Pharmaceutical Company Profiteering: Behind the High Cost of Drugs in America

by Hannah Keppler

The recent passage, judicial review and implementation of the Affordable Care Act (ACA) has intensified the nationwide debate regarding the role that large health care companies play in delivering health services to people.  Most people understand that private health care providers are businesses that seek to profit from the services they provide, but at a certain point, a conflict of interest is generated between a company’s desire to maximize their profits and their mandate to pay for their customers’ medical care.  How much money can a health care company garner for their services before it becomes “profiteering”? 

While health insurance companies have borne the brunt of public outrage regarding profiteering in health care, the pharmaceutical companies seem to have escaped the same level of scrutiny.  With the cost of drugs constituting a significant portion of American healthcare costs (10% of national health expenditure for prescription drugs in 2010) [1], shouldn’t the cost of drugs factor into the discussion when we talk about how to rein in healthcare costs?  Thanks to a recent series of articles in the New York Times about the cost of healthcare, many people now realize that, nationally speaking, we pay much more for the exact same medicines compared with Canada, Europe, and most other countries.  Why are we paying so much more than everyone else? The short answer is that, since we lack a national healthcare system, we have less collective leverage to negotiate prices with drug companies or buy medicines in bulk, and the pharmaceutical industry spends a lot of time and money lobbying in Washington to keep this system exactly the way it is.  To be specific, in 2012, the pharmaceutical industry spent $152 million on federal lobbying [2].  In fact, when Congress was drafting a reform of the Medicare prescription drug benefit (Medicare Part D) in 2003, the law was specifically written to forbid the federal government from being able to negotiate bulk prices with drug companies.  Compare this with the Department of Veterans Affairs (VA), which is able to negotiate drug prices and establish a formulary, and pays an average of 40-60% less on drugs than Medicare does [3].  In fact, one recent study estimated that, if Medicare Part D had the same ability to negotiate drug prices as the VA, the “most conservative high-cost scenario” would place annual savings at $50 billion per year [4].  In 2005, the top 11 pharmaceutical companies made about $57 billion in profits.  In 2006, the first year that Medicare Part D was implemented, that number shot up by 34% to $76 billion! [5]   

While there are clearly political obstacles inherent in the inability to control the cost of pharmaceuticals, what about the intrinsic research and development (R&D) costs that the drug companies must bear? After all, companies spend a lot of money and take a lot of risks conducting clinical trials that can last years or decades, only to reject the vast majority of drug candidates. Therefore, many people see high drug prices as subsidies for the cost of the research and development. This is certainly an idea that the pharmaceutical industry does everything in its power to propagate. However, most people don’t realize how much drug companies benefit from the initial public expenditure on R&D.  For example, the NIH funds much of the initial research for many new drugs, and much of this research is conducted at public, non-profit universities throughout the country. In fact, “According to the NIH, taxpayer-funded scientists conducted 55 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995” [6].   The same study showed that, rather than the purported $500 million dollars that companies say they spend on R&D for each successful product they bring to market, the real cost is between $50 to $100 million dollars (these estimates include the cost of failed drug trials).  Public universities and institutions like the NIH can’t afford the entire cost of bringing a drug to market, so they license their initial research to a pharmaceutical company, who will then conduct the clinical trials and end-stage research to bring the drug to market.  The pharmaceutical company can then patent the drug and profit from its exclusivity in the market for twenty years, while the university where the basic research was conducted collects royalties from the licensing agreement.  In spite of this public-private partnership, Americans are still paying the highest prices in the world for drugs, the very drugs for which we initially invested public money to research.  Of course, clinical trials are not cheap and pharmaceutical companies do still foot a good portion of the bill, but they greatly benefit by allowing government scientists and funding to select the most promising candidates for development.

So it is fair to ask at what point “profiting” becomes “profiteering”, in the context of how much companies are actually spending.  It turns out that drug companies spend much more money on marketing and advertisement than they do on R&D—according to a study done in 2008, the industry spends roughly twice as much on marketing than it does on R&D [7].  Why is this a problem?  When we publicly foot the bill for the basic research and initial testing of drug development, we are essentially freeing up resources in the companies that they spend on marketing campaigns, TV ads, soliciting doctors, and many other advertisement techniques.  In essence, we pay for drugs twice—once with our tax dollars to finance early stage R&D, and again to pay for the exorbitant costs of the drugs themselves, costs which are inflated more by relentless marketing than by actual R&D.  This situation describes a profound structural problem and we can’t continue with this undue burden of cost on our healthcare system, where the risks of initial research and development are publically subsidized, but the rewards of selling overpriced products are monopolized by well-positioned private interests.

The financial cost of drugs is just one aspect of the problem—ethically dubious practices by drug companies inflict severe social costs on the development of medical science and the delivery of quality pharmaceuticals to patients in need.  Companies often solicit prominent scientists to be lead authors on papers promoting a new drug, when in fact the paper was written by employees of the drug company and the main author only has to put his or her name at the head of a pre-written paper (this is called “ghost-writing”).  This way, findings published in a major scientific journal appear to be endorsed by a major scientist in that particular field of medicine, which can also create misconceptions of objective analysis and impartial study.  There has also been increasing recognition that pharmaceutical companies skew the perceptions of their drugs’ efficacies and risks by only publishing the trials that were successful and hiding the ones that were not, giving doctors false impressions of the efficacy of drugs.  One well-publicized example of this was Vioxx, a drug marketed by Merck to treat osteoarthritis and other chronic pain.  In 2004, Merck withdrew Vioxx from the market amid revelations that it had withheld five years’ worth of clinical data that showed a serious risk of heart disease (up to a 4-fold increase!) in people taking Vioxx.  The FDA even sent a letter to Merck in 2002, warning them against misrepresentation of their product and failing to publically disclose the information regarding cardiovascular risks [8].  However, with an estimated $2.5 billion in revenue from Vioxx alone, it could be argued that Merck had a vested interest in ignoring such financially adverse data as long as possible. 

Another more recent case concerns the drug Avandia, a diabetes medication produced by GlaxoSmithKline (GSK).  Avandia was approved by the FDA based on the fact that it lowered HbA1C, which was based on a lower standard for drug approval.  It turned out that Avandia increased risk of heart attack by 43 percent, and could be linked to as many as 100,000 heart attacks [9].  A two-year investigation revealed that GSK knew about this increased risk of heart attack and attempted to silence concerns voiced by doctors about side effects. GSK had even conducted a head-to-head trial with Avandia versus Actos, its competitor, and found that their own drug performed much worse.  However, in internal email communications regarding this trial, company employees stated that the results should never see the light of day.  In July 2012, GSK pleaded guilty to federal charges and paid a $3 billion settlement.  In an attempt to introduce some transparency to the risks of drugs taken by millions of people, Europe recently released guidelines mandating access to all clinical trial data, but was promptly sued by the pharmaceutical industry for fear that the data would be “misinterpreted” (or perhaps “correctly interpreted”).

My purpose in writing this blog is to raise awareness of these issues involved in the costs of health care and to foster a dialogue about what really drives these costs.  I think that drug prices should be part of the conversation when we’re talking about healthcare reform, and that we shouldn’t be paying more than everyone else for the same drugs that we publicly subsidize.  I also think that, as medical students, we need to be acutely aware of what is evidence-based and what is skewed for financial purposes.  We need to be able to interpret a clinical trial so that we know whether it was done in an unbiased fashion.  Most importantly, we need to know that the drugs we’re prescribing for our patients are actually effective, and in order to know this we need good evidence.  The WHO states that there is “an inherent conflict of interest between the legitimate business goals of manufacturers and the social, medical and economic needs of providers and the public to select and use drugs in the most rational way” [10].  As healthcare providers, we must keep this in mind when deciding what is best for our patients.


Hannah is a first-year medical student at Albert Einstein College of Medicine, recently graduated from Binghamton University. She is Suffern, NY native.  Her interests include access to medicines, women and children’s health and global healthcare policy.  



  3.  Frakt ABPizer SDFeldman R.  Should Medicare adopt the Veterans Health Administration formulary?  Health Econ. 2012 May;21(5):485-95.
  4. Stiglitz, Joseph E. (2012-06-04). The Price of Inequality, (p.48)


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3 Responses to Pharmaceutical Company Profiteering: Behind the High Cost of Drugs in America

  1. Jill Kirschen says:

    Health insurance companies and pharmaceutical companies both should bear the brunt of public outrage for the high cost and selectivity of their products. I know folks, even in my own family, who mail order prescription drugs from Canada or Europe for a fraction of the cost here just so they can afford to take their medications. Heart meds, blood pressure meds, diabetes meds. These are not meds that can be eliminated. Affordability is essential to healthcare and a healthy America. I am not personally interested to see multi-million dollar TV ads for prescription medications and all their potential devastating side effects. It’s a shame that companies spend more of our money on marketing and advertisements than on R&D. If everyone has affordable health care through the Affordable Health Care Act, then all would be more likely to seek out and visit doctors regularly. Healthcare providers could then give the best medical care, prescribing and explaining all of these drugs and their side effects [that pertain to the individual] in private , eliminating the money spent on inappropriate and embarrassing ads (than run on prime time when our kids are watching!) for everything from clinical depression to erectile dysfunction. There should be no nationwide debate.

  2. Pingback: Pharmaceutical Company Profiteering: Behind the High Cost of Drugs in America | Edmund's Page

  3. Terry Lynch says:

    Aloha Hannah from Hana , HI. Your discussion was very revealing of the many factors that lead to monetary medicine’s blind eye to first do no harm. They take no oaths and take no responsibility,and act as despotic rulers paying their way to medical institution teaching obedience and slanted studies. The whole truth is often just a turkey to be carved up for their thanksgiving, even on pain of death and serious disabling side effects for the innocent consumer. It was good to read that there are a few referees on the field exacting penalty. But it is sad that every aspect of medical schools is propagandised, that the Halls of Congress are so infiltrated by the blinding light of Greed. But I am glad always to see the guiding light of Dr. Rita Redburg of San Francisco Medical School saying hold the Rx on Statins and providing the real facts. There is hope with you, “so help me Hannah”.

    May you be blessed by the Most High in your calling

    Terry Lynch

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