Every politician dreads the moment when the special interest group which paid for their campaign is in direct opposition to the well-being of the citizens they were elected to represent. Such is the case with Senator Burr, Senator Dole, and the pharmaceutical industry. Last week the Senate blocked a bill which would have allowed the government to negotiate lower drug prices on the 2003 Medicare Drug Bill. The vote was 55 “yes” (49 Democrats, 6 Republicans) and 42 “no” (42 Repubs, 1 Dem). 60 “yes” votes were required to pass the bill. Senators Burr and Dole voted no.
This is a long post but please bear with me. There are some fun facts on the pharmaceutical industry that you may not be aware of. Also, this Senate vote is a perfect illustration of what is wrong with our political system in general and our North Carolina senators in particular. It seems that on most votes our senators favor corporate interests over the interest of North Carolina residents.
That Senator Burr and Senator Dole are indebted to the pharmaceutical industry is not in dispute. Both senators have accepted significant contributions from the pharmaceutical industry. Richard Burr, who received more money from drug companies than any congressional candidate in 2004, has a career total of $585,149. Elizabeth Dole’s career total is “only” $208,672. However, most of that money was when she was elected in 2002 and ranked 4th on the pharmaceutical industry contribution list. Since she is running for re-election in 2008, I would be shocked if she is not in the top three this election cycle.
For North Carolina citizens, the 2003 version of the Medicare Drug Bill short-changes them in two ways. First, it is fiscally irresponsible. This is a I.2 trillion dollar entitlement, with drug company profits estimated at 139 billion dollars. As taxpayers, we are responsible for paying all of the bills, but have no ability to control any of the costs. Why not let the efficiencies of the free-market work for the taxpayers, for once? Secondly, it is morally irresponsible. Partly to maintain drug company profits, a gap in coverage (the “doughnut hole”) is required. Unlike other forms of insurance, Medicare Part D has a bizarre gap in coverage between $2,250 and $5,100 of drug expenses. This makes no medical sense since it effectively penalizes the sickest patients; usually those with chronic illness who can least afford an interruption in their medication. Allowing the government to negotiate drug prices would signal a shift of power from corporate interests back to the people, where it belongs.
Does the pharmaceutical industry need, or deserve, preferential treatment? I would argue no. Here’s why.
Profits: The pharmaceutical industry is the corporate kingpin in generating high profit margins, and has been for 25 years. In 2003 the ten pharmaceutical companies listed in the Fortune 500 had greater profits than the other 490 companies combined! Historically, the pharmaceutical industry averages about 15% profit margin, which is 3 to 4 times the average company on the Fortune 500 list. Pity poor Wal-Mart, which limps along at a 3.6% profit margin. Even Exxon, with their recent record breaking quarterly profit of 10 billion dollars, only had an 11% profit margin.
Clearly the pharmaceutical industry, awash in profits, does not need further political protection from free-market forces. So, let me anticipate the industry’s rebuttal on why they deserve continued corporate welfare, and shatter some myths along the way.
Pharmaceutical companies need high profits because of high research and development costs. Finding new drugs is a high-risk business. It’s the industry’s dirty little secret that they spend twice as much on marketing than they do on research. Who can forget the vivid imagery in the Levitra commercial of the “football” passing through the “tire swing?” Why don’t drug companies slash their marketing expenses and triple their research budgets? Because the drug companies are more about the merchandising of brand-names than they are about being research institutions. As to high risk, I would only say that an industry that historically and consistently outperforms every sector of our economy over the past 25 years is a pretty good bet.
Protect the drug companies, or no more miracle medications. Well, no doubt we need innovative break-through medications. Unfortunately, the pharmaceutical industry hasn’t been discovering many of them lately. Maybe that’s because they spend most of their money and energy on developing “me-too” drugs that provide marginal improvement on existing (and cheaper) medications. If you think we need a 6th medicine for indigestion ($4 per pill) or a 4th drug for erectile dysfunction ($11 per pill), than you should be happy with the current state of pharmaceutical research. Frankly, while Congress is at it they ought to require that new drugs outperform existing medications, rather than placebo’s, before FDA approval. Maybe then we would see some real progress in treatment or prevention of cancer, diabetes, and heart disease.
Besides, advancements in basic science are the foundation by which truly innovative drugs are discovered. These discoveries are far more likely to occur in government institutions (National Institute of Health or National Cancer Institute) or academic institutions (often funded by taxpayers through federal grants). Taxpayers pay twice: they fund the basic research and then pay exorbitant prices when the drugs are approved.
Price negotiation is the first step towards “socialized medicine.” Nonsense. This is simply about letting your tax dollars compete in the free market against the Medicare Part D plans which currently exist. Why shouldn’t taxpayers be able to utilize the efficiencies of the free market as corporations do?
Price negotiation is price “fixing.” Again, nonsense. This is about wanting the government to be able to negotiate drug prices, not mandate price controls. However, the “price-fixing” argument should bring howls of protest from every physician or hospital employee. Medicare and Medicaid have “fixed” prices on physician services for years. And the Medicare reimbursement is usually “fixed” at a rate that is 20 to 50% lower than what the private insurance companies have decided is “usual and customary.”
The government shouldn’t decide which medications I can have. Too late. Every private insurance plan that offers prescription coverage has a “formulary” with restrictions on which medications are available. Believe me when I tell you that when Blue Cross or Cigna creates a preferred drug list, it has everything to do with their profitability and little to do with your health needs. Moreover, the government already has in place a very satisfactory and cost efficient formulary. It’s called the Veteran’s Administration (VA) Formulary. If it’s good enough for our veterans than it’s a reasonable choice for the rest of us, too.
American consumers pay the highest prices because they must subsidize the rest of the world where price-controls are in place. This is not only a lie, but a very revealing one. For years, drug makers have told the IRS that their profits come mainly from international sales. As the head of Pfizer’s US operations proudly told me, “Pfizer is profitable in every region we operate.” Clearly, international pharmaceutical sales are robust. In addition, their overseas markets have provided a tax shelter. Only when enticed by a tax holiday in 2005, which allowed them to “repatriate” their profits at a 5.25% tax rate, rather than the standard 35%, would the drug companies return 75 billion in profits from their international tax havens. This type of (apparently legal) aggressive tax sheltering is the drug company version of the Cayman Islands mailbox “headquarters.” The pharmaceutical industry wants the constitutional and legal protections of conducting business in the United States; they just don’t want to pay their fair share of taxes. This is profiteering, not patriotism.
Once again Senator Burr and Senator Dole have chosen to ignore the needs of their constituents because they are indebted to corporate interests. And this time they said to hell with the free market and fiscal responsibility, too. Why do we elect these people?