Alex Avgoustidis investigates the corporate power of Big Pharma and its ramifications for the American people.
“I was spending $2,880 a month just to keep myself alive – that was more than I was making even working 50 hours a week”. This is the reality that Laura Marston, a Type 1 diabetic American citizen, has faced for the greater part of her life. Since her teenage years in the 1990’s, nothing has changed about insulin: why, then, has the price of a vial increased by $254? Laura is not the only one struggling through the rising tides of prescription drug bills: millions of Americans have to live with the financial repercussions of their medical needs, and diabetics are not the sole victims of this financial threat.
According to 2018 data collected by the OECD, spending on medicines per capita in the US was a staggering $1,230. In second place was Switzerland, at a much lower $894, while spending in the UK was all the way down at $526. In the same year, Americans saw the average price per standard unit (IU/ml) for all insulin types at $99. So, when their Canadian neighbors could acquire the same product for 1/8 of the cost, Laura – and the millions of Americans who share her story – are left with infuriation and an abundance of questions.
To understand the intricacies of pricing in the healthcare industry, one has to tap into the world of industrialized power and corporate exploitation.
The Name of the Game
Before delving into the pharmaceutical pricing divide between the US and the rest of the world, it is essential to identify the forces which have given the American pharmaceutical market its modern shape: the forces of research and development, oligopolistic features, and patents.
Drug makers rarely hesitate to bet their bottom dollar on R&D, and frankly, no deep investigation is required for one to decipher the value that pharma giants put on research and development: in 2018, the healthcare industry amounted for 22% of global expenditure on R&D, and US corporations alone invested approximately $80bn. Drug manufacturers yearn for continuous technological developments in order to increase productive efficiency of their already-established products. Perhaps more importantly, R&D holds the potential to propel the industry towards the creation of new pharmaceutical consumer options that open up entirely new sources of revenue.
Looking at the market in its entirety, one needs to uncover its oligopolistic attributes to understand the actions of its participants. The pharmaceutical industry is disproportionately dominated by the US, holding 40% of the global market share in 2018, while the domestic market comprises 10 medicine manufacturing giants that generated $365bn revenue in 2020 alone. Thus, while the market might not be a pure oligopoly considering the number of ‘players’ in the pharmaceutical ‘game’, it becomes blatantly clear that the financial stakes are incredibly high for individual corporations, as they each cover a substantial portion of domestic demand. Competition between pharmaceutical moguls would be expected to drive down prices, alarmingly providing incentives for collusion within the market. Notably, insulin price-fixing between Eli Lilly, Sanofi, and Novo Nordisk has long been suspected, with the three companies currently under legal investigation.
Patents are also instrumental in defining power within the market, and account for approximately 80% of pharmaceutical revenue. Once a corporation in the US has a patent approved on a newly-crafted medicine, it becomes the sole manufacturing authority of that product. Ultimately, once the patent has expired, the drug becomes generic and all pharmaceutical actors get to provide their own version of the medicine to the market. However, this expiration date is often a minimum of 5 years down the line, and with corporations exploiting loopholes in the patent system, prices can surge hand-in-hand with the interest of the patent-holder. A clear example is Sanofi’s strategy for Lantus insulin; having completed 74 patent applications, the corporation is trying to set the stage for 37 years of competition-free production.
A Hard Pill to Swallow
The argument over the source of higher pharmaceutical prices in America is reminiscent of the country’s recent presidential debates: two completely distinct sides of the story and a lot of finger-pointing.
Pharmaceutical companies have consistently emphasized to lawmakers the implications of high R&D expenditures which, whilst qualitatively beneficial, induce significant production costs and raise prices. Manufacturers claim that the cost of R&D is solely incorporated into American prices, carrying the weight of innovation for the rest of the world. According to Big Pharma, lower prices in the US would entail lower-quality drugs on a global scale and thus, this disproportionate pricing fundamentally boils down to the size of the national market and the relatively higher wealth of the American consumer. Johnson & Johnson don’t have much to lose if they charge lower prices in a relatively small, less affluent, country like Greece, but the stakes are much higher in a market of 330 million potential customers.
Additionally, drug manufacturers pass responsibility to pharmacy benefit managers (PBMs), who act as intermediaries between pharmaceuticals and insurers. PBMs can dictate which prescriptions are included in coverage plans provided by insurance firms, determining if the medication will be paid out-of-pocket by the consumer. They also hold immense negotiating power in introducing rebates, which are discounts on insured drugs. Negotiations, however, imply uncertainty and bureaucracy, and result in different out-of-pocket expenses for each drug manufacturer. If Eli Lilly’s Humalog is not included in Laura’s insurance plan, or its price is closer to the uninsured value, the manufacturer holds PBMs responsible.
Nevertheless, such predicaments fail to impress the public and scholars alike. In an industry that holds such financial power, many believe that not only do these pharmaceutical giants deliberately and collectively overvalue their products, but are also enabled to do so by flexing their negotiating muscle and exploiting political influence. In fact, USC health economist Darius Lakdawalla called the US drug market a “big hot mess”, declaring prices as unrepresentative of the true cost of research and development, and creating unjustifiable pressure on the shoulders of medical patients in the US. One question remains unanswered for Lakdawalla and millions of Americans behind him: where do all these augmented profits go?
Holding the Purse Strings
While pharmaceutical spending on R&D is by no means negligible, drug giants invest their remaining, sizeable revenues in ways that question their corporate integrity. The BBC reported that the largest firms’ quarterly profits are twice the size of R&D expenditure and significantly more resources are directed towards self-promotion and marketing. Secondly, ever-increasing sums are devoted towards the acquisition of smaller drug companies, which strengthens economies of scale and allows corporations to realign their portfolio assets. Thirdly, there is notable expenditure on buying back their own shares of stock. Economist William Lazonick from the University of Massachusetts Lowell discovered that from 2006 to 2015, 57% of the value of R&D spending was used to buy back shares by the 18 largest corporations in the market.
Data on the sector’s lobbying power also reveals distressing insights. According to the US National Library of Medicine, from 1999 to 2018, the industry invested a total of $1.2 billion on contributions to state, congressional, and presidential electoral candidates, national committees, and outside spending groups. This hints to the unfair pricing criteria that facilitates high enough profits to enable such lobbying expenditures, but more alarmingly, it contextualizes the political influence these corporations possess.
Although pharmaceutical pricing has been condemned by Republicans and Democrats alike, the persistent inflationary trends on the price tag of survival, in combination with the corporate power of Big Pharma, make pessimism seem the reasonable lens for viewing American healthcare. Nevertheless, as the future of health in the United States remains uncertain, one truth prevails for Laura and the millions like her: the need for change.