By BRIAN KLEPPER
First published 11/27/18 on The Health Care Blog
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.