High cost of healthcare: Big Pharma is the elephant in the room

pharmaceutical costs healthcare

Last week I wrote a post about the myriad causes of the climbing costs of healthcare in the US. This week we’re going to talk about the elephant in the room regarding rising healthcare costs: Big Pharma.

A history lesson

Let’s talk about one example of pharmaceutical greed and corruption to start with. The drug information insert in OxyContin, approved by the FDA in 1996, listed OxyContin as a drug with low addiction properties. Keep in mind this insert went through multiple approval levels within the FDA and the government decided this information was accurate and reasonable to share with the public. Questions such as ‘low addictive properties compared to what?’ seemingly went unasked and the fact that OxyContin is chemically nearly indistinguishable from heroin wasn’t printed in this drug insert.

Purdue Pharmaceuticals, which produces OxyContin, created websites such as PartnersAgainstPain.com and aired commercials stating how safe this drug was and how under treated pain was in the US. They sponsored peer reviewed journal articles regarding the effective and non-addictive properties of OxyContin. Sales representatives aggressively sold concepts to physicians regarding how safe this drug was and how much their patients needed appropriate pain control, even for minor aches and injuries.

In 2000 CMS shared that pain was under treated and pushed hospitals to use paid as another vital sign, like heart and respiratory rates. No matter that pain is subjective and vital signs are objective things that can be measured. Hospitals were rated in quality based on how effectively they treated pain – meaning how quickly and aggressively they prescribed opioids. It is my personal opinion that anyone who believes Big Pharma didn’t have a significant hand in that decision by CMS is very naïve.

During the late 1990s there were terms such as ‘pseudo addicted’ to describe the physical dependence people who used this drug suffered. This is a made up term which means nothing but cloaked the fact that this was a highly addictive drug.

This push by big pharma to prescribe this drug led to huge profits as insurance companies paid claims submitted to them by physicians and pharmaceutical companies. People in Purdue made money, tens of thousands of people became addicted or died from opioids, and costs for unnecessary care and prescriptions started to climb. Some physicians started pill mills as they realized how easy it was to make hundreds of thousands, even millions, of dollars in prescribing OxyContin.

Keep in mind we knew opioids were addictive at this time because we had already faced two opioid addiction epidemics in the US; one had occurred post Vietnam which wasn’t in the distant past during this time.

Pharma as venture capital firms

In 2001 Times magazine ran a front-page story regarding the opioid epidemic in the US. Since that article there has been public discussion regarding the amorality of pharmaceutical companies, their sales tactics, their lobbying, and the incredible amounts of profit they make. Regardless of all these conversations, there is incredibly limited regulation on pharmaceutical companies.

On average most large pharmaceutical companies spend about 15% of their net profit on research and development. In a previous post on this website there was discussion that healthcare is incentivized to prolong diseases, not cure them. Pharmaceutical companies are absolutely incentivized to do just that due to their being managed like a venture capital funds, not like public service providers.

Pharmaceutical companies can only develop so many new drugs annually. There is not infinite growth potential; eventually the growth in the pharma industry must plateau. Pharma in 2020 is starting to see a decline in profit margins. The only mechanism available to them to continue to make more money is to continue to increase the costs of drugs.

While pharmaceutical company CEOs become millionaires, new treatments and novel drugs are not designed or tested, and costs are shifted to the public.

Cost shifting

Here is an example: A drug which has been around for decades costs about a dollar per pill to make. A pharmaceutical company sells that drug for about six dollars per pill and makes a nice little profit. A bigger pharmaceutical company buys that smaller company, and therefore the rights to make that drug. The larger company changes the price of that drug to over $2000 per pill. People who have relied on that life saving medication still must take it. If they don’t, they will die.

So the pharmaceutical company has total control over that population and the cost of the drug. They control the supply and the demand cannot shift elsewhere. Here is a fundamental truth about these kinds of drugs, though: the demand is a fixed variable. The percentage of the population who need this medication is not going to the change; that is a constant. If the demand is fixed, how does a company continue to increase profits on that drug? The only answer: increase the price.

Patients cannot pay for this out of pocket, of course. Their insurance companies pick up the tab. The cost for these outrageous price gouging practices is then transferred to other people who have insurance through that company by raising premiums and deductibles.

A person who is physically well and utilizes very little medical services pay may thousands of dollars a year in health insurance. Their employers are paying significantly more than that annually. These well people and their employers are paying tens of thousands of dollars per year in order to cover costs being incurred by other patients. That is cost shifting.

Costs must be shifted in these circumstances as people who require these lifesaving medications cannot be expected to pay out of pocket for them. This shifting will always be somewhat necessary in healthcare insurance but has become extreme partly because drug prices are utterly unregulated in the US.

A call to regulators

Limiting lobbying, eliminating the ability of pharmaceutical companies to advertise drugs on television and radio, and getting big pharma out of the pockets of CMS and the FDA should be the first step to healthcare cost containment in the US. Those are reasonable regulations. The US is the only country to allow pharmaceutical companies to operate in such a way and this allowance is doing the US no favors.

If we are to start reining in the costs of healthcare in the US the first place to start is in pharmaceutical companies. Mark-ups should absolutely be limited. Profits per pill should be limited. While all companies are entitled to make a profit, it cannot be at the cost of public health, access to care, and cost containment. Healthcare providers, hospitals, and makers of drugs and medical equipment must be held to a higher standard than all other businesses. The healthcare industry, and all the supporting companies and industries, are public services. They should conduct themselves as such. If they will not police themselves then regulators must do so on their behalf.

Post Script: There are still ongoing court cases against Purdue Pharma related to opioid abuse, even after a decade of evidence suggesting they knew they were killing people and significantly contributing to addiction solely for the sake of profits.

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