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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 … Next Page »

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Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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