Four healthcare CEOs did something extraordinary at the Reuters Health Summit last week: They admitted that drug companies put up prices just for the hell of it. It was a rare moment of group candor from Big Pharma and its allies, who usually argue that prices are set by the market or that companies need high prices to pay for innovative R&D.
Prices in the drug business only ever seem to go up, making healthcare in the U.S. among the most expensive in the world. About 60 percent of bankruptcies in the U.S. are linked to medical bills. Although an increasing number of medicines are going off-patent to become cheap generics, bringing some prices down, that alone does not subject the remaining on-patent drugs to the kind of price competition you'd want to see in a healthy, free market.
"Prices were just shoved up every year to make more money and meet earnings, to be blunt," Shire (SHP.L) Chief Executive Angus Russell said.
He was referring to so-called mass market drugs used to treat common conditions like high blood pressure, rather than the specialty products for rare genetic diseases that are Shire's hallmark.He could have been referring to his own drugs, too. A Shire spokesperson told BNET just three days before Russell spoke that it put up the price of Adderall XR to take advantage of a shortage of the drug in some markets. Previously, Shire jacked up the price of Adderall to force patients to switch to its other branded drug, Vyvanse. The hope was that patients and doctors would not switch back to generic Adderall when it arrived.
AstraZeneca (AZN) CEO David Brennan agreed with Russell:
"We really don't have good transparency on pricing in the United States market," said AstraZeneca CEO David Brennan, while noting that it is one of the few markets where companies can freely raise prices.The main reason companies can raise prices freely in America is not because Europe and the East are riddled with price-control regulations. It's largely because federal law in the U.S. prevents the government from negotiating with drug companies over the price of drugs. If a drug is approved by the FDA, Medicare and Medicaid -- i.e. the taxpayer -- have to pay for it, according to an oft-manipulated pricing formula. A simple cost-free reform to this law -- to allow Medicare and Medicaid to bargain with drug suppliers the same way insurance companies do -- would shave billions off national healthcare costs and force drug companies to start competing with each other on price as well as safety and efficacy.
"We have observed some really high price increases being taken by other companies in the U.S. ... which I just find absolutely incredible," GlaxoSmithKline (GSK.L) CEO Andrew Witty said on a recent conference call.
"We think it is probably not the right moment for people to be taking crazy price increases. We think ultimately that is going to come back to bite."CEO, heal thyself
GSK has seen declines on some products sold in European countries where their governments have got pricing leverage over companies. But his Q1 2011 earnings statement says on page 4 that GSK still managed to offset declining sales of its asthma blockbuster Advair by raising its price.
And David Snow, the troubled CEO of pharmacy benefit manager Medco Health Solutions (MHS), complained about the same thing:
"As their branded drugs approach the patent cliff, there has always been the tendency to see increased pricing toward the end, just to get the last dollar out of every drug before they lose brand protection," said David Snow, chief executive officer at Medco Health Solutions (MHS.N), one of the nation's largest managers of prescription drug benefits.Snow argued that prices were going up to pay for the $80 billion excise tax the industry agreed to pay in order to pass President Obama's healthcare reform. Sure, those fees add to the cost of drugs. But none of these CEOs will ever dare publish how many extra drug sales they made due to increased health coverage for previously uninsured Americans.
Besides, Medco isn't helping keep costs down for employees in the California Public Employees' Retirement System. It once allegedly paid a "consultant" $4 million in order to get a $48 million contract managing pharmacy benefits for CalPERS. (In other words, it could have fulfilled the contract for just $44 million.) Medco isn't a charity. Every "consulting" fee it pays must be extracted from patients at some point in order to stay in business.
So, brownie points for honesty, fellas, but zero points for action.
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