Still Hard to Swallow

By Morton Mintz
Washinton Post,
Sunday, February 11, 2001; Page B01

What's new about prescription drug pricing is the attention that it's been getting in Congress, thanks partly to bus loads of elderly Americans going to Canada and Mexico to buy their medicines at sharply lower costs. What's relatively new is direct-to-consumer television and print advertising of drugs, on which pharmaceutical manufacturers are spending billions of dollars.

What's surprisingly old is the problem of excessively high drug pricing.

In December 1959, the Senate Judiciary Committee's subcommittee on antitrust and monopoly, led by Estes Kefauver (D-Tenn.), launched an unprecedented investigation of the pharmaceutical industry. Over the ensuing 2 1/2 years, the subcommittee exposed pricing practices that repeatedly astonished the public -- but may seem all too familiar to consumers today. Some examples from the Kefauver report:

• Eli Lilly was selling 100 tablets of the antibiotic V-Cillin to pharmacies in England for $6.50 and in Australia for $10.75, while charging pharmacies in the United States $18.

• For 100 pills of the steroid prednisone, the production cost was $1.50, tops. Brand-name manufacturers were charging pharmacists $18, and the retail price was $30.

• For 100 capsules of the antibiotic tetracycline, Bristol's production cost was $1.67, its price to druggists $30.60. Consumers paid $51.

Then, as now, pharmaceutical manufacturers and their allies claimed that high prices were indispensable to fund the research that produces constant advances in drug therapy. The subcommittee found, however, that the 22 largest pharmaceutical manufacturers were spending 24 cents of every revenue dollar on promotion. This was approximately four times their spending on research.

Kefauver cited specific findings that further undermined the research rationale:

• Schering charged pharmacies $8.40 for 60 tablets of estradiol progynon, a drug for menopausal disorders. Schering bought the drug in bulk from Roussel of France, and therefore had done no research of its own on it. The 60 tablets contained 11.7 cents worth of the drug. Schering's markup was 7,079 percent.

• Rhone-Poulenc of France invented the potent tranquilizers Thorazine and Sparine, and licensed their manufacture to pharmaceutical houses in other countries that had contributed nothing to the invention of either medicine. For 50 Thorazine tablets, Rhone-Poulenc charged pharmacists in France 51 cents. The British licensee charged 77 cents, the West German licensee 94 cents; the U.S. licensee (Smith Kline & French) charged $3.03. For 50 Sparine pills, the U.S. licensee (Wyeth Laboratories) charged 94 cents in Australia but $3 in the United States.

In other words, the problems were the same we see today: Medications priced far higher than research and production costs warrant, and priced higher for Americans than for consumers elsewhere.

"What we are confronted with in the [prescription] drug industry," Kefauver concluded in the subcommittee's report, "is the existence of prices which by any test and under any standard are excessive."

The senator urged several reforms. Had they been enacted, consumers would have saved billions of dollars annually for nearly 40 years. But they were not. "Conservative congressmen, responding to industry opposition" gutted the price provisions of the Kefauver bill, Fortune magazine reported at the time.

Congress, whether controlled by Democrats or Republicans, has not troubled since the Kefauver investigation to dig deeply into why drug prices are so many times higher than production costs. Nor into the effects on drug prices of the immense cost of promotion. (In the 4 1/2 years ending last June, the industry spent a staggering $54.5 billion promoting its wares to health-care professionals and consumers, according to the health-care information company IMS Health.)

Congress has failed to investigate the industry's often-repeated claim that it costs up to $500 million, on average, to bring a new drug to market (the figure came from a 1991 paper by four economists with ties to the drug industry). Or where sensible incentives for research end and profiteering begins. Or how to nurture research for therapeutic breakthroughs and to fight great scourges like AIDS, rather than for copycat medicines aimed only at gaining market share or for another drug for baldness.

So, frozen as ever, we begin the 21st century with pricing excesses continuing unabated.

It's unrealistic to expect meaningful, structural pricing reforms from this Congress or this White House: In the 1999-2000 election cycle alone, the pharmaceutical industry made campaign contributions topping $23.4 million, funneled hundreds of millions of dollars to front groups and lobbyists, and reportedly spent more than $40 million on so-called issue ads.

More likely is that last year's canceled bill authorizing re-importation of made-in-the-USA drugs from Canada and Mexico will be repaired and reenacted. But that would treat the symptoms, not the underlying disease of monopolistic drug pricing.

If lasting, reasonable drug pricing is ever to be obtained in this country, one remedy Kefauver advocated should be put back on the table. It's compulsory licensing.

The United States is the only major economic power that allows an inventor to patent a medicine (as opposed to the methods and processes used to produce it). Kefauver's proposal was to give the inventor a three-year monopoly; after that, the company would be compelled to license the medicine to other manufacturers, who would have to pay the inventor royalties of up to 8 percent for the life of the patent. The other manufacturers would have to develop their own production methods, though, since those patents would be unaffected.

When Kefauver's proposal reached the Senate floor, most Democrats and all Republicans allied themselves with the industry in fierce opposition. Kefauver then offered a compromise: Compulsory licensing would kick in only for those drugs found by the Federal Trade Commission to have a wholesale price more than five times the cost of production. The compromise, no less ferociously opposed, also died.

Compulsory licensing could still work to encourage profit but not profiteering. But it has little appeal on Capitol Hill, where the Senate came close to passing a bill to add three years to the 20-year life of product patents on the allergy drug Claritin and seven other "blockbuster" brand-name medicines. (Schering-Plough's net earnings on Claritin in its first five years on the market were $1.3 billion.) The bill was approved last year by the Senate Judiciary Committee and only faded away in light of the election battle over Medicare drug benefits.

A Congress wanting to take minimal pro-competitive action could consider a proposal from Benjamin Gordon, staff economist of the Senate Small Business Committee's monopoly subcommittee, who worked on an inquiry into the drug industry from 1967 to 1977. Gordon suggested that government authorize the National Institutes of Health or some other federal agency to develop, test and produce -- but not sell -- new medicines. That agency's experience could provide a yardstick to compare the prices charged by private manufacturers. There is precedent for this in the Tennessee Valley Authority, created during the New Deal in part to help set standards for the pricing of electric power.

With the aid of such a yardstick, Gordon said in a recent interview, the government could identify which patent-monopoly medicines it bought for programs such as Medicaid were excessively priced. Then the government could contract with other manufacturers to produce and distribute the medicines at a more realistic price.

To do this, the government would invoke a 52-year-old law, Section 1498(a) of Title 28 in the U.S. Code, which empowers it to set the price it will pay the owner of a patent on any invention, with two qualifications: The invention must be used for governmental purposes, and a reasonable royalty must be paid to the patent owner.

That the law could achieve huge savings for the taxpayers was dramatically illustrated in a 1971 speech by monopoly subcommittee chairman Gaylord Nelson (D-Wis.). While the Veterans Administration was buying the tranquilizer meprobamate in Denmark for $1.55 per 500 tablets, he pointed out, Carter-Wallace was charging U.S. pharmacists $26 for the same quantity of meprobamate under the brand-named Miltown.

Section 1498(a) could be used to target any brand-name medicine with very low production costs but very high prices. A drug manufacturer contending that the government's price is unreasonable can sue the United States. To succeed in court, however, the owner must first establish the patent's validity. This can be extremely difficult, as Carter-Wallace found out. Seeking a generic version of Miltown, the government invoked 1498(a), and the company sued. But after a years-long battle with the Justice Department, a court ruled the patent invalid in 1972.

Only after proving validity can the manufacturer go to the next step: trying to show that the government's price is unreasonable. To do this a drug manufacturer would have to disclose production costs. Brand-name medicine manufacturers hate that idea.

A promising new idea came from Rep. Thomas H. Allen (D-Maine), who in 1999 proposed a bill that would allow pharmacies to buy drugs for Medicare beneficiaries at the best price paid by the government. As things stand, the beneficiaries pay retail prices that, on average, are nearly twice those paid by Medicaid, the VA, and big HMOs and hospitals. For example, Allen said, a prescription for Prilosec that cost an average customer $114.56 cost a large-scale buyer $59.10; the figures for Zoloft were $220.45 vs. 115.70.

The GOP-controlled House Commerce Committee held no hearings on the bill, and it died. But Allen, encouraged by having 152 co-sponsors (although none were Republicans), plans to re-introduce it.

His bill aside, the proposals for structural reform of drug prices are old because the structural problems are old. The arguments against the reforms are old, too. But why not a new Kefauver-type investigation? A subpoena-empowered congressional committee could determine where sensible incentives end and profiteering begins. What, exactly, is the case that the leaders on Capitol Hill, Republican or Democratic, might make against such an inquiry? Maybe they should tell us. Morton Mintz reported on the pharmaceutical industry for The Washington Post from 1958 to 1988. His books include "By Prescription Only" (1967) and "At Any Cost: Corporate Greed, Women, and the Dalkon Shield" (1985, out of print).

© 2001 The Washington Post Company


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