Drug Costs, a Major Driver of Health Insurance Costs

Health care is of course a very hot issue right now. It’s a hot issue for me personally, as my own health insurance – which I purchase privately as a self employed person – just went 28%. That’s not a typo. It’s always gone up 4-6% per year, this year, 28%, not to mention an increase in the deductible and other costs, and now exceeds my car payment…

I’m in the state of MA, which passed a universal health care law that everyone had to have health insurance (they will literally fine you $900 per year if you don’t BTW), with the state offering plans at lower premiums for those who qualified, etc.

This was supposed to lower insurance costs by making the market more competitive, etc. The result for MA, a huge increase in insurance premiums, and an increased state deficit to boot…

I don’t know the details of the proposed national health care plan yet, but I do recall a speech by Pres Obama making reference to MA as some sort of success story…

If the national system has any relation to the MA system, we are going to be in big trouble real fast…

I’m not at all against universal health care as a concept, but without major cost containment taking place, such as tort reforms, and other measures, in particular, drug costs, it’s a pipe dream.

Doctors are also being squeezed hard these days on many levels (for example, insurance costs for doctors is also off the charts these days…), and this only makes it more difficult for them to help their patients.

To that end, many are not aware just how much big pharma costs this country, how much power they have, and what a great job they have done of preventing true competition in the market while driving their profits up.

Marcia Angell, M.D. – former editor of the New England Journal of Medicine (NEJM) – one of the most respected med journal on the planet, in line with JAMA, Nature, etc – wrote one of many good books on the topic. Below, is a summery of some of the major issues by which drug companies fail American citizens, keep our costs up, and add greatly to insurance premiums.

How They Deceive Us, and What to About It

by Marcia Angell, M.D.
(Random House; August 31, 2004)

1. The pharmaceutical industry claims to be a high-risk business, but year after year drug companies have higher profits than any other industry – by a long shot. In 2002, the top ten American drug companies had a profit of 17 percent, compared with 3.1 percent for the other Fortune 500 industries. The biggest drug company, Pfizer, had a profit of 26 percent.

2. The industry claims to be innovative, but only a small fraction of its drugs are truly innovative. Of the 78 drugs approved by the Food and Drug Administration (FDA) in 2002, only 17 contained new active ingredients, and only 7 were classified by the FDA as likely to be improvements over drugs already on the market. Most of the others were just minor variations of old drugs.

3. The most profitable drugs are variations of top-selling drugs already on the market – “me-too” drugs. There are whole families of me-too drugs, and no good reason to believe one is better than another at equivalent doses. They cash in on already-established, huge markets. The top-selling drug in the world, Pfizer’s Lipitor, is the fourth of six cholesterol-lowering drugs of the same type.

4. The industry’s most innovative drugs usually stem from research done at government or university labs. An internal National Institutes of Health (NIH) document showed that only 1 of the 17 key research papers that led to the five top-selling drugs in 1995 came from the company that sold the drug. Big drug companies license or otherwise acquire about a third of all their drugs from’ universities, the NIH, or smaller companies.

5. Contrary to popular belief, big drug companies spend less on research and development (R&D) than they keep in profits and far less than they spend on marketing. By their own figures, in 2002 (when profits were 17 percent of revenues), the top ten American drug companies spent only 14 percent of revenues on R&D and 31 percent on marketing and administration (of which the lion’s share was probably marketing). The industry claims to spend $802 million to bring each new drug to market, but independent analysis shows that the true figure is a small fraction of that amount.

6. The U. S. is the only advanced country that does not regulate drug costs in some way, and other countries spend only about half as much for the same drugs as Americans. Methods vary, but essentially governments in other countries take advantage of their bargaining power to negotiate prices. Still, drug companies do not sell at a loss in these countries.

7. The pharmaceutical industry has an iron grip on Congress and the White House. It has the largest lobby in Washington, with more lobbyists than elected representatives, and it contributes heavily to political campaigns. Over the past two decades, Congress has enacted a series of laws that practically ensure windfall profits to the pharmaceutical industry, at public expense. For example, the Medicare prescription drug benefit enacted in 2003 specifically prohibits Medicare from negotiating for lower drug prices.

8. Drug companies promote diseases to fit drugs. To expand sales, they persuade people in affluent countries that they are suffering from conditions that need long-term treatment. Thus, millions of normal Americans come to believe that they have dubious or exaggerated ailments like “generalized anxiety disorder,” “erectile dysfunction,” “PMDD,” and “GERD.”

9. The part of the FDA that approves new drugs receives half its support from drug companies. The FDA reviews drugs for safety and effectiveness before they are allowed on the market, but drug companies pay large “user fees” in return for quick reviews. That means the agency is beholden to the industry it is supposed to regulate. .

10. New drugs are not required to be any better than old ones, and there is usually no way to know whether they are. Drugs have to be tested before the FDA will approve them, but they do not have to be compared with older drugs for the same condition, only with placebos. That means we don’t know whether new drugs are better or worse than old ones. They just have to be reasonably safe and better than nothing — *a low standard indeed.

11. Drug companies have enormous influence over what doctor are taught about drugs and what they prescribe. The companies support most continuing medical education (CME) courses, medical conferences, and meetings of professional societies. They have armies of sales representatives to visit doctors and teaching hospitals to tout their wares, hand out free samples, and provide meals and other gifts. There is ample evidence that this huge investment in medical “education” pays off in terms of the prescriptions doctors write.

12. Drug companies have a lot of control over clinical trials of their drugs, which makes drugs look better than they are. They support much of the drug research done in academic medical centers by faculty researchers. In return, they insist on designing studies that increase the likelihood of a favorable result. There is good reason to believe that much of the company-supported research on prescription drugs is biased as a result.

13. The pharmaceutical industry portrays itself as a model of American free enterprise, but it is anything but. Of the top ten companies in 2002, half are European. And while the industry is free to decide what drugs to develop and to price them as high as the traffic will bear, it is utterly dependent on government-funded research and government-granted monopolies in the form of patents and FDA*conferred exclusive marketing rights.

14. Even while the pharmaceutical industry turns out whole families of me-too drugs for relatively mild conditions in affluent people, it pays almost no attention to major scourges in poor people — like malaria. It also gives short shrift to less profitable drugs. There are shortages of some vaccines and life-saving drugs, such as antivenins for poisonous snakebites; because few companies want to make them.

  1. Lauren Hooks 14 years ago

    I just love this blog. I found you guys on yahoo. I actually agree very much so with most of the things that I have read here.This is kinda rare with all the bad information that is out there.Money decisions have to be made with knowledge.I will definately be back to visit this site again.

  2. makster 14 years ago

    I am self-employed. My wife has insurance at work that covers both of us. To date the cost has been minimal for fairly good coverage. I am thankful for that. I have checked on the price of insurance for after she retires and it is scary.
    It looks like it will take a huge part of our monthly income for health coverage. So much so that it will definately change or way of life. I don’t know if the Government’s plan will help or hurt the situation.
    I really feel that that drug cost are way out of line. Our family Dr. seems to perscibe a drug at every visit. Takes a quick look at you, asks a couple questions and gives you a perscription.
    The situation is a bad one that hopefully can be solved in the near future.

  3. Author
    Will Brink 14 years ago

    If the MA experience is any reflection of the proposed national model, it’s only going to get worse. That’s not Obama bashing, and the system was in big trouble well before he took office, but I fear his cure may be worse then the disease….no pun intended!
    I really hope I am wrong on that, but I can only go by what we are seeing, and it aint good!

  4. Daniel 14 years ago

    Luckily I’m in the UK so it’s free health care here. Them points you listed are very interesting though especially the one about them promoting diseases which fit drugs so people believe they have it.

  5. viswiss 14 years ago

    Health insurance is the most important thing for the people because it gives a whole life cover so that it saves your life. I think we should try to take those policies as soon as possible. There are lots of policies are available in the market so you just have to select one of them.
    Anyways keep it up and keep sharing.

    • Author
      Will Brink 14 years ago

      Viswiss, don’t know where you are getting your info from, but there are not “lots of policies” and what is offered for policies, are too expensive for many, while offering very poor coverage. MA, and other states, limit your choices (so much for allowing insurance companies to compete to lower premiums….) to a handful of companies.

  6. motor supermarkets 14 years ago

    Super information,I have Digged your post, Thank you

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