Pharmaceuticals Under Bad Influence

Have you ever noticed that conservatives in government always argue that private industry is smarter than government? Of course, the conservatives in government usually were in private industry and left it to work in government. There's just the germ of an understanding here.

To their credit, the people in industry, at least the drug industry, have shown a great deal of intelligence and ingenuity. Forty years ago they got hit with some really well intended congressional legislation, and they've managed to bounce back stronger than ever.

If anybody remembers Sen. Estes Kefauver of Tennessee, it's probably for his 1950 investigations into organized crime, or his coonskin cap, but in 1960 he was also chairman of a Senate committee investigating drug prices. Evidently the Washington Post remembered, because on Feb. 9 they published a recap of some of the 1960 findings:

Eli Lilly was selling 100 tablets of the antibiotic V-Cillin to pharmacies in England for $6.50 and in Australia for $10.75, while charging pharmacies in the United States $18.

For 100 pills of the steroid prednisone, the production cost was $1.50, tops. Brand-name manufacturers were charging pharmacists $18, and the retail price was $30.

For 100 capsules of the antibiotic tetracycline, Bristol's production cost was $1.67, its price to druggists $30.60. Consumers paid $51.

The Kefauver report caused a great deal of public indignation -- and a few laws that were supposed to lower drug prices. Somehow, the pharmaceutical companies found ways to get by.

Drug prices have managed to increase considerably faster than inflation, and again there are drastically different prices for different markets. Not only are prescription prices lower outside of the United States, they're different in the United States, depending on who the payer is, and even who the patient is.

In a report by Rep. Elijah Cummings (D-Md.), a prescription for Medol(r), a steroid hormone, would have a wholesale price of $20.10, but the same drug, labeled for veterinary use, would only cost $3.90. Lanoxin(r), a heart drug, costs $25.65 for a human, but only $6.36 for a Labrador retriever. Those elderly people who are eating dog food so they can afford to pay for their prescriptions have it backwards.

A 1999 report by the House Government Reform Committee minority staff found that Americans pay 72% more than consumers in Canada, and 102% more than consumers in Mexico. But when Rep. Tom Allen (D-Me.) proposed that Medicare recipients be allowed to buy their prescription drugs at the prices charged to the government and hospitals, about 50% below current prices, the bill died in committee.

To their credit, the pharmaceutical companies have an answer. During the time of the Kefauver investigations, they cited research costs as the reason drugs were sold for over 1,000% above their cost of production. It does take a lot of money to fully investigate the value and safety of a new drug, and this would have been a good answer if the Senate report hadn't covered the issue. Very few of the drugs studied had actually been developed in the United States. They were licensed from overseas drug companies which had done the real research. The drug companies were lumping market research into their totals. Finding out whether physicians will respond better to an ad with a blue background or a yellow one is research, and it doesn't come cheap .

This time around, the drug companies have a more detailed answer that includes a discussion of drug utilization, foreign methods of drug distribution and international currency exchange rates. They've learned an important lesson -- if you can bring a social issue to a certain level of complexity (anything over 30 seconds is usually enough) everybody will lose interest. Besides, the prices of individual drugs haven't gone up -- you only think so because you're using more drugs. Aside from that, the Galen Institute, a Washington think tank that never saw a deregulation it didn't like, argues that most people are only paying $200/year out of pocket for prescription drugs, the rest is covered by insurance, so what's the fuss about anyway? Also, the reason your health care insurance costs are going up is because of government regulation. Shut up and eat your Alpo(r).

But the drug companies aren't quite finished yet. According to their pamphlet "Why Do Prescription Drugs Cost So Much?": "Economists say that, properly measured, pharmaceutical industry profits are only slightly above the average for all industries. This is true because standard accounting methods write off R&D -- both atypically high in the pharmaceutical industry -- as current expenses. If those costs were depreciated over time, the rate of return would be lower."

Good point! Here's an industry that can charge exorbitant prices, spends billions on advertising, millions on political contributions, and yet for 1999 only reported an 18.5% profit margin, and even that's an accounting anomaly. If they can't do better than that, maybe those CEO's would be better off working for the government.

Sam Uretsky is a pharmacist who writes on health issues from Long Island, N.Y. Email

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