Editorial

Demonizing the Insurance Companies While Giving the Drug Companies a Pass

In the weeks and months prior to the passage of the health-care bill, proponents of the bill portrayed the health-care crisis in the US as a battle between the greedy insurance companies and the rest of us. To be sure, some of the practices of the insurance companies have been objectionable, such as refusing to underwrite at any price people with preexisting conditions, and dropping people from coverage after they become ill. Hopefully, these practices will stop; although we should not kid ourselves into believing that mandating coverage for high-risk people will do anything but raise premiums for everyone.

I am no fan of medical insurance companies. However, it seems that the pharmaceutical industry is at least as responsible as the insurance industry for the high cost of health care. And yet, the drug companies appear to have been let off relatively easily, both rhetorically and legislatively, by the proponents of the health-care bill.

As a case in point, take Wellpoint, the large insurance company that was lambasted by nearly everyone for requesting a 39% premium hike for individual health insurance policies in California. In 2008, Wellpoint had total revenue of $61 billion, of which 84.4% was paid out in claims. Its profit for the year was $2.49 billion, or about 4% of total revenue. Last year, total profit (excluding a gain from the sale of a subsidiary) was again about 4% of revenue.

In contrast, Pfizer Inc., a large drug company, had revenues of $50 billion, with a gross profit of $41.1 billion (82.2% of sales). After subtracting factors such as administrative costs, research and development, marketing and promotion, and depreciation and amortization, net profit was $8.62 billion, or 17.2% of total revenue. AstraZeneca, another large drug company, had total revenue last year of $32.8 billion and a net profit of $7.52 billion (22.9% of total revenue).

Prescription drugs account for approximately 10% of the total cost of health care. In 2009 that would amount to approximately $250 billion of the $2.5 trillion spent. If drug companies’ net profits average around 20% of total revenues, then the pharmaceutical industry made about $50 billion last year in profits. In contrast, if the private insurance industry underwrites one-third of all health-care expenditures in the US (a reasonable estimate considering the existence of Medicare, Medicaid, self-insured large corporations, and uninsured self-pay customers), then the profits of the entire medical insurance industry would be about $30 to 35 billion. Thus, the drug companies are pocketing more of our money than the insurance companies are.

But it’s actually worse than it looks. According to one estimate, the pharmaceutical industry spends nearly one-quarter of its revenues on marketing and promotion, which includes detailing doctors, advertising in medical journals, direct-to-consumer ads on television and elsewhere, free samples, sponsoring of “educational” events for physicians, and sponsoring of phase IV clinical trials (which are designed primarily to enhance marketing campaigns).¹ Thus, built into the high cost of prescription drugs is not only a very high profit margin, but also about $60 billion a year earmarked for persuading doctors and the general public that we should be taking the drugs.

The the drug industry’s obsession with profits is underscored by two recent examples of bad behavior. First, a small drug company managed to obtain a use patent from the Food and Drug Administration for colchicine, an inexpensive drug that has been around for many decades. The company obtained the use patent by doing some research on colchicine, which had already been well studied as a treatment for gout, familial Mediterranean fever, cirrhosis of the liver, and some other conditions. After being awarded the use patent, the company raised the price 50-fold (from 10 cents a pill to $5 a pill) and threatened to sue any other company that continued to manufacture and sell the drug. Second, it was recently revealed that companies whose patents for blockbuster drugs have expired have been bribing generic-drug manufacturers to delay the marketing of the generic products. These payoffs have been costing consumers about $3.5 billion per year.² Senator Herb Kohl (D-WI) has introduced a bill that would prohibit this practice, but no such prohibition was included in the 2,700-page health-care bill.

Moreover, notably absent from the bill was a provision that would allow the reimportation of drugs from Canada, where many medications cost substantially less than they do in the US. The pharmaceutical industry could still make a reasonable profit if it sold its drugs in the US at Canadian prices. Of course, the industry would have to tighten its belt by not bombarding us with so many drug ads, and not spending so much money wining and dining the doctors.

Alan R. Gaby, MD

Notes

1. Gagnon MA, Lexchin J. The cost of pushing pills: a new estimate of pharmaceutical promotion expenditures in the United States. PLoS Med. 2008 Jan 3;5(1):e1.

2. Pay for delay. JAMA. 2010;303:929.