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Testimony of Don DeMoro
IHSP Executive Director
Embargoed Until March 11, 2003
The Institute for Health & Socio-Economic Policy (IHSP) is a non-profit policy and research group. The IHSP focus is current political/economic policy analysis in health care and other industries and the constructive engagement of alternative policies with international, national, state and local bodies to enhance, promote and defend the quality of life for all. The IHSP has a number of Advisory Boards comprised of analysts and policy activists with expertise in their respective industries of interest. Advisory Boards include Health Care, Alternative Technologies, Energy, Communications, etc. The Health Care Advisory Board is comprised of scholars from the Albert Einstein College of Medicine, Boston University, Harvard University, the Canadian National Federation of Nurses’ Unions, the New School in New York and the University of California. Institute for Health & Socio-Economic Policy “Big Pharma :” Mergers and Drug Costs
INTRODUCTORY REMARKS . 3
EXECUTIVE SUMMARY . 3
PHARMACEUTICAL M&A COSTS: ECONOMIC AND MEDICAL . 7
HOSPITAL COSTS, DRUG COSTS AND MEDICAL INFLATION . 10
PHARMA M&A IMPACTS. 10
PHARMACEUTICAL MERGERS AND DRUG COSTS AS A PERCENT OF TOTAL U.S. HEALTH CONCLUSION . 17
ADDENDA . 17
TABLE 1 PROFITS OF THE TOP 20 “PHARMA” CORPORATIONS . 4 TABLE 2 PHARMACEUTICAL MERGER AND ACQUISITION VALUES: 1993 THROUGH JUNE, 2002 . 8 TABLE 3 PERCENT CHANGE IN HOSPITAL AND PRESCRIPTION DRUG COSTS BY YEAR . 10 TABLE 4 PRESCRIPTION DRUG COSTS AS A PERCENT OF TOTAL U.S. HEALTH CARE TABLE 5 TOP 20 PBMS—FIRST QUARTER 1999. 13 TABLE 6 TOP 10 PBMS BY LIVES COVERED 1999 . 14 TABLE 7 PROFITS OF THE TOP 20 “PHARMA” CORPORATIONS . 15 TABLE 8 SUMMARY OF MEDICARE HMO MARKET WITHDRAWALS EFFECTIVE JANUARY 1, 2001 TABLE 9 HMO MEDICARE WITHDRAWALS BY STATE, 2002 . 18 TABLE 10 HMO WITHDRAWALS BY PLAN, 2002 . 19 IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
I. Introductory
Honorable Chair and members of the Committee. My name is Don DeMoro and I am Executive Director of the Institute for Health & Socio-Economic Policy (IHSP). The Institute is a non-profit research and policy organization with a focus on health care and other industries. The Institute has a prestigious health care advisory board, one of whose members has co-authored a work nominated for a Pulitzer Prize, and scholars from the Albert Einstein College of Medicine, Boston University, Harvard University, and the University of California. Past IHSP projects include: • The health care impacts of California Proposition 209 for the Public Media Center and the • The relationship of pharmaceutical mergers to drug prices and caregiver staffing ratios for the Office of US Congressman Dennis Kucinich, Ohio.1 • A review of literature on health care and technology at the request of the U.S. Congress, • In progress is another study for Congressman Kucinich examining hospital drug pricing practices and their impact on hospital charges overall. • Joint sponsorship with the one million member International Federation of Automatic
Control's (IFAC) Committee on Social Impact of Automation of an international conference
in San Francisco on Human Centered Design.
We also have a collaborative relationship with the California Nurses Association due to their focus on important health care policy and reform issues. I present below some of the findings of our report. You have our report in your packet so I will not go through every detail, but I want to summarize the main points and to answer any questions you may have. II. Executive
The recent wave of pharmaceutical mergers (1995-2002) has contributed to the corporate drug sector’s ability to raise prices on pharmaceutical preparations across the board. Those prices have financially impacted drug distribution companies, Pharmacy Benefit Management (PBMs) corporations, HMOs and hospitals, some of whom are now struggling with declining revenues. HMOs have: 1. Begun to drop even more Medicare patients, since drug costs are a primary expense in caring for the those 65 and older, resulting in a reduction in access to care for one of the nation’s most vulnerable patient populations. 2. Required tighter price controls and reduced numbers of available drugs in their 3. Passed what costs they can, including simply withholding payments, to hospitals with 1 The analysis presented here is in part based on the study for U.S. Congressman Kucinich referenced above. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Hospitals have responded by increasing the spread between what they pay for drugs and what they charge for them. Worldwide, pharmaceutical revenues are imposing: 2 • Those publicly traded pharma corporations that had net sales of one million or more for their • Their net sales totaled more than $543.2 billion. • Aggregated Net Profits for the top 20 corporations totaled $60.7 billion. • Market capitalization (value of outstanding stock) was about $1.5 trillion for the 326 firms.
In contrast, all U.S. hospitals’ (about 6,000 facilities) aggregated profits for year 2000 was
$15.4 billion.

The United States accounts for the largest proportion of the world market for pharmaceuticals, or
34.5 percent.(Strongin, 2000) In 2000, pharmaceutical sales in 13 key markets3 grew an average
of 10 percent(2001a) and the global market is expected to stay as profitable through 2004.
(Moore, 2000)
The top five Pharmas, Pfizer, Merck, Bristol Myers-Squibb, Glaxsosmithkine PLC-ADR and Du
Pont accounted for 47.9% of the aggregated net profits for the top 20 firms.
Table 1 Profits of the Top 20 “Pharma” Corporations
1. Pfizer
2. Merck & Co Inc
3. Bristol Myers Squibb Co
4. Glaxosmithkline Plc –Adr
5. Du Pont E I De Nemours & Co
6. Novartis-
7. Nestle S A –Adr
8. Astrazeneca
9. Procter & Gamble Co
10. Lilly Eli & Co
11. Wyeth
12. Roche Hldg Ltd -Adr
13. Schering Plough Corp
14. Abbott Labs
15. Pharmacia Corp
16. Aventis -Adr
17. Tiers Principal Protected Tr
2 Source: IHSP calculations of Securities Exchange Filings. 3 These 13 markets include: USA, Canada, Germany, France, Italy, UK, Spain, Japan, Brazil, Mexico, Australia/New Zealand and Argentina. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
18. Amgen Inc
19. Bayer Ag - Adr
20. Hoechst A G -Adr
$60,722,136,247.00
Among all industries, Pharmas were number one in return on revenues (18.5 percent), assets (16.6 percent), and equity (39.4 percent). (2001b) Profits were over three times greater than the average of all other industries. Huge tax benefits afforded to drug companies lowered their average effective tax rates nearly 40 percent relative to all other major US industries from 1990-1996.(2000b)4 Though there are hundreds of pharmaceutical companies, there are only 50 companies that control about two-thirds of the total world pharmaceutical market, (Jolley, 2000) and the top 10 U.S. companies make up 39.5 percent of the domestic market.(Moore, 2000)5 The average market value of an acquired pharmaceutical company has risen three-fold since 1990.(2000a)6 From 1993 through the second quarter of 2002, the value of publicly announced Pharma M&A
transactions in year 2001 dollars is about $457.2 billion. That figure, however, includes only 331
transactions that have publicly announced prices out of a total of 486 publicly announced
transactions.
• The $457 billon in pharmaceutical merger and acquisition values is an amount sufficient
to fund7 the total costs of all drugs paid by 5,942 hospitals for 20 years at 1999-2000
levels.8

• The profits of the top 20 Pharmas alone could pay for total costs of all drugs paid by
5,942 hospitals for 2.7 years at 1999-2000 levels.

• The market capitalization value of the top 326 Pharma corporations could pay the total
costs of all drugs paid by 5,942 hospitals for 66.6 years at 1999-2000 levels.
All this merger activity is having extraordinary market impacts: Five of the 10 most powerful marketers in the industry recently merged. The list includes: • GlaxoSmithKline, created in December 2000 when Glaxo Wellcome joined with • Pfizer, which took over Warner-Lambert in June 2000. 4 Quoted from, (DeMoro, 2001) 5 Quoted from, (DeMoro, 2001) 6 Quoted from, (DeMoro, 2001) 7 Source: IHSP calculations of Medicare Cost Report data for all U.S. hospitals most current filing as of December 31, 2002. 8 An IHSP examination of the 5,942 U.S. hospitals that filed Medicare Cost Reports current as of December 31, 2002 reveals that a total of $22,839,935,866 was spent on drugs by all hospitals. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
• Pharmacia, formed by the union of Pharmacia & Upjohn and Searle in April • AstraZeneca, created by the 1999 merger of Astra AB and Zeneca. • Aventis, launched in 1999 through the union of Hoechst Marion Roussel and These five new entities accounted for more than 35 percent of all promotional spending by the pharmaceutical industry in 2000, according to Scott-Levin's marketing research audits. They also generated more than 30 percent of all retail sales, reports Scott-Levin's Source(TM) Prescription Audit. Overall, the top 10 companies were responsible for 66 percent of the industry's promotional spending and 58 percent of retail prescription sales. (2001c) (From, (DeMoro, 2001)) Rising drug costs pose challenges for Medicare beneficiaries, who tend to use more medications (averaging 23 per year in 1999) than do younger adults. CBO projects that total drug spending for the Medicare population will grow from $95 billion in 2003 to $284 billion in 2013, increasing at an average annual rate of over 10% and totaling $1.8 trillion (2004-2013).(2003a) Adding only hospital drug costs and gross charges9 for both inpatients and outpatients for all
reporting hospitals current as of December 31, 2002 results in about another $100,000,000,000 in
expenditures to the $140,000,000,000 in drug costs in 2001, (2003b)or an increase of 71%.

From this perspective the rise in hospital costs
can be seen to be driven in good part by the rise
Adding only hospital drug costs and gross charges for
both inpatients and outpatients for all reporting
in drug costs and hospitals’ pricing mechanisms hospitals current as of December 31, 2002 results in
in their attempt to cope with those costs. about another $100,000,000,000 in expenditures to the
$140,000,000,000 in drug costs in 2001, (2003b)or an
increase of 71%.
weakening of Sherman-Antitrust to facilitate health care corporations to build economies of scale, (Eggleston, 1994) prescription drugs as a percent of total U.S. health care spending rose from 5.8% in 1994 to 9.8% in 2001. In absolute dollar amounts, this represents an increase from $54.6 billion in 1994 to $140.6 billion in 2001.(2003b) These values do not reflect the value of prescription drugs provided to patients by hospitals as part of a hospital stay, by nursing homes as part of care in a nursing home, or provided by physicians in their offices are not included in prescription drugs During this same period, Pharma publicly announced merger and acquisition transactions numbered 422, for which 288 had pricing information, and are valued at approximately $384 billion in 2001 dollars. The economies of scale achieved through the Pharma mergers have failed to bring about the anticipated control of drug spending. Further, increasing drug prices are linked to the wholesale abandonment of Medicare patients by 9 Gross charges are not equivalent to reimbursed charges. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
“ …. while Clinton's proposal calls for Medicare to cover prescription drugs starting in 2002, many H.M.O.'s that already provide such coverage said they intended to cut back drug benefits for Medicare subscribers next year. It was precisely the prospect of getting prescription drug coverage, most frequently at little or no cost, that led many elderly people to Medicare H.M.O.'s in the first place…. (Pear, 1999) In 1998, Medicare Managed Care plans abandoned 407,000 enrollees, (Booske, Lynch, & Riley, 2002; Booske et al., 2002) and by mid 1999, 400,000 enrollees were dropped.(Pear, 1999) In 2000, the figure was 327,000. In year 2001 934,000 enrollees were deserted and in 2002 536,000 enrollees found themselves without health care coverage.(Booske et al., 2002) The total is about 2,604,000. There is an association between rising drug costs and the costs and volume of pharmaceutical mergers since 1993. Those costs have increased precipitously in the post 1994 Sherman Antitrust (Eggleston, 1994) amendment era. Those HMOs that have improved their finances in recent years have done so by dramatically raising premiums, restrictive formularies and through wholesale desertion of the Medicare market, thus escaping escalating drug costs and Pharma induced public demand through direct advertising and detailing. The hospital industry principal means of coping with ever rising drug prices is to charge significant premiums over costs; however, even then, large numbers of hospitals have financial difficulties – particularly those smaller institutions in the public sector. Pharmaceutical M&A Costs: Economic and Medical
The United States accounts for the largest proportion of the world market for pharmaceuticals, or 34.5 percent.(Strongin, 2000) In 2000, pharmaceutical sales in 13 key markets10 grew an average of 10 percent(2001a) and the global market is expected to stay as profitable through 2004. (Moore, 2000) Within the drug industry, there has been significant growth in coordination and consolidation. Strategic alliances grew from 120 in 1986 to 635 in 1997.(Levy, 1999) Though there are hundreds of pharmaceutical companies, there are only 50 companies that control about two-thirds of the total world pharmaceutical market, (Jolley, 2000) and the top 10 U.S. companies make up 39.5 percent of the domestic market.(Moore, 2000) In the pharmaceutical industry, between 1998 and 2000, 15 of the top 25 pharmaceutical companies publicly engaged in such merger negotiations; industry analysts believe that all 25 have negotiated privately.(2000d) In terms of market share, the newly merged GlaxoSmithKline is the largest, capturing about 7 percent of the world market.(2000a) Mergers and acquisitions have been increasingly profitable. The average market value of an acquired pharmaceutical company has risen three-fold since 1990.(2000a) While in 1989, the value of SmithKline and Beecham was $8.9 billion,(2000a) the 2000 Warner Lambert/Pfizer deal was worth $90.2 billion. (Cowell, 2000) 10 These 13 markets include: USA, Canada, Germany, France, Italy, UK, Spain, Japan, Brazil, Mexico, Australia/New Zealand and Argentina. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
The average compensation for 12-drug company CEOs in 1998 was $22 million. (2000b) The industry was number one in return on revenues (18.5 percent), assets (16.6 percent), and equity (39.4 percent). (2001b) Profits were over three times greater than the average of all other industries. Huge tax benefits afforded to drug companies lowered their average effective tax rates nearly 40 percent relative to all other major US industries from 1990-1996.(2000b) The volume and value of mergers and acquisitions in the industry as indicated in the below table has been significant. From 1993 through the second quarter of 2002, the value of such transactions in year 2001 dollars is about $457.2 billion. That figure, however, includes only 331 transactions that have publicly announced prices out of a total of 486 publicly announced transactions. Table 2 Pharmaceutical Merger and Acquisition Values: 1993 through June, 200211
Number Of
Number With Price
Transactions
Value in 2001 Dollars
2002 (Thru
$457,242,618,713

A number of observations are in order concerning the above table. First, it is critical to note that
the total value of about $457 billion is an extremely conservative figure. This is due to the fact
that of the 486 total transactions, only 331 or about 68% of them had publicly announced prices.
The price of the other 155 transactions or 32% of the total transactions is unknown. We believe
that imputing a price to them through any statistical technique is methodologically risky given the
limitations of the available data elements for those transactions. A simple averaging of transaction
values would imply another $214 billion should be added to the $457 billion total for a grand
total of about $671 billion. However, it must be stated that lacking concrete data, we hesitate to
infer that $671 billion is an accurate figure.
A more fruitful approach would be to consider the relative market share of the pre-merging firms,
their product mix and disaggregated share of each facet of that mix, their overall debt
structuration, and other relevant data elements; however, that approach is rendered intractably
problematic due to the lack of availability of these data elements for all firms.
11 Source: IHSP calculations of Levin & Associates Data and Publicly Available Data. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
The relative impact of extremely large financial figures in everyday lived experience is often difficult to convey. The A simple averaging of
IHSP has therefore adopted what we call “Medical/Social transaction values would imply
Equivalencies” to better bridge the gap between enormous another $214 billion should be
economic figures in the abstract and their impact on the added to the $457 billion total for
everyday health concerns of the nation’s population. a grand total of about $671
billion.
Below are a few of those “Medical/Social Equivalencies:” • The $457 billon in pharmaceutical merger and acquisition values is an amount sufficient to fund14 the total costs of all drugs paid by 5,942 hospitals for 20 years at 1999-2000 levels.15 • The profits of the top 20 Pharmas alone could pay for total costs of all drugs paid by 5,942 hospitals for 2.7 years at 1999-2000 levels. The $457 billon in pharmaceutical merger and acquisition values is an amount sufficient
to fund12 the total costs of all drugs paid by 5,942 hospitals for 20 years at 1999-2000
levels.13
The profits of the top 20 Pharmas alone could pay for total costs of all drugs paid by
5,942 hospitals for 2.7 years at 1999-2000 levels.
The market capitalization value of the top 326 Pharma corporations could pay the total
costs of all drugs paid by 5,942 hospitals for 66.6 years at 1999-2000 levels.
• The market capitalization value of the top 326 Pharma corporations could pay the total costs of all drugs paid by 5,942 hospitals for 66.6 years at 1999-2000 levels. 12 Source: IHSP calculations of Medicare Cost Report data for all U.S. hospitals most current filing year. 13 An IHSP examination of the 5,942 U.S. hospitals that filed Medicare Cost Reports current as of December 31, 2002 reveals that a total of $22,839,935,866 was spent on drugs by all hospitals. 14 Source: IHSP calculations of Medicare Cost Report data for all U.S. hospitals most current filing year. 15 An IHSP examination of the 5,942 U.S. hospitals that filed Medicare Cost Reports current as of December 31, 2002 reveals that a total of $22,839,935,866 was spent on drugs by all hospitals. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Hospital Costs, Drug Costs and Medical Inflation
Table 3 Percent Change in Hospital and Prescription Drug Costs by year
Prescription Drug Costs by Year-(1980-2001) Percent Change in
Hospital Care Costs
Percent Change in
Prescripton Drug
1996 1997
Source: Centers for Medicare & Medicaid Services. Table 2: National Health Expenditures Aggregate Amounts and Average Annual Percent Change, by Type of Expenditure: Selected Calendar Years 1980-2001 Copyright IHSP 2003, All Rights Reserved Drug and hospital costs are widely believed to be fueling medical inflation.(Rapaport, 2002; Pear, 2002) However, most tracking of drug costs include only those drug costs, “…purchased from retail outlets such as community or HMO pharmacies, grocery store pharmacies, mail order pharmacies, etc. The value of prescription drugs provided to patients by hospitals as part of a hospital stay, by nursing homes as part of care in a nursing home, or provided by physicians in their offices are not included in prescription drugs but are included in those respective expenditure categories…”.(2000c) Adding only hospital drug costs and gross charges16 for both inpatients and outpatients for all
reporting hospitals current as of December 31, 2002 results in about another $100,000,000,000 in
expenditures to the $140,000,000,000 in drug costs in 2001, (2003b)or an increase of 71%.
From this perspective the rise in hospital costs can be seen to be driven in good part by the rise in
drug costs and hospitals’ pricing mechanisms in their attempt to cope with those costs.
Pharma M&A Impacts
Five of the 10 most powerful marketers in the industry recently merged. The list includes: • GlaxoSmithKline, created in December 2000 when Glaxo Wellcome joined with • Pfizer, which took over Warner-Lambert in June 2000. 16 Gross charges are not equivalent actual reimbursements. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
• Pharmacia, formed by the union of Pharmacia & Upjohn and Searle in April • AstraZeneca, created by the 1999 merger of Astra AB and Zeneca. • Aventis, launched in 1999 through the union of Hoechst Marion Roussel and These five new entities accounted for more than 35 percent of all promotional spending by the pharmaceutical industry in 2000, according to Scott-Levin's marketing research audits. They also generated more than 30 percent of all retail sales, reports Scott-Levin's Source(TM) Prescription Audit. Overall, the top 10 companies were responsible for 66 percent of the industry's promotional spending and 58 percent of retail prescription sales. (2001c) A. Pharmaceutical Mergers and Drug Costs as a Percent of Total U.S. Health Care
Costs
The table below depicts prescription drug costs as a percent of total U.S. health care costs for selected years. It is evident that the rise in drug costs beginning in 1995 is closely associated with the rise in pharmaceutical merger and acquisition activity. Increases were fairly flat in the mid 1990’s, but began to climb in 1995 after the Sherman Anti-Trust Act was modified to allow the health care industry to achieve economies of scale in an ostensible effort to bring down total health care spending. Table 4 Prescription Drug Costs as a Percent of Total U.S. Health Care Costs17(2001d)
Copyright IHSP 2003, All Rights Reserved IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
It is important to note, however, that the above increases do not include all drug costs and are
therefore conservative figures.18
Worldwide, pharmaceutical revenues are imposing:
• Those publicly traded corporations that had net sales of one million or more for their most
• Their net sales totaled more than $543.2 billion. • Total Aggregated Net Profits for the top 20 corporations was $61 billion. • Market capitalization for the 326 firms was about $1.5 trillion.19 Two de-facto pharmaceutical industry engineered policies facilitated by mergers and acquisitions coupled with extraordinary direct advertising contribute to the robust financial picture in the pharmaceutical market: the increase in drug prices in the United States and the increase in consumption. The increase in consumption is in good measure generated by the industry’s recent intense direct advertising in the mass media to artificially over stimulate and maximize demand beyond clinical efficacy.20 Some of the impacts on drug prices due to the relatively new and intensive industry policy of heavy advertising is presented below: • The 10 drugs most heavily advertised directly to consumers in 1998 accounted for $9.3 billion or about 22 percent of the total increase in drug spending between 1993 and 1998. • Spending on oral antihistamines such as Claritin*, Zyrtec*, and Allegra* increased by 612 Percent between 1993 and 1998, representing 4.5 percent or $1.9 billion of the total Increase in drug expenditures. • Spending on antidepressants such as Prozac*, Zoloft, and Paxil increased by 240 percent Between 1993 and 1998, representing 11.8 percent or $5 billion of the total increase indrug expenditures over this time. • Spending on cholesterol-reducing drugs such as Lipitor, Zocor*, and Pravachol* increased by 194 percent between 1993 and 1998, representing 8 percent or $3.4 billion of the total increase in drug expenditures.
18 Expenditures for prescription drugs are limited to those purchased from retail outlets such as community or HMO
pharmacies, grocery store pharmacies, mail order pharmacies, etc. The value of prescription drugs provided to patients
by hospitals as part of a hospital stay, by nursing homes as part of care in a nursing home, or provided by physicians in
their offices are not included in prescription drugs but are included in those respective expenditure categories.
Consequently, the expenditures for prescription drugs shown here are underestimated and may differ from other
estimates (e.g., prescription drug sales by manufacturers estimated by market research firms)(2000c)
19 Source: IHSP calculations of Securities Exchange Filings.
20 To stimulate the use of prescription drugs and, particularly, new therapies, manufacturers promote prescription drugs
in several ways. The largest type of promotional spending is “detailing” ($5.7 billion in 1998), where a company
representative makes personal selling visits to physicians in offices and hospitals and leaves samples. Direct-to-
consumer advertising ($1.3 billion in 1998) is a relatively recent phenomenon that has grown dramatically, with
nearly a 5-fold increase in spending overall since 1994, and nearly a 20-fold increase for television advertising
since 1994. (emphasis added). Many of the products with the most direct-to-consumer advertising are also among the
top prescription drugs by sales and by number of prescriptions dispensed.(2000c)
IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
• Spending on anti-ulcerant drugs such as Prilosec*, Prevacid, and Pepcid increased by 71 percent between 1993 and 1998, representing 6.4 percent or $2.7 billion of the total increase in drug expenditures. • In addition to the seven drugs identified above, these drugs also included Propecia (a hair-loss treatment), Evista (an osteoporosis drug), and Zyban (a smoking deterrent). • Many heavily advertised drugs, particularly antihistamines, antidepressants and cholesterol reducers, are likely to be used on an ongoing basis. • In 1998, pharmaceutical manufacturers spent $8.3 billion promoting their products in the United States. About $1.3 billion was spent on direct-to-consumer (DTC) advertising and $7.0 billion on advertising and detailing to health care professionals.(Scott-Levin, “The Pharmaceutical Industry: More Reps and More Promotion Fuel New Launches,” press release, 18 June 1999. Accessed June 29, 1999, from www.scottlevin.com). • The makers of the antihistamines Claritin, Zyrtec, and Allegra spent $313 million on DTC advertising for these products in 1998. Together, these three drugs accounted for 90 percent of sales of prescription antihistamines and 2 percent of total drug spending in that year. • Policy changes by the FDA, particularly a 1997 relaxation of guidelines for broadcast advertising, have allowed drug manufacturers to engage in much more extensive direct-to-consumer advertising.(Barents Group LLC, 1999) Pharmaceutical companies enable these policies via mergers and acquisitions that ultimately reduce competition to keep prices high and create economies of scale to fund their intensive marketing/advertising operations. These de-facto policies in tandem with the ascendancy of managed care have given rise to Pharmacy Benefit Management corporations (PBMs). The top 20 PBMs by prescription drug statistics and the top 10 PBMs by covered lives are depicted in the below tables: Table 5 Top 20 PBMs—First Quarter 199921
Number of
Percent of all
Percent of all
Prescriptions
Prescriptions
Prescriptions
Managed (in
Covered by Third
Dispensed
thousands)
Party Payers
Through Retail
Pharmacies
21 Source: IMS America. Taken from “The Role of PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit,” The Henry J. Kaiser Family Foundation, January 2000, p. 8. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Number of
Percent of all
Percent of all
Prescriptions
Prescriptions
Prescriptions
Managed (in
Covered by Third
Dispensed
thousands)
Party Payers
Through Retail
Pharmacies
*Express Scripts, Inc acquired Diversified Pharmaceutical Services in February, 1999. #Advanced Paradigm acquired PCS Health Systems in October, 2000. Table 6 Top 10 PBMs by Lives Covered 199922
Name Of Pbm23
Lives Covered 1999
Lives Covered 2001
P C S Health Systems24
Merck-Medco Managed Care
Diversified Pharmaceutical Services*
Express Scripts ValueR/X*
WellPoint Pharmacy Management
Integrated Pharmaceutical Services
22 Source: Drug Topics, 1/18/99 and SMG Marketing Group Inc taken from the following website: http://www2.interaccess.com/smg/wire.htm 23 *Express Scripts, Inc acquired Diversified Pharmaceutical Services in February, 1999.Advanced Paradigm acquired PCS Health Systems in October, 2000.Information gathered from individual firm’s websites. 24 New name is Advance PCS IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Name Of Pbm23
Lives Covered 1999
Lives Covered 2001
Advance Paradigm
Medimpact Healthcare Systems
Caremark - Prescription Service Div
First Health Services
Table 7 Profits of the Top 20 “Pharma” Corporations
1. Pfizer
2. Merck & Co Inc
3. Bristol Myers Squibb Co
4. Glaxosmithkline Plc -Adr
5. Du Pont E I De Nemours & Co
6. Novartis-
7. Nestle S A -Adr
8. Astrazeneca
9. Procter & Gamble Co
10. Lilly Eli & Co
11. Wyeth
12. Roche Hldg Ltd -Adr
13. Schering Plough Corp
14. Abbott Labs
15. Pharmacia Corp
16. Aventis -Adr
17. Tiers Principal Protected Tr
18. Amgen Inc
19. Bayer Ag - Adr
20. Hoechst A G -Adr
$60,722,136,247.00
B. Medicare Patients Left Stranded
Numerous past reports document that Medicare HMOs tend to recruit the healthiest and wealthiest patients while Medicare fraud is in full swing.(Lawrence, 1997; Pear, 1998; Hilzenrath, 1998; Costello, 1998) However, currently (Associated Press, 1997; Riley, Ingber, & Tudor, 1997; Hinman, 1997; General Accounting Office, 1997; Brown, 1997; Holtz, 1996; Arno, 1997; CNA, 1997), Medicare HMOs are deserting the Medicare market(Morgan, Virnig, DeVito, & Persily, 1997; Naasz, 1998; Kilborn, 1998a; Kilborn, 1998b; Appleby, 1998). IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Statistics compiled from CMS' 1998 reports indicate that Medicare health care plan withdrawals resulted in 407,000 beneficiaries (6.5 percent of M+C enrollees) making a plan change in January 1999. In 2000, 327,000 beneficiaries (5 percent of M+C enrollees) were affected by plans' withdrawals or reduction in service areas. Some plans withdraw completely from MMC while others continue participation in Medicare but reduce their service areas by no longer serving beneficiaries in some counties or ZIP codes. In 2001, 934,000 Medicare beneficiaries (15 percent of total enrollment in M+C) were forced to make new choices about their health plan coverage when their Medicare health care plan withdrew from the program or reduced their service areas. Most recently, 536,000 (10 percent of M+C enrollees) were affected in 2002.(Booske et al., 2002) While public sector hospitals, who tend to have a greater proportion of poorer Medicare patients than private sectors hospitals, are disproportionately impacted by the reduction in Medicare payment rates, (Baxter & Mechanic, 1997; Beaglehole & Bonita, 1998; CAPH, 1997a; CAPH, 1997b; DeMoro, 1998; Hammerle, 1992; Navarro, 1976; Lienert, 2000) the wider claim that the Balanced Budget Act of 1997 mandated reduction in Medicare payments has been the principal cause for recent reduced profits may not be correct.25 MedPAC stresses the role of private payer cutbacks but does not emphasize the role that drug expenses may have in prompting those cutbacks and on hospital revenues, or any possible HMO response to such expenses in their contractual relationships with hospitals. The implication here is that HMO desertion of Medicare patients, and the overall reduction is some hospital profits are not so much due to a reduction in Medicare payments, but due to drug costs. Those costs accounted for about 44% of the 1999 increase in health costs - even more than the 32 percent increase attributable to the growth in physician spending - while hospital inpatient spending accounted for about 3 percent.(Hogan, Ginsburg, & Gabel, 2000) • Drug spending accounted for 44 percent of the 1999 cost increase. About one- third was due to higher drug prices, the rest to new drugs and increases in use of existing drugs. • Hospital outpatient spending, which accounted for 21 percent of the increase, has grown at a consistently high rate throughout the 1990s, with annual per capita cost increases averaging around 8.5 percent. • Hospital inpatient spending accounted for only 3 percent of the increase, continuing the pattern of the last half-decade, during which per capita spending fell more often than it rose. (2000e) 25 In its 1997 report to Congress, ProPAC25 recommended that hospital inpatient reimbursements under PPS (Medicare’s Prospective Payment System) be frozen in fiscal 1998. ProPAC made its recommendation primarily on the basis of its margin calculations, which showed that hospital PPS margins had topped 14% in fiscal 1997, the highest they had ever been.(Weissenstein, 1998) Though hospitals continue to point the finger at Medicare as the chief culprit for their slump, MedPAC's analysis showed that private payers reduced the percentage of inpatient costs that they cover for their enrollees by 4 percentage points from 1997 to 1998. Medicare reduced its proportion of costs by only 1 percentage point during the same period.(Gardner, 2000) IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
VI. Conclusion
There is an association between rising drug costs and the costs and volume of pharmaceutical mergers since 1993. Those costs have increased precipitously in the post 1994 Sherman Antitrust (Eggleston, 1994) amendment era. Those HMOs that have improved their finances in recent years by dramatically raising premiums, restrictive formularies and through wholesale desertion of the Medicare market, thus escaping escalating drug costs and Pharma induced public demand through direct advertising and detailing. The hospital industry principal means of coping with ever rising drug prices is to charge significant premiums over costs; however, even then, large numbers of hospitals have financial difficulties – particularly those smaller institutions in the public sector. VII. Addenda
It is useful to distinguish expenses from costs. Profits, mergers and acquisitions and concentrated executive compensation are costs. They are health care values that are not necessarily used to provide or enhance patient care. By way of contrast, expenses are those values that are used to provide or enhance patient care. The expense issue in particular has been a central concern of the industry, the federal government and most researchers. Yet, the conceptualization of “costs,” while seemingly self-evident, has not entered the mainstream of health care policy debate, and the vast majority of studies do not categorize merger and acquisition figures per se as costs26 – even though they account for tens of billions of dollars in total health care spending each year. (From, (DeMoro, 2001) The tables below details some of the ongoing mass exodus of HMO plans from the Medicare market. Table 8 Summary of Medicare HMO market withdrawals effective January 1, 200127
Parent Company
% Exiting
Exiting 11 states plus 23 counties in three additional states effecting 355,000 members. Remaining in selected markets in 5 states serving 304,000 members. Exiting 11 states with 104,000 members. Remaining in New Mexico and Arizona markets serving 50,000 members. Exiting 18 counties in AZ, CA, CT, NJ, NY and PA. with 19,000 members. Remaining in 36 counties in AZ, CA, CT, FL, NY and PA serving 240,000 members. Exiting 45 counties with 84,000 members. Remaining in all 9 states in selected markets serving 434,000 members. 26 Corporate profits and executive compensation as well as executive stock holdings can also be considered as costs since both remove from the system value that could perhaps be utilized elsewhere in the provision of care as opposed to enhancing market share or as financial perks for a managerial elite within the industry. 27 Source: Taken from: Managed Care On Line website: www.medicarehmo.com IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Parent Company
% Exiting
Exiting eight New Jersey counties with 7,200 members. Remaining in New York and Connecticut and selected New Jersey markets serving 80,000 members. Exiting 15 counties in 5 states affecting more 26,600 members. Remaining in all states but Ohio ( 8 total ) serving 968,000 members. Exiting 21 counties affecting 56,000 members; remaining in 61 counties serving 340,000 members Connecticut, AvMed Health Plan, CareFirst BlueCross BlueShield, Harvard Pilgrim, Kaiser Permanente, HealthGuard, Medica, Ochsner Health Plan, Premera Blue Cross, Providence Health Plans, Regence BlueShield, Sierra Health Services Table 9 HMO Medicare Withdrawals by State, 2002
Withdrawals By State – Year 2002
State
IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Withdrawals By State – Year 2002
State
Grand Total
Table 10 HMO Withdrawals by Plan, 2002
Withdrawals By Plan, 2002
Plan/State
Advantage Health Plan, Inc., In
Aetna U.S. Healthcare, Inc. - H0359, Ar
Aetna U.S. Healthcare, Inc., Az
Aetna U.S. Healthcare, Inc., Nj
Aetna U.S. Healthcare,Inc., Pa
Aetna U.S.Healthcare Of California Inc., Ca
Americhoice Of New Jersey, Inc, Nj
Amerihealth Hmo_Inc, Nj
Av-Med Health Plan Inc, Fl
Beacon Health Plans, Inc., Fl
Blue Care Network - Southeast Michigan - H2350, Mi
Blue Care Network - Southeast Michigan, Mi
Blue Cross Blue Shield Of De, Inc. - H0803, De
Blue Cross Blue Shield Of De, Inc., De
Blue Cross Blue Shield Of Kansas City - H2652, Mo
Blue Cross Blue Shield Of Kansas City, Ks
Blue Cross Blue Shield Of Kansas City, Mo
Blue Cross Of California, Ca
Bluecross & Blueshield United Of Wisconsin - H5258, Wi
Bluecross & Blueshield United Of Wisconsin, Wi
Ca Physicians Serv/Dba Blue Shield Of Calif, Ca
Community Care Hmo, Inc, Ok
Community Health Of Ohio - H3676, Oh
Community Health Of Ohio, Oh
Connecticare, Inc - H0754, Ct
Connecticare, Inc, Ct
Fallon Community Health Plan, Inc., Ma
Family Health Plan, Inc. - H3649, Oh
IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Withdrawals By Plan, 2002
Plan/State
Family Health Plan, Inc., Oh
Health Alliance Plan Of Michigan, Mi
Health Net, Ca
Health Options, Inc, Fl
Health Plan Hawaii - H1252, Hi
Health Plan Hawaii, Hi
Health Plan Of The Upper Ohio Valley, Oh
Health Plan Of The Upper Ohio Valley, Wv
Hip Of Greater New York, Ny
Hmo Colorado, Inc - H0603, Co
Hmo Colorado, Inc, Co
Hmo Partners/ Health Advantage - H0451, Ar
Hmo Partners/ Health Advantage, Ar
Humana Health Plan, Inc. - H1890, Ar
Humana Health Plan, Inc., Il
Humana Health Plan, Inc., In
Humana Health Plan, Inc., Ky
Inter Valley Health Plan, Inc., Ca
Kaiser Foundation Hp Of Ga, Inc., Ga
Mcare, Mi
Medspan Health Options, Inc - H0759, Ct
Medspan Health Options, Inc, Ct
National Med, Inc. - H0568, Ca
National Med, Inc., Ca
Oxford Health Plans (Nj), Inc., Nj
Oxford Health Plans (Ny) Inc., Ny
Pacificare Of Arizona, Inc, Az
Pacificare Of California/Secure Horizons, Ca
Pacificare Of Oklahoma, Inc., Ok
Pacificare Of Oregon, Inc., Or
Pacificare Of Texas, Inc., Tx
Pacificare Of Washington, Inc., Wa
Physicians Hlth Svc Of Ny, Inc, Ny
Preferred Plus Of Kansas, Inc. - H1750, Ks
Preferred Plus Of Kansas, Inc., Ks
Premera Blue Cross - H5066, Wa
Premera Blue Cross, Wa
Renaissance Hmo, Inc. - H3663, Oh
Renaissance Hmo, Inc., Oh
Selectcare Hmo,Inc. - H2357, Mi
Selectcare Hmo,Inc., Mi
IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
Withdrawals By Plan, 2002
Plan/State
Sterling Life Insurance Company, Ms
Sterling Life Insurance Company, Tx
Texas Health Choice, L.C. - H4565, Tx
Texas Health Choice, L.C., Tx
The Oath Of Alabama, Inc., Al
United Healthcare Of Arkansas, Inc. - H0455, Ar
United Healthcare Of Arkansas, Inc., Ar
United Healthcare Of Fl, Inc., Fl
United Healthcare Of Florida Inc., Fl
United Healthcare Of Illinois, Inc - H9045, Il
United Healthcare Of Illinois, Inc, Il
United Healthcare Of Ohio, Inc., Oh
Univera Healthcare Central Ny - H3372, Ny
Univera Healthcare Central Ny, Ny
Grand Total
IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
1. Inside the Industry - Merger: FTC Approves GlaxoSmithKline After Divestures (2000a). American Health Line [On-line]. 2. News from Pete Stark. (2-16-2000b). Ref Type: Generic Prescription Drug Trends: A Chartbook (2000c). Madison, Wisconsin: Kaiser Family Foundation and the Sonderegger Research Center. 4. The Cost of Pharma Mergers on Clinical Research (2000d). Center Watch, 7, 5-10. Tracking Health Care Costs: An Upswing in Premiums and Costs Underlying Health Insurance (2000e). (Rep. No. 20). Center for Studying Health System Change. 6. Global Pharma Sales up 10% in November 2000 (2001a). Drug Monitor [On-line]. Available: www.imshealth.com
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Financing Administration, Office of the Actuary, National Health Statistics Group [On-line].
Available: www.hcfa.gov/stats/nhe-oact/tables/t2.htm
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“Big Pharma :” Mergers and Drug Costs
15. Banstetter, Trebor (2001, April 10). More hospitals may sue insurers. Star- 16. Barents Group LLC (1999). Factors Affecting the Growth of Prescription Drug Expenditures Washington: National Institute for Health Care Management. 17. Baxter, R. J. & Mechanic, R. E. (1997). The status of local health care safety nets. Health Aff.(Millwood.), 16, 7-23. 18. Beaglehole, R. & Bonita, R. (1998). Public health at the crossroads: which way 19. Booske, B. C., Lynch, J., & Riley, G. (2002). Impact of Medicare Managed Care Market Withdrawal on Beneficiaries. Health Care Financing Review, 24, 95-115. 20. Brown, S. (1997). Medicare fraud. The Nation [On-line]. 21. CAPH. (1997a). 1997 Status Report of the Medi-Cal Disproportionate Share Hospital Program: Broke and Broken. Berkeley, California Association of Public Hospitals and Health Systems. 22. CAPH. (1997b). The Disproportionate Share Hospital Payment Program - California's Disproportionate Share Program: Patching the Weakened Local Safety Net. Berkeley, California Association of Public Hospitals and Health Systems. 23. CNA. (1997). Corporate Health Care: For-Profit, Not-For-Profit, or Not for Patients? Kaiser Permanente. San Francisco, California Nurses Association. 24. Costello, C. (1998). Shortchanged: Billions Withheld from Medicare Beneficiaries (Rep. No. 98-103). Families USA Foundation. 25. Cowell, Alan (2000, December 13). British Drug Makers See FTC Approval of Merger. The New York Times, pp.1 Business. 26. DeMoro, D. Health Care and the Market - Protecting Public Health Care from Private Greed. A Presentation to the Canadian Health Coalition and the Canadian Labour Congress. Ottawa, Ontario. 4-16-1998. Orinda, Institute for Health & Socio-Economic Policy. 27. DeMoro, D. (2001). Big Pharma: Mergers, Drug Costs and Health Caregiver Staffing Ratios. A Report Produced as a Public Service at the Request of the Office of Representative Dennis J. Kucinich (D-OH-10). Orinda: Institute for Health & Socio-Economic Policy. 28. Eggleston, James (1994, November 22). Relief from Antitrust Laws for Monopolization of Hospital Industry. California Nurse, pp.1. 29. Gardner, Jonathan (2000, March 20). MedPac Blames Private Payers. Modern IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
30. General Accounting Office (1997). Medicare: fewer and lower cost beneficiaries with chronic conditions enroll in HMOs (Rep. No. HEHS-97-160). United States General Accounting Office. 31. Hammerle, N. (1992). Private choices, social costs, and public policy : an economic analysis of public health issues. Westport, Conn.: Praeger. 32. Hilzenrath, David S. (1998, July 14). Study: HMOs Target Healthiest Seniors. Survey Also Finds Promotional Seminars Were Inaccessible to Wheelchairs. Washington Post, pp.CO3. 33. Hinman, A. (1997). HMOs may skimp on care for stroke patients, study says. CNN 34. Hogan, C., Ginsburg, P., & Gabel, J. (2000). Tracking Health Care Costs: Inflation Returns. Health Affairs, 19, 217-223. 35. Holtz, A. (1996). Poor and elderly do worse in HMOs. CNN Interactive [On-line]. Available: http://cnn.com/HEALTH/9610/01/nfm/hmo.outcomes/index.html 36. Jolley, J. (2000). Pharmaceutical Manufacturing into the Future. The 37. Kilborn, Peter T (1998, July 31a). End of H.M.O. for the Elderly Brings Dismay in Rural Ohio. The New York Times, pp.1. 38. Kilborn, Peter T (1998, July 6b). H.M.O.'s Are Cutting Back Coverage of the Poor and Elderly. The New York Times, pp.1. 39. Lawrence, J. (1997). Fraud and Abuse Find A Home in Managed Care. Managed 40. Levy, R. (1999). The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change Federal Trade Commission. 41. Lienert, Anita (2000, June 26). Mercy patients left adrift after closing St. Hohn's hit by crush of new Medicaid patients. The Detroit News, pp.1 A. 42. Moore, Stephen (2000, December 1). Wave of Pharmaceutical Mergers to Alter Ranking of Sector Giants. Wall Street Journal. 43. Morgan, R. O., Virnig, B. A., DeVito, C. A., & Persily, N. A. (7-17-1997). The Medicare-HMO Revolving Door -- The Healthy Go In and the Sick Go Out. The New England Journal of Medicine 337[3], Page unknown. 44. Naasz, K. (1998). Exodus of HMOs From Rural Markets Could Be Part of Larger Trend. Managed Care Reporter, 9, 741. 45. Navarro, V. (1976). The underdevelopment of health of working America: causes, consequences and possible solutions. American Journal of Public Health, 66, 538-547. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)
“Big Pharma :” Mergers and Drug Costs
46. Pear, Robert (1998, July 17). Blue Cross of Illinois to Pay $144 Million for Defrauding Medicare. The New York Times. 47. Pear, Robert (1999, July 2). H.M.O.'s Will Raise Medicare Premiums or Trim Benefits. The New York Times, pp.1. 48. Pear, R. (2002). Propelled by Drug and Hospital Costs, Health Spending Surged in 2000. The New York Times Web Site [On-line]. 49. Rapaport, L. (2002). State's HMOs turn '01 profits. But rising drug and hospital costs are seen as a threat to current prosperity. Sacramento Bee Website [On-line]. Available: http://www.sacbee.com/content/business/v-print/story/1757706p-1837124c.html 50. Riley, G. F., Ingber, M. J., & Tudor, C. G. (1997). Disenrollment of medicare beneficiaries from HMOs. Health Affairs 16[5], 117-124. 51. Strongin, R. (2000). Pharmaceutical Marketplace Dynamics. In George Washington University, Washington: National Health Policy Forum. 52. Weissenstein, Eric (1998, June 29). Solving the Medicare Equation: Are Margins Truly the Best Way to Measure a Hospital's Fiscal Health? Modern Healthcare, 130. IHSP. Do Not Quote, Copy or Distribute Without Consent of the IHSP. (Embargoed Until March 11, 2003, 1:30 PM)

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