"My sense is that some of these big drug companies are saying that the heats off now. Theyre saying that Congress didnt pass a health care bill last session; theyve got a lot of new allies in the Congress, and they can get away with more than they could have before."
The speaker was Democratic Representative Ron Wyden, a longtime critic of pharmaceutical companies. The occasion was the release of a Families USA report, "Worthless Promises: Drug Companies Keep Boosting Prices."
Families USA is among those lobbying groups which are still licking their wounds from Congresss refusal to enact President Clintons national health care plan. The promises it claims were broken were those made in 1993 of 17 companies, which represent about two-thirds of the pharmaceutical industry. The companies promised to hold prices overall to rates at or below that of the consumer price index.
Profiteering drug companies make convenient villains, precisely because they provide such valuable products. Demonizing them can help provide a basis for expanding government health regulation. But here, as is so often the case, the allegations dont match reality.
Sen. Ron Wyden, demagogue-Oregon
One problem with the comparison is that drug price hikes almost always come in January. When Families said "from 1993 to 1994," it really meant, as indicated by a tiny note on its chart, January 1, 1994 compared to January 1, 1993.
The drug companies made their promise in 1993, meaning the price hikes mentioned in the Families report had already been implemented at the time the promise was made. By cutting off their calculations when they did — 14 months ago — Families USA threw down the checkered flag before the drug companies had a chance to start their engines.
But leave that aside and lets look at the basic question. Have drug companies hikes recently been out of line with the consumer price index?
Unfortunately, the "top 20" methodology cant tell us. Top 20 is fine for rating sports teams or video rentals, but in this context it just doesnt mean much. For example, for all we know the top ten drugs account for 100 times more sales than the next ten. Its a rating system thats not so much unfair to the pharmaceutical industry as it is unfair to anybody simply trying to figure out whats going on.
What is grossly unfair to the drug companies is Families USAs use of what are called "average wholesale prices," or AWP.
With most products, such as food, wholesale prices are the prices the store pays. The store then marks them up and sells it to consumers at retail.
But it doesnt work that way with drugs. Indeed, the joke in the pharmaceutical industry is that AWP stands for "aint whats paid." AWP prices "are a fiction" says Dr. Joel Hay, head of the Department of Pharmaceutical Economics at the University of Southern California, Los Angeles. "HMOs pay less, Medicaid pays less, drug store chains pay less, hospital chains pay less, large managed care providers pay less. And the discount can be enormous. Sometimes its greater than 50 percent off list price."
The second part of the problem with using the average wholesale prices, according to Ernst Berndt, professor at Sloan School of Management at MIT, is the growing role played by generic drugs in the drug shoppers budget.
He notes industry studies showing that generic prices are falling at a rate of five to ten percent per year. "For example," he says, "a product like Tagamet [an ulcer medication] became generic in mid-May and is being produced by many major manufacturers and now sells at half the price it used to. My understanding is Families conveniently excluded this."
It did. Indeed, five of Families USAs "top 20" drugs are now available generically. But the group just assumed that sad little old folks like the ones its report tells about are going to be so loyal to brand names that they ignore the generics. The report put little marks next to the drugs indicating that they were available generically, but omitted this from its calculations.
Neglecting the generic aspect is all the more misleading in that, as Hay points out, when a company loses its patent and its drug can now be produced generically by other companies (or by that companys own subsidiary), it often actually jacks the price up, knowing that it cannot possibly now compete on price basis. Henceforth it will make all its money on the basis of brand loyalty.
How can this be, when patent laws give companies exclusive, if temporary, rights to market their drugs? Says Hay, "I guarantee you its a highly competitive market, and the HMOs, the chain stores, and other buyers are making enormous efforts to get the companies to increase the discounts."
These are the people in competition for your dollar. Think twice before turning their job over to various schemes proffered by "were-on-you-side" lobbyists and politicians.
Read Michael Fumentos additional work on economics.