Feature

Winning the medical profits race

Despite all the talk of regulation and managed care, US drug company profits are booming. Geof Rayner reports

S pharmaceutical companies responded to the Clinton administration’s charges in the early to mid-1990s that drugs were overpriced and the healthcare industry in need of reform and tighter regulation with a single voice – which said ‘No’. The companies claimed that the market and managed care, not government interference, would brake rocketing costs. And for a while they were true to their word. Pharmaceutical prices – together with other healthcare prices – moderated, adding substance to the Republican’s successful onslaught on Clinton’s health reform plans. Even though the Clinton administration did bring in legislation to expand the market for generic drugs, the net result is that the US is virtually alone in letting drug companies set their own prices and, consequently, profits.

The remedy for healthcare costs, including drugs, was supposed to be competition and managed care. Managed care covers 80 per cent of the US population – albeit with a rising tide of public dissatisfaction. Realists always claimed that managed care could only offer one-off cost savings which occurred when people switched from open-ended, fee-for-service-based indemnity insurance. Everyone who understood corporate economics — as opposed to the wishful thinking of many health economists — knew that this would not last, and that the claim that America had entered a new competitive era in healthcare was bunkum. All that happened was that the big corporations swept away ‘corner shop’ provision in healthcare, ending the era of the individual physician-shopkeeper, while managed care companies and the big pharmaceutical companies launched new business strategies to maximise the returns for shareholders.

But it is the drug companies, not the managed care companies, who are winning the profits race, with growth of 16 to 18 per cent expected for the next four years. (British manufacturers are also doing well. Glaxo-Wellcome, although seeing an overall drop in sales by 4 per cent up to the end of October, saw a 14 per cent gain in its US sales.) They are doing it by bringing more drugs on to the market and by advertising directly to patients, spending £1.3bn on consumer ads this year, seven times what they spent five years ago. On top of this, £11bn is being spent this year on marketing to doctors, including generous donations to specialist professional societies linked to ‘public education’ on the benefits of new drugs. These drugs are expensive, typically between two and 10 times the price of the ones they replace. Prilosec, Astra’s anti-ulcer drug, costing $116 for a month’s supply, achieved £4bn in sales until June last year, representing 20 per cent growth; Lipitor, Warner-Lambert’s blood-pressure reducer, costing $84 for a month’s supply, saw growth over the year by a factor of seven, bringing sales to £1.3bn. But even generic drug prices are rising, by around 10 per cent per year. This year retail pharmacies will rack up sales of $105bn in prescription drugs, up 85 per cent over just five years.

There are two glaring paradoxes. The first, already noted, is that healthcare is increasingly driven by supposedly cost-conscious managed care (federal and state insurance schemes like Medicare — for the elderly — and Medicaid — for the disabled, elderly and very poor — are also adopting it). The second is that individuals are paying proportionally less for drugs. In 1990 patients paid almost two-thirds of prescription costs, down to a quarter today.

The solution to the first paradox is that the cost of healthcare will rise. For big companies, the average increase in premiums will be around 10 per cent this year, but for small companies, with less clout, approaching 50 per cent. Since many people will not be able to afford the increase, they will drop their health insurance, increasing the pool of 40 million or so uninsured.

The answer to the second is that while insurers are shouldering a higher burden, out-of-pocket costs are higher then ever. As expected, it is the poor, the uninsured and the elderly who suffer most. To qualify for Medicaid in North Carolina for example – this scheme covers drug expenses — a couple are required to have an income below $8,000 a year. Sickness expenses soon drive people’s incomes down to this level. Medicare, which covers the healthcare costs of older people, doesn’t cover the costs of prescription drugs. Out-of-pocket expenses and extra insurance now consumes a larger proportion of people’s income than before the scheme started in 1965.

None of this takes into account the actual medical value of many of these drugs — the US has a lamentable record in removing drugs from the market which show adverse side-effects. But it does all go to show how wonderful drug companies are — at least when it comes to investment returns. It also shows how weak ‘consumer pressures’ and ‘market restraints’ are and how feeble the US government is in standing up to the real powerhouse of the American system of governance: the profit-driven corporation.