Jeff Koopersmith

The Koopersmith Drug Plan
Why now is the time for inside diplomacy -- and a little dash of altruism -- to deal with the issue of high pharmaceutical prices once and for all
A former pharmaceutical lobbyist steps forward with an audacious and daring solution to the problem of high cost of prescription drugs in America
By Jeff Koopersmith

Nov. 5, 2003 -- NEW YORK (apj.us) -- As Congress struggles to wind up its maneuverings on pharmaceutical pricing for the aged and the luckless, one should bear in mind certain immutable facts a propos the drug manufacturing industry, the greater bulk of which is now headquartered in the United States.

They aren't the only problem.

Make no mistake: fair drug pricing is an issue that involves the entire chain of manufacturing and distribution.

So what is the best way to accomplish fair pricing? Through diplomacy, the World Trade Organization, the World Bank, and perhaps, if we are fortunate, from cooperation from the pharmaceutical industry as well -- including everyone from research scientists to your local druggist.

Let me begin with some background on the issue:

The underpinning of so-called "socialized medicine" had its roots strengthened during the aftermath of World War II. It was then that the United States, through a variety of treaties and aid, supported pro-democracy politicians and democracy in general by lending money and clout to those parties who among other "goodies" promised free or low cost medical plans that insured a more comfortable population. It was one blow against communism.

In a sense, this democratic insurance policy has run its course. The premiums paid by Americans have grown far too costly.

First, allow that pharmaceutical companies are overflowing with honest, caring management and employees. They employ tens of thousands of Americans in superb and secure jobs.

These companies also underwrite much of the research which has provided so many of us with cure, comfort, and extended life opportunities. They may do it for the wrong reasons -- but they do it.

Drug companies also contribute or offer deep discounts on their products to some of us who cannot afford our medications, although many of them undertake this feebly. Yet many of the largest companies are leaders in this regard. Some offer discounts on their entire line of products, others on a harsh and demonstrated need basis. Several have taken some larger share of social responsibility and should be congratulated.

That said, pharmaceutical companies have a problem -- a most central one, which is haunting them now in the halls of House and Senate office buildings, and will preoccupy them continuously until major national and worldwide adjustments occur.

The issues surrounding drug research and manufacture are complex. In the end, however, the paramount problem is a generally evocative, solitary and haunting underlying dilemma: medication keeps people alive -- you, me, our parents, children, and grandparents.

As a result, pharmaceuticals are viewed as a life and death subject -- and patent medications are far too costly, at least in the United States. Even when medications provide only comfort, a stronger body, or relief from pain, the subject product continues to be profoundly life-impacting. There is no escape from this, no quick fix, no easy road to take.

Yet a hidden issue, not focused for us by the mainstream media, Congress, or the White House, is the world market for pharmaceuticals and the role it plays in driving costs for drugs sky-high in America.

This issue is not well understood, partially because the industry itself provides such huge sums of money to the media in advertising revenue (when was the last time you saw a television network newscast without a commercial for a prescription-only drug?), and to politicians through the largest amalgamation of campaign contributions by any business sector. These truths are incontrovertible.

Lately, we've heard and read a great deal about senior citizens and others less fortunate buying their medications in Canada and from Internet sites emerging like wildfire around the globe.

Our American focus, of course, is this question: "Why is the rest of the world paying far less -- sometimes 80% less -- for the exact same medications?"

I was once a lobbyist for the pharmaceutical industry. In fact, I left that industry because I could no longer see a clear way towards protecting my own integrity -- not at all because of my clients who were some of the most sincere and trustworthy executives in the business, but because of the stranglehold of the drug industry's lobbying group -- the Pharmaceutical Research and Manufacturers of America, PhRMA.

The men and women piloting PhRMA's policies are imprudent and mislead their members through what must be akin to organizational mysticism.

I cannot tell you exactly why -- but I can tell you that the underlying principle for PhRMA when dealing with drug pricing issues on Capitol Hill is "hold the line and blame everyone else."

So it's "Hold the line" throughout the industry.

Holding that line is important to drug manufacturers because the United States is the only industrialized nation on earth that does not have formula pricing similar to those in Canada and administered by its Patented Medicine Prices Review Board (PMPRB). In a sense, the PMPRB decides at what price new drugs enter the Canadian marketplace, and also links its findings to European pricing structures.

During the 1990s, nearly all major pharmaceutical companies decided to move their headquarters to the United States -- some say in reaction to and others retaliation for similar review board practices worldwide. But one additional reason is that US tax laws allow fundamentally ludicrous and expansive tax credits and other incentives for what amounts to cross-border repackaging of pharmaceutical products -- but that's another story and unimportant to this discussion.

Let's make it simple.

For purposes of debate let's assume that the entire world market for pharmaceuticals is $100.00

Total US consumption is about $34.00 of that $100.00. Keep in mind that these figures include all prices -- from the manufacturer, from the wholesaler, and from the retailer. This means that the rest of the world -- all with "socialized" medical systems and free or almost free drug plans -- purchase about 66% of the entire market or $66.00 worth.

At these ratios I might suggest that the United States government might explore:

1. Asking other nations to slowly increase their prices to reflect ratios for the entire market -- as reflected by price paid for prescription drugs; or

2. Tax imports from these nations as percentages equal to their share of the world drug market and put that money aside to pay the freight for lower cost medications for Americans; or,

3. A combination of both.

The rest of the world could take their choice.

What this would mean is gradual increase in foreign prices with an equal decrease in US prices.

If all drugs cost $100 then only a 15% increase in other-nation combined pharmaceutical prices (to the end user) would bring US prices into closer parity with the rest of the world.

Let's look at this in terms of rounded percentages.

Rest of World = 66%
US = 34%

Now, what if other nations on socialized or highly subsidized national drug provision standards raised their prices by 15% over five years?

That's only 3% per year.

In the end, this would mean other nations would pay 85% of the total world market price more in proportion to their share of user population. These nations would still pay far less for prescription medications -- but somewhat more compared to current rates.

US Prices could then fall by 45-50%.

Another pointed example:

US Price for Cipro: $100
Foreign Price: $50

Total usage in US 25 million prescriptions =
$2.5 Billion in revenue from US sources.

Total World usage - 75 million prescriptions =
$3.75 billion

TOTAL CIPRO MARKET=
$6.25 billion

New World price for Cipro at $65 per Rx=
$4.875 Billion
(A 15% increase over current world price)

New US Price for Cipro=
$1.375 Billion
(Rx cost per = $55.00, not $100! That is a 45% decrease in over current US price)

TOTAL CIPRO MARKET=
$6.25 Billion (exactly the same!)

In truth, the price for Cipro is not standard. Here's a look at the real prices paid around the world (Source: Third World Traveler, December 2001)

Country		Company		Price		$USD
US		Bayer		wholesale		4.67
US		Bayer		federal government		1.83
Canada		Bayer		government		1.56
Canada		generic		government		0.95
New Zealand		Bayer		retail		0.29
South Africa		Bayer		government		2.10
Poland		Bayer				1.51
Poland		Polfa Grodzisk				0.29
India		Bayer		retail		0.13
India		FDC		generic		0.06

[Source: Third World Traveler December 2001]

Today we have the "Real McCoy" Cipro available for between a low of USD$0.13 and a high of USD$4.67 -- a high aimed at the sitting-duck US wholesaler, retailer and end user. A generic in India is a mere six cents. That's quite a spread. As a matter of fact, the savings for US purchasers of Cipro might be far more than my example by now.

Yet, under the plan outlined above, other drugs might come with far lower reductions to Americans. Remember: the decrease suggested for the US market reflects the offset increase in price for the entire pool of prescribed medicines for the rest of the world, not drug by drug.

Naturally, if such a plan were adopted, some pharmaceutical companies might want each and every drug calculated individually.

Why? Because in some cases US purchasers might account for far more than 25-35% of the total world market. Therefore the resulting decrease for Americans would be far less.

This is why it is important to keep all prescription drugs "bundled" under one pricing program worldwide -- to keep the program simple and more easily enforceable. It is this simplicity that might be attacked by the industry, and other nations facing pressure from the United States to increase their pharmaceutical price ceilings.

Thus, under the "Koopersmith Plan," the rest of the world, except for the US, would increase their prices slightly each year for five years toward a total of 15% or more above current prices and adjust them in bulk to the same final ratio each year thereafter.

The pharmaceutical industry, including end users -- and measured by the uncovered consumer price -- would be legally bound to lower their US prices concurrently in an equal amount.

The advantage is that the pharmaceutical lobby and its members would get to keep their, some say, extraordinary profit margins -- as a reward for impressive service to world health care and their base from which to do the important research needed -- and in the United States.

Under this plan, the pot remains the same -- it is only divided differently.

Another solution: Let the pharmaceutical companies work out these schemes with other nations if they can, and if they dare. Yet there's small chance of that. Even pharma giants don't have enough clout to push prices higher in nations that purchase their medications directly for their citizens.

To gain insight into how the pharmaceutical industry thinks, one might refer to John E. Calfee's piece for the ultra-conservative, big industry-controlled American Enterprise Institute, which board members include the Chairman of Merck, titled "The High Price of Cheap Drugs -- The House is tempted by a terrible idea." (07/21/2003, Volume 008, Issue 43)

Calfee agonizes about Congress looking at the expansion of importation or reimportation of prescription drugs from Canada, the EU, and other nations as a potential section of recently passed Medicare drug benefits.

Calfee confuses the real issue by using phrases like "dictates" referring to medicine review boards in other nations; "prices steadily fall behind FREE market levels" -- with free market meaning, of course, the HIGHEST prices in the known world. He uses other buzz words like "socialistic" freely as well.

He claims that other-nation's price controls prevent "innovative" pharmaceutical firms from reaping "free-market" rewards anywhere -- except of course, in the USA. Of course, this is largely pap. Several very profitable drug companies reap great rewards -- no matter where their products are sold.

There is no question that Americans provide the greatest crop of cash to pharmaceutical giants, wholesalers and retailers.

Yet in fact, eight of the top ten pharmaceuticals companies on earth are now headquartered in the United States -- but not because European governments don't pay enough for their products, but because the United States offers significantly better incentives, tax breaks, and other government and social perquisites not matched by its European counterparts.

For Calfee to suggest that drug companies have picked up and moved to the United States our of spite is sheer nonsense.

Mr. Calfee presents a hilarious comparison -- that European drug companies outspent American firms on research and development by around $7.6 billion to 4.6 billion in 1990 -- BUT, as of 2000 the American pharmaceutical firms outspent the Europeans 23 Billion to 14 Billion.

Of course, this is largely because of the fact that so many of these companies have moved to the United States during the past decade, not because the European companies are avoiding research. In essence Calfee contradicts his own argument within the same paragraph.

Mr. Calfee also claims that the European Commission is "alarmed" and considering relaxing price controls to re-attract big pharma within its border nations. This is poppycock. He most likely harvested this argument from the fact that the EU is entertaining proposals from its executive arm to allow companies like Schering and Novartis a bit more freedom in setting prices. Such proposals -- even if adopted -- will take years to come to fruition, and history tells us that EU member nations do what they will no matter the agreed upon consensus. In fact, these nations themselves are the largest single purchasers of pharmaceuticals in the world. What incentive would they have to increase prices -- to themselves?

Added to this is the implied delusion that companies that have already migrated to the more lucrative ground of the United States will now dash their huge investments in plant, facilities and personnel here merely to run back to Europe.

Not a chance.

The response from the European Federation of Pharmaceuticals Industry, which represents (lobbies) companies including Schering, Novartis and Pfizer Inc., was this: just the mention of price freedom in Europe is "significant."

Yes, the "mention" is significant -- but that is all.

Yet Calfee, at one fell swoop, makes my point as well. If the EU is indeed seriously considering relaxation of price controls, then perhaps it won't feel the nip should the United States request the opening of negotiations to increase the EU share of the cost to feed the world pharmaceutical breadbasket.

Schering, Novartis, and other pharmaceutical manufacturers would be far better off if the high price of their products was spread more evenly among the populations of the earth than if the EU allowed them merely to relax price controls on "some" of their products.

Pressure on them from the United States -- which is now substantial and growing fierce -- would subside and eventually disappear, leaving the pharmaceutical companies with significantly improved images and a concerted ability to negotiate and lobby a single source for higher prices.

Of course European drug manufacturers will understandably continue to press the issue -- but Mr. Calfee's argument against lower prices in the United States is begging, as he does not mention -- of course -- the theory that price rises throughout the rest of the world could not only mitigate or eliminate the intense pressure on the pharmaceutical industry emanating from all points on the American map, but also maintain profit margins as before or better.

Mr. Calfee makes an even more preposterous claim -- that drugs imported from Canada might be unsafe or counterfeit. He knows, or should, that counterfeit drugs have been sold from within the United States as well.

His argument is further specious. If the FDA suspects that imports might increase the level of counterfeits, Congress will respond with more strenuous testing requirements. Even now, wholesalers will be required to test under all pending legislation in this area.

Calfee moves on to some truth -- that pharmaceutical companies might refuse, simply slam the door on wholesalers seeking to export large quantities of drugs from Canada or anyplace us into the US market.

Well, of course!

He claims this is because drug companies must be loyal to their stockholders. Perhaps they would be more loyal if they adopted stricter across the board pricing worldwide -- with prices that are fair -- to them and Americans -- and fixed, not prices that rely on how tough or lax the control boards are.

Under Mr. Calfee's theory, these same companies could simply refuse to sell to any nation that fails to meet the price. This is nonsense. Companies are not "losing" money selling to the remaining 65% plus of the market who maintain price controls. They are simply earning less. My theory does not suggest that pharmaceutical companies suffer -- only that that should become a driving force to flatten the burden.

In fact, in a thoughtful atmosphere, the pharmaceutical companies themselves might anticipate the natural and gaining revolution against what is perceived at least as a pocket-picking of American patients, and begin to force prices slightly higher in nations with 'socialized' structures, in turn to bring prices down in the single and so-called free medical market of the United States.

However, PhRMA and most of its members would prefer to drink lavishly at both the US and EU troughs -- and are doing so, in elegant fashion, today.

More insight about pharmaceutical company executive thinking can be gained from Mr. Calfee, writing about US reimportation schemes from Canada and beyond. He posits that two scenarios could play out, "one bad and the other worse."

"In the first scenario," he writes, "drug manufacturers would again simply refuse to ship huge volumes of drugs to small foreign countries in order for the drugs to be shipped back and cripple profits at home, where the drugs were invented. If that happened (and I think it would), our European friends would probably have a political fit. They would face the prospect of either going without American drugs or raising their own price ceilings--and with them the costs of their fiscally strapped socialist health care systems."

Calfee does not base his supposition -- that US drug firms would simply refuse shipments to smaller countries to in essence blackmail them into toeing the line -- on mere conjecture.

He is an expert analyst and propagandist for industry, and has access to company management and to their lobbyists and lobbying associations. He is giving us a bird's eye view of current conditions existing in the boardrooms of pharmaceutical giants.

Mr. Calfee goes on to suggest that smaller nations would believe that the plan to allow Americans to reimport the same drugs as lower prices would indicate some scheme to force US drug prices on Europeans. He believes that this would cause an international outcry for drug price controls in the United States and would become "a centerpiece of international diplomacy."

But of course. However, he does not address the obvious: what if all consuming nations agreed to gradual leveling of the playing field as I suggest? Yes, this would become a diplomatic issue -- but could end in a win for all concerned.

Calfee presents a second senseless scenario: reimportation will grow in leaps and bounds and that drug prices would certainly drop in the United States -- collapsing the US price structure thus "suppressing innovation" in America "just as they have done abroad."

He writes, "It is one thing for the Canadians and Europeans to free-ride on American R&D, but we can't free-ride on ourselves. The system that gave us the drugs the whole world wants would be hobbled just when researchers are finally glimpsing pathways to cures for cancer, Alzheimer's, and other killers," he adds.

That's claptrap.

Is Mr. Calfee suggesting that research on cancer and other causes of death would cease merely over the immensity of profit? If so, the condition of science is far more brutal than one might have imagined -- and the attitude of the pharmaceutical industry could be termed evil.

It is not. In fact, most research is done at universities and institutes around the world -- much of it already paid for by taxpayers, some underwritten by the pharma giants themselves..

Granted, the profit motive might move research toward quicker conclusion -- but nothing I propose would cut off funds for private research, done in-house, by the pharmaceutical giants. The $300 billion market for medication must certainly be able to provide the same or more billions for research -- and to the private sector.

Is Mr. Calfee also suggesting that pharmaceutical companies earn no profits from which to gain money for research and development except in the United States?

It appears so -- yet he writes just above that European firms spend $14 billion on research.

Which is true?

He adds, "The hundreds of biotechnology firms searching for these cures would know that if and when one of them discovers the elusive solution that no one else could find, it will face the prospect of price ceilings set by a government agency intent upon cutting costs. Given that the expensive part--all the laboratory work and the years of clinical trials--had already been paid for, the manufacturer of a breakthrough drug would have no choice but to take whatever deal it could get as long as the price covered manufacturing and distribution, without consideration for the expensive failures littering the path to success."

Yet what evidence does Calfee have that such would be the case?

None at all.

In a common-sensical world, the costs of developing and testing new drugs should, of course, be included in any agreed upon world price structure -- and governments or a single common agency involved in such decisions would be subject to the same lobbying and other information provision from numerous sources that would most definitely and adamantly underscore the need for decent returns on investment.

Again, I speak of sharing costs, not eliminating them.

The fact is that Calfee's arguments are circuitous. Worse yet, they are merely self-serving to the industry he courts and do not address the key concern: how to ameliorate soaring US price pressures while leaving the door open for innovation without severely penalizing the rest of the world.

The answer is clear.

Because of the enormity of the product -- its life-saving, life-sustaining, and quality-of-life properties -- pharmaceutical development, manufacture, and sales do not fit into any traditional view of free market economics.

Yet we are engaged in attempting to make this industry fit into a mold in which it does not belong -- one similar to computer or auto manufacturing.

The elimination of that unsound fantasy and with it the perception of what some see as pharmaceutical industry piracy perpetrated on American patients and health insurance companies, does not mean that the pharmaceutical industry will have to wither and die.

On the contrary, robustness and enormous reward for any innovative drug company can be built into the system I propose, or into a world pricing system that would encourage and reward ground-breaking research and discovery.

In fact, monetary rewards to company executives and stockholders might be greater than today.

The key motivating factor must be the shared cost and mutual responsibility for new drug development. "Shared" does not mean "shouldered" by the population of the United States no pharmaceutical companies alone.

Another key to resolving this issue are problems surrounding wholesale and retail distribution of prescription drugs.

As Professor Patricia Danzon has been jovially announcing, pharmaceutical companies do not always, and perhaps rarely, play a singular role in the wide disparity of drug price throughout the world. She claims in fact that they have no responsibility at all.

Let us, for the moment, buy into her theory.

Enter the wholesale and retail pharmacies. These are a large portion of the problem, although Prof. Danzon attempts also to protect them by arguing that retailers are subject to healthy "free-market" forces active in the United States and therefore neither pay too much for their supplies, nor gouge the patient.

Yet, there is significant evidence that this is untrue -- especially for the non-insured patient, often elderly, poor, an undocumented alien, or a child.

Make no mistake, the global market definition -- as outlined above -- must include retail sales prices, prices paid by HMOs, and prices paid under government formularies as well.

In fact, specific attention must be paid to this retail segment of the pharmaceutical distribution chain.

Prof. Danzon at least appears to be an apologist for Big Pharma. Her background, though laudable, is strewn with clients who benefit from unchecked drug and medical services contracts.

In fact, her latest venture -- a study to counter attacks on the pharmaceutical manufacturers -- was indeed funded by Merck, one the world's largest and richest drug companies.

Prof. Danzon denies she owes her unique perspectives to prior or ongoing alliances -- but pharmaceutical companies make a colossal mistake in pushing her to the fore on their behalf.

In fact, during October of this year Prof. Danzon appeared before a suspicious group of reporters and others at the National Press Club pushing this notion of the innocent drug company -- and deftly massaging confusing numbers to make it appear as if Americans are paying less or about the same for prescription drugs than most anywhere else on earth.

They are not.

My personal favorite is Danzon's linking of income in different nations as a ratio to the price paid for pharmaceuticals. To hear her tell it, Mexican peasants are paying more for their medication than either you or I when in fact they pay nothing at all -- or a pittance.

While defending the giant pharma companies, and denying it, she also takes pains to defend wholesalers and retailers -- the best source of revenue for her past "community-minded" clients which include:
The Alliance of American Insurers
The American Hospital Association
The American Medical Association
The California Commission on Tort Reform
The Health Insurance Association of America
Hospital Corporation of America
Merck & Co. Inc.
The Pharmaceutical Research and Manufacturers Association (PhRMA)
Pfizer, Inc
USHealthCare
The World Bank

These are not exactly organizations looking out for your pocketbook -- but rather, wearing it.

Prof. Danzon, although she owes professional faithfulness to the largest insurers, her past and present clients -- and perhaps because of it -- now extols the virtue of "insurance" to play the primary role in making certain that fifty million Americans now uninsured for medical services and pharmaceuticals gain access at low prices.

Again, she flogs the free market at work. Yet she pays no lip service to the rumor that these insurance companies are not interested.

There's no money in insuring the poor. They've said it -- over and over again.
Danzon is charming, and a brilliant person, but confounds the smartest among us with her charts, graphs, and hocus-pocus so complex and full of impossible-to-recall shorthand that it might convince even the most astute member of Congress that the patient is the enemy.

Her latest presentation -- paid for by Merck -- is an expanded reprise of "Price Comparisons For Pharmaceuticals: A Review Of US And Cross-national Studies," completed in April 1999 -- again penned by Danzon at The Wharton School, University of Pennsylvania. Her conclusions, now five years later, are mysteriously or not similar to the underlying theory in that study.

The 1999 study, while presenting interesting summary data, is basically a shot across the bow of legislative staff and others who she claims "misunderstand" the pharmaceutical breadbasket. The message: it's not the pharmaceutical companies, stupid!

My only question to this cheerful saccharine lady is whether or not she truly believes that humankind achieves anything at all from altruism -- or are we, as she implies, simply market-driven selfishness come to life?

Yet Prof. Danzon does serve an equitable purpose -- to remind policymakers that Big Pharma is not the only "interested party" in this global drug pricing disaster. So are Big Retailers and their wholesale suppliers who grow wealthier each day, often at the expense of the most needy, while they remind us how lucky we are to have the newest and most expensive patent medicines available to man.

Whether or not the United States government is ready to propose a global price structure -- inclusive to manufacturers, wholesalers, and retailers of pharmaceuticals -- or is prepared to cajole or even force a more equitable system from its neighbors remains to be seen.

Pharmaceutical companies and their minions -- including their stockholders -- must now join in a concerted effort to remedy this problem in an equitable manner. If they do not, we are certain to get some slapdash congressional bandage, replete with unfairness -- to both the patient and the companies which strive to successfully treat his ailments.

You see, if all the players come graceful to the table wishing to preserve their talent, a handsome but cautious profit, and a dedication to easing the ills of man, then this issue might never yet again arise.

It's that simple.

JEFF KOOPERSMITH is a political consultant, opinion research authority, policy analyst, and self-described "renegade lobbyist."