Who Believes the $80B Pharma Pholly?

A couple weeks ago pharmaceutical companies pledged to "voluntarily" reduce their revenues by $80 Billion over 10 years. Forgive me for not standing up to salute that initiative.


Maybe it's because I can... like, do the math in my head.


$80 Billion / 10 years = too damn little $8 billion per year.


That won't stop the spinmeisters who are brazenly pushing this as a great sacrifice, however, some people see this offer for what it is.



To be sure, $80 billion is less than one-tenth the projected cost of healthcare reform. But by striking this cost-sharing deal with one of the reform effort's leaders--Sen. Max Baucus--and the White House, drugmakers could shame other providers into cutting their prices, too.



Health care reform shouldn't cost anything, but you can't shame people without a conscience into better behavior. It seems that Senator Baucus is behaving quite shamelessly himself. We need more aggressive health care reform. Some Congressional members see that pharmaceutical companies have deeper pockets.


Other Congressional members have invested heavily in pharmaceutical stock and you can take a look at their disclosures here. Is there any doubt this conflict of interest will affect the efficacy of health care reform?


With the pharmaceutical global market expected to be over 1 Trillion dollars per year by 2012, I can understand why so many people are investing in pharmaceutical companies. It also makes sense for pharmaceutical companies to look like they are doing their part in health care reform. Cutting the Medicare Part D donut hole in half is an estimated $8 billion per year "donation" to the U.S. elderly population and it sounds good, but wait until you look under the hood. That concession is a sham and Congress needs to be more in Pharma's face over pharmaceutical pricing and force the issue of negotiations.


It's hard to nail down the personal consumption expenditure (PCE) figures for pharmaceuticals in the U.S. The BEA reports it to be $276.5 Billion in 2006. It's estimated that pharmaceutical PCE was $315 billion in 2008 and it's projected to be anywhere from $400-$460 Billion by 2012.


ok...lemme see here.....


That's


$8 billion / $276.5 = 3%


or


$8 billion / $315 = 2.5%


or


$8 billion / $400 = 2%


or


$8 billion / $460 = 1.7%


This assumes that will be $8 billion in savings the first year, but really it will be an average of $8 billion per year for 10 years. The first year will be closer to $7 billion and the 10th year will be closer to $9 billion. We are supposed to think pharma is simply going to give up $8 billion without trying to shift the costs of that $8 billion elsewhere? Are they also pledging to not raise prices across the board? Does this mean they are pledging to not do another Nexium?


Yep, just as I thought.....hogwash white wash.


The U.S. bought 42.8% of the global supply of pharmaceuticals in 2007, but due to patent expiration and a couple other factors, that percentage is slated to fall over the next 4 years. The U.S. has 1/5th of the world's population, but we contribute more than 1/3rd of Global pharmaceutical revenues. We do take more drugs, but we also pay more for them. We don't have higher prevalence rates and we don't have greater acuity than the rest of the world. Medical necessity doesn't account for why we take more drugs than anyone else. No, something else is at work. The Republicans call it the "free" market. Any other customer would demand and receive a volume discount, but the U.S. doesn't get that discount. We pay a premium price instead. That is due to our Congressional leaders not doing their job.


We allow pharmaceutical companies to advertise directly to health care consumers (unlike other countries) and we allow pharmaceutical companies to give CME (Continuing Medical Education) to our prescribing physicians; which is a conflict of interest for physicians that isn't addressed from a regulatory position. We moved low income elderly patients from getting their drugs under Medicaid to getting them under Medicare so pharmaceutical companies will receive more money and we extend patent protection at the pharmaceutical company's request (to the detriment of the health care consumer).  


If pharma splits the difference of the Medicare Part D donut hole and assume phrama doesn't offset this loss through cost shifting (a BIG assumption), it will decrease U.S. pharmaceutical spending to a range of $368-$428 billion in 2012...maybe. At least that's the story line Max Baucus et al wants us to believe. That's still $53 billion more than what we spent in 2008. That $8 billion per year would reduce the global pharmaceutical revenues from $1.043 Trillion to $1.035 Trillion in 2012 or about 1%; or about 0.3% (one third of one percent) of total health care expenditures for the U.S. (about $2.35 Trillion in 2007). (I got a rush when I got to this figure, but it wasn't from the excitement of the amount of money we could save.)


Pharmaceutical companies are aware that the U.S. market will slow expansion and they are aware that most of Europe will mirror the U.S. market. They don't plan on losing that money, so they will be focusing on:



  1. The expectation that emerging markets in Central and Eastern Europe to drive growth in future.


  1. The expectation that large untapped populations and strong economic growth in major Asia-Pacific countries to be the most lucrative pharmaceutical markets in the future.


  1. The expectation that growth in the Latin American markets will be strong with Brazil and Mexico being the most emerging pharmaceutical markets in the world.

Again, I just don't see why Congress, President Obama or anyone else should be ecstatic over splitting the Medicare Part D donut hole difference with U.S. senior citizens. Don't get me wrong, I'm happy to accept that $8 billion per year, but I'd also like to see these things happen:



  1. Outlaw direct to consumer pharmaceutical advertising. This would save us anywhere between $10.6 - $15.2 billion per year, but media advertisers would lose about $1 billion per year in revenues. No wonder pharma loves direct advertising. They get $10 for every dollar spent, a terrific ROI by anyone's standards. You won't get any media wonk to push this suggestion, it would give their Marketing Veep apoplexy.


  1. Outlaw pharmaceutical company sponsored CME's (aka "free" Continued Medical Education) which presents targeted drugs as the "drug of choice" for targeted diagnoses. Don't expect physicians to like this one too much. Keeping up with CME's can cost as much as $5,000 per year for a doctor. It's difficult to extrapolate how much more we are spending on drug therapies due to this indoctrination process, but pharma wouldn't be sponsoring these "educational" opportunities if they weren't getting a decent ROI out of it. Pharma thinks that giving up taking physicians out to dinner would be enough, but free CME is far more lucrative for drug makers. I take a conservative savings of about $20 billion per year out of the U.S. market if we do this ban.


  1. Henry A. Waxman's idea of reversing a 2006 policy that took low-income elderly folks out of Medicaid drug coverage and added them to Medicare (which pays more) could save between $50 - $63 billion cut in drug spending deserves a closer look. (I'm not sure if this is an annual savings or if it's aggregated over several years.)


  1. Limit biologic pharmaceutical exclusivity to a 7-year protection plan as President Obama advocates. This could yield another $7 billion or so in savings per year.

Either way, that totals up to be more than $50 billion per year in savings, which would be exactly the sort of thing big pharma wants to avoid.


Before you say pharma can't afford to be more generous, take a look at their top CEO's compensation and then speculate on the rest of their executive compensation. Then, take a look at what the head of Pfizer has to say about the Public Option. Pharmaceutical companies are short sighted. If health care reform insures even half of the uninsured (I'd like to see all 50 million get access to health care), then they will reap millions in additional sales that will offset their concessions. They know that, but pharma wants to have their cake and eat it too.

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