PhRMA (Pharmaceutical Research and Manufacturers of America), the biggest pharmaceutical lobbying group in the US, is preparing to launch an ad campaign to show Americans how good our free market health care system is. They’re worried that Obama’s plan to allow the federal government (via Medicare and Medicaid) to negotiate lower drug prices will cut into their profits.
I recognize that drug companies produce some vital medications. My father’s autoimmune disease and resulting kidney failure would no doubt have killed him by now without drugs created by “big pharma.” For that, my family is grateful. And I know that there are lots of other families in similar situations, with a loved one still alive thanks to research and development done by pharmaceutical companies. But there are plenty of questionable practices in the pharmaceutical industry (as there are in just about any for-profit industry).
What it really boils down to is that it doesn’t matter how great the drugs are if people can’t afford them. When seniors with confusing Medicare D plans are struggling to pay for their out of pocket expenses for their drugs, something is broken. And allowing Medicare to negotiate prices is a plausible way of curtailing the upward spiral in drug pricing. Here in Colorado we’ve seen more and more health insurance carriers increase copays for drugs, add prescription deductibles, or cover only generic drugs in an effort to keep prescription costs under control. And unless something changes in the way drugs are priced, I doubt that health insurance carriers will be likely to start increasing coverage anytime soon.
People (probably in the pharmaceutical industry) will no doubt be crying foul, and claiming that with an estimated $10 – $30 billion cut in revenue if Medicare gets to negotiate lower prices, pharmaceutical research and development will suffer. But let’s look at the numbers. Health insurance carriers are often criticized for the profits they earn. But when we look at the five Fortune 500 health insurance companies (Wellpoint, United, Aetna, Humana, and Cigna) the profits as a percentage of revenue are between 2.3% and 7%. They’re not losing money, but they’re not bringing down the house either. Now let’s consider the pharmaceutical industry. There are 12 companies in the Fortune 500 list, and only two (Abbott and Bristol-Myers Squibb) have profits below 10% of their revenue. Phizer’s 2007 profit was nearly 37% of their revenues. Those are some pretty big numbers. They even make the oil and gas industry profit margins seem small. So let’s not feel too sorry for big pharma. I think they’ll be ok, even if Medicare gets to negotiate drug prices.
