Healthcare reform once appeared to be a prescription for doom and gloom in the drug industry. Painted as profiteers by the Clinton administration six years ago, drug companies were supposed to fall on hard times as healthcare costs were squeezed in all quarters.
But a funny thing happened on the way to drug Armageddon. Government reforms fizzled, and efforts to rein in healthcare costs have spurred rather than depressed drug sales. Now rapidly increasing drug expenditures are casting long shadows on hospital budgets.
In fact, prescription drug sales grew by double-digit percentages in 1997, the second year in a row for such dramatic increases, according to new data from IMS America, a Plymouth Meeting, Pa.-based market research company. Last year prescription drug sales jumped 12.6% to $81.2 billion. That followed an 11.7% gain in 1996. Sales to nonfederal hospitals rose 10.5% to $11.1 billion. And according to the market watchers at IMS, drug sales will continue to rack up double-digit gains, above and beyond inflation, through the end of the century.
A slew of blockbuster products -- from antidepressants to anti-cholesterol pills -- have helped buoy sales by bringing patients who otherwise might not have been treated into the fold of prescription consumers.
And the rise of HMOs, it turns out, boosted rather than dampened drug consumption by extending drug coverage to more people and elevating utilization.
For instance, third-party payment for drugs has been rising by almost one percentage point a quarter in the retail segment in recent years, IMS says, and now accounts for fully 75% of all retail prescription sales.
But the financial success of the drug companies is posing a real challenge for their hospital customers.
"We're seeing therapeutic advances that are priced very high -- either per unit or per course of therapy; it's a bit of a concern," says Rita Shane, director of pharmacy and home care at 754-bed Cedars-Sinai Medical Center in Los Angeles.
IMS data show the cost of new drugs and broader use of existing drugs are bigger factors than inflation in pushing up pharmaceutical expenditures.
In 1997, for example, price inflation for existing drugs accounted for only 2.5% of the rise in drug sales, according to IMS. The remainder -- 10.1% -- was growth in prescription volume and new products (See chart).
"Is there anything that will rain on this parade?" asks Rich Fehring, vice president at Plymouth Group, the consulting arm of IMS. "I see nothing but good times" for the drug industry, he says.
That's precisely the problem for providers already reeling from cost-containment pressures.
"We think there will be a 15% to 20% annual growth rate in real dollars in pharmacy costs, given the new technologies we see in the pipeline right now," says Richard Lisitano, director of pharmacy services at 764-bed Yale-New Haven (Conn.) Hospital.
The clinical benefits of many of the latest drugs are significant, he says, but their high costs place a heavy burden on providers. Ten years ago pharmacy represented only 1% to 2% of the expense budget at Yale-New Haven. Now it's about 5%, and by 2002 it will surpass 10%, Lisitano estimates.
Besides research breakthroughs, however, marketing is driving big increases in sales volume. The industry spent an unprecedented $4.9 billion on sales and marketing last year, up 16% from 1996, IMS says.
And the perception among many providers that there are more drug salespeople than ever before is firmly rooted in reality. According to IMS, the combined sales forces of the top 30 drug companies currently stand at nearly 54,000, up 40% in just two years. Myron Holubiak, general manager of Plymouth Group, quipped that drugmakers won't be happy until the ratio of salespeople to customers is 1-to-1.
That mythical goal has gotten even harder to reach, however, as prescription drug companies increasingly target patients rather than doctors as the ultimate customers.
Drug companies plowed $917 million into direct-to-consumer advertising last year, a whopping 46% increase over 1996. Although that's only a quarter of the $4 billion the industry spends on advertising directed at doctors, all signs point to even heavier ad spending aimed at persuading patients to demand drugs by brand name. After all, the Food and Drug Administration allowed drug companies to include both the name and the use of a prescription drug in the same ad starting last August.
Although the effect of consumer advertising on inpatients has been minimal, it is raising the hackles of primary-care physicians across the country.
According to IMS and providers, the drug industry's pitch to consumers won't slacken soon.
"Pharmaceutical manufacturers," Lisitano says, "have figured out that patients exert a little more influence on this process than we thought they did."