If you are a regular reader of politically oriented commentaries on the pharmaceutical industry then you are familiar with, and perhaps even subscribe to, what I call “the Big Five”—myths about this industry that routinely poison debates, obscure genuine problems, and distort policy recommendations on health care. These myths have been all over the public arena again recently, and it’s time to confront them systematically.
Myth #1 Pharmaceutical companies exaggerate the costs of developing new medicines to justify high prices. In fact: The research and development (R&D) expenditures of this industry are staggering—and since they are matters of public record there is no way and no need to exaggerate them.
In the U.S., the member companies of the Pharmaceutical Research and Manufacturers of America (PhRMA) alone spent more than $51 billion on R&D in 2014. That total is based on the same audited financial statements that appear in our annual financial reports to shareholders. In my own company’s case our R&D spending last year was $4.7 billion. In fact, the pharmaceutical industry accounts for 21 percent of all R&D spending by all U.S. businesses—creating and sustaining hundreds of thousands of jobs while serving as a the engine of biomedical progress for the entire world. This level of investment is what is required today to bring forth new medicines.
Myth #2 Industry does not develop most new medicines; they come from government and university laboratories. In fact: Government and academic research contribute in essential ways to biomedical progress—but the complex and expensive process of turning insights on diseases and promising leads into approved treatments for patients occurs almost entirely in private industry.
A recent academic analysis helps to tease out the key distinctions. Looking at the patent applications of all of the drugs approved by the U.S. Food and Drug Administration (FDA) from 1988 to 2005, the study found that nearly half of the new drugs cited either a public-sector patent or a government publication in their patent applications—demonstrating that publically funded research often contributes indirectly to the discovery and development of new medicines. But fully 91 percent of the approved drugs themselves were patented in the private sector—demonstrating that they were substantially discovered and developed by private firms.
Myth #3 Prescription medicines are the main driver of health-care cost increases. In fact: Expenditures on prescription medicines have been a stable component of health-care spending over time and often contribute to overall cost savings rather than to increases.
Only about 10 cents of every U.S. health-care dollar is spent on retail prescription medicines—which is the same share that was spent on prescriptions in 1960. While the overall use of medicines to treat many diseases has increased dramatically in that same period of time—and average life expectancy at birth in the U.S. has increased by more than nine years—the share of spending accounted for by prescription medicines is the same as it was 55 years ago. That comparison makes pretty clear that medicines are delivering value to the system rather than driving unsustainable cost increases.
A study published in the journal Health Affairs provides a good example of how this has worked. The researchers compared total medical expenditures for patients with four major diseases who faithfully used the medicines prescribed by their doctors versus those who did not. The “adherent” patients incurred somewhat higher prescription-drug costs, of course, but savings in their overall health-care expenses exceeded the extra drug costs by wide margins.
The fact that nearly nine out of 10 U.S. prescriptions are filled with generic medicines (which originated in the innovator sector, by the way) also has a lot to do with the overall stability of drug costs. The impact of generics has been especially positive for senior citizens and the programs that insure them. Looking at the top 10 prescription classes by volume used by Medicare Part D beneficiaries, the average daily cost of these therapies declined from $1.50 in 2006 to well under a dollar in 2013, and is headed much lower still.
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Myth #4 Public and private health-care payers must accept and pay whatever prices drug companies charge for medicines. In fact: The free market actually works in prescription medicines—and private and public payers alike have powerful levers to control drug expenses.
For example, health insurance companies in the U.S.—including those that administer the federal government’s Medicare plans—can control spending on branded medicines by establishing “formularies” of approved treatments, requiring prior authorization of prescriptions, and giving incentives to doctors to prescribe generic medicines. Many hospitals and the Pharmacy Benefit Management (PBM) companies that purchase medicines have significant market share and therefore significant leverage over the prices paid for medicines. As in almost every other industry, our list prices (the prices that sometimes make disapproving headlines) seldom reflect the prices obtained by large buyers.
Myth #5 Government-controlled pricing of medicines in other countries explains their lower health-care costs. In fact: The cost of medicines explains only a small fraction of the differences in health-care spending between the U.S. and systems where socialized medicine prevails.
A 2012 analysis of Organization for Economic Cooperation and Development (OECD) data shows that while the U.S. spends nearly twice as much per-capita on health care as Canada and Germany, for example, medicines account for only 6 percent of the difference in total health care spending between the U.S. and Canada, and only 9 percent between the U.S. and Germany. In other words, if we equalized drug prices with those countries tomorrow, we would further reduce the economic incentives for new-drug innovation—but we would do essentially nothing to lower the cost of health care.
As easy as it might seem to blame a single industry for the myriad challenges of affording health care in an aging population, the myth-making is counter-productive and dangerous. It perpetuates innovation-killing ideas such as direct Medicare “negotiation” of prescription-medicine prices (tantamount to price controls); forced rebates, and shorter periods of exclusivity for biopharmaceutical intellectual property. And it keeps us from tackling problems that genuinely harm health-care consumers—such as perverse insurance structures under which patients pay substantially more out of their own pockets for medicines than for doctor visits or hospital stays.
No one should fear the truth when it comes to our shared goals of improving our health-care system, continuing medical progress, and making life better for patients.
