Drugmakers' Plea: No Price Controls
ALONG with health insurers, pharmaceutical companies have become major corporate players in the national debate on health-care reform. Their rallying cry is ``no price controls,'' and their argument is that cost-containment measures urged by President Clinton could stifle the development of expensive new drugs.
``Price controls, in any industry, just do not work,'' says Donald Parfet, executive vice president for administration with the Upjohn Company, a large producer of pharmaceuticals based in Kalamazoo, Mich. ``Maybe it's a savings against today's budget, but long term it suppresses supply and you're no longer able to keep up with demand.''
Mr. Parfet says American society places ``enormous demands on health-care providers to cure absolutely everything.'' He says he foresees a tremendous ongoing demand for new drugs.
But the development of a single new drug typically takes 14 years and costs $359 million, says Jane Rady, president of Lorex Pharmaceuticals in Chicago. The company is a joint venture between G. D. Searle & Company in Skokie, Ill., and the French company Synthelabo. ``It's a high-risk business,'' she says. Only one out of 5,000 chemical compounds concocted by the industry ever make it to the marketplace.
Ms. Rady and Parfet are participants in a major public relations effort for the drug industry that includes extensive media advertising and tours by company officials.
The industry's critics in Congress are not buying its arguments, however. ``The fact is that cost containment on pharmaceuticals does not necessarily mean a decline in research and development expenditures,'' said Sen. David Pryor (D) of Arkansas, chairman of the Senate's Special Committee on Aging, in a recent statement. ``It does mean that companies may have to reduce their excessive profits and cut back on extravagant marketing and advertising expenditures.''
The pharmaceutical industry's image as a profitmaking titan is self-perpetuated, says Joseph White, a scholar at the Brookings Institution in Washington who specializes in health-care issues. ``If you read the business pages in the 1980s, it was a great industry for its aggressive pricing,'' he says. A little regulatory restraint may be in order, he suggests. Mr. White argues that ``price regulation in this field need not discourage innovation.'' The key, he says, is to target the regulation so that it allows for big prices on so-called ``breakthrough'' drugs and restrains the cost of ``copycat'' drugs already in general use.
The Clinton plan, however, aims its main price-control weapon - a federal review board for pharmaceutical prices - at breakthrough drugs, on the theory that these new products face the least price constraint through competition. That tactic, says Marc Roberts, a health-care economist with the Harvard School of Public Health, is part of a ``search for demons'' that permeates the current health-care debate.
Mr. Roberts sees drug pricing as a very small part of the cost-containment picture. By controlling drug profits, he says, you might be able ``to knock 2.5 percent off health-care costs.'' Insurance and government reimbursements to doctors and hospitals are the central issues, he argues, but they are politically painful. Hence the effort ``to find some bad guys'' in the drug industry.
The current system of patent rights on drugs is working as intended, allowing big profits on innovative products, Roberts says. He argues that regulation should be aimed instead at the ``enormous amounts of money'' the drug industry spends to sell its products. Roberts notes favorably the rules imposed by the Kaiser Permanente health maintenance organization (HMO) in California banning drug salespeople from physicians' offices and restricting them to regulated areas.
Forced price reductions
The drug marketplace is already in the throes of change, Parfet says. He predicts that the industry's traditionally high rates of return - in excess of 20 percent on stockholder's equity - will drop because of ``market forces reducing pricing.'' HMOs have become ``very sophisticated buyers of drugs,'' he says, and they demand discounts. Further, Parfet says, ``60 to 70 percent of our leading compounds will go off patent in the next four to five years.'' Those drugs will enter the ``generic'' market where prices are lower.
But the ``market forces'' argument does not sway Senator Pryor. He views drug industry mergers as an attempt to control the ``generic'' market and thus keep prices high. Pryor's line: ``We need to find an effective mechanism to hold down the cost of drugs for the average American during the phase-in to the new system.''
The pharmaceutical industry has allies in Congress, too, and the senator's quest for a cost-containment ``mechanism'' - such as the price review panel - will not be easy. Lawmakers with large pharmaceutical sectors back home are likely to listen when drugmakers scorn such devices as, in Rady's words, ``a covert way of creating price controls.''