Why Drug Prices Are Out of Control, or Money Well Spent by Big Pharma

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Nowadays, it’s not only radicals who are recognizing the rising problem of inequality. Between Bill de Blasio’s mayoral inauguration, Obama’s pointed speech early last month, and Pope Francis’ critique of trickle down economics in November, the rhetoric of Occupy Wall Street seems to be going mainstream. Newly emerging statistics – for instance, that the top 0.01% of earners now seem to take home a bigger percentage of the national income than in any other year for which we have the numbers – seemingly rubs more and more Americans the wrong way.

To be fair, however, perhaps this increasingly skewed distribution of income and wealth should be interpreted as nothing more than the fair return on a prudent investment strategy. With enough money devoted to government lobbying, one could argue, any of us could be the beneficiary of upward wealth redistribution. But while some contributing factors to inequality – say the failure of the minimum wage to keep up with inflation (much less with productivity growth) – can be concisely displayed in numbers and graphs, acts of direct upward wealth redistribution require demonstration by way of a specific case study. Here, I consider the illustrative (and evolving) case of the transfer from taxpayers to pharmaceutical companies through Medicare Part D.

When Medicare was crafted in 1965, a drug benefit had strong Democratic Congressional support; at the same time, it wasn’t a political priority for either party, and so given concerns about costs, it was dropped from the final bill. Growing pressure from seniors over subsequent decades, however, ultimately made a drug benefit an important political issue. Prescription drug coverage for seniors could have been created over these years with relative ease: A benefit could have been affixed to traditional Medicare, which would then have administered the program, and could have negotiated with pharmaceutical companies over prices (as other capitalist democracies, and even our own Veteran’s Administration, already do).

However, the drug benefit that ultimately emerged – “Medicare Part D” – with President George W. Bush’s 2003 Medicare Modernization Act (MMA) was the result of a much stronger power than common sense: corporate lobbying. Indeed, as argued in the 60 Minutes exposé, “Under the Influence,” the pharmaceutical industry all but wrote the law. Former congressmen and senators who had registered as lobbyists for the industry then endeavored to get it passed. Thomas Scully, a former hospital industry lobbyist who was appointed by Bush to run Medicare, was the primary negotiator with Congress over the MMA. He managed to obtain a waiver of federal ethics rules that allowed him to negotiate for lobbying jobs while still running Medicare, and in the lead up to the law’s passage, actually threatened to fire his chief actuary if he revealed a higher cost estimate for the program. Meanwhile, the main proponent of the bill in the House – Congressman Billy Tauzin, who had received significant campaign funding from the pharmaceutical industry – was actually already looking for lobbying jobs while the legislation was under consideration. Within weeks of its passage, he was in negotiations with the Pharmaceutical Research and Manufacturers of America (PhRMA), the chief lobbying group for the industry, for a position.

The profound generosity of the 2003 Act – not in terms of benefits for seniors, but with respect to profits – should therefore come as little surprise. First, the bill created an entirely privatized, administratively wasteful, and unnecessarily complex system of Pharmaceutical Dispensary Programs (PDPs) to administer the benefit. Under this system, seniors must choose from dozens of plans with various costs and differing formularies: Given the complexity of aggregating prices, premiums, and deductibles together with a universal human incapacity for predicting future illnesses, seniors succeed in choosing the cost-optimal plan (according to a 2012 report by the National Bureau of Economic Research) less than 10 percent of the time.

But the real prize of the law lay elsewhere: By explicitly outlawing Medicare from involving itself in “negotiations between drug manufacturers and pharmacies and PDP sponsors,” the bill ensured that Medicare would pay richly for the drugs it purchased. Notably, when it comes to all other healthcare – including physician services, hospitalizations, lab tests, and so forth – Medicare essentially has a “take-it-or-leave-it” approach to pricing. When it comes to prescription drugs, however, Medicare isn’t even allowed to use its purchasing power to try to get a better deal for US taxpayers, which is particularly problematic because many prescription drugs are patent-protected, giving the seller monopoly-power in determining prices.

Perhaps the industry, however, is simply getting what it pays for: In 2013, for instance, it led all other industries with $171 million spent on government lobbying. Similarly, the various other actors crucial to the bill’s passage have also earned strong dividends on their legislative investment, allowing some to quickly catapult into the highest echelons of the rich. Billy Tauzin, for instance, accepted a $2 million a year offer to head PhRMA. Scully similarly soon joined the ranks of the drug lobbyists. In fact, according to 60 Minutes, at least 15 congressional staffers, officials, and congressman who worked on the bill subsequently took positions with the industry.

Nor has the situation changed in more recent years. PhRMA predicated its support of President Barack Obama’s Affordable Care Act on, among other things, maintaining the prohibition on Medicare drug price negotiation. Tauzin, still President of PhRMA, visited the White House some half dozen times after the 2008 election, and the industry ultimately got what it wanted: no price negotiations or drug imports. In that same year, Tauzin took home a bonus of $2.3 million in addition to his $2.1 million salary, and the following year he cashed out of the organization for a cool $11.6 million. Who knew public service could be so rewarding?

But such payouts are miniscule in comparison with the predictable, and predicted, upward transfer of wealth effected by these lobbying efforts. When comparing the prices of the top 20 drugs prescribed to seniors, the organization Families USA found nearly a 60 percent markup in median drug prices (by comparing the lowest Part D prices with the lowest VA prices). The aggregate size of the wealth transfer that results from such differences was estimated in a January 2013 report by the Center for Economic and Policy Research, which argued that if Medicare spent as much as other industrialized nations on prescription drugs, it would save the federal government between $229.7 and $541.3 billion over the coming decade. The report also estimated that such a move would save state governments between $30.8 and $72.7 billion and beneficiaries directly between $47.7 and $112.4 billion over this same period. What’s a cool half trillion between friends? Clearly, Big Pharma’s annual lobbying expenditures are a downright pittance in the context of such rewards.

The massive annual salaries of the CEOs of the pharmaceuticals companies – $25 million in 2012 for the head of Pfizer alone, for instance, and about $200 million for the big 11 that year collectively – cannot, in other words, be construed as simply the natural result of anarchical market forces. On the contrary, much of the wealth accumulation at the apex of the economic pyramid over the last few decades has had little to do with some miraculous, collective upsurge in the work ethic, intelligence, prudence, inspiration, perspiration, thrift, or math-and-science skills of a tiny class of mega-rich: instead, it has more to do with the rest of us being out-maneuvered in the political arena. The absurd fact that financiers pay much less in taxes on money made on the stock market than what many others pay on money earned through actual work is yet another example of crude upward wealth redistribution via political action.

Conservatives frequently argue that inequality is a fact of life, or the price of doing business in a market economy; liberals often argue that we could do a better job of ameliorating the consequences of inequality through a stronger safety net. No doubt we need a stronger social welfare system, real universal health care, a more progressive tax code, a world-class system of education, and much more. But if we are to understand the reasons why ours is an increasingly unequal society, we can’t neglect to trace the green strings of power back to the corporate puppeteers.