Pharmaceutical Industry and Drug Costs

Blog Post

Is our pharmaceutical industry, commonly known as “Pharma,” guilty of anti-competitive marketing?  My granddog, Brucie, has a strong case for the prosecution.  A feisty, athletic West Highland white terrier, she (with the genderbending name) has canine atopic dermatitis —allergic itching.  She no longer scratches herself into reddened and denuded skin because of regular injections of a complex biopharmaceutical made by the veterinary drug giant, Zoetis, an offspring of Pfizer. 
This drug is just like agents I occasionally prescribe to control rheumatoid arthritis and lupus. Brucie’s treatment costs about $30 a month.  If my patients went to Walmart to purchase similar agents, the cost would be between $3800 and $5000 per month.  The actual purchasers of these drugs are pharmacy benefit managers (PBMs—Express Scripts, OptumRx, CVS are the biggest), negotiating prices and filling prescriptions on behalf of health insurers.  PBMs negotiate just a 15% discount off retail prices on branded biopharmaceuticals.
The 100-fold difference between human and dog pricing is partially explained by the byzantine pathway that drugs follow to get into the hands of their human clients.  For dogs, it is a simple matter.  Their owners are responsible for buying products to treat allergic itching, for example, based on price and performance in a competitive and transparent market.  Pharma, dealing with humans, faces much higher costs for research and development, as well as a much greater threat of legal actions from patients and their industry competitors.  Marketing to physicians and directly to the public adds about 20% to the cost of their products.  But these overheads do not explain why humans pay 100 times as much for the allergy therapy.
When these drugs first emerged as major advances in the treatment of diseases 20 years ago, their high price—then averaging $800 per month—was attributed to manufacturing costs.  By all expert accounts, these costs have plummeted while the prices have increased five-fold.  If these products did not have competition for therapeutic value, their high prices might be understandable.  But in my field, at least, there is healthy competition.
So why are the prices so high?  The charitable interpretation is pharmaceutical industry is socking away money to fund R&D to cure cancer, allergies, and autoimmune illness.  That is what they claim.  But data from their own industry shows that investments in R&D from 2007 to 2017 have not kept pace with the drug  prices, while marketing costs have soared.
Getting better prices for drugs starts with the purchasing agents, the PBMs, the most important of which could be the federal government.  The Medicare Modernization Act of 2003—creating Medicare D—rejected the idea of a national PBM and instead adopted a pharmaceutical industry-written bill which generated numerous PBMs for Medicare recipients, none having substantial bargaining power. In addition, the PBMs have evolved a self-serving ethic, accepting contracts from producers or wholesalers for bundled sets of products and accepting rebates (aka kickbacks) that disguise their actual, lower payouts.  Health insurance plans, because they accept risk for drug costs, have lately been dumping and/or suing their PBM contractors over these deceptive practices that cut into their profits.
Medicare and Medicaid set drug prices based on the negotiations of these corporate PBMs. They are rife with conflicts of interest, but our state and federal governments spend about 200 billion dollars yearly on drugs for Medicare and Medicaid based on secret negotiations that are divorced from the public interest. This floor on the costs of drugs prevents health care systems like Kaiser Permanente from conducting free-market negotiations with drug sellers.  If the sellers gave Kaiser better prices, all other systems, including government programs, would find out and demand to “piggyback.”  “There is no free market for prescription drugs in the US,” says Kaiser CEO Bernard Tyson.
Giving our government the power to evaluate the relative value of drugs and conduct auctions for their purchase is the ultimate third rail for Pharma, which spends $240 million annually for lobbying—more than any other business.  Remarkably, President Trump has repeatedly advocated government action to lower prescription prices.  His instinct to get a better deal turns out to be a vital first step in moving incrementally to universal health care—and to a system where humans are treated as well as dogs.
Dr Bertken can be reached at drbertken [at]

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