Lakeside Medical Musings

Drugs Just Cost Too Much

“Houston, we have a problem…”

The problem is the skyrocketing cost of medical care in the United States.  For every dollar that goes into the healthcare pot, there is one less dollar that goes into your personal pocket to spend on other necessities such as food, clothing, housing, and even entertainment.  It is a serious drain on the quality of life in the US, and it is one of the primary reasons why real incomes are not increasing: your employer has to pay higher healthcare costs, so the company cannot afford to pay higher salaries. It is a problem that has been getting worse and worse for the past thirty years, and we seem to be getting closer and closer to a real breaking point. A major contributor to the problem is the pharmaceutical industry. The large pharmaceutical and biotech companies, known as Big Pharma, combine to be one of the reasons why American healthcare costs are significantly higher than anywhere else in the world.  It is certainly not the only —  or even the biggest — contributor to the high cost of health care, but it is a major cause, and drug prices continue to soar.  Today I am going to discuss the problem, and next time I will present some possible solutions.

I am going to start with what I refer to as “the scum of the industry.”  Valeant Pharmaceuticals is a company that purchases the rights to manufacture uncommonly used medications from other companies and then explodes the price.  Since there is no competition in making these medications, the new inflated prices stick.  Here are three medications that Valeant now owns, along with pricing comparisons between 2013 and 2015.

Drug                2013                2015

Curpimine      $888               $26,189

Syrpine           $1,395             $21,267

Glumetza        $896                $10,020

In 2015 alone, Valeant raised prices on its brand-name drugs an average of 66%, according to a Deutsche Bank analysis, about five times more than its closest industry peers. This is a great business model for a company, and I’ll freely admit there is nothing illegal about these extreme price increases, but this highlights a deficiency in our system and the greed that is rampant within the industry. Here are some articles about this that you might find interesting,  here and here .

The poster child for scummy pharmaceutical companies is Turing Pharmaceuticals, see here.  This is a start-up run by a former hedge fund manager, Martin Shkreli (who is no longer Turing’s CEO since his arrest in mid-December for securities fraud). This company’s model is to buy the rights to manufacture certain drugs from other companies and then radically increase the prices. As noted in around-the-world headlines this past year, Turing bought a drug called Daraprim that sold for $13.50 per dose, and Turing immediately raised the price to $750 –yes, for just one pill.  Big Pharma calls these companies “outliers” and says they are not representative of the industry.  Extreme?  Absolutely.  Representative of the entire industry?  Absolutely.

Big Pharma protests that these scum outlier companies are sullying the name of the pharmaceutical industry as a whole, and I would agree.  But Big Pharma is not without a similar stain.  Big Pharma institutes huge price increases in multiple medications simply because… well, because they can.

Let’s look at a drug called Betaseron.  This was the first in a class of new medications for the treatment of MS, multiple sclerosis. Betaseron, released in 1993, changed the way we treated MS, and it was a miracle drug for MS sufferers. This drug would be expensive, according to the pharmaceutical industry, because of the high cost of its development.  The cost to consumers in 1993 was a whopping  $8,000 to $10,000 per year – WOW!   The pharmaceutical industry rationalizes the initial high price of a drug because a company needs to recoup their development costs as well as generate a reasonable profit. Drugs have a limited patent protection, and competition from newer drugs and generics would — supposedly — eventually bring the price down.  Did it? Did that happen?  Well, let’s look at today’s market for MS drugs.  There are currently eight or nine medications in the same class as Betaseron and, remarkably, their costs to consumers are all about the same, additional information here. A one-year course of Betaseron is about $60,000 a year. The cost of Betaseron has increased five to seven times more than the general rate of prescription drug inflation.  The cost of the development of Betaseron was paid back years ago, but the price didn’t come down.  As you can see, it actually accelerated.  This drug has been on the market for over twenty years! What happened to free market price forces?

The drug companies argue that the cost of development is so enormous that they must charge what seems like excessively high prices initially, but that the high price is, in reality, fair. The pharmaceutical industry claims that the cost of developing a new drug averages over $1 billion (more than that in 2016 when adjusted for inflation). This billion dollar price tag comes from a study done in 2003 by the Tufts Center for The Study of Drug Development.  They looked at 68 randomly chosen drugs (“randomly” chosen by self-reporting pharmaceutical companies) and  they calculated the cost at $802 million in 2000 and then adjusted that amount for inflation to 2011, bringing the estimated cost to $1 billion. According to the Pharmaceutical Research and Manufacturers of America, even that cost estimate was too low. Their calculations in 2006 stated that the cost to develop a single major drug had risen to $1.32 billion, an increase of  64% since 2000.  This, by the way, is more than twice the cost of medical inflation during this period.  But, for the sake of argument, let’s go with the Tufts Center’s $1 billion price tag.

in 2011, The London School of Economics published a widely-respected comprehensive study co-authored by Donald W. Light and Rebecca Warburton entitled Demythologizing The High Costs of Pharmaceutical Research that suggests the true cost for the development of a new drug is actually closer to $55 million, a lot of money, sure, but nowhere near The Tufts Center’s claim of $1 billion.  This study pointed out that the data from the Tufts Center was submitted by the drug companies themselves on a confidential basis and was therefore unable to be independently verified. Interestingly, The Tufts Center study was funded by — guess who? —  the drug companies. Let’s take a closer look at the Light and Warburton study — and I suggest you read the seventeen page abstract yourself in its entirety to get a more thorough understanding of the complexity of the problem.

Basic scientific research is the first step in identifying and developing a new drug.  84% of this research is funded by the federal government — under programs such as the National Institutes of Health (NIH) — with various universities providing additional funding. The Tufts Center made the assumption that the drug companies spent $121 million in this phase. The Light and Warburton study asserts that this number is way too high since, in fact, the industry pays only 1.2% of their sales for all their basic research, not the 17-19%, or one-third of the cost of development, that the Tufts Center claims.

Now let’s look at the funny math of the Tufts Center study.  Research and Development (R&D) costs are tax deductible. The costs are not depreciated but are deducted directly from taxable profits.  This alone lowers net costs by 39%!   The L&W authors point out an incredibly odd accounting trick that the Tufts Center study used:

Finally, the authors added the ‘cost of capital,’ that is, the costs of returns from funds that would have been invested in the stock market, were the R&D project not undertaken. The authors used an estimated ‘cost of capital’ of 11 per cent, based on equity returns between 1985 and 2000, adjusted to remove inflation (implicitly assuming that similar returns could be obtained, risk-free, in the future). They compounded the 11 per cent over the estimated time (90.3 months) required for clinical trials and USFDA review; although it is unclear just how the times were estimated. Compounding at 11 per cent doubled the estimated cost for R&D from $403 million to ‘a total pre-approval cost estimate of US$802 million (estimated in 2000 dollars.)

“When Light and Warburton correct for all these flaws—well, all the ones that can be quantified—they end up with an average cost of bringing a drug to market that’s $59 million and a median cost that’s $43 million. In 2011 dollars, that’s a $75 million average and a $55 million median.”

This is just absurd!  No other industry gets to consider the loss of potential stock market returns from their profits as a cost to their business. But it sure does work if you’re trying to make it look like your costs are way higher than they actually are.  See more information here.  To be fair, the Tufts Center group has roundly disputed all of the claims of Light and Warburton and feel they (L&W) have misinterpreted the data.

So considering the “huge” cost of new drug development, let’s take a look at how Big Pharma, as a whole, is doing.  All companies have a right to make a profit.  That is the basis of capitalism, the American way.  All industries experience good times and bad times, better periods and worse periods. In 2013, the oil companies did very well when oil was selling at over $100 per barrel, as opposed to now, in 2016, when oil is below $30 per barrel. As a result, oil companies that specialize in exploration and drilling are declaring bankruptcy today at a startling rate.

The profit margin of a company is the percentage of profit they make off of every dollar of product they sell. If you sell one dollar of product and make ten cents in profit, your margin is 10%.  To give you an idea of typical profit margins, grocery stores operate on a profit margin of  1-2%; in 2011, a banner year for oil, Exxon’s margin was less than 10%.  For most of the past twenty-plus years, Big Pharma has enjoyed the highest margins (or tied for first) of any American industry – for every single one of those years!   Look at the graph below. The top blue line is the operating margin for Big Pharma, between 19% – 25% and still rising!  Impressive. Exxon, eat your heart out!


Keep in mind that these astonishing profit margins include the costs of big fines for bad behavior.

$3 billion: that’s how much GlaxoSmithKline agreed to pay the U.S. Department of Justice in 2012 to settle civil and criminal charges related to its misbranding of the drugs Paxil and Wellbutrin and its failure to disclose safety information about the diabetes drug Avandia.

Although the $3 billion fine was the largest fine ever levied against a drug company, it was a mere drop in the bucket for GSK, accounting for less than 11% of its associated revenue for the year, according to The Economist. And during the years that Glaxo illegally marketed antidepressants to kids under 18, the company reportedly raked in $27.5 billion, says the Christian Science Monitor.

So here are just a couple of truly eye-popping facts about medication costs:

  1. The average cost to an individual consumer for cancer drugs in 2000 was about $10,000. By 2012, that same cost had risen ten-fold to over $100,000.
  2. Specialty drugs and the so-called “orphan” drug costs have skyrocketed. (Orphan drugs are those that are not brought to market because they will be commercially unprofitable for the developer as their application, while necessary to some, is very limited.) MS drugs are around $60,000.  Hepatitis C drug costs are upwards of $80,000, and a new drug for cystic fibrosis is $259,000 per year of treatment.
  3. Between 2013 and 2014, 222 generic drug groups increased in price by100% or more.
  4. Mylan NV’s albuterol sulfate, an older commonly prescribed asthma drug, increased in price by 4000% in just one year from 2013 to 2014.

And, of course, there is deception from the industry about these consumer price increases:

Dr. John Lechleiter, the CEO of Eli Lilly, recently attempted to debunk five “Big Myths” about Big Pharma. As he wrote, “Only about 10 cents of every U.S. healthcare dollar is spent on retail prescription medicines—which is the same share that was spent on prescriptions in 1960. While the overall use of medicines to treat many diseases has increased dramatically in that same period of time—and average life expectancy at birth in the U.S. has increased by more than nine years—the share of spending accounted for by prescription medicines is the same as it was 55 years ago. That comparison makes pretty clear that medicines are delivering value to the system rather than driving unsustainable cost increases.”

The percentage of healthcare dollars spent on prescriptions dropped from 9.8 percent in 1960 to 7.3 percent in 1970, and then sank further down to 4.7 percent in 1980. This percentage then began to rise again, going to 5.6 percent in 1990, to 8.8 percent in 2000, and to 10.2 percent in 2009 (data compiled by the Centers for Medicare and Medicaid Services).

So if we pick a year, let’s say 1960, when the practice of medicine was much simpler and thus cheaper than it is today, we see that US healthcare dollars were spent on just three items:  surgery, x-rays and drugs, because that was the sum total of the options physicians had in their bag to treat patients. This fact alone made the cost of drugs a relatively high percentage of the healthcare dollar.  But consider all the expensive treatments that have been developed since 1960! We now have dialysis, open heart surgery, MRI and CT scans, pacemakers, cardiac stenting, organ transplantation, and a whole host of other therapies that were not available in 1960. These high tech, expensive therapies have increased the overall cost of health care significantly and THAT is the reason, the ONLY reason, why the costs of drugs, percentage-wise, has declined. As these newer, costlier treatments became available, the percentage of the health care dollar spent on drugs dropped to 4.7% in 1980.  But now drug costs are well above the 1960 levels at 10.8% of healthcare dollars. And this increase is because of Big Pharma’s excessively high pricing of both new and old medications.

Pharmacy spending is an even higher percentage of employer based healthcare costs.  77% of employers spend 16% or more of their healthcare dollars on pharmacy benefits, and this number continues to increase as the cost of specialty drugs continues to skyrocket.

One of the ways that Big Pharma is able to keep prices and profits high is with the patents on their drugs. J. Kyle Bass, a hedge fund manager, formed a company last year called The Coalition for Affordable Drugs.  This company makes money by short selling (another Big Short — read the book or see the movie, if you haven’t yet) drug companies whose patents they believe are shaky, and buying shares in drug companies whose patents reflect true innovation. See here.

“Some patents and extensions to patents represent an unreasonable use of government regulation to enshrine monopoly power to the detriment of the public at large,” Mr. Bass said. “This system must be fixed or we will continue to pay more and more for the same old drugs we’ve been buying for decades.”

One of the patents that is being challenged is for a drug called Propofol which is marketed under the trade name Diprivan.  This drug has been around for 30 years and is protected by a patent — not because of the drug itself, but because of the rubber stopper used in the container.

Suprenza, a weight loss medication, had its patent extended in 2013 to 2029.  The patent was for the orally disintegrating tablet with a “speckled appearance.” The speckles are the colored granules of a water-soluble sugar which are not patentable.

A process called “evergreening” or “product-hopping” is what happens when a company makes a very minor change in a medication just before it goes off patent.  It then markets the new product to take away sales from the old product.  When the old product goes off patent, and generics come on the market, the new product has already been ingrained in physician practicing patterns and has thus assumed a large portion of the old drug’s customers.

But to me the worst practice — which is not illegal, but should be —  is known as pay-for-delay.  When a branded drug approaches the end of its patent life — so that generic companies can begin to  produce the medication as a generic —  the Big Pharma company pays the generic drug maker huge sums of money if the generic company agrees to not sell a generic version.  The FTC believes this anti-competitive inter-drug company dealing costs consumers and tax payers $3.5 billion in higher drug costs every year. See here.  A law was introduced in 2013 to make this process illegal, but it has failed –twice! —  to even make it out of committee.  Where are the antitrust lawyers when you need them?

The pharmaceutical industry has developed some truly spectacular medications. Many of the medications  they’ve developed have greatly improved — and definitely prolonged — the lives of many people.  But it’s also true that many of the drugs they have developed are known as “me, too” drugs, which are drugs that are essentially the same as already existing medications, introduced as competition to another company’s similar drug, or released just as their own, very similar, drug is about to come off patent.

Consumers in the United States pay an unfair share of the costs of development for new medications as well as of the pharmaceutical industry’s profits.  These costs are hurting our economy, burdening patients with high out-of-pocket costs and frequently rationing the availability of many lifesaving medications to those in need.  I don’t blame the pharmaceutical industry for taking advantage of our broken and easily abused system. I blame our Congress, which is controlled by Big Pharma money, for not fixing this problem. In my next blog, I am going to discuss the vast difference in pricing for the same medications throughout the world and some steps that we can take here in the US to make medications and healthcare more affordable.

Thanks for reading and, as always, I welcome your comments.

6 thoughts on “Drugs Just Cost Too Much

  1. Artfldgr

    i forgot to mention, why is it ok that gruber designed a system that would pay for lesser things by costing more of some things, and pharma doing the same is bad? as i said, i work in research and i can tell you all kinds of wasteful crud thats here… mismanagement styles that go back to the 30s and the union wars of the socialsts… unions that are forcing high salaries and really great pensions… so a programmer here never gets a raise, doesnt get title chages (that comes with a raise and without it you can make them unhirable other places and save money), but to improve minorities in the stem field they will pay double the salary for a visa person… they do not create great software to run things, they hire vendors who create expensive stuff that barely works, then wont back out and make it work… about five projects here were ex employees that figured the way to get raises was for a department to quit, make software and sell it back… horrid stuff. i came from fortune 10 and wall street trading programs, and bronx science.. and its like wading through molasis here. they are more concerned with the socialist view and gender and all those games than they were about medicine… this despite they get treble reimbursment under ACA over the small doctor… lord, it makes me want to tear out my eyes as to the incredible waste, incomptence and so forth… but thye are so used to saying, what is the state going to do, let a top research hospital who just spent a few billion dollars go out of business.

    here is one you dont know about that was in the daily news about another hospital:

    Mount Sinai entices top doctors with no-interest New York City mortgages
    Since 2008, the highly ranked Icahn School of Medicine at Mount Sinai has given six- and seven-figure mortgages to at least three sought-after physicians, the Daily News has found. Insiders say such deals are common in attracting and keeping top medical talent — although it might not sit well with students who shell out $43,000 a year in tuition for the school.

    we dont get raises, they waste tons of money.. Dean just got a million dollar bonus..
    and they are giving out million dollar loans with no interest and no term

    and your going to grouse about profits of companies that make what you need?
    heck, whats the average that the FDA causes things to cost just so those companies can say their liability is limited beause this was checked out and the process watched and so how much can you sue for if the FDA approved it, and they did what they were told?

    i get tired of all this and hearing this… without reward you don get the best people
    their raises only come when someone wants to leave, then they will pony up
    salaries are 20% below market, and so, you thnk the best come to work here?

    i could spend hours detailing things like people starting companies so that a person working here can order supplies… go through their garbage… they throw out tons of stuff… worth a lot, but instead of a program to recover things, they give it to a company that makes a fortune… they kill innovation by taking ideas without reward, so one one wants to give ideas. they collude with the state to get students to vote a certain way so they get more state funds… they favor unions to the point that a janitor makes 6 figures and tech personell make 30,000 less… unless a new hire… yes, a janitor makes 110,000 under the union, and the programmer who its illegal to unionize gets a lot less.. the list goes on and on and on…

    but the public doesnt hear that… it hears that a company following the inane laws that the votors put the leftist in chage made, get angry at the companies for following those rules when without them, that didnt happen till recently.. you think Obama changing the patent from first to invent to first to run to the patent office is going to make things good for smaller people

    i have designs for things for cancer patients, chip design (i have worked with schadt of illumina), and other things… but since they claim ownership for my working here, there is no way that would ever see the light of day… despite docs being interested in my work and wanting it… theft of IP is the norm and those students dont know that they are sitting there paying lawyers to wait and take their future away for coming to the school.

    tons more, and i dont hear about this stuff… cause this stuff and even many of the problems are from the improvements and rules the people who want to make society like a project have fixed things with, when before they fixed it, it was a lot better. i still remember house calls and i grew up in an inner city slum as a immigrants child..

    too bad my third world immigrant wife is punished for marrying me and my being evil under the politics of the day and has to be replaced by others they import… i even thought of leaving the US, giving up my citizenship, and coming back to get more cash as a cherished person vs an evil resident

    maybe teaching all these kids that the thing that murdered so many and screwed up economy for over 100 years and has a 100% failure rate was STUPID…. now they are complaining that the system is exhibiting the same outcomes as a system in change to the other!!! its ridiculous…

    if it wasnt so trajic us ex soviets would be laughing at your idiocy of adopting the failed policies that murdered millions by state actions direct and indirect and sit there wondering why its resulting in deaths of people that will increase.

    its inane… but its predicted each time.. and fails every time..
    now we have to live with that damage, and pretend that wasnt it so we get to do more

  2. FredTerracinaI greatly

    You have gone a great way in explaining why patent care is being hindered by the unconscionablyhigh costs of pharmaceuticals. Another way patients are hindered in obtaining quality care is because of the shortage of physicians in regards to geography and specialty. Two factors are involved in this maldistribution of physician.

    One is the diminition of the idea of whatt was called the “Social Contract” inculcated in our college years. This will never be perfect for physicians are no less susceptible to self interestfaults than any other professuion, ie they are human beings. The medical profession can help though by emphasising the importance and duties of a physian in regards to the ” social contract and our Hippocratic Oath.

    The maldistribution problems are exacerbated by the huge debts incurred during college and residencies. Again there will always be some who only act in their self perceived intest but a system to forgive orsubstantially reduce the debt based on service would go a long way towards increasing the time each health care professional can give to all of their patients.

    I look forward to your incisive thoughts and admire your conscietiousness.

  3. Artfldgr

    Your post to comments on the NYT times article was partially spot on. but note, the more they make socialism and state intervention the norm, the more this will happen. it happened in russia, and still is a problem there, it happened in venezuela. Rationing and socialsm are cojoined twins as the result is always the same -including blaming companies for not going bankrupt and out of business for the cause… (chavez said similar when the companies stopped selling below market and stopped making things and he said it was a conspiracy)

    the fixes require more money. take the registry idea.. lets take the profit from the company to make a registry with employees, servers, lines, software licenses, rent for space, insurance, liability insurance, and more… all to coordinate the rationing caused by not wanting to pay the company the money… hows that working as a fix..

    my family came from the workers paradise… this is how it was… they even tried assembly line surgery… where you put a patient on a conveyor belt for eye surgery… the ny times hailed it as a great thing… (would you like that? think i love lucy making chockolates and doing so with your eyes as someone speeds up the belt 3% to get more patients through cheaper)

    in the west people got twenty brands of toilet paper, in the east where the state improved things they waited 20 hours for paper that was akin to sand paper comparatively.

    in the west prior to our socialist movements and controls, and reduction of prices by spending the profits on entities that are to lower prices (how do you lower prices by creating a HMO who makes billions in between docs and patients? restrict care to patients to make the money to lower costs to patients. the ACA takes that farther)

    we now have death panels, but since they werent the fantasized boards of George Banart Shaw:

    You must all know half a dozen people at least who are no use in this world, who are more trouble than they are worth. Just put them there and say Sir, or Madam, now will you be kind enough to justify your existence? If you can’t justify your existence, if you’re not pulling your weight in the social boat, if you’re not producing as much as you consume or perhaps a little more, then, clearly, we cannot use the organisations of our society for the purpose of keeping you alive, because your life does not benefit us and it can’t be of very much use to yourself –Shaw

    if we could see that it was not death panels that would impose rationing, but it was necessity of the lack that would cause death panels, maybe accepting Grubers and other statists ideas of forcing the world to fit their megalomaniacle designs on us, was a bad idea..

    P.S. I work in medical research, research computing… and i have not had a raise for 11 years… all the raises go to management.. they screw us and now are seeking h1b visas to replace professors, doctors, and programmers under different visas as well that are not counted… so in essence, because i came here, and they lied as they want to do to patients now, my wife from indonesia cant have a family, we will never own a home, and we will soon be bankrupt and i just got exceeds expectations on my reviews again.. while watching them try to hire a visa person for 50,000 more than i make for a similar job… the state has broken the best medical system mankind ever had or now probably will have… but dont worry, just as in soviet russia, the politburo and supreme soviet do not get rationed, only the cattle that voted for them to rework things at the end of a gun get that!

  4. Rachel Wiener

    I just happened upon your blog in the comments section of The New York Times on the article regarding the shortages of various drugs. Your blog article is very informative to a novice like myself. Something needs to be done to contain the costs. I understand that the drug companies need funds for research and development, but at the expense of people’s health and lives is really unconscionable. Thanks for an easily understandable article.

  5. Russell Ranson, Jr.

    John, thanks for writing on this so quickly and thoroughly. I look forward to studying your post and reading the many apparently great links. Also look forward to your next post.