Why Drug Prices are so High: GAO & Other Sources

Posted by D. Cupples |  Yesterday, the GAO released a report on rising retail drug prices based on samples prices in New York and Pennsylvania for commonly used drugs (report # 07-1201R). Prices increased an average of 4.3% per year from Jan. 2004 - Jan. 2007, out-pacing inflation by about 43%.

From Jan. 2004 - Jan. 2007, brand name drug prices went up 21.2% -- while generic drug prices went down 12.8%. Are generics cheaper to make?  That seems unlikely, given that they are chemically equivalent to brand-name counterparts.

Have costs gone up?  Not all of them.  From 2005 - 2006, for example, drug giants Pfizer, Merck and Eli Lily cut costs by laying off thousands of workers (NY Times and Sarasota Herald Tribune).  If labor costs went down, why did some drug prices rise faster than inflation?

Pharma TV commercials imply that concerned drug makers devote overwhelming amounts of money to developing new, life-saving drugs.  That claim seems grossly exaggerated.... 

 

Consider the money going toward research and development versus toward profits, marketing and administrative costs.  The table below contains examples.  I chose the companies' 2004 annual reports, because that was the first full year of drug pricing examined in the GAO's study (annual SEC reports linked at the end of this post).

	R&D	Profits, Marketing, Admin.
Abbott Labs	. . $2 billion	. . $8 billion
Bristol-Myers	. . $2.6 billion	. . $8.8 billion
Eli-Lilly	. . $3 billion	. . $6.1 billion
Merck	. . $4 billion	. . $13 billion
Pfizer	. . $8.8 billion	. . $28 billion

  (Numbers were rounded off.)

"R&D" refers to research and development.

"Profits" refers to money left over after all costs, including materials, advertising and executive-pay.

"Marketing" refers to ads, free drug samples, and perhaps salespeople.

"Admin" refers to administrative costs, including salaries, perks and other non-production-related costs.

As the table indicates, those companies devoted two to four times more money to profits, marketing, and administrative costs than to R&D. Consider that next time you see a drug company ad.

Another issue is how drug companies spend their research dollars. According to Dr. Marcia Angell, author of The Truth About the Drug Companies..., the drug industry devotes much of its R&D money not to finding new cures but to making "Me-Too" drugs (copies of existing drugs). For example, when Astrazeneca's patent on the heartburn drug Prilosec faced expiration, the company slightly altered the formula, patented it, and marketed the Me-Too version as Nexium.  Last time I checked, Prilosec sold over the counter for about $20; Nexium is prescription-only and cost 3 to 5 times more, though some doctors view the two drugs as virtually identical.

Dr. Angell also explained that much of the innovative, disease-curing research is sponsored by the National Institutes of Health (i.e., by us taxpayers). Consider the blockbuster cancer drug Taxol.

The NIH discovered Taxol in the 1960s and spent nearly half a billion dollars on research (GAO report # 03-829). The NIH gave Bristol-Myers exclusive rights to market Taxol: the deal was that Bristol-Myers was supposed to charge reasonable prices, given that we taxpayers had funded the drug's development. 

In 2001, Bristol Myers reportedly sold Taxol for about $1,700 per month -- though it cost only about $90 to manufacture a month's supply. According to the GAO, we taxpayers spent nearly $700 million on Taxol through the Medicare program from 1993-2002.

Why have drug prices been skyrocketing?  My guess is that drug makes want them to.

Related BN-Politics' Post: Contractor Fraud: Driving Up Healthcare Costs

Links to Drug Companies' FY 2004 Annual Reports:

Abbott Labs
http://www.sec.gov/Archives/edgar/data/1800/000104746905005185/a2149332z10-k.htm

Bristol-Myers Squibb
http://www.sec.gov/Archives/edgar/data/14272/000119312505041808/d10k.htm

Eli-Lilly
http://www.sec.gov/Archives/edgar/data/59478/000095013405004385/c92539exv13.htm

Merck
http://www.merck.com/finance/annualreport/ar2004/pdf/Merck_2004_AR_FinSec.pdf

Pfizer
http://www.sec.gov/Archives/edgar/data/78003/000095012305002379/y06124exv13.htm