, I can find out the cash price at the pharmacy before I buy it and I can find out what tier it’s in on my insurer’s formulary which tells me what my copay will be also before I buy it. I can’t do that with hospital costs and sometimes I can’t even find out whether a particular doctor who treats me in a hospital is in my insurer’s network or not which can subject me to huge surprise bills.

    There are three huge problems that are driving U.S. healthcare costs upward in my opinion two of which are cultural and one is contractual. The first cultural problem is our overly litigious society which means doctors have to order lots of unnecessary or marginally useful at best tests to protect themselves from potential malpractice lawsuits. I don’t blame them as I would do the same thing if I were in their position. The second problem is that way too many people demand lots of care at the end of life even when the prognosis is dire and the care is likely to be futile. Family members often can’t let go emotionally and there may be no living will or advance directive to provide guidance as to what care the patient wants and doesn’t want in an end of life situation. In other countries, people are more accepting of death when their time comes and doctors are probably quicker to tell patients and families that there is nothing more they can do if that’s the case. The contractual problem is the confidentiality agreements between insurers and providers that preclude disclosure of actual contract reimbursement rates. This makes it impossible for doctors and patients to identify the most cost-effective high quality providers in real time and direct more business to them.

    I’m not saying drug companies are angels but laying the bulk of the healthcare cost problem at their feet is wrong and won’t come close to solving the problem. I’m skeptical about how much money would be saved if TV advertising of drugs were banned as it once was but maybe they should be required to disclose the list price of their drugs prominently in their commercials and other advertising. I can look it up on my Good Rx app but let the customer see it in the ad and maybe then they won’t be so quick to ask their doctor about it.

  6. There are two issues here. First, the other countries with price controls often don’t get the newest drugs to treat cancer and other diseases as quickly as we do. More importantly, the combination of the unfettered U.S. market and the price controlled markets in other developed countries create a fallacy of composition problem. Even drug companies based in the UK, France, Germany, Switzerland and Japan know that the U.S. market is unfettered which means they will get paid for innovation. If the U.S. decided to opt for drug price controls too, nobody would get paid for innovation so there wouldn’t be any or at least not nearly as much or it would take much longer to come to market.

    It’s like the Medicare for all advocates who think Medicare is so great that we should extend it to the entire population by going to a single payer system. Medicare is a fallacy of composition situation too. It works as well as it does because there is still a large commercial insurance and self-funded employer sector to shift costs too. Hospitals in particular constantly complain that Medicare and Medicaid don’t cover their full costs. If hospitals suddenly had to accept Medicare rates from all comers, their business model would likely collapse.

  7. How could I forget the 24/7 advertising so important to research and development? They practically own cable news. No wonder nothing gets done about drug prices. When you own cable news through advertising, you own the mouthpiece of politicians. Where is the silver bullet for that disease?

  8. Ah yes, the Big Pharma business model. It is certainly unique in its attachment to the antibiotic model of disease. Do I have it right? The First Amendment does’t allow Congress to prohibit Pharma TV advertising. The contributing factors for chronic disease are usually very complex and rarely respond to an isolated quick fix strategy. From the TV ads, you’d think that psoriasis is very frequent and that the citizens with psoriasis all succumb to an associated arthritis. We all could go on and on!

  9. “If we ever tried to control drug prices like many other developed countries do, it’s likely to create more problems than it solves.”

    What problems have other countries experienced because of this?

  10. It is really more an issue of fairness and transparency that is at stake, not total costs. Many providers and hospitals are running on razor thin margins while pharma Is rolling in dough. And I bet they didn’t make most of it selling to the second and third world. And your argument about PBMs would be like suggesting that the public would not sink their money into enormous monopolies if it was not in our interest somehow. They make it so. The facts are: drug prices are skyrocketing while doctors offices are closing and hospitals are forced to consolidate because they can barely make it under excessive regulation. And I’m sure you understand a lot of what Pharma does has little to do with innovation when they develop a “me too” drug to weasel their way into market share, participating in illegal price fixing along the way with their so called “competitors”. Look at the egregious behavior surrounding the newer insulins: there is no excuse for the exponential rise in costs except that they can get away with it.

  11. The suggestion that the pharmaceutical industry’s profits are twice as high as the rest of the healthcare industry combined in misleading. About 80%-85% of U.S. hospital beds are owned by non-profit entities. However, non-profit status hasn’t stopped the hospital sector from consolidating into powerful systems with high market share locally or regionally and the market power to extract very high prices from commercial payers while claiming that Medicare and especially Medicaid don’t pay them enough to cover their often bloated costs. Moreover, there are lots of clever ways for large non-profit hospital systems to hide profits. For doctors still in private practice, what’s left after practice expenses such as staff salaries, equipment and supplies, office rent and utilities and malpractice insurance is their income before taxes but could just as easily be called profits. Most nurses, NP’s, PA’s, physical therapists, technicians, etc. are working for salaries but as noted in my prior comment, hospital charges plus physician and clinical services account for fully 80% of medical claims paid by insurers, Medicare, Medicaid and other public payers.

    Plenty of drugs that have been developed over recent decades help to keep patients healthy and out of the hospital and shorten hospital stays when they’re in the hospital. Drugs are developed and produced by private companies who need to earn a profit to sustain their business model. The same is true for the three major drug wholesalers in the U.S. and the 65,000-70,000 pharmacies. If we ever tried to control drug prices like many other developed countries do, it’s likely to create more problems than it solves. I think we need to be careful what some of us wish for.

  12. When it comes to healthcare costs, I think it’s more useful to look at medical claims actually paid by commercial and public payers as opposed to the National Health Expenditure Data. Commercial insurers, as I’ve noted numerous times before, will tell you that their medical claims break down into the following three buckets: (1) hospital costs, including outpatient services, 40%; (2) physician fees and clinical services including labs, imaging, physical therapy, etc., 40%; and prescription drugs, 20%. The Medicare breakdown is close to that as well. These are the cost components that are the primary drivers of insurance premiums and the tax burden needed to fund Medicare, Medicaid, and the VA healthcare system. Interestingly, while prescription drugs account for only 20% of claims, they probably account for 99% of the public outrage around high healthcare and health insurance costs.

    With respect to pharmacy benefit managers (PBM”s), commercial insurers and self-funded employers would not hire PBM’s to manage their drug plans, including price negotiations with drug companies and building formularies, unless they were convinced that the PBM’s added value by producing lower overall spending on prescription drugs that these payers would have spent if they didn’t engage PBM’s to help them.

    The biggest issue concerning PBM’s relates to how rebates from drug companies are handled. In 2017, CVS-Caremark received $10 billion in rebates and passed all but $300 million (3%) through to their payer clients. The clients, in turn, used most of that money to lower member premiums from what they would have otherwise been. Sicker patients with high deductible plans get stuck paying the full list price of the drug within their deductible and uninsured patients are exposed to the full list price as well. That is about to change starting in 2019 at least for insured patients with high deductible plans.

    With respect to the profitability of drug companies, first it’s important to note that the large companies do lots of business outside of the U.S. so the profits they earn are not all attributed to U.S. payers and insured members by a long shot. Second, it’s also worth noting that roughly 90% of all prescriptions are generic drugs these days though they account for less than 30% of the dollars spent on drugs. For the most part, generic drugs in the U.S. are actually less expensive than they are in other countries. Prices are higher here than elsewhere for specialty drugs which are defined as drugs selling for $600 per month or more and for non-specialty brand name drugs.

    While other countries use price controls so they can pay lower prices than what prevails in the U.S. for brand name and specialty drugs, they often don’t get access to the newest drugs as quickly which can delay patient access in those countries by several years in many cases. The two key questions related to drug pricing in my opinion are (1) how profitable do drug companies need to be to provide their investors with an adequate risk-adjusted rate of return on their capital compared to what they could earn from alternative investments in other industries and (2) to what extent, if any, are we prepared to pay for medical innovation?

    The pharmaceutical industry is a high risk business with lots of research and development failures. If we want to sustain medical innovation, including the invention of new lifesaving drugs, we need to be able to pay for them within reason. If payers, including public payers, deem the price of certain drugs to be too high, then just say no, we won’t pay. They will have to take some political heat to do that but it can be done.