Prescription for profit


Thanks to an aggressive public relations drive by the pharmaceutical industry, most people believe the high cost of prescription drugs results from research and development costs. A report by Public Citizen, reviewed by economic and pharmaceutical industry experts at various universities and medical schools, reveals how deceptive this claim is. Since the drug companies refuse to reveal their R&D records to Congress and independent auditors, the report is based on government studies, SEC filings and documents obtained through the Freedom of Information Act. Congress’s unwillingness to subpoena R&D records may have something to do with the $262 million the industry spent on lobbying, political campaigns and “issue ads” promoting candidates in 1999-2000.

The $500 million figure that drug companies cite as the R&D cost for developing each new drug includes tax-deductible costs and unrealistic risk scenarios. The actual after-tax cost can be estimated at between $57 million and $110 million, including failures. Furthermore, the government bears a significant portion of this cost. Taxpayer-funded scientists conducted 55 percent of the research projects that led to development of 1995’s five largest-selling drugs.

Given the “high risk” the drug industry confronts in developing its products, its status as the most profitable industry in the U.S. every year since 1982 seems most curious. The industry’s return on revenue is three times the average for other industries represented in the Fortune 500. Of course, the fact that 22 percent of the drugs produced are copies of existing drugs, rather than innovations, partially explains this mystery. To make life safer for these bold entrepreneurs, the government also essentially pays them $600 million per year to perform $100 million of tests on the safety of these drugs for children.

In fact, while drug companies spend 12 percent of their revenues on R&D, they spend 30 percent on marketing and administration. The latter figure has been increasing by 40 percent a year since the government lifted restrictions on direct marketing to consumers.

Given this state of affairs, Congress should give Medicare the authority to negotiate drug prices with the industry. According to a Merrill Lynch report, such an approach could produce 30 to 40 percent more savings than any plan currently under consideration, but would only cut drug company profits 3.3 percent (as demand would increase). Maine is taking a similar approach in its dealings with the drug companies, and could provide a model. Congress should also exercise more control over the prices of drugs produced with taxpayer money.

Furthermore, Congress should require greater disclosure of: the role taxpayer funds play in individual drug development; R&D costs; best domestic and foreign prices for drugs; and drug researcher conflicts of interest. The U.S. government should end corporate welfare programs like the pediatric incentive and supports for patent extension and abuse. Congress should also strengthen regulations on pharmaceutical advertising and beef up FDA enforcement.

Of course, prospects for reform are dim. While the drug companies allow their employees in Congress to make speeches to constituents about “taking on the drug companies,” they will not likely allow any of the above policies to become law. Both major parties recognize that they can get away with doing the industry’s bidding, because their constituents will not punish them. Anyone who knows the extent of their representatives’ betrayal knows that the other major party is merely pursuing other betrayals.

There is, however, a system whereby citizens can realize their collective will. It is called “voting.” Every year, more and more parties appear on the ballots, representing an ever-broader range of political views. Many third parties oppose the bipartisan abuses of which people most complain. The Greens, the Libertarians, the Reform Party, and a number of other third parties oppose corporate welfare and political corruption, albeit for different reasons. In local, state and national elections, the cost of voting for a third party is invariably small – most jurisdictions are overwhelmingly dominated by one major party.

Voting for a third party accomplishes much more than “protest.” It brings new viewpoints into political debate, and promotes discussion of issues the major parties would otherwise avoid. In many states, third parties gain access to public funds once they achieve a certain percentage of the vote, allowing them to spread their message.

Throughout American history, strong third party movements have often played a role in forcing the major parties to place the desires of their constituents above the orders of their corporate paymasters. Unless Americans start voting their hopes, instead of their fears, the pharmaceutical industry will continue to have an absolute veto on health care legislation.

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