Monday, June 23, 2003

Most of my friends are ignoring the brouhaha over prescription drugs and medicare. After all, we’re young, hip, and immortal. The fact of the matter is, though, that even if you plan to die young and leave a good-looking corpse, you should be worried about how the government is screwing us all over.

The House and the Senate have each passed slightly different prescription drug plans for senior citizens. Democrats (as usual) are saying things like “it doesn’t go far enough” (implying that its good, but not great) and Republicans are predictably shouting “this is salvation for seniors”. In reality, though, this sucks for everybody.

Here’s how the plan is going to work. A senior citizen signs up for private insurance that covers prescriptions. Then, once they are enrolled, the government helps pay for prescriptions – but only after a certain amount of premium is paid (about $450 a year) and after a certain amount of money has been paid by the senior citizen for drugs (about another $250). After all of that the plan begins to pay 80% or 100% of the remaining drug costs (depending on if we’re talking House or Senate plan). Sounds OK, right?

Well, not really. The first big problem concerns the fact that the plan won’t go into effect until 2006. This isn’t because its complicated (although it is), this is because virtually no company offers prescription-only insurance – the basis for the plan. Congress expects private companies to begin offering prescription-only insurance in the meantime so that they can cash-in on the plan.

This may be wishful thinking. The people most likely to enroll in such plans are those who really need the coverage. Insurance companies make their profits by not covering people who are likely to need their insurance. Or, they do so by overcharging enough in premiums and co-pays that they still make money despite providing benefits. So the companies that do provide prescription-only insurance are almost certainly going to charge as much as possible for every step of the insurance cycle. All of those extra costs, by the way, will be paid for with tax moneys.

The Senate version of the bill has a provision, though, saying that Medicare will offer its own prescription insurance – but only if there are less than 2 private providers of such insurance in a region. Many worry that this will in effect promote local monopolies – insurance companies that are the sole providers of insurance in a region who, free from competition, charge whatever they want and have their charges gladly paid for with tax money.

Another problem is the cost structure. Although senior citizens that spend a great deal on prescription drugs ($5,000+) will save money, they vast majority of seniors (about 70%) will not have their costs go down. Indeed, the Commonwealth Alliance (a watchdog group) estimates that about 35% of seniors on Medicare will have their drug costs go up. For about 10% they will double or more. Oh, and if they have other insurance (say, from retirement benefits) that contribute toward drug costs, that money doesn’t count toward the plans out of pocket costs – no matter what, you must pay $700+ to receive any benefits.

To sum up, the plans currently passed by Congress rely upon an almost nonexistent service that, if and when it is provided, will cost some senior citizens more than they pay now and will certainly cost the government a great deal more than if they were to pay all cost directly (since the plan is effectively funding insurance company profits on top of drug costs). It involves a chain of doctors, private individuals, private insurance companies, pharmacies, etc., all of which will require more administration, also driving up costs.

So why did the Congress pass a bill that makes care more complicated, more expensive, and more prone to error? As usual, the answer is ‘money’.

According to the group Public Citizen, drug companies spent almost a quarter of a billion dollars on lobbying, advertising, and campaign contributions during the 2000 election cycle. The annual lobbying expenditures by drug manufacturers has been no less than $25 million for almost 2 decades. The three or four drug companies that dominate the market spend fortunes on influencing our elected leaders to protect their own immense profits.

How immense are the profits of the drug industry? According to Fortune magazine (April 2002 issue), the average profits of the major drug manufacturers were 8 times the average return of the rest of the Fortune 500, making it the most profitable industry in America. Indeed, the most profitable drug company in America, Pfizer, made more profit ($7.8 billion after all taxes, expenditures, etc.) than Fortune 500 companies engaged in railroads, clothing, home construction, and publishing combined. Merck, the second most profitable drug company, had a total profit of 7.3 billion, meaning that its profit was greater than the profits of all Fortune 500 companies engaged in hotels, casinos, resorts, crude oil production, pipeline industries, food production, and semiconductor manufacturing combined.

According to the University of Minnesota, the drug industry has been one of the top two industries in America for over 30 years and has been the clearly dominate money-maker since the dawn of the 1990’s with a profit margin almost 4 times greater than the average for Fortune 500 companies. Heck, even inn 2001, when the economy as a whole was taking a dive for the pavement, gross profits for the drug industry were up 33%. Needless to say, the multimillionaire CEO’s of these companies, with their hundreds of millions of dollars in stock options, are very interested in protecting these immense profits.

In addition to lobbying congress (also known as ‘paying for protection’), the drug companies lobby us, the everyday consumer. The most successful ploy is to contend that the enormous costs of research and development to develop drugs that may or may not work demand that they charge high prices – otherwise, they say, they can’t keep developing life-saving drugs.In an informal survey of 50 people at a nearby college I found that 80% of them could recite this argument almost word for word.

In truth, however, R&D doesn’t cost that much. While the National Science Foundation does report that drug companies spent about $16 billion on R&D in 1997 (the most recent comparative year), this was less than the $18 billion spent on R&D for computer hardware alone, meaning that they are spending less R&D money than companies that do not compare to their level of profitability.

Indeed, Fortune magazine reports that none of the top 10 drug companies spent more money on R&D than they designated as profits in 2001. Indeed, on average drug companies spend three times as much money on advertising, marketing, and administrative costs as they do on research and development. And according to a Senate committee report from 1991, drug manufacturers exaggerate their research costs by adding in all expenditures on marketing research, including things like focus groups and surveys to create a name for a new drug.

It gets even shadier. An oft-cited 2001 report by the Tufts Center for Drug Development claimed that it costs $802 million dollars to develop a single new drug. This number is, in polite terms, an obfuscation. The Tuft’s report includes in this total the ‘opportunity cost of capital’, or the theoretical money ‘lost’ by the company by not investing in something else. Now, considering that the most profitable industry in America is the manufacture of new drugs, I am not alone in wondering how the Center for Drug Development decided that this hypothetical cost came to about $400 million dollars per new drug, or about 50% of their total estimated costs.

Another ‘obfuscation’ is the failure to mention that R&D dollars are tax deductible, meaning that, after tax savings, R&D costs should be reduced by about 33%, reducing the actual cost of R&D to about $240 million per new drug. Last but not least, the Center for Drug Development’s estimates are only for the development of completely new drugs, something that is increasingly less common. Most new drugs today are variations of existing pharmaceuticals, meaning that the actual R&D cost per a new drug may average as low as $40 million each, perhaps much lower.

We will almost certainly never know the actual costs of R&D for new drugs because the companies involved (despite their complaints) refuse to divulge the information. Even when subpoenaed by Congress the drug companies refused, eventually winning the right to stay silent in the Supreme Court in 1993.

In addition to all of this, the government pays for at least some drug research and development with tax money. The National Institutes of Health says that 45 of the top 50 drugs in volume of sales were developed with at least some government funding (with a total of no less than $175 million in taxpayers’ money) and that total drug research expenditures by the government were over $1 billion dollars in 1996. Unfortunately, the NIH tracks its research spending “very loosely” and cannot give a detailed accounting of how the money was spent.

What we do know, however, is very upsetting. For example, the drug Taxol was developed at taxpayer expense (for a mere $27 million, at that). It is currently exclusively marketed by Bristol-Meyers Squibb and had total sales of about $1.6 billion world-wide in the year 2000. The return to taxpayers? Zero dollars.

The drug industry also receives tax breaks. In a 1999 congressional report it was revealed that the average effective tax rate of major industries was about 27% from 1993-1996. During that same period, the effective tax rate for drug manufacturers was about 16% due to tax breaks granted by Congress. In the end, the most profitable industry in America is also the least-taxed industry in America. This is certainly the result of decades of hard-core lobbying by the drug industry.

Which leads us back to the prescription drug bills now being reconciled in the congress. One of the reasons that it is so complicated is to make sure that prescription drug users are not represented by a single company or governmental group. Why? It drives down costs and, thus, profits.

Virtually every European nation (and I’m including Canada is this group) negotiates prescription drug costs. Some set limits to profits, requiring a company toi reimburse the government if it exceeds some upper profit limit (about 17% in England, more elsewhere), some encourage the use of generic drugs, and some simply sit down with the drug companies and reach an agreement on a ‘fair’ price. According to the Government Accounting Office all the nations that do this use the same drugs that Americans do but spend between 35% and 50% less total on prescriptions. Similarly, in America the Veteran’s Administration has conducted simple negotiations with drug companies reducing the cost of prescription drugs at VA centers by 50%. As a result, 60% of the drug companies’ world-wide profits come from America.

Needless to say, the drug companies are very interested in maintaining the high prices in America – the difference is pure profit. As a result, more than $12 million in ‘soft money’ alone was donated to political parties and PACs in 2001-2002 (75% to Republicans, the rest to Democrats). And an additional $78 million was spent on lobbying members of Congress that same year. In total, the drug industry has a total of about 625 full-time lobbyists, more than half of which are former Federal employees – including 23 former members of Congress.

And the lobbying is paying off. Over the last 20 years, as the drug companies spent more and more in Washington, all efforts to provide a prescription drug benefit directly through Medicare have failed, patent protection for drugs (making them more profitable for longer) have been extended a number of times, and legislation has been passed limiting the ability of citizens to sue drug companies for damage caused by drug side-effects.

And, of course, the new prescription drug plan from Congress. A plan that costs senior citizens more, costs all taxpayers more, denied patients the opportunity to engage in group negotiation, and guarantees that the drug companies will continue to make tens of billions of dollars in profit every year.

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