The oil companies are currently taking a PR beating. Consumers have been feeling the direct consequences of gas price increases, which, in turn, they associate with news items such as the war in Iraq, global warming, and the drain of energy costs on the economy.
Regardless of the accuracy of these perceptions, they make for great news, especially when held against the backdrop of record oil industry profits.
Oil companies don't set the price of crude oil and there are dozens of reasons why oil prices and industry profits should not be regulated. Unfortunately, that doesn't matter. The American public will only make one primary connection: gas prices are high and oil companies are still making record profits.
Americans can live with high prices, but there is something about working-class people giving rich people money that gets under their skin. It all comes together for them at the gas pump, the place where it hits and hurts the most.
The average pharmaceutical consumer has never really had that "gas pump" moment, when the cost of the product to the consumer and the profit being made by the producer come together. That's a good thing for that industry because pharmaceutical companies are far more profitable than oil companies. The gas pump moment has been avoided because the consumers of pharmaceuticals have no idea of the real costs of the drugs
Americans don't buy prescription drugs on the free market like they buy gas. For many years now, most Americans have purchased their drugs through a non-transparent system of physician reimbursements and consumer co-pays. This free ride will not last forever, though. The steady advance of consumer- directed healthcare, particularly health savings accounts (HSAs), will alter how the public views the pharma industry.
HSAs were created by the Medicare Modernization Act of 2003. HSAs, and the consumer-directed healthcare movement to which they are central, have introduced consumerism to prescription drug purchasing. Instead of a $10 or $20 co-pay, more employees will pay the full price of their drugs directly from privately owned savings accounts. While some may pay a negotiated rate, they will still pay more than a co-pay and they will know the relative costs of branded and generic drugs.
Nearly half of American businesses are offering or will soon offer consumer-directed health plans and more than three-quarters of employers say they expect consumer-driven plans to change employee purchasing patterns by making them aware of the actual cost of healthcare. As the cost of prescription drugs moves from an employer expense to an employee expense, it will open employees' eyes to the true cost of their drugs. The "gas pump" moment is coming.
The Hollywood version of all this will be that big bad companies are making outrageous profits at the expense of working people and their communities. This story will sell very well. The real story, that Americans pay too much because the rest of the world pays too little, will do about as much as the oil company defense that global oil prices are set by free markets.
True, Americans do fund global drug development through high prices. It's also true that the cost of drugs includes the resources necessary to develop future drugs and navigate an extremely complex regulatory process. Those arguments, while valid, will not hold water for long because the public won't care. They will compare costs with industry profits and they won't be happy. In addition, the pharma industry has weakened its position by falling behind on addressing vital needs such as new antibiotics and vaccines.
Unfortunately, this PR crisis comes at time when the industry has real needs: better protection for property rights and from litigation.
On the plus side, the pharma industry still enjoys a relatively easy ride. For example, last month there were several articles published from the American Heart Association's meeting comparing Lipitor and Zocor. For the marginally ambitious patient willing to split pills and apply a bit of consumerism, Zocor can be had for roughly 25% of the cost of Lipitor. However, none of the major news stories touched on the price difference. If BMW tied Hyundai in a track test, the sticker price would certainly be discussed.
The media is in the habit of talking about drug costs as an industry trend, not a personal burden. This type of media coverage won't last. Cost, not just efficacy, will be a central part of how we view drugs.
- Russell LaMontagne is president of Corinth Group Communications in New York.