Prescription Drug Scams

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Dean Baker
Truthout, June 29, 2006

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The New York Times had an excellent story this week about how drug and medical supply companies make large contributions to charitable foundations run by physicians. To the casual observer, these contributions look like kickbacks, given in exchange for doctors writing prescriptions for their products and also publishing favorable research findings.

This is not the first instance of corruption in the prescription drug industry. The stories of corruption in the drug industry could fill the Manhattan phone book. For starters, this is not the first time the industry has been associated with kickback schemes. It used be standard practice to hold expense-paid "seminars" at lavish vacation resorts. Of course, there also have been instances of straight out bribes to prescribe the right drugs.

The research process has also been corrupted. The industry frequently pays prominent researchers to submit journal articles that were drafted in the company's PR office touting the benefits of their drugs. In their own research, drug companies will often attempt to conceal evidence that their drugs are ineffective or even harmful, as is alleged in the Vioxx lawsuits.

The industry's efforts to buy political influence with campaign contributions and lobbyists are well-known. The Medicare prescription drug benefit costs twice as much as was necessary because the industry got Congress to structure the bill to ensure hefty profits for drug companies, instead of affordable drugs to seniors.

The Post ran an article last year revealing how Eli Lilly's representative in Congress (the person who represents the district in which its headquarters is located) managed to get the company $200 million in extra profits by inserting an obscure rule for state Medicaid plans in a huge omnibus spending bill. In the same week, the Times had an outstanding article reporting that industry was hiring former cheerleaders to market its drugs to doctors. With this cesspool of corruption, the fun never stops.

To economists, the corruption in the pharmaceutical and medical supply industry should not be surprising. In most industries, competition drives prices down close to the cost of production, but in these sectors, government-granted patent monopolies keep prices far above costs. Drugs that would sell for $20-$30 per prescription (without any payment from insurers) routinely sell for several hundred dollars. In some cases, drug prescription prices run into the thousands of dollars. That's what you can do when the government gives you a monopoly on a drug that a patient needs to stay alive.

Economists know that when the government intervenes in the market to keep prices far above production costs, it is inviting corruption. And the pharmaceutical industry has responded to this invitation with enthusiasm, continually finding new ways to maximize the profit from their government-granted monopolies.

Drug patents do serve a purpose: they provide incentives to develop new drugs. But, there are other ways to finance research. For example, the federal government spends $30 billion a year supporting biomedical research performed by the National Institutes of Health (NIH). There are other mechanisms that could be explored for financing drug research which would likely be far more efficient, and far less dangerous to the public's health, than the current patent system.

The basic economics of drug patents are striking. The country spends $220 billion a year on drugs. Without government patent monopolies, it would be paying around $70 billion for the same drugs, a saving of $150 billion a year. According to data from the industry, this excess spending supports $40 billion a year in drug research, meaning that the public pays almost 4 dollars in higher drug prices for every dollar in drug research.

But the picture gets worse. According to the Food and Drug Administration, two thirds of the industry's new drugs are copycat drugs that are not qualitatively better than existing drugs. This means that the public spends more than $10 in higher drug prices for every dollar that the industry spends researching breakthrough drugs.

Wait, it gets even worse. According to data from the industry, it costs drug companies almost 7 times as much to perform a clinical trial as the NIH. This makes sense, if one purpose of the industry trials is to provide kickbacks to the doctors performing the trial. Because of patent monopolies, drug companies have little reason to minimize the cost of their research. They use research expenditures as a way to promote drug sales, just like any other spending. This means that their $40 billion in research spending may be substantially inflated due to patent-induced corruption.

In short, the system of patent-financed prescription drug research has supported the growth of an incredibly corrupt and inefficient pharmaceutical industry. The patent system is bad for the public's health and bad for the economy and bad for jobs. If the industry didn't own the politicians, someone would be talking about changing it.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.