Excuses for price gouging on drugs don't hold water

The pharmaceutical industry is feeling rising heat from all directions as a result of its excessive price increases that reflect a contempt for consumers and the nation's economy. In response, pharma has been mobilizing its defenders in the media and academia to deploy the industry's standard mixture of half-truths and outright distortions.

A recent example of such a whitewash appeared in the Inquirer yesterday, putatively written by Kenneth Thorpe from Emory University. It is noteworthy because it contains, within the concise space of a few hundred words, most of the threadbare arguments that pharma has been wrapping around itself for decades.

Thorpe's first point is that capping drug prices won't reduce the overall rise of health care costs because medications account for only 10 percent of the sector's total spending. As pharma's Washington lobby is especially fond of that claim, it has been slammed numerous times in this space. Nevertheless, completeness requires pointing out the disingenuousness of Thorpe's assertion.

As a context it is important to first recognize that while all health care costs are rising, drugs are going up faster than prices in the other sectors. Taken together, prices for brand, generic and specialty drugs increased 10.9 percent in 2014 over the previous year and 127 percent since 2008. During those same six years, the consumer price index rose by just 11 percent.

But even that doesn't reveal how much pharma is sticking it to the American public and taxpayers.

Prices for brand-name drugs rose 14.8 percent last year while generic medicines increased 4.9 percent. Digging deeper, the cost of drugs to treat prostate cancer rose 52 percent last year. Medications for Parkinson's, asthma and muscle pain cost 30 percent more, and Alzheimer's drugs shot up 23 percent.

Next, by implying that cost savers should look to other areas besides drugs, Thorpe deliberately ignores an incontestable fact. Although other health care components such as hospitals, physician/clinical services and administration/insurance, represent bigger slices of the health cost pie than drugs, those sectors run on vastly thinner profit margins than pharma. While pharma enjoys one of the largest margins of any legal business, the other sectors offer far less room for cramming down the prices on their services.

This means that deep price cuts for hospitals and clinics can squeeze some of them out of existence, while the only thing in pharma that will take a haircut from price controls are the outrageous profits of some hedgefunds and the extortionate compensation of people in the C-suites. So policy administrators looking to save programs such as Medicare and prevent health costs from tanking the economy have to cut where they can.

Thorpe trots out his next line of baloney when he writes that rising drug prices "reflect the ever rising costs of research." To support that point he claims that it now costs $2.6 billion to bring each new drug to market.

The number he cites and what it represents are both fabrications. Thorpe pulls it out from the rear end of a Massachusetts university which the pharma lobby hires each year to corroborate its justification for exorbitant prices. As a starter, the number is an allocated expense, not the actual, out-of-pocket money that drug companies spend for each new drug. The academic flacks outside Boston take the industry's total R&D expenditure for the year and divide it by the number of new products introduced during that time to get the $2.6 billion number.

The real, out-of-pocket expenses for new drugs average about one-twentieth of the amount that Thorpe and the PhRMA fling in everyone's face. In any event, pharma's R&D costs don't impede it from enjoying one of the highest profitability levels of any sector as determined by all three profit measures: earnings/equity, earnings/sales and earnings/assets.

Thorpe then drags out the two claims that he and his pharma patrons consider their ultimate weapons. He states that price controls on drugs will discourage the pharma companies from investing to develop new, life-saving and life-enhancing medications.

Here again, pharma and its flacks probably think that repeating the same nonsense for fifty years will convince people that it's true. To examine that contention, Carleton University's School of Public Policy and Administration in Canada published a policy brief this July that compared drug prices and several other factors among the world's most advanced countries: the 31 member nations of the Organization for Economic Cooperation and Development (OECD).

Among other things, they looked at the correlation between price levels and R&D spending in the various countries. They concluded that, "In all cases," the concern about lower revenues impeding the arrival of new drug products was "misplaced." If anything, they had good reason to suggest that the opposite result is likely – price controls would lead to the launch of more groundbreaking drugs.

They state that in the current situation, "80% of new patented drugs entering the market provide no significant additional therapeutic benefits as compared with existing alternatives." The present U.S. system of an uncontrolled market allows drug companies to price such me-too drugs at the same level as the first entrants in their respective classes. That merely incentivizes drug companies to "develop non-innovative and less risky 'me-too' drugs instead of new innovative medicines for unmet needs, and to invest in marketing instead of R&D."

Pharma's higher profits in the U.S. do not necessarily lead to increased investment in research. At the same time, it is also b-s for the industry and its flacks to claim that price controls will cause pharmaceutical industry jobs to flee the country. The Carleton authors maintain that enormous pharma profits are often "used to buy competitors through mergers and acquisitions" that result in the closure of research labs and employee layoffs.

Then, near the end of his screed, Thorpe drags out pharma's old and trite claim that using more drugs now, regardless of their cost, preempts health care from incurring more expensive costs at a later date for hospitalizations, surgeries and other procedures.

The problem with such misdirection is that while everyone has to pay the steep prices for drugs, only segments of patients will go on to require the costlier operations and other procedures. As an example, pharma flacks try to justify a medication for hepatitis C that costs $84,00 (at $1,000 a pill) by claiming that amount is far lower than the $500,000 for a liver transplant that patients will need if they don't receive the medication.

Pharma's deceit there rests on the fact that only 20-25 percent of people with hepatitis C will go on to develop the liver steatosis or fibrosis that impede metabolic function and, among those patients, only a quarter of them will go on to require liver transplants.

Moreover, hepatitis C – unlike cancer – is a slowly progressing disease that for years caused gastroenterologists and other specialists who treat it to take a watch-and-wait approach. When interferon plus ribavirin were the standards of care for treating hep C and the GI specialists knew about improved versions in development (for example, a pegylated formulation), they "warehoused" their patients by having them wait the year or two until the new forms became available.

So perhaps the $1,000-a-pill medications are justified for the more serious, more advanced patients and those where the disease is progressing rapidly. But pharma is not content to limit this stratospheric price to the eligible 5 percent of hep C patients. They want everyone who is HCV positive to pay through the nose.

The American public has now been seeing the same, moth-eaten excuses for high drug prices from pharma's paid spokesmen in politics and academia for more than 60 years. The industry used many of the same explanations when it was hauled in front of the U.S. Senate's Kefauver committee that investigated the drug companies during the 1950s.

As pharma tries to defend itself against price controls, its excuses for excessive prices are as flimsy now as they were during the Eisenhower era. The American economy at this time doesn't enjoy the kind of economic growth it did during that earlier period, so while the justifications for high drug prices are still a crock, the damn thing leaks and smells after more than fifty years.

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