Big Pharma Likes The Free Market
PhRMA (Pharmaceutical Research and Manufacturers of America), the biggest pharmaceutical lobbying group in the US, is preparing to launch an ad campaign to show Americans how good our free market health care system is. They’re worried that Obama’s plan to allow the federal government (via Medicare and Medicaid) to negotiate lower drug prices will cut into their profits.
I recognize that drug companies produce some vital medications. My father’s autoimmune disease and resulting kidney failure would no doubt have killed him by now without drugs created by “big pharma.” For that, my family is grateful. And I know that there are lots of other families in similar situations, with a loved one still alive thanks to research and development done by pharmaceutical companies. But there are plenty of questionable practices in the pharmaceutical industry (as there are in just about any for-profit industry).
What it really boils down to is that it doesn’t matter how great the drugs are if people can’t afford them. When seniors with confusing Medicare D plans are struggling to pay for their out of pocket expenses for their drugs, something is broken. And allowing Medicare to negotiate prices is a plausible way of curtailing the upward spiral in drug pricing. Here in Colorado we’ve seen more and more health insurance carriers increase copays for drugs, add prescription deductibles, or cover only generic drugs in an effort to keep prescription costs under control. And unless something changes in the way drugs are priced, I doubt that health insurance carriers will be likely to start increasing coverage anytime soon.
People (probably in the pharmaceutical industry) will no doubt be crying foul, and claiming that with an estimated $10 - $30 billion cut in revenue if Medicare gets to negotiate lower prices, pharmaceutical research and development will suffer. But let’s look at the numbers. Health insurance carriers are often criticized for the profits they earn. But when we look at the five Fortune 500 health insurance companies (Wellpoint, United, Aetna, Humana, and Cigna) the profits as a percentage of revenue are between 2.3% and 7%. They’re not losing money, but they’re not bringing down the house either. Now let’s consider the pharmaceutical industry. There are 12 companies in the Fortune 500 list, and only two (Abbott and Bristol-Myers Squibb) have profits below 10% of their revenue. Phizer’s 2007 profit was nearly 37% of their revenues. Those are some pretty big numbers. They even make the oil and gas industry profit margins seem small. So let’s not feel too sorry for big pharma. I think they’ll be ok, even if Medicare gets to negotiate drug prices.
What free market? If by “free,” you mean free from government mandates and prohibitions, which is what most people mean. (That is, if they care to consider that the word “free” actually means something when placed in front of “market”.) To a significant extent the U.S. already has socialized medicine, as I write here.
In terms of prescription drugs, the FDA has a default ban on them until it lifts the ban, which it calls “approval.” That’s not a free market. From an earlier blog post, “…the cost of getting one new drug approved [by the FDA] was $802 million in 2000 U.S. dollars, or $1.02 billion in 2008 dollars.”
@Brian T. Schwartz: Those are good points. Thanks for the thoughtful reply.
I see from a lot of your writing that you compare things people can’t live without when unfortunate and unpredictable things happen to them (health insurance and life saving medication) to things like steel (Hank Reardon in Atlas Shrugged).
So lets say you have it your way… the government stays completely out of the health insurance biz, “let the consumer take their money elsewhere if they don’t like the service they’re getting.” What happens when I get cancer and the insurance company (that I’ve been paying premiums to for years) makes the business decision to not pay on the basis that even though they are contractually obligated, they have the expensive legal staff to defeat somebody with not very much money and busy battling cancer?
I don’t like the way they do business and don’t have the resources to battle them in court while also battling cancer. Which health insurance company should I switch to that will cover my now pre-existing condition of cancer?
From what you write and how you quote Rand, it sounds like you’re atleast solidly in the Rand school of libertarianism (vs. Rothbard)? So atleast you still agree there should be a government based court system in this example?
Please no links back to a blog post on your site. Can you explain your positions in the comments on this page so the discussion is easier to follow for the readers?
IMHO, Big Pharma could improve profit margins significantly by ceasing direct-to-consumer advertising and paying researchers under the table to conduct dubious studies for marketing purposes, among other things.
Brian makes some valid points WRT lacking a free market. Why else would Big Pharma lobby FDA to prevent reimportation of drugs produced in the US packaged for/sold in foreign markets, not to mention multiple cases of preventing generic competition for soon-to-expire patents, Cephalon’s Provigil/Nuvigil debacle being the latest.