Drug Companies’ Cost Structure

Sager FDA Testimony 4/04

Tax Pill-fering How Merck Saved 1.5b paying itself for drug patents

• Merck sets up subsidiary in Bermuda, in partnership w/ British bank• Quietly transfers patents for blockbuster drugs to new subsidiary• Merck pays royalties to subsidiary for licensing Mevacor, Zocor, etc.• Subsidiary loans money back to Merck to buy Medco.• Arrangement allows some of the profits to disappear into “Bermuda

triangle” between different tax jurisdictions. • Merck avoids $1.5 billion in federal taxes over next 10 years.• Later, Merck liquidates company & recovers its money

Drucker, Wall St. Jl 9/06

Drug Industry Lobbying • $108.6m spent industry-wide- 2003: • Total $750m spent 1997-2003 • Employed 824 lobbyists (2003)

– 8 lobbyist per member of senate– 45% lobbying for Industry and HMOs have

“revolving door” connections• Both sides of the aisle (2005-06)

– No. 1 recipient R.Santorum (R-PA) $977,000– No.2 recipient H.Clinton (D-NY) $854,000

Block Medicare Drug Benefit

Shape Medicare Drug Benefit

Citizens for Better Medicare• Sham grass-roots org• $65m Television ads• Director is former PhRMA

marketing director• Multiple “independent” partner

groups largely industry funded• Gave $10 phone cards to

seniors to call kids convey their fears

• Weren’t citizens…..weren’t for better medicare

But Politicians Ones that Can Really CheerPaid Well to Protect High Prices

Particularly Problematic Areas

• Enrollment mass confusion• Website referral• Penalty • Forced/Involuntary plan assignment • Donut hole• Public hospitals penalty• Discount cards (remember them?)

Donut Hole: Not only Bad Now But….. Keeps Growing

“Roller Coaster” Part D Bumpy Ride

• In 1st year under the standard drug benefit-38% will be subject to no-coverage gap ("doughnut hole,”)-14% will exceed the threshold of catastrophic coverage

• Over three years, enrollees, on average, will incur out-of-pocket costs of 44% of their total drug spending. Enrollees with higher spending could pay as much as 67% of total costs.

Commonwealth Fund "Riding the Rollercoaster: The Ups and Downs in Out-of-Pocket Spending Under the Standard Medicare Drug Benefit” (Health Affairs, July/August 2005)

Lower Part D Drug Costs?Represent Policy Failures

• Shifting costs drugs from Medicaid to Medicare for dually-eligible has actually raised costs for government payers.

• Study top 25 prescribed brand drugs from 41 PDPs in one Minnesota zip code 1/06

• Prices 14% -50% above those Medicaid would have paid. • Most Medicare D prescriptions 20%-30% above Medicaid

prices. • Not just implementation failures, but policy failures• Competing PDP providers not likely to lower drug prices

– Patients shop for premiums; can’t shop for best drug prices

Schondelmeyer Congressional testimony 1/20/06

IOM Report on FDA & Drug Safety

• Reform FDA conflicts– Panels– Approval funded by industry– Leadership revolving door

• Shift emphasis toward post approval safety• More oversight re: advertising

– No direct to consumer ads 1st 2 years – Black box warnings

• More comparative efficacy information

Psaty NEJM 10/06

A few Simple Prescriptions• Publish all the trials, not just + ones

– Int’l Com Medical Jl Editors clinical trial registry

• Compare drugs with standard therapy rather than just placebos– Are they really any better than what we have

• More meaningful trials and outcomes data– Efficacy vs. effectiveness– Full spectrum of patients and real interactions

• More transparency of costs – True cost of drug development– Less secrecy about negotiated prices