Public debate over legislation to allow Medicare to negotiate the price of drugs has been dominated by stories of personal suffering caused by high drug prices, accounts of lifesaving cures provided by pharmaceutical innovations, and arguments regarding nuanced economic models of how reducing drug prices could affect government spending and pharmaceutical innovation.
Big questions related to the role of companies or government in providing for the health of the public have gotten short shrift. Two of the biggest are:
- Do pharmaceutical companies have a responsibility to provide medicines to those in need, or is their primary purpose as corporations to maximize value for shareholders?
- Does government have a responsibility to provide medicines to the public, or is its role to incentivize companies to make medicines available by linking increased profits to the provision of important products?
Why don’t these questions get asked, so they can be answered?
The research team I work with at Bentley University’s Center for Integration of Science and Industry experienced firsthand how difficult it is to ask these questions when we undertook a research project to examine the profits of large pharmaceutical companies. The project was prompted by public opinion surveys showing that 80% of respondents believe that pharmaceutical profits are a major factor contributing to unreasonable drug prices. The goal of our research was to test the claim that pharmaceutical companies are “excessively” profitable.
Our approach was to compare the profits of the largest pharmaceutical companies with the profits of other large companies in the S&P 500. The premise was that if the median profit of companies such as Apple, Disney, Kellogg’s, Kroger, Marriott, or Walmart could be considered “normal,” and large pharmaceutical companies were more profitable than that, then pharmaceutical profits were excessive.
Trouble started brewing early on. Some members of the team disagreed with this premise and we began confronting each other with difficult questions: Why should profit from the sale of iPhones, entertainment, breakfast cereals, groceries, hotel rooms, or sundries be comparable to profit from the sale of medicines to treat infection, diabetes, HIV, or cancer? Is the purpose of a corporation to maximize returns to its shareholders — the Friedman doctrine — or is the purpose of a corporation to benefit all stakeholders? Should pharmaceutical companies’ profits be assessed the way we balance our checkbooks each month, hoping that we earn more than we spend so we can invest in our families and futures?
Inhabitants of academia’s ivory towers are supposed to engage difficult questions. We are taught to view disagreement as an element of a dialectic in which the informed perspectives of different individuals, distinct disciplines, and diverse communities provide insights into complex problems. Philosophers from the time of Plato considered reasoned contradiction and conflict central to logical argument. Hegel formalized a process of dialectic reasoning in which the process of negating and contradicting opposing views ultimately leads to a determinant resolution.
The conflicts within our team did not, however, yield Platonic dialogues or Hegelian dialectics. Our disagreements about drug prices and profits led to raised voices, frayed nerves, and hurt feelings. The social values and expertise of individuals were questioned. Careers, reputations, and friendships seemed to be on the line. At times, each of us considered whether we should walk away from this line of research altogether.
I am fortunate to have wonderful colleagues. Gradually, our mutual respect for each other, our mindfulness of the heuristics and habits of mind associated with our different disciplinary trainings, and constant monitoring of our research methods and our vocabulary for implicit biases allowed us to achieve the immediate goal of completing a research paper.
The study my colleagues Sarah McCoy, Gregory Vaughan, Ekaterina Cleary, and I reported in a JAMA theme issue on drug pricing showed that from 2000 to 2018, the 35 largest pharmaceutical companies collectively had revenue of $11.5 trillion, spent $1.8 trillion on research and development, had profit measured by net income (the difference between revenue and expenses, also called the bottom line or earnings) of $1.9 trillion, and distributed $1.8 trillion of this amount to their shareholders through dividends or stock buybacks.
Overall, we found that the median earnings of large pharmaceutical companies over this period was 13.8% of their revenue, significantly higher than that of 357 companies from other industrial sectors, whose median earnings were 7.7% of their revenue.
Our research provides insights into how large pharmaceutical companies apportion their revenues between the costs of doing business, investing in future innovation, and distributing profits to shareholders. It also provides perspective on how much drug prices might be reduced without the profits of pharmaceutical companies falling below those of large companies in other sectors.
This paper did not, however, answer the original question of whether pharmaceutical companies were “excessively profitable.” Instead, our experience taught us that the data we generated had meaning only in the context of the big questions we had been unable to engage. The higher profitability of large pharmaceutical companies has different significance if corporate leaders have a fiduciary responsibility to maximize shareholder value than it does if the purpose of a corporation is to benefit all stakeholders and social good. The reasonableness of drug prices has different significance if medicines are treated as an economic good whose price can be dictated by market dynamics than if health care is considered a human right and caring for those who are sick is a moral or social imperative that supersedes pecuniary concerns.
By sidestepping these uncomfortable questions and focusing on the process of our research rather than its purpose, we also avoided the contradictions and conflicts that are the essence of a constructive dialectic. So too, society continues to focus on the processes of policy making, politics, and drug pricing rather than engaging in the difficult debates over the essential purpose of pharmaceutical corporations and the products they produce.
Academics like me and my colleagues, and others, can do better. We need to learn how to reassess our differences in a reasoned dialectic that synthesizes the needs of citizens, businesses, and society to develop a concept of reasonable drug prices and profits. Until then, the goal of ensuring that medicines are available and affordable to those in need is likely to remain an unresolved item on the nation’s social and political agenda.
Fred D. Ledley is a physician scientist, educator, entrepreneur, professor of natural and applied sciences and management at Bentley University, and director of the university’s Center for Integration of Science and Industry.
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