George’s Corner: May/June 2014 

Economics of the Drug World

A couple of weeks ago I shared with pharmacy students my views and experiences with drug economics. Putting the presentation together caused me to gather and review my thoughts after many years of working with the issues.

First, some basic principles:

1. Economics is not the study of money. It is the study of what people do with their money.

2. When in doubt, “follow the money” will clarify what is happening.

3. A transaction takes place when the buyer and seller agree on a price.

When talking about the drug world, we need to understand that all of the big manufacturers are multinational companies. When talking about pharmacies, I believe there is only one U.S.-based multinational pharmacy chain. When talking about nations, each is independent. When talking about people, everybody wants quality medical care, easily obtained and at a low price.

Every other developed country in the world has a national health program. They all have a lower per-capita healthcare cost and a higher life expectancy than the United States. All of those other countries deal directly with the drug manufacturers.

Health Insurance is an oxymoron. Insurance programs pay up to a specified maximum amount.

• Auto insurance pays up to the value of your car.

• Home insurance pays up to the value of your home.

• Life insurance pays up to the value you place on your life.

Health insurance does not fit the model. When it does set a ceiling, we all say “Wait a minute, what if my healthcare costs more?”

Most of the government insurance programs in the United States do not deal directly with the drug manufacturers. In fact, Medicare Part D is expressly prohibited from bargaining with the drug manufacturers.

Private programs often make deals with drug manufacturers. That is why there are “preferred products” in most private programs.

Assuming that you agree with all of the above, some interesting observations can be made. (If there is something you don’t agree with, let me know. I want to hear what others have to say.)

In those other countries the buyer and seller get together in one way or another and agree on a price. The government deals directly with providers of services and providers of products. Providers of services are paid for their services. Providers of products are paid for their products. In the case of products the buyer specifies exactly what is to be bought and gets price bids on that product. In the case of drugs, if there is more than one drug that has the same effect, bids are requested for both. Competition, a basic tenet of free enterprise, happens. The prices go down.

In the United States the big buyers are the government and employers. This is where the “follow the money” trail begins. The greater the number of parties on that trail, the greater the number of transactions, and the greater the number of opportunities for some of the money to be kept by the parties. (They would not be on the trail if it did not help feed their kids.)

So, who are the players on that trail? Here’s a list to start with: employers, government (federal and state), manufacturers, wholesalers, prescribers, hospitals, pharmacies (all types), PBMs, “insurers,” HMOs, and, don’t forget, patients. Add any more you can think of.

Your Assignment

• Get a sheet of blank paper. This is important. At least 8 1/2 x 11 inches.

• Get a quarter ($0.25) and draw a bunch of circles on that sheet.

• Label each circle with one of the players listed above.

• Draw lines between those players that relate to each other and indicate which way the product is moving and which ways the money is moving. Don’t forget all of those hidden deals between players.

• Draw some more lines indicating who is influencing whom. It gets complicated. You probably need to start over with a clean sheet. I did. When I did this on the blackboard for the students, they complained about how messy it was.

Are you sure you included everybody? Are you sure you connected all of the circles that have connections with each other? How about more players, like advertising, “free” samples, Dr. Oz, or stockholders in any corporate entities on your chart?

If you have stuck with me so far:

The programmer types have a bunch of confusing flow charts and fuzzy if/then statements.
Draw some more lines indicating who is influencing whom. It gets complicated. You probably need to start over with a clean sheet. I did. When I did this on the blackboard for the students, they complained about how messy it was.
The pharmacists are saying, “I knew all that, but I never saw the big picture. I just saw what was going on in my pharmacy.”

If you really want to think about the big picture, go worldwide. Make some big circles for other countries, their manufacturers, and how they relate to that first sheet.


Read a couple of mine, then create your own.

• In the United States we pay high prices for drugs. In other countries low prices are paid. I call that “hidden foreign aid.”

• Several of the international companies are moving their headquarters to a country that has better tax rates. There are even some mumbles about the multinational drug chain thinking about doing that.

• One major U.S. government program deals directly with the manufacturers and collects huge rebates. California’s Medicaid program (Medi-Cal) bargains directly with the manufacturers. The result is Medi-Cal’s list of contract drugs — often called its “formulary.” The process is complicated and very secret. The details of the individual contracts are not available. The net effect is that billions of dollars come back to the state every year.

I am tempted to go on but I would rather that you think about it, share it with your associates, and discuss the ramifications. Please let me know your views, reactions, and observations. This all really needs to be a dialogue (or a multilogue) instead of just individuals expressing views. CT

George Pennebaker, Pharm.D., is a consultant and past president of the California Pharmacists Association. The author can be reached at; 916/501-6541; and PO Box 25, Esparto, CA 95627.

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