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Why America’s biggest charities are owned by pharmaceutical companies

WHEN A PATIENT in need of a drug in America goes to fulfil their prescription, the price they have to pay can vary wildly. For generic off-patent drugs, prices are usually low for the uninsured and free for those with insurance. But for newer, patent-protected therapies prices can be as high as several thousand dollars per month. Those without insurance may end up facing these lofty list prices. Even those with coverage will often have to fork out some of the cost, called a co-payment, while their insurance covers the rest.

These co-payments, which for the most expensive drugs can themselves be prohibitively high, can act as a deterrent to collecting a prescription. Into this gap a new type of charity has emerged, one that offers to make your co-payment for you. They come in two main types: independent ones, like the Patient Advocate Foundation, which spent $380m on co-payments in 2016, and co-pay charities affiliated with drugmakers themselves.

According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.

Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation.

The impact of these charities is large and growing. Most of them are less than 15 years old. In 2001 just five drugmakers operated charities, spending a total of $370m. That had risen 20-fold, to $7.4bn, by 2016. According to Ronny Gal, an analyst at Berstein, a research firm, the co-payment on the price of a drug is usually just 10% of the cost the pharmaceutical company ultimately charges to the insurance provider. This would mean that $7.4bn, if it were all spent on co-payments, could earn drugmakers $74bn in revenues—which would account for nearly a quarter of total drug spending in America.

Pharmaceutical companies will often claim that helping patients with their co-payments is a way of making costly drugs more accessible. But it has the fortunate consequence of making their customers price-insensitive, because insurance companies will often use high co-payments to nudge their customers into opting for generics over costlier branded drugs: no co-pay, no incentive to save money.

Say a patient is prescribed a statin, a type of drug to lower cholesterol which has proved useful in reducing heart disease. They could take Lipitor, a branded drug manufactured by Pfizer, with a list price of around $165 per month. But a generic, Atorvastatin, has also recently become available for just $10 per month. In the absence of help from a charity, a patient with private insurance would probably be able to get Atorvastatin free, but would have to pay some of the cost for Lipitor. With help from Pfizer’s co-pay charity, both are free. “It is entirely to their advantage because consumers only care about what it costs them,” says Adriane Fugh-Berman of Georgetown University. “It’s not charity, it’s cheating.”

There is also evidence that pharmaceutical companies bump up the scope of their co-payment programmes shortly after they increase drug prices. When Martin Shkreli, the former boss of Turing Pharmaceuticals (who has since been imprisoned for securities fraud), increased the price of Daraprim 50-fold in 2015, he also donated to a fund to cover co-pays for patients with toxoplasmosis, a disease treated using Daraprim. The ability of insurance companies to push these price increases back onto drugmakers, by raising co-payments, is limited.

American authorities are trying to curb the effects these charities may be having on prices. In California in 2017 a bill was passed banning companies from providing co-pay assistance in some situations, such as if a patient’s insurance company offered a drug on a lower cost that the Food and Drug Administration, America’s drug regulator, had deemed therapeutically identical, or when the active ingredient is available over-the-counter at a lower cost.

A patented formula for itchy backs

The Securities and Exchange Commission (SEC) is also looking more closely at independent charities that are sometimes sponsored by pharmaceutical firms. One independent charity offered co-pay support only for a specific type of “breakthrough pain” for cancer patients, a condition its sponsor had a 40% market share in treating. An SEC probe has already settled claims with some pharmaceutical firms, though none has admitted wrongdoing. United Therapeutics has settled the biggest claim, worth $210m, with the Department of Justice. Lundbeck, a Danish drugmaker, and Pfizer have settled smaller claims. “Pfizer knew that the third-party foundation was using Pfizer’s money to cover the co-pays of patients taking Pfizer drugs,” according to Andrew Lelling, a US attorney, “masking the effect of Pfizer’s price increases.” Johnson & Johnson, Astellas, Gilead Sciences, Celgene, Biogen and others face investigations.

Using co-pay charities to support high prices is good for business, but charitable contributions foster healthy profits in another way, too: they are tax-deductible. The corporate tax codes of most countries allow companies to deduct the cost of any charitable giving from pre-tax profits. But in America the system is more generous, says Jason Factor, a tax lawyer at Cleary Gottlieb Steen and Hamilton. Companies that give products for the benefit of the “needy or ill” can deduct up to twice the cost of donated goods. How convenient!