Resources Update: Windfall Medicare Profits for Drug Companies

In January 2006, when the new Medicare Part D drug program went into effect, pharmaceutical companies’ profits were estimated to exceed $2 billion or more annually. The transfer into Medicare of millions of low-income people previously covered under Medicaid provided pharmaceuticals companies with a new source of profit. The Part D proviso that prohibited the federal government from negotiating directly for the lowest available prices further raised profits. In contrast, states have been able to negotiate and receive the lowest available prices for drugs for their Medicaid recipients. However, with the recent elections that gave Democrats control of the Congress, pharmaceutical companies are poised to do battle, as Democrats gear up to eliminate the restriction against the federal government’s ability to negotiate for lowest prices on behalf of Medicare recipients.

Leading Big Pharma’s defense is former Representative Billy Tauzin, who left the House in 2003 after helping to pass the new Medicare Bill to accept an annual salary of more than $2 million as President of the Pharmaceutical Research and Manufacturers of America. Another heavyweight drug lobbyist is Thomas Scully, who served as the Bush Administration’s Medicare expert and helped steer the drug subsidy bill to passage before accepting his lobbyist position in 2003.

GAO Calls for Improvements in FDA Oversight of Direct-to-Consumer Drug Advertising

Tauzin also made the news recently in urging voluntary guidelines for direct-to-consumer (DTC) advertising by the pharmaceutical industry. In a speech to venture capitalists last spring, he observed that, “It would be naive to not acknowledge the fact that D.T.C. advertising is also a lightening-rod in the health care debate in this country.”

Between 1997 and 2005, consumer drug advertising jumped from $1.1 billion a year to $4.2 billion. A recent report to Congress by the Government Accountability Office on FDA oversight of DTC advertising recommended improvements. Congress recently held hearings on the issue. In rejecting Tauzin’s call for voluntary guidelines, Senator Edward Kennedy noted that, “Patients deserve the best and most accurate information about the medicines they take. An essential part of any drug safety proposal must be to give the F.D.A. the authority and resources it needs to oversee direct-to-consumer advertising, and to allow the FDA to impose conditions or limits on that advertising, where needed to protect the public health.”

GAO: Number of New Drugs is Declining

While profits and advertising are up, the number of new drugs is declining, according to another recent report from the U.S. Government Accountability Office. The GAO found that while annual spending for research and development increased by 147 percent, the number of new drug applications grew only by 38 percent. Furthermore, the new applications were for drugs that represented modifications to existing medicines, not new medicines. Such a disparity raises doubts about the pharmaceutical industry claim that rising drug prices are a reflection of new drug development.