The phrase “BIG PHARMA” typically isn’t used in a positive context. While this wasn’t always the case—Johnson & Johnson’s response during the Tylenol tampering crisis in 1982 is often upheld as the epitome of crisis management and a demonstration of excellent ethical corporate behavior—consumers’ attitudes toward the industry today are dominated by a sense of mistrust.

  The industry has begun to take steps in recent years to address this negative perception and instill a greater awareness of ethical behavior. For example, the International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) adopted a new code of conduct in 2012 that provides guiding principles on ethical conduct and promotion. And the United Kingdom adopted a Code of Practice for the Pharmaceutical Industry effective January 1, 2016.

In the United States, the Pharmaceutical Research & Manufacturers of America (PhRMA) adopted in 2009 a new Principles on Interactions with Health Care Professionals (see “Pharma Ethics Code Isn’t Working” in Strategic Finance, February 2011). Aspects of the new code and a new law requiring disclosure of payments to physicians seem to be having some beneficial effects.


In a follow-up to its Dollars for Docs project, ProPublica, an independent nonprofit organization that produces investigative journalism in the public interest, advises that “drug companies have dramatically scaled back payments to doctors for promotional talks.”

Since the spring of 2014, all drug and medical device companies have been required to report payments to doctors under the terms of the Physician Payments Sunshine Act. Yet this act fails to cover nurse practitioners and physician’s assistants, who also receive payments for promotional talks, consulting, meals, and other activities.

ProPublica’s analysis of drug marketing costs signals that profits rather than patient needs have been the primary motivation for high marketing costs. The most heavily promoted products typically aren’t cures, breakthroughs, or top sellers but rather “me-too” drugs. “They may have some unique niche in the market, but they are fairly redundant with other therapies that are already available,” said Dr. Joseph Ross, an associate professor of medicine and public health at Yale University School of Medicine.

Expensive television commercials directed to patients add considerably to the cost of marketing prescription drugs. The American Medical Association (AMA), the organization of physicians, states that only the U.S. and New Zealand allow this practice. In the last two years, these ads have increased by 30%, totaling $4.5 billion, which represents only one-tenth of the ad budgets of pharmaceutical companies. An AMA report noted, “The growing proliferation of ads is driving demand for expensive treatments despite the clinical effectiveness of less costly alternatives.” Patrice A. Harris, chair-elect of the AMA, added: “Direct-to-consumer advertising also inflates demand for new and more expensive drugs, even when these drugs may not be appropriate.”


Manufacturers of pharmaceutical products blame high drug prices on the need to support expensive and complex research, lengthy governmental regulations for new drug approvals, and Wall Street expectations of large, ever-growing profitability. Perhaps a simpler and more important answer, according to a January 15, 2015, New York Times article is the fact that in the U.S., insurance companies by law must include essentially all new and expensive drugs in their benefit packages. The philosophy is that all care must be provided for everyone, regardless of how much treatment costs or how little it helps.

The result of these factors is that prescription drugs in the U.S. not only cost far more than elsewhere, but they continue to rise, according to Medscape Medical News in “Why Are Drug Costs So High in the U.S.?” The article asserts that the major reason for the large difference in prices is that various insurance companies with limited bargaining power negotiate drug prices individually with the manufacturer.

The U.S. lacks any sort of central or universal healthcare system or agency that regulates across-the-board cost. In many other countries, negotiations of drug prices between governments and pharmaceutical companies are routine. Some countries also have drug formularies and advisory boards that put restrictions on the use of new and expensive medications, actions which aren’t allowed in the U.S. Perhaps PhRMA should consider adoption of self-regulatory protocols in the U.S. to accomplish patient cost savings.

Another systemic flaw is the U.S. Food and Drug Administration’s (FDA) drug approval process, which only requires clinical demonstration of a drug’s safety and effectiveness, not any therapeutic benefit compared to an already existing drug. “For the longest time drug companies had a dual mission,” said Dr. Hagop M. Kantarjian, professor at the University of Texas MD Anderson Cancer Center in Houston. “They wanted to help patients and at the same time make a reasonable profit, but now I think they have lost their moral compass.”

“The U.S. makes most of the discoveries, the taxpayer funds 85% of the basic research, yet at the end of the day when a drug is FDA-approved—for cancer as well as for other indications—we as Americans are paying at least twice the price as those outside the U.S.,” Dr. Kantarjian added. He characterizes this phenomenon as “double jeopardy.”

Cancer-treatment drugs seem particularly expensive. Ensuring Patient Access to Affordable Cancer Drugs: Workshop Summary, a study from the Institute of Medicine (IOM, now called the Health and Medicine Division (HMD)), reports the cost of cancer drug therapy has increased from $100 per month to $10,000 over a 50-year period from 1965 to 2013. Prices for oncology drugs have more than doubled just during the past decade.

The IOM report notes that total Medicare spending on prescription drugs increased from $400 million in 1992 to $7 billion in 1999, by another $1 billion in 2000, and then an additional 26% from 2001 to 2002. The growth in spending is attributed to “the increased volume of new and more expensive medications that were being substituted for older therapies.” Again, this shift at least partially results from costly advertising and marketing as well as unlimited upward pricing flexibility in the U.S.

The pharmaceutical industry should consider adopting more ethical business strategies that benefit patients rather than Wall Street. If that isn’t possible, then management accountants should urge Congress to act.


Call (800) 245-1383 for clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma. The helpline cannot be considered a hotline for reporting suspected ethical violations.