Legal Drug Pushers

The best argument for single-payer healthcare? Pharmaceutical company profiteering.

by Maria Tomchick

July 14, 1998

Healthcare costs in the U.S. are the highest in the world because of an inefficient private system that ensures profits for hospitals, blood-sucking middlemen (insurance companies), and drug companies. Especially drug companies.

Pharmaceutical corporations are among the most profitable companies in the U.S. As an industry, they have the highest returns on revenue (their profits as a percentage of their total revenues), meaning that they take enormous markups on their products. Literally, they charge "what the market will bear," which is quite a lot if you have a severe illness and need pain killers, or better yet, a terminal illness that can be arrested with a pill (or lots of them). In other countries with national healthcare, governments have enacted price controls on drugs to limit skyrocketing costs, because the government has to pay for the drugs. Not so in the good ol' USA.

Instead, you and I pay two times, three times, sometimes 10 times more for our medicine than people do in Canada, for example. This year, wholesale drug prices in the U.S. soared a record 10.7 percent in the month of May alone, then climbed another 3.2 percent in June.

How do pharmaceutical companies explain the high prices? They blame them on the cost to research and develop new drug therapies. R&D is expensive, but not as expensive as they want you to believe—certainly not as expensive as the cost to promote, market, and sell these drugs to hospitals, HMOs, and an estimated 600,000 prescribing physicians. On average, companies spend about $200 million to develop a new drug therapy (which includes all the tests and trials of drugs and chemical combinations that never prove useful). The last time Congress checked, back in 1991, annual R&D costs for U.S. pharmaceutical companies totaled $9 billion, yet drug companies spent more than $10 billion per year just to promote their products in the private marketplace—and that cost has only grown since then. In 1997, Bristol-Myers Squibb alone spent $1.4 billion on R&D, and a colossal $2.2 billion on advertising and promotion.

Why do drug companies need to spend so much money pushing their products? If the need is there, doctors will prescribe it, right? Not true. More than half of the new drugs developed every year are not designed to treat new or untreated conditions, but to compete with drugs that are already on the market. Called "me-too" drugs, these are easier and cheaper for companies to develop, because much of the basic research on how the drug should work in the human body has already been done—it's just a matter of finding a new, slightly different compound in the same class as the old drug. For the company to patent and market it, the new drug needs to be different, and if it is stronger and has different side-effects (hopefully fewer and less severe, but not always), so much the better.

The motive behind the "me-too" phenomenon is simple: as a drug that's been on the market for a number of years gets close the expiration of its patent, the company that owns the drug starts to panic. Once the patent expires, other companies can make generic versions of their best-selling, proprietary drug—thereby forcing the price down. The company has to find a new, different, more powerful drug to replace it. Of course, when the new drug hits the market, the company has to spend millions to persuade doctors to stop prescribing the old, cheaper medication and switch their patients to the new one. It's an endless cycle of skyrocketing costs fueled by the immoral, for-profit nature of the U.S. healthcare system.

We're always hearing about HMOs, hospitals, and insurance companies seeking ways to cut costs, and keeping down the cost of prescription medications is part of that process. But while it's becoming harder for drug companies to sell expensive new "me-too" drugs to doctors, there's a new promotional cost in the equation: They've started pushing their wares directly to consumers. In 1996, drug companies spent $600 million on direct advertising to consumers, which is twice what they spent in 1995 and almost ten times more than in 1991. Direct-to-consumer advertising of prescription drugs is banned in most other nations, and the World Health Organization's Ethical Criteria for Medicinal Drug Promotion expressly forbids it.

Yet U.S. pharmaceutical companies are buying more billboards and TV time, and pushing more aggressively for their medicines to be switched from prescription-only to the over-the-counter market, so consumers can be free to self-prescribe. More drugs were switched to over-the-counter status in 1997 than in the previous five years. Since 1986, the FDA has approved only 33 over-the-counter switches; over a third of those were done in 1995 and 1996. And in August 1997, the FDA finally gave in to drug company lobbyists and released new criteria for the advertising of drugs on TV, making it easier for drug companies to hock their wares directly to patients.

In addition to marketing costs, pharmaceutical companies take huge markups in devious ways. Most drug companies belong to a larger holding company that also owns a chemical company. The chemical company can make the drug chemicals in its own plant, then "sell" them to its sister division, the pharmaceutical company, at a high markup; this is called "transfer pricing." When consumers complain about prices, the pharmaceutical company then points to the high price it had to pay for "raw materials"—but they bought the chemicals from themselves and manufactured the high markup.

In addition to padding their own pockets, pharmaceutical companies still get a special tax credit (subsidy) from the U.S. government (U.S. taxpayers) when they manufacture the "raw materials" into pill form. The Section 936 tax credit applies to any company that sets up a manufacturing plant in Puerto Rico. Other industries have benefited from this tax credit too, but by the early '90s drug companies were collecting more than all other industries combined. This little loophole is being phased out, but it still saves the pharmaceutical industry over a billion dollars every year.

So beware of brand new, expensive drugs—the high cost is not an indication of efficacy. And when your doctor writes you a prescription, ask him how much it's going to cost you. Ask him if there's a generic drug that will do the same thing, or an alternative treatment that will be effective without the need for you to take a pill and support a drug company.

And remember that, for those of us who have serious conditions that need drug treatment on a continual basis, our private healthcare system really fails. Chronically ill people often can't afford high drug prices, and end up suffering needlessly when they ration their medication or are forced to stop taking it. For their sake, if for no other reason, we need a single-payer system and a limit on drug prices.

Maria Tomchick is co-editor of Seattle's shamelessly biased political weekly Eat The State!, as well as a self-proclaimed "pinko" and a perpetual student of kung-fu. She is not Xena but she wouldn't mind wearing some of that leather.

Additional reporting by Mat Honan.

For more on the delightful pharmaceutical industry, check out the source of many of the statistics in this article: "Bitter Pills: Inside the Hazardous World of Legal Drugs" (Bantam Books, 1998) by investigative journalist Stephen Fried.

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