Wednesday, June 08, 2005

Pharmaceutical Follies, Part I

Some 20 years ago, in Jackie Mason’s original show that opened first in Los Angeles and then in New York, he told a joke that went something like this: “Every mother has a passionate desire for her son to become a doctor—and if he’s not too smart, a lawyer—but if he’s a little slow, an accountant.” Times have changed however, and if Jackie performed that same joke today, he might add the following to that list: “If he’s ethically challenged, a politician—and if he’s morally deficient, a Washington lobbyist.”

Perhaps it’s coincidence, but it would appear that all of the above professions have converged, and in the opinion of some, united, in order to promote and enhance the interests of, amongst others, the pharmaceutical companies. It can be argued that every company, and every industry, has the right, even the obligation to optimize its ability to succeed in order to benefit shareholders, employees and the economic well-being of the country. It would be naïve and unrealistic to believe that the drug companies are any better or worse than those in other businesses. However, the degree to which an industry is willing to emphasize any one aspect of its efforts, as well as the methods used, are subject to public scrutiny and open criticism. Attitudes are often reflected in surveys that measure public opinions of various industries, and recent opinion polls have demonstrated that the average American today views prescription drugs most favorably, but has a much less fa-vorable opinion of the pharmaceutical industry.

Typical is a recent survey by the Kaiser Family Foundation that reveals that 78 percent of adults believe prescription drugs make a “big difference” in people’s lives. While 90 percent think drug companies contribute significantly to society by researching and developing new drugs, 70 percent think the pharmaceutical companies that produce them are more concerned “about making profits” than developing new drugs.” Only one quarter agree that companies are more concerned with saving lives and improving quality of life than profits.

Much to the consternation of the drug companies’ national trade association, the quaintly named (more on that later) Pharmaceutical Research and Manufacturers of America (PhRMA), “customer service ratings have declined since 1997 when almost eight in ten people said that drug companies do a ‘good job’ serving customers. In 2004, for the first time, more people said drug companies generally do a ‘bad job’ (48%) than a ‘good job’ (44%) of serving customers.” Despite huge advertising expenditures by drug companies and their trade association, “most of the public does not believe that research and development drive the cost of prescription drugs. Instead, 74 percent say drug company profit margins or marketing costs are the largest contributors to the high price of prescription drugs, and 80 percent say drug costs are not justified because companies charge more for medications than necessary.” To add to PhRMA’s misery, although the vast majority of adults, (90%) have seen or heard advertisements for prescription medications, many are skeptical of the information provided. Fewer than two in ten (18%) say they can trust what pharmaceutical companies say in their ads ‘most of the time.’”

Is the public’s perception correct, that drug companies are, in essence, obsessed with profits rather that with saving lives? To be fair about it, the same question might be asked, for example, of the automobile industry, or any other for profit organization. After all, isn’t profit what capitalism is all about? What it really boils down to is a matter of balance. So let’s look at the pharmaceutical industry, and see if you can draw some conclusions.

The most relevant description of drug company profits is contained in a report based on the annual Fortune 500 list for the year 2002. In that report by Public Citizen dated June 2003, it stated, “It was no big surprise the drug industry recorded large annual profits in 2002—it simply was a continuation of a trend that has stretched over three decades. Throughout the 1970’s and 1980’s, drug companies in the Fortune 500, achieved returns on revenues that were two times greater than the median for all industries in the fortune 500. In the 1990’s the drug industry’s profitability grew about four times the median.” As a result, the number one proit producer on the fortune 500 list was the drug industry.

In the year 2002, the drug industry did even better than the above figures. A profit of 17 cents was realized for every dollar of revenue. For the average Fortune 500 company, that figure was 3.1 cents. Return on Assets was 14.7 percent versus the Fortune 500 average of 2.7 percent. While the drug industry also ranked number one for those figures, it ranked (only) second among all businesses in Return on Equity with a rate more than two and a half times the Fortune 500 median (27.6 percent compared with 10.2 percent.)

Are these returns over the past three decades justified, or are they merely the result of Americans paying the highest prescription prices in the world? If the latter, what mysterious force is employed to generate such generous results? The answer could be “K Street.”

In 2003, a TV series titled K Street ran for one season on HBO. This series was a case of fiction imitating real life, conceived in the hope it would become another West Wing—except for one major difference: the TV series was a flop, whereas the real K Street activities are so successful, they literally (in my opinion) serve as a real threat to the very core of the American democratic (not the party) system. K Street in Washington D.C. is the home of almost every major lobbying organization in the country. To provide some idea of the breadth of this increasingly dangerous impediment to popular democracy, there are some 18,000 registered lobbyists, and their influence and actions permeate and indeed, today dominate every piece of federal legislation, every political and judicial appointee, every budget decision, and every political pronouncement that is considered. In essence, (and I don’t believe I am overstating the case), in addition to the three traditional legislative, executive, and judicial branches of government, there now exists a new quasi-governmental branch titled “lobbyists.” Some day, the true nature of this undemocratic process, honed to a fine edge by the Republican majority, (only because the Democratic Party didn’t think about it first) will be revealed (perhaps herein).

Here is just one example of the insidious nature of this new threat, as described in a May 17th article in the Washington Post: “House Majority Whip Roy Blunt (R-Mo.), the man one step behind Tom DeLay (R-Tex.) in the Republican leadership, has built a political machine of his own that extends from Missouri deep into Washington’s K Street lobbying community. Blunt…has assembled an organization of whips and lobbyist vote counters that has delivered more than 50 consecutive victories for the GOP leadership in tough fights over issues including tax and trade bills, District of Columbia school choice, and tort reform—without a single defeat.

Here is the key to this revelation: “Working outside the glare of public attention, Blunt has maximized the organization’s influence by delegating authority to Washington and business and trade association lobbyists to help negotiate deals with individual house members to produce majorities on important issues.” The article continues, “Business and trade association lobbyists representing a broad range of corporate interests have used their leverage in lawmakers’ districts to persuade them to cast difficult votes for Republican budgets and against politically popular Democratic amendments.”

Lobbyists: the new fourth branch of government.

For purposes of this article however, the pharmaceutical industry has long recognized the importance of the lobbying system, employing one of the largest lobbying staffs on K Street. Recognizing the monetary facts of political life, it also makes substantial political contributions, and funds extensive issue advertising campaigns. To place its position in perspective, and to possibly explain the ability of the industry to hold the number one profit position of all industries on the Fortune 500 list, it has hired more professional lobbyists than any other interest group.

About six weeks ago, the Center For Public Integrity (a non-profit public interest group) reported, “The deep pocketed pharmaceutical and health products industry has lobbied more than 1,400 congressional bills since 1998, and spent a whopping $759 million during that period…” The report continues, “…[it] has used more professional lobbyists in the last six and a half years—almost 3,000—than any other organized interest”. In comparison, the insurance industry, second largest in terms of spending, spent $644 million in the same period and employed just over 2,000 lobbyists.

One of the largest victories of this massive lobbying effort had to be the passage of the recent Medicare, Prescription, Drug Improvement Act of 2003. The investment house, Goldman Sachs Group, estimates that the bill will increase drug industry revenues by nine percent, or $13 billion in the first full year (2006), or more than $100 billion over eight years. Lobbying by the drug industry insured that there would be no price controls, and that the federal government would not be allowed to use its enormous buying power to negotiate prices (the way the Veteran Administration currently does).

As described in that Public Integrity report, this initiative was not only successful, it must have been viewed by the industry as triumphal. However, do not dismiss the cooperation of (certainly) the politicians, arguably the accountants and the attorneys, plus as you will see in Part II, even some physicians.

If further evidence is needed of the persistent corruption inherent in the system, how about this: The chairman of the House Energy and Commerce Committee, responsible for and credited with moving the bill through Congress, was Billy Tauzin, Representative from Louisiana. When he left Congress this year, he was immediately appointed CEO and President of PhRMA. His pay (off?), $2 million a year. Equally suspicious is the fact that immediately after the Medicare bill passed, 20 former congressional executives and staffers also followed suit through the revolving door from public service to lucrative lobbying contracts with the pharmaceutical industry. Are you infuriated yet? I sure hope so.

Unlike Porky Pig of movie cartoon fame who ended many an episode with the saying, “That’s all folks,” in this case “That ain’t all folks.” Much more to come in Part II.


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