subscribing to the Community Health Association has come from the United Automobile Workers.

The other half has come from one or more of the banks of Detroit I think.

Senator KEFAUVER. All right, sir.

Will you start your statement.

Dr. BUTLER.1 I am Dr. Allan M. Butler and I am appearing here in behalf of the Physicians Forum, a national organization of physicians established 22 years as a forum for the consideration of proposals to improve the efficiency, availability, and equality of medical care. Major improvements in the Nation's medical care system have been necessitated by the rapid increase in medical science and technology that has so expanded the potentialities for effective medical therapy and for the prevention of illness and complications of illness.

As professor at the Harvard Medical School for 30 years, past associate editor of the New England Journal of Medicine and of the Journal of Clinical Investigation, chairman for several years of the pharmacy committee of the Massachusetts General Hospital, as a member of the OSRD Committee on Clinical Testing of Anti-Malarial Drugs during World War II, as past president of the American Pediatric Society and of the Physicians Council for Information on Child Health (now the Physicians Council), and as present director of clinic services of the Metropolitan Hospital and Clinics of Detroit, I have had ample personal experience to justify a deep concern for the impact of the promotional and other questionable practices of the pharmaceutical industry on doctors and layment. That this concern is widespread throughout the medical profession is indicated b yeditorials, committee reports, and comments by individuals in such professional journals as the New England Journal of Medicine, Pediatrics, the Journal of Medical Education, and the Medical Letter.

We, therefore, welcome your committee's inquiry into excessive drug prices, pernicious drug promotion, chaos in drug names, monopolistic controls of drug patents and markets, and the adverse effect of all these factors on the prescribing habits of physicians.

We also wish to congratulate the committee on its comprehensive and revealing collection of data, its fair and conservative appraisal of the situation and its thoughtful conclusions as summarized in the statement by Senator Estes Kefauver in the opening hearings on July 5, 1961.

After careful review of the committee's data, appraisal, and conclusions and of its own experience, the board of directors of the Physicians Forum unanimously and enthusiastically endorsed S. 1552.

I would like to submit the statement of the board with the statement that I am now making.

Senator KEFAUVER. Is that attached?

Dr. BUTLER. Yes, it is. The copy is here.

Senator KEFAUVER. Suppose we have this printed at this point in the record.

(The document referred to follows:)

1 The full text of Dr. Butler's prepared statement may be found on p. 1108.

COSTS, QUALITY, AND PROMOTION OF ETHICAL DRUGS

A statement of the board of directors of the Physicians Forum, New York, N.Y., June, 1961

Expenditures for ethical prescription and proprietary (over the counter) drugs have increased from $300 million in 1929 to over $22 billion in 1960. Of this total, close to $2 billion goes for ethical drugs. The average price of a prescription has increased from 90 cents in 1929 to $3.50 in 1960. The greatest part of ethical drug expenditure is atributed to the sale of the wonder drugs and price increase is likewise due to a switch from the low cost and standard pharmaceuticals to the new and more expensive trade name drugs-to the antibiotics, tranquilizers, antidepression drugs, hormones, metabolic agents, antiobesity drugs, diuretics, anticoagulants and others. Not only has there been an increase in the average price per prescription, but there has also been an increase in the number of ethical drugs prescribed, from 7.6 per family in 1950 to about 12 per family in 1959, a rise of some 55 percent in 10 years.

Despite this increasing expenditure for new and expensive drugs, the part of the medical-care dollar devoted to drug costs has not shown any increase. In other words, the drug share of the medical dollar, amounting to about 22 cents has remained about the same in the past 30 years or so.

Drug costs vary a great deal according to age. In 1959, the Senate Subcommittee on Problems of the Aged and Aging showed that while all age groups spend on the average $19 per person per year on drugs, those 65 and over spend about $42 per person, or about 21⁄2 times as much. The prescription bill of a sick person is usually much higher, often as high as $200 for a chronic illness. In other words, the greatest burden of drug costs is borne by the older age groups, by the population with the most chronic illness and with the greatest need for drugs, and with the least ability to pay for them. While the cost of each prescription has increased in general, the income to pay for them has not.

Another factor contributing to the burden of drug costs is that for the most part they are not covered by medical care insurance.

Confronted with limited income or financial reverses, the average family can and does put off buying automobiles, household appliances, clothes, and even higher priced foods, but they cannot put off buying drugs or find cheap substitutes. Ethical drugs as Senator Kefauver has expressed it, have an intermediary between the producer and the buyer-the physician who writes the prescription. "In this respect, the drug industry is unusual in that he who buys does not order, and he who orders does not buy." The consumer, in other words, is completely captive. When he is sick, he must buy the drug the doctor orders, and unlike automobile buying, he cannot or does not know how to shop around for a different model or a lower price.

Thus, the pricing policies of the largest pharmaceutical companies are almost completely removed from the corrective discipline of consumer sovereignty, and from the laws of supply and demand. In most instances, drug prices are set by administrative decision and are held constant over extended periods of time. The drug industry is, indeed, a highly competitive industry, but its competitive efforts seem expended mainly in capturing the prescription pads of the busy doctor who in most instances cannot judiciously weigh the real properties of drugs against the promotional claims for it. Competition in prices of drugs has been replaced largely by competition in promotion. Price competition tends to lower prices and increase efficiency. Promotional competition does the opposite it increases both the use and the price of drugs.

Some critics have contended that the retail druggist's margin is excessive. But this is denied by spokesmen for the retail druggists who point to the high manufacturer's prices of drugs, and the inventory cost of stocking a single drug under a variety of trade names.

When a company has a patent monopoly on a drug or when it licenses one or more companies to package and sell the drug, an understanding is usually reached about the price of the drug, so that the primary company's interests are protected. In some circumstances, the price under the generic name and the price under the trade name are the same.

Most doctors prescribe by trade name rather than by generic name, and they prefer to do this because trade names are forcefully brought to their attention by effective and sustained promotional methods, and because most trade names

are easier to remember and write than the complex industry provided generic equivalents. Another important reason for the preference for trade names is fear that generic products of the smaller companies are not of as high a quality as the trade-name products of the big companies.

That the profits of the drug industry are high is indicated by the following statement in May 1960 issue of Fortune magazine: "There is no doubt that the drug business has been remarkably profitable by all the usual standards. Drug companies commonly earn 15 to 20 percent on invested capital after taxes, and their after-tax margins on sales run 10 to 15 percent, figures that few other manufacturing companies attain except in boom years. The drug company's advantage lies principally in the fact they deal in innovations which in any industry tends to be very profitable." According to the Kefauver committee. the drug industry has a rate of return of 21.4 percent, which is the highest of any manufacturing industry and approximately double that of the average of all manufacturing, which is 11 percent.

Research expenditures to develop new products have been cited by manufacturers as an important factor contributing to current drug prices. However, expenditure for research by the 20 largest drug companies is only 6.4 percent of sales. Much of this research has been termed "molecule manipulation," or "me-too" research.

Selling expenditures, including promotion by detail men, brochures, pamphlets, newspapers, magazines, special conferences, cocktail parties, golf tournaments, phonograph records, and other methods account for 24 cents of the sales dollar or almost four times the amount spent on research.

The Physicians Forum fully endorses Senate bill 1552 introduced by Senator Estes Kefauver.

In general the legislation is designed to promote competition and protect the public interest in these principal ways:

1. By making it unlawful under the antitrust laws for large drug companies to agree upon which company will obtain a patent, to agree which companies shall be awarded licenses in the event that a patent is issued, and to make similar restrictive agreements.

2. By requiring compulsory licensing of qualified applicants (after 3 years) under the product patents for prescription drugs.

3. By providing that the Food and Drug Administration shall pass on the efficacy as well as the safety of drugs.

4. By seeing to it that physicians are provided with clearer, better and additional information on the bad as well as the good features of drugs. 5. By requiring fuller and more comprehensive inspection of drug manufacturing plants, thereby giving to physicians greater confidence in prescribing on the basis of generic rather than trade names.

6. By providing for the licensing of drug manufacturing companies which should also give physicians greater confidence in prescribing by generic names since a company could lose its license to do business if it did not meet the requirements of the Food and Drug Administration.

7. By giving to the Food and Drug Administration authority to establish the official or generic names for drugs, thereby providing a means of simplifying generic names which, in contrast to the short and simple trade names, are often so long, complex, and unpronounceable that they are not remembered or used by physicians.

Much is wrong with prices and promotion of ethical drugs; obviously Federal legislation is necessary in addition to voluntary action by industry to correct abuses and regain deficiencies in Government regulation of the drug industry. Dr. BUTLER. In endorsing S. 1552, the forum was particularly impressed by certain aspects of the subject.

In 1959, the rate of net return on net worth after taxes in the drug industry was higher than any other major industry, 18.1 percent, as compared with 10.5 percent for all manufacturing corporations; and profits were 10.3 percent of sales for drug companies, but only 4.8 percent for all manufacturing corporations. Some firms enjoyed over 30 percent return on invested capital. This data is taken from the report of the Federal Trade Commission.

Including the cost of stockpiling multiple trade-name products instead of a generic-name drug, the figure may at times reach 70 cents on the dollar.

Today, as the extent of prescribing a drug may be proportional to the intensity and volume of promotion behind it, rather than to the specific therapeutic needs of patients, little wonder there is competition in promotion rather than in prices and efficacy of products. Such expenditures for the entire drug industry are currently estimated at about $750 million per year, or 25 percent of the sales dollar. Much of this is for entertainment of physicians, psychological gimmicks and misleading, or at times even false, statements.

Senator HRUSKA. Doctor, in that connection, could you give us some examples of false statements to which you refer?

Dr. BUTLER. I do not think I can out of memory because I would not like to try to remember a false statement and do it inaccurately. Senator HRUSKA. Of course not.

Dr. BUTLER. But if you would like me to submit examples, then I would be glad to do so.

Senator HRUSKA. It is a serious charge, and I think it warrants some deliberation in detailing and making it specific, but if it is to stand, you see, if we are to accept it in anyway, we would like proof; I would.

Senator KEFAUVER. Yes; I think that is a good idea. Suppose you submit the material and we will make it exhibit 46.

Dr. BUTLER. I can very readily submit the evidence.

Senator HRUSKA. You can supply it for the record at a later time. You need not do it now, Doctor.

Dr. BUTLER. I will just make a note now. I supposed what I said was generally admitted.

Senator HRUSKA. Was what?

Dr. BUTLER. Generally admitted. That the pharmaceutical houses are making misleading, and at times even false, statements.

Senator KEFAUVER. Very well, that will be exhibit 46.

Dr. BUTLER. But I will be glad to provide data or information substantiating that statement.

(Exhibit 46 may be found on p. 857.)

It is shocking to realize that this $750 million is about four times the funds available to all medical schools in the United States for their total educational programs. What a boon, if all or even part of this could be diverted to improving or extending the education of physicians.

In this respect, the pharmaceutical houses have an extraordinary opportunity to contribute to education, if they would use their promotion and advertising as an instrument of education as well as an instrument of sales.

In the better hospitals throughout the country, the formulary committee selects, as mentioned by Dr. Modell, the most useful among the thousands of drugs on the market. This relatively small number of drugs is then purchased by the hospital pharmacy by their generic names from a manufacturer with good quality controls. Physicians treating patients in the wards or in the outpatient clinics of these better hospitals prescribe these drugs only, and only by their generic names. This is good practice and should be extended.

We must take vigorous exception to a statement by Dr. Hugh Hussey, Jr., in his testimony before this committee on July 5, on behalf of the American Medical Association; namely, that:

Any judgment concerning [a drug's efficacy] can only be made by the individual physician who is using the drug to treat an individual patient.

In current private practice, it is rarely possible for the physician to evaluate in a scientific fashion the effect of new and complicated drugs on one or a few patients. It is the total experience of controlled clinical testing and prolonged clinical use that determines the usefulness and toxicity of drugs.

The physician does not have the time, and, as a rule, the competence, to judge whether the claims for therapeutic effectiveness of a drug made by a manufacturer are justified. He finds it difficult to review the medical literature to determine the extent of toxicity, side effects and allergic reactions. He, therefore, may be dependent on secondhand information, most of which is the advertising and promotional material of the manufacturers and distributors of drugs. As physicians and the public at large now know, this material tends to exaggerate the advantages and minimize the hazards of new drugs.

In seeking an explanaion of the American Medical Association's untenable position on this point of efficacy and several others mentioned later in this statement, it is difficult to disregard the existence of a "conflict of interest." I take issue with Dr. Larson when he denies such and resents Senator Kefauver's reference to such conflict. It is there and should be recognized.

A large portion of the revenues of the AMA, particularly of its medical journals, comes directly from the drug companies for medical advertising. The AMA receives a royalty payment for practically every piece of medical advertising sent to physicians through the mail.

As is generally recognized, the AMA seal of approval for advertising introduced some 40 years ago was as much in the interest of increasing advertising for its journal as to promote ethical advertising.

When, a few years ago, the seal of approval was found to limit advertising, it was discontinued. And, as is well known, the AMA and the drug companies have cooperated in opposing legislation concerning the financing and distribution of medical care.

In mentioning this, we are not minimizing the great service rendered by the AMA's Council on Drugs in its reports on the pharmacology, toxicity, and therapeutic use of innumerable drugs. But the AMA's efforts have obviously not prevented the present intolerable situation from developing, nor do we see any reason to have faith that it and the drug industry can effect the necessary changes.

Senator HRUSKA. Doctor, you have referred to the AMA and the drug companies as having cooperated in opposing legislation concerning financing and distribution of medical care.

Dr. BUTI ER. Yes.

Senator HRUSKA. Would that refer to such bills as the King-Anderson bill, for example; the bill that would seek to attach to social security the problem of medical care for the aged?

Dr. BUTLER. That would be, I think, one of the bills that both the AMA and the drug industry have argued against.

Senator HRUSKA. Are you in favor of the King-Anderson bill?