The scandalous rise in drug costs needs to be tackled
It is widely acknowledged that the political and administrative class allowed public spending to run out of control during the boom and bubble periods. But even by the wasteful and reckless standards of that time, the increase in spending on drugs was exceptional.
In 1995 the State spent €279 million on pharmaceutical products and medical equipment. By 2008 that figure had not doubled, trebled nor quadrupled, but was 640 per cent higher at more than €2 billion. (It has since fallen only marginally despite much talk of the State getting a better deal from drugs companies.)
This is not just astounding, it is scandalous. To see how scandalous it is, comparison with peer countries is needed. The accompanying chart shows the extent to which Ireland is an extreme outlier among its peers. Of the western European countries for which figures are available (from Eurostat), the second biggest increase in pharma spending over that period took place in Spain. There, spending increased by 176 per cent, a mere fraction of the 640 per cent increase in Ireland.
Spain is a highly relevant comparator because the two reasons that could explain higher-than-average spending in Ireland also apply to Spain over that period.
The first possible explanation is rapidly rising income levels. In the mid-1990s average income levels per person in Ireland were below the EU average. Some of those I spoke to in researching this article suggested that rapid economic growth merely allowed spending in Ireland to catch up with richer countries. There is some truth to this, but Spain also experienced a sustained period of high growth from low income levels. It managed to contain pharmaceutical spending.
Another possible explanation for the explosion in public spending on drugs suggested by some of those with knowledge of the matter is rapid population growth: more people consume more medicines. Ireland’s population over the period did grow at rates well above the European average, but so too did Spain’s. Again, population growth cannot explain the extreme position of Ireland.
So what explains the eye-popping increases in pharma spending? There is little doubt that inertia and complacency in the political and administrative system is part of the answer – huge amounts of taxpayers’ money were spent with little consideration of effectiveness or value for money. But as pharma spending grew even more rapidly than total public spending during the period there is more to the story than simply ineptitude on the part of politicians and civil servants.
Front and centre is pricing – drugs companies charge the Irish State more for their products than they charge most other states. This not only boosts their top-line in Ireland but because the price many governments pay for drugs is based on prices in other countries, higher Irish prices allows drugs companies to charge more elsewhere too.
The formidable lobbying power of the industry is a vital context in all of this. When it comes to influencing governments, big pharma has few rivals. One lever the industry has is the threat of withdrawing supplies of a drug in a given country if a government displeases it.
The industry has other ways of exercising influence in Ireland. This economy stands out from others in that many of the world’s leading drugs companies have large-scale operations here. Their contribution to this economy is great – in terms of jobs and taxes paid, as well as technology and know-how spillovers. Their export levels are perhaps the best indicator of the size of the sector – in 2011 it shipped €26.4 billion, equivalent to 17 per cent of GDP.
The huge importance of the industry to the Irish economy gives its firms the additional lever of threatening to shut down their operations here.
The less than subtle threat to that effect, made by senior industry figures in letters to the Taoiseach, which were revealed by this newspaper late last year, illustrates the power of the industry.
Paying over the odds for drugs has cost taxpayers many billions of euro over many years. It amounts to a subsidy to the industry. There are strict and comprehensive EU rules on how states aid industry with taxpayers’ money. In the interests of Irish and European taxpayers the competition authorities in Brussels should investigate the matter.
No matter how important the industry is, an untransparent transfer of taxpayers’ money to private interests should not go on. If the administration here is not prepared to take on the industry, Brussels should.