Just as President John F. Kennedy singled out the steel industry for jawboning in the early 1960s, President Clinton appears to be using the power of the presidency to win price concessions from one of today’s most profitable industries: pharmaceutical manufacturers.
The President has accused the drug industry of profiteering at the expense of sick people and termed “shocking” the skyrocketing prices of prescription medicines.
Advisers have acknowledged that Clinton has decided to make an issue of drug prices as a prelude to introducing his health care reform plan in early May. And one White House source said the President sees drug prices as “one example of why the health care system doesn’t work.”
The political firestorm generated by Clinton’s remarks is expected to result in enactment of legislation limiting--and possibly eliminating--one of the most lucrative tax breaks used by drug manufacturers. And White House officials--with enthusiastic help from Democratic members of Congress--have threatened many more Draconian measures, including mandatory price controls on prescription drugs.
Hoping to head off such actions, the industry is renewing its pledge to restrain prices voluntarily and is investing millions of dollars in a slick advertising campaign to persuade Americans that medicine is still their best health care bargain. Full page ads appeared in 40 newspapers last week at a total cost of $500,000.
The drug companies, which have long enjoyed friendly relations with politicians in Washington, have said they are stunned by the vehemence of the attacks against them. They also maintain that the Administration wants to make them scapegoats for all of the ills of the American health care system.
“We hope this is not an effort to demonize the industry--to set it up as the villain,” said Jeffrey L. Trewhitt, spokesman for the Pharmaceutical Manufacturers Assn. “But in these circumstances, you emotionally start to feel a sort of siege mentality.”
To many, the tough criticism of the pharmaceutical industry is deserved. While enjoying average annual profits of more than 15%, generous federal tax breaks, patent protection and considerable government research assistance in the development of new medicines, drug companies have raised their prices at a relentless pace over the last decade.
Prices for drugs are rising faster than any other element of the nation’s rapidly escalating medical bill, according to Sen. David Pryor (D-Ark.), a longtime critic of the drug manufacturers and a close friend of the President. Pryor sees only one reason for it: “Greed has become excessive.”
On many individual medicines, price increases far outstrip the inflation rate. Last year, for example, prices rose 18.6% for Donnatal, a stomach medicine produced by Wyeth-Ayerst; 17.4% for PCE, an antibiotic produced by Abbott Laboratories, and 15.4% for Azmacort, an asthma inhaler produced by Rhone-Poulenc Rorer, according to the Senate Special Committee on Aging.
In their defense, the pharmaceutical firms contend that critics are overlooking the enormous investment the drug companies must make in research and development. The Pharmaceutical Manufacturers Assn. estimates that the industry will earn profits of nearly $85 billion this year but will invest $12.6 billion of it in research and development.
They also argue that medicines account for only a fraction of all health care spending and frequently prevent more costly treatments, such as surgery. Ulcer drug therapy, for example, costs $1,000 a year, but can eliminate the need for surgery at a cost of $25,000.
“You have to ask yourself why have they focused so much attention on five cents of every health care dollar,” said Kevin Colgen, director of media relations for Merck. “Focusing on the price of pharmaceuticals diverts attention away from the real problem, which is that so many people don’t have access to health care.”
Their protests aside, drug company executives understand why they have been singled out for criticism by Washington. While Medicare and private health insurance policies cover most other medical costs, prescription medicine is an out-of-pocket expenditure for most Americans.
Members of Congress receive more complaints from citizens about drug prices than any other element of health care spending--particularly from politically active senior citizens. The American Assn. of Retired Persons estimates that nearly four in 10 Americans age 65 and over are spending at least $230 a year out of their own pockets for prescriptions.
“It’s something that people can really relate to,” said Pryor’s aide, Ann Trinca, referring to prescription prices. “The Medicare reimbursement rate for the price of bedpans is clearly not nearly as sexy an issue.”
Keen public interest in drug prices explains why so many members of Congress have gleefully joined the President in bashing the pharmaceutical industry.
In the last few weeks, these shots have been fired at the industry from Capitol Hill:
--Rep. Henry A. Waxman (D-Los Angeles) released a study by the Office of Technology Assessment estimating that the pharmaceutical industry has been spending $10 billion a year on marketing and advertising, or about $2 million more than it has spent on developing new drugs. The industry disputed the validity of this research as well as its conclusions.
--Rep. Ron Wyden (D-Ore.) conducted hearings questioning whether drug companies are overcharging for medicines developed primarily by government researchers. Wyden focused on Taxol, a new treatment for ovarian cancer developed by the National Cancer Institute, which cost the government between 60 and 90 cents a milligram to produce and is being marketed by Bristol-Myers for $4.87 a milligram.
--Rep. Pete Stark (D-Oakland) released a study purporting to show how $60 billion could be saved over the next decade if the United States created a drug price review board similar to that which sets prices in Canada. Stark said the industry has always acted “like a spoiled child” whenever the subject of cost containment has been raised.
--Sen. Pryor introduced legislation that would phase out a major tax break used primarily by many drug companies that exempts from federal taxes income earned in Puerto Rico, where many drug firms have built plants. Pryor described it as “a giant tax windfall” that costs the U.S. Treasury about $3 billion each year.
If these Democrats have their way, any new law enacted by Congress to reform the health care system will include potent measures to restrain drug price increases. The White House is known to be considering a number of options for accomplishing the same goal.
Drug industry officials said they do not expect the President to go so far as to propose outright price controls. But they recognize that they are not likely to defeat all of the other punitive measures under consideration in Washington, they added. In fact, some analysts said they believe the industry is willing to accept some restrictions to stave off mandatory price controls and other more onerous proposals.
Although the industry opposes Stark’s proposal for a Canadian-style drug price review board, for example, some company executives have let it be known that they would not object to the creation of a panel to monitor the industry’s voluntary efforts to hold down prices.
So far, 10 leading drug companies have taken the pledge to keep their overall price increases below the rate of inflation, even though some individual drug price increases may exceed that level. In addition, Pfizer has promised not to increase prices more than 4% or 4.5% this year on any single drug.
Dissatisfied by these voluntary moves, Pryor is drafting a proposal that would restrict patent protection for drug firms that raise prices faster than the inflation rate. H also has persuaded Clinton to support his proposal for scaling back on the tax breaks that companies receive for establishing manufacturing plants in Puerto Rico.
While the tax breaks for Puerto Rican manufacturing facilities are available to all industries, they have been used primarily by the drug companies.
C. L. Clemente, Pfizer senior vice president, argued that the pharmaceutical plants have succeeded in transforming Puerto Rico from “an agrarian economy to an industrial economy.” But critics said the tax breaks are excessive. According to Pryor, Pfizer receives a tax credit of $156,000 for every employee it hires in Puerto Rico--636% more than the average salary paid to the worker.
Pryor also has declared his intention to hold the drug industry accountable for the benefits that it receives from government research into cures for major diseases. Likewise, Wyden is drafting legislation that would require companies to commit to a price before they get the right to market a drug discovered by government researchers.
Judging from the tone of the criticism, the drug companies would appear to be facing serious political trouble. But industry analysts noted that the companies have a remarkable lobbying record in Washington and have succeeded in calming political storms in the past.
Since 1981, according to Federal Election Commission records, 29 drug industry political action committees have contributed nearly $9 million to members of Congress. Just last year, the industry called on its friends in the Senate to help defeat an effort by Pryor to trim the tax advantages of establishing plants in Puerto Rico.
In addition, despite the criticism being leveled at the drug companies from Clinton and other top Administration officials, industry representatives are still welcome at the White House.
After Clinton’s remarks about profiteering on childhood vaccines, Health and Human Services Secretary Donna Shalala met with representatives of companies that manufacture the vaccines. And a number of top drug company executives have been invited to the White House for discussions early this week, industry sources said.
Drug industry officials said they are confident that the President and his advisers, including First Lady Hillary Rodham Clinton, will consider their views as the Administration drafts a health care reform proposal.
“We too want to see the health care system reformed,” said Merck’s Colgen. “We think we have something to bring to the table.”