Wednesday, March 11, 2009

Health Costs

[from JohnS]
Rather shocking information regarding the markup from the cost of active ingredients to the retail price on some prescription drugs has been circulating via e-mail lately. I checked it out on Snopes and found the numbers to be true. Snopes editorializes that the information while valid is of dubious value because of the many other factors that go into the cost of manufacturing and marketing a product. Still my curiosity has been raised.
Here are three examples:

Claritin:10 mg.
Consumer Price (100 tablets): $215.17
Cost of general active ingredients: $0.71
Percent markup: 30,306%

Lipitor:20 mg
Consumer Price (100 tablets): $272.37
Cost of general active ingredients: $5.80
Percent markup: 4,696%

Prozac:20 mg
Consumer price (100 tablets): $247.47
Cost of general active ingredients: $0.11
Percent markup: 224,973%

I take Lipitor, a common cholesterol drug once daily, so let’s examine the numbers.
The daily cost is $2.72, a yearly cost of $990.80 vs. a yearly active ingredient cost of $21.17, giving a gross profit of $971.63 per year.

I have no way to calculate the other costs, R&D, manufacturing, distribution and retail costs, however others have estimated the manufacturing costs approximate the cost of active ingredients. I would place the distribution costs at a similar number. The retail cost would be more because it must be stocked, counted and bottled at a yearly cost estimate of $50 for a total of $113.50. Thus, a net profit of $877.30 on my purchases of Lipitor each year not counting R&D costs. Before calculating R&D costs let’s look at some further numbers.

Lipitor is a common cholesterol drug, so I will estimate that one million people take the drug worldwide; it is probably higher. That would provide a net profit of $877 million dollars a year. I have been taking the drug for years so let’s say the drug has been on the market for 10 years providing a net profit of 8 billion, 773 million dollars. Now, let’s say R&D cost is 1 billion dollars giving a net profit of 7 billion 773 million, not bad to share between the manufacturer and retailer, but, let’s say I underestimated the costs by a billion or two. A net profit of 5+ billion over ten years, 577 million per year, isn’t bad for a single drug.

Look at the markup of Prozac! A chart listing other drugs can be obtained from Lipitor is one drug amongst hundreds and the fourth least in markup in the Snopes sample.

This may be the capitalistic way; however, with the concern about the costs of health care and knowing that many drugs can be purchased more cheaply overseas, one cannot help but wonder.


Ira Glickstein said...

Thanks JohnS for posting a new Topic on an important issue. However, I agree with Snopes that the chart of percent markup from the cost of active ingerdients is "of dubious accuracy and has little relevance".

Consider this: Water, piped to your home, costs less than a penny a gallon, which comes out to about 0.2 cents for the bottle of water I purchased at the Florida Strawberry Festival a couple days ago. I paid $2 for the water! That is a markup of about 10,000%. All the company did was filter and bottle and distribute the water! There was no research expense to speak of, no medical and legal liability for side effects, no possibility the product would be made obsolete by competition or that it would fail to work as well in humans as it did on test animals, etc., etc.

As for drug cost being different overseas, the cost of water varies greatly here in the US. $2 at the Festival. From $1 down to 25 cents in our local supermarket - and you can drink your capacity for free at the water fountain.

Seriously, we in the US do subsidize pharmaceuticals for the whole world. When faced with price restrictions in other countries, they sell at a smaller markup - sometimes much smaller. Any manufactured product has a non-recurring cost (R&D) and a recurring cost (manufacturing, distribution, ...). US customers pay nearly all of the non-recurring costs plus what others have to pay (recurring costs plus a reasonable profit). Legal liability is generally higher in the US so we get to pay that as well.

Ira Glickstein

JohnS said...

As often happens, I didn't make myself clear. I am not complaining about capitalism or free enterprise. Rather, my concerns are the cost of our healthcare system, the current tendency to socialize the system, as well as people, children included, with inadequate health care. While I have no choice but to subsidize our current system through my taxes, it does gall me to see what appears to be price gorging. Once we socialize our health care system, and I think we are moving toward some form of socialized health care, although I am sure the politicians will find a more acceptable name, will our nationalized health care system pay the same markups? If so, who suffers - the taxpayers? If the government refuses to pay the markups, limiting the cost of medicines, why don’t they do so now?

Your example has one serious flaw - you chose to pay for the water. If I need to use Lipitor, or any medicine because of my health, it is not voluntary; except of course, I can choose between health and serious illness of death.

By the way, I carry water from home when I play golf; many of my friends buy water at the course – their choice. At the same time, I buy iced tea at restaurants while many of my friends choose water. It is my choice to pay up to $2.25 per glass an exorbitant amount.

Ira Glickstein said...

OK, JohnS, the government imposes profit regulations and price controls and, for a few years, drug prices go down and company profits are limited and everybody is happy.

With less money coming in, and lacking any chance to cash in on some future "blockbuster" medication, the big pharmaceuticals cut research and development budgets and hire teams of lawyers to find ways around the regulations and politically-connected lobbyists to insert loopholes into the laws.

The inflow of new medications slows, and with it the outflow of old (but still pretty effective) medications to the low cost generic and over-the-counter markets.

Meanwhile, smaller pharmaceutical companies, often the source of the most innovative new drugs, are hit by a double whammy: 1) It is harder for them to raise venture capital because they are unlikely to generate big payoffs, and 2) It is harder for them to navigate government reguations because they cannot afford fancy lawyers/lobbyists like the big companies.

Net result: Fewer and less effective medications, reduced US-based medical research, and, in time, counting the costs of government regulators, higher drug costs for all of us.

Ira Glickstein