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Pharma Plays The “Value” Card: Drug Spending Then And Now


Xconomy National — 

Dr. John Lechleiter, the CEO of Eli Lilly, recently attempted to debunk five “Big Myths” about Big Pharma. As he wrote, “Only about 10 cents of every U.S. healthcare 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.”

This comparison is anything but clear-cut to me. The word value is being trotted out once again to justify increasingly high prices on both existing and new medicines. Lechleiter equates the fact that the same percentage of healthcare dollars was spent on drugs in 1960 and 2015 as being proof that medicines are consistently delivering value. It’s as if this ten percent number was an immutable constant, like Avogadro’s number or the speed of light in a vacuum. In a separate article, Robert Ingram, the former CEO and chairman of GlaxoWellcome (now GlaxoSmithKline), makes the even bolder claim that this ten percent number “has not changed since 1960 and is projected to remain the same for the next decade.”

Lechleiter is cherry picking numbers here, and Ingram is simply wrong. There is no a priori reason why these two numbers should be tightly linked, and in many years these numbers have diverged significantly. The percentage of healthcare dollars spent on prescriptions dropped from 9.8 percent in 1960 to 7.3 percent in 1970, and then sank further down to 4.7 percent in 1980. This percentage then began to rise again, going to 5.6 percent in 1990, to 8.8 percent in 2000, and to 10.2 percent in 2009 (data compiled by the Centers for Medicare and Medicaid Services).

Does this mean that drugs sold in 1960 were producing only half as much value as they did in 1980, since they accounted for a much higher percentage (9.8 percent vs. 4.7 percent) of healthcare dollars? Are drugs today also producing half as much value as they did in 1980? There are many ways to look at these numbers, and picking two particular years can result in misleading conclusions.

The percentage of healthcare costs that comprises prescription medicines depends on two different numbers. One is the cost of drugs themselves, but the other is the total cost of all of the remaining items that make up our healthcare system (plus the drugs). For this reason, it’s important to keep in mind what’s been happening historically with these non-prescription costs, since these account for the lion’s share of all healthcare expenses.

What Was Medicine Like Back In 1960?

The U.S. healthcare system is amazingly complex and costly. A doctor plucked into our era from 1960 would be shocked at the changes that have taken place over the past 55 years. Let’s jump into the time machine, travel back to 1960, and see what healthcare was like then. We can orient ourselves by asking: What medical advances in practice today were not available to patients in the U.S. in 1960?

There were no heart, liver, lung, intestine, or allogeneic bone marrow transplants in 1960. The total number of U.S. patients given kidney transplants, bone marrow transplants from siblings, heart pacemakers, or who had coronary bypass procedures could be counted on a few hands. Kidney dialysis only became widespread in the 1960s. There were no knee, hip, or heart valve replacements, and no artificial intraocular lenses for treating cataracts. There was no laser eye surgery back then (or any type of laser surgery) as the first lasers were just being developed. There were no infant ventilators or home respirators. No in vitro fertilization procedures. Want to peer inside the human body? Try exploratory surgery, as there were no ultrasound tests and no CT, MRI, or PET scans.

The scalpel ruled back then, as there were no laparoscopic surgical procedures and no surgical robots. No scopes with miniaturized cameras at the end of them, and certainly no cameras that could be swallowed and transmit pictures as they transited your body. No proton beam therapy machines. The first defibrillators were just being introduced in hospitals (there were no portable units). Computer-controlled medical devices were still a distant dream. In 1960, many doctors in the U.S. actually made house calls, and it was not a concierge service. Surgery (with its associated hospital stays) was among the biggest contributors to healthcare expenses. And there were no electronic medical records for patients.

Given the rise of numerous complicated and expensive medical procedures and devices introduced beginning in the 1960s, one might easily expect that spending on medicines, as a percentage of the total healthcare costs, should have dropped relative to 1960. And that’s exactly what happened for a time, as the numbers above illustrate. The introduction of new medicines and medical procedures have certainly contributed to the fact—as Lechleiter points out—that people are living about nine years longer today than they did in 1960. That actually increases overall health expenditures, since expenses get paid out for an average of nine more years, and healthcare costs peak in the final years of life.

Non-Medical Innovations Also Helped Extend the Lifespan Of Americans

There are also a number of other life-saving and extending innovations (excluding healthcare) that have come into vogue since 1960 that have contributed to Americans living longer. Here are five examples:

1) The widespread use of car seat belts starting in the 1960s—first introduced as standard equipment by Volvo in 1959—certainly helped reduce the morbidity and mortality associated with car crashes.

2) Dr. Luther Terry, the Surgeon General of the U.S. Public Health Service, issued the first report on the dangers of smoking in 1964. Cigarette smoking by adults has declined steadily since that report, and the percentage of Americans who smoke today is less than half of what it was in the 1960s.

3) Fresh foods today are much more available nationwide, as are non-pesticide contaminated organic foods.

4) A much larger number of Americans are getting regular exercise, even in the midst of the growing obesity crisis, and are understanding how exercise contributes to good health.

5) Weather forecasts based on the use of satellites, and their associated warning systems, are available to help get people out of harms way from hurricanes, flooding, and tornadoes.

How did Americans get healthcare back in 1960? In general, you either had private health insurance, insurance through your job, or you paid your own way. Some received charitable care from private agencies. It’s important to remember as we compare now with then that the total number of Medicare and Medicaid patients in 1960 was zero, as these safety nets were not introduced until 1965. If you were old and poor, you likely found yourself in a very difficult place paying for healthcare. Only about half of Americans over the age of 65 had any type of health insurance in the years before Medicare started. As a study by the Social Security Administration reported in 1964, “the complex task of paying for necessary health services and providing adequate insurance for non-budgetable expenses remains beyond the economic capabilities of most aged persons.”

Even the nature of disease diagnosis and treatment has changed since 1960. This is not to say that some people weren’t afflicted with a number of infectious diseases, but there was no way to diagnose them at that time. No patients left their doctor’s offices after hearing they were infected with HIV, hepatitis B or C, SARS, MERS, or Ebola viruses.. There were no Lyme, Legionnaires’, or prion disease diagnoses. The introduction of numerous low-priced vaccines—a true triumph of the pharmaceutical industry—over the past 55 years has saved both countless lives and healthcare dollars. The Centers for Disease Control and Prevention currently recommends that children be immunized against 16 different infectious diseases. The majority of these vaccines were not available in 1960.

Pharma Operated Under a Different Set of Rules in 1960

You can get a good feel for this by getting your hands on a dusty copy of The Real Voice (1964), Richard Harris’s behind-the-scenes coverage of the Congressional pharma hearings that led to the passage in 1962 of the Kefauver-Harris Amendment to the Federal Food, Drug, and Cosmetic Act of 1938. Many of the leading drug companies worked together in the early 1960s to manufacture, cross license, and sell the exact same medicine. Park-Davis (at one time, the worlds largest drug company), for example, sold 20 of the 51 major drug products on the market, but manufactured only one of them. Drug companies often purchased raw ingredients from bulk manufacturers and then sold them to the public under variety of different trade names. Doctors would sometimes switch their patients from one branded drug to another, not realizing that they were prescribing the exact same medicine. For example, Schering, Merck, Upjohn, and Pfizer all sold prednisone under different names, but (amazingly!) for the exact same price. This same medicine could be bought from smaller drug companies for about one-fourth of that cost.

However, if a doctor prescribed a drug under a particular trade name, pharmacists by law could make no brand substitutions in most states, even if the alternative was much cheaper. Estes Kefauver noted an unusual aspect of the drug industry at the hearings, “he who orders does not buy, and he who buys does not order.” Dr. A. Dale Console, the former medical director at Squibb, testified at the hearings that the pharmaceutical industry was “unique in that it can make exploitation appear a noble purpose.” European drug companies discovered a number of useful drugs (e.g. chlorpromazine, reserpine, and tolbutamide) and licensed them to American companies, which then sold them in the U.S. at huge markups to European prices. Doctors could give you experimental medicines without bothering to tell you that fact. The FDA had no power to compel drug companies to take ineffective drugs off the market. And there was no requirement that drugs be tested in animals before they were tested in people. Times, indeed, were very different.

Landmark Legislation Changes Up the Game For Pharma

The passage in 1962 of The Kefauver-Harris Amendment introduced a number of substantial changes to the way drugs were developed and sold. I’ve previously written about the importance of this legislation, which included having to actually demonstrate proof of drug efficacy, the need to disclose side effects in advertising, and the requirement to report adverse drug reactions to the FDA. One can readily imagine that this legislation must have driven up the cost of drug development and marketing significantly..

Lechleiter correctly points out that things other than prescription drug prices (such as hospitalization, physician, and insurance payments) make up the largest share of healthcare costs. One has to wonder, however, if drug pricing has been “set” by the industry to reflect a near constant percentage of the total spend over time—that it has been adjusted upward in recent years to maintain the ten percent ratio. Big Pharma certainly suffers from a significant image problem. According to a Kaiser Health tracking poll, a large majority of Americans blame drug companies, and not insurers, for their ever-increasing drug bills.

The Cost Of Drugs Rises At An Alarming Rate

Let’s focus on one of the most controversial topics in medicine today—the cost of cancer drugs. An analysis of newly approved cancer drugs over the last five years shows that there is no significant correlation between the cost of the medicines and how long these drugs either extend peoples’ lives, or keep their cancers from spreading. If there were no correlation between these costs and benefits, how would one justify saying that these drugs, as a class, are providing value to cancer patients?

According to a group of European cancer experts, many modern cancer drugs provide very little benefit to patients. Their analysis, which was unrelated to a drug’s cost, was recently published in Annals of Oncology. And in an unprecedented development, one of the key plenary session talks at the 2015 American Society of Clinical Oncology meeting was delivered by Dr. Leonard Saltz of Memorial Sloan Kettering Cancer Center who opined that “cancer drug prices are not related to the value of the drug.” Doctors at MSK have developed a cancer drug-pricing calculator (DrugAbacus) to help stakeholders think about what factors should play a role in determining the cost of cancer medicines. The cost of some new cancer drugs have become so prohibitively expensive that both the U.K.’s National Institute for Health and Care Excellence and its Cancer Drugs Fund have refused to pay for them. For example, AstraZeneca’s new ovarian cancer drug olaparib (marketed as Lynparza in the U.S.) was rejected and deemed too expensive, even though it’s a first-in-class drug that extends life expectancy.

High prices are not limited to cancer drugs. Price increases for some multiple sclerosis (MS) drugs climbed by an average of 30 percent per year for two decades, according to a report in the journal Neurology. Pharmaceutical economist Stephen Schondelmeyer likens drug companies to an oil cartel, acting in concert to keep prices high. Competition in most economic situations drives prices down, but in the MS market, the introduction of new drugs caused the prices of those already on the market to increase. Similar results have been seen with drugs for rheumatoid arthritis. Cheap animal-derived insulin is apparently no longer available to diabetics, having been replaced by newer genetically engineered versions. While it’s true that newer recombinant human insulins cause fewer problems in most patients, for some people the older medicine caused fewer cases of hypoglycemia. The newer insulins are also much less affordable.

The new oral hepatitis C medicines have become one of the biggest contributors to the nation’s soaring drug expenses over the past few years. Prescription drug spending by pharmacy benefit companies nearly tripled last year, with costs rising from an average of 4.2 percent per year to over 12 percent in 2014. Spending on specialty drugs (those that require special handling, administration, or monitoring) rose by an average of 38% across Medicare, Medicaid, and commercial insurance plans. As a result, only 2.3 percent of prescriptions written accounted for some 30 percent of all out-of-pocket drug costs.

Huge price increases are not limited to specialty medications. Even the cost of many generic drugs, which account for about 86 percent of all drug prescriptions, have soared compared to previous years. Another industry strategy involves buying drugs from other companies, and then jacking up the price. Healthcare spending as a percentage of gross domestic product has risen steadily since Medicare and Medicaid were created in 1965. Prescription drug spending has not been constant across the years; it spiked notably from 1993 to 2005, and my guess is the recent data (which is not yet available) would show another spike over the past few years. Global drug sales are expected to top $1.3 trillion in 2018, which is not too shabby for an industry that’s in the process of reinventing itself due to declining productivity.

I’ll save my thoughts regarding some of Lechleiter’s other dubious “myth” claims for another day. I do agree with him that “solving” the other part of the healthcare equation that represents 90 percent of the nation’s costs is more important than reducing the cost of medicines. Drug companies like to trumpet this fact to distract us from the soaring costs of their products—the classic misdirection of a talented magician. However, we shouldn’t give drug firms a free pass on rising prices just because other groups are also feeding greedily from the nation’s healthcare trough.

Quoting cherry picked or inaccurate numbers does little to inform the debate on drug pricing, and in fact damages industry’s claims regarding the true value of their products. Speaking of value, a new grant obtained by the non-profit Institute for Clinical and Economic Review is going to lead to a series of reports on the cost effectiveness of new drugs. In a similar vein, the National Comprehensive Cancer Network has developed a tool that will enable doctors to get a clearer picture of the cost vs. benefits of available cancer therapies. It will be interesting to see how these projects impact payers and drug providers, and whether they will lead to a reduction in drug costs.

Finally, let’s return to the comparison of drug costs now vs. those in 1960. You might be surprised to learn that the percentage of the U.S. population under age 65 provided with some form of private healthcare coverage has actually declined since the 1960s. Medicare and Medicaid have helped to provide coverage for many adults, but the percentage of uninsured Americans has been in the 16 to 17 percent range for the past 25 years. The Affordable Health Care Act is helping to fix this problem. Although some states are having serious financial issues paying for their health insurance markets, here in Washington state, the percentage of people who now have healthcare insurance is closing in on the theoretical maximum of 95 percent. The ACA is just one significant step forward on a long and rocky path towards providing affordable healthcare for all of our citizens. With the majority of Americans favoring government interventions to lower the price of drugs, its pretty clear that the “value proposition” has been a losing strategy for industry. Pharma’s promises that it is providing drugs of great “value” to consumers will continue to ring hollow if it can’t produce clear and convincing data to support its claims.