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How Conflicts of Interest Make Chemotherapeutics More Expensive

The critical shortage of chemotherapeutics, the topic of much current discussion and of a recent Senate hearing testimony,[i] suggests that the cause of the shortage is multifaceted. There are, as the FDA points out,[ii] many contributing factors with regard to drug shortages in general. The role that one of those factors—conflicts of interest—plays in creating this shortage has not been adequately reviewed and understood.

Conflicts of interest pervade the chemotherapy landscape, starting with Congress and Medicare and trickling their way down to the oncologists who administer the chemotherapeutic agents.

Conflicts of interest pervade the chemotherapy landscape, starting with Congress and Medicare and trickling their way down to the oncologists who administer the chemotherapeutic agents.

The 2003 Medicare Prescription Improvement and Modernization Act of 2003 was promoted to control costs and to provide help to the elderly and poor. While this act had the advantageous provision of providing new coverage for Medicare beneficiaries for most prescription drugs, the legislation also included provisions designed to promote the interests of the pharmaceutical industry.

Before voting on this legislation, Congress was misled into believing that the cost of the program would be $395 billion over 10 years—but Medicare officials had already revised the estimate to $534 billion.[iii] One report revealed that the chief Medicare actuary later told Congress his boss at the time, Tom Scully, told the actuary to withhold the numbers if he valued job security.[iv] As the lead negotiator for the act, Scully was conflicted—he was also negotiating a job at a law firm. He became a lobbyist for the pharmaceutical industry at this firm 10 days after the act was signed into law.[v]

There were more than 1,000 pharmaceutical lobbyists working toward the passage of this legislation, and large portions of the act were allegedly written by the lobbyists.[vi] The legislation passed following an “unorthodox” roll call, described by one congressman as the “ugliest night” he experienced in his 22 years in politics, characterized by arm twisting, threats, and tears.[vii] A subsequent investigation suggested that Congress and the leading Medicare administrator may have acted upon conflicts of interest and yielded to the influence of the pharmaceutical industry to adopt the act.

The lobbyists were intent on passage of the act because a key provision of the law prohibits Medicare and the federal government from using its size and purchasing power to negotiate lower prices from drug companies.[viii] Drug companies would still retain the right to set their own prices, meaning that these companies could raise their prices at the expense of taxpayers. To illustrate, Medicare patients pay almost 60 percent more for the top 20 drugs overall than veterans pay under a Department of Veterans Affairs program because the Veterans Affairs Department is allowed to use its large purchasing power to negotiate prices with the pharmaceutical industry.[ix] At the same time, the act limited how much oncologists could mark-up wholesale oncologic agents to affect cost savings.

The act ultimately reduced reimbursements for outpatient chemotherapy drugs to the average sales price plus a 6 percent markup and began providing an increased fee for administration in an attempt to cover actual costs. Previously Medicare reimbursed such drugs at the lesser of the charge billed or 95 percent of the average wholesale price.[x]

Unlike other specialists who do not dispense drugs, oncology practices are unique in that they may purchase and administer chemotherapeutics. Prior to the act oncologists bought chemotherapy agents at wholesale prices and then sold them at marked-up prices to patients or their insurers, resulting in $1.6 billion in overpayments.[xi] Over the years, this meant more than 50 percent of the revenue in an oncology practice could be the result of the sale of chemotherapeutic agents.[xii]

Oncologists must confront a conflict of interest between their own economic well-being and what is in the best interest of their patients. Prescribing an expensive brand-name-equivalent drug with a 6 percent markup compared to a much cheaper generic with this markup clearly puts oncologists in a position to make money at the expense of their patients or their patient’s insurers. As one doctor put it, “Why use paclitaxel (and receive 6 percent of $312) when you can use Abraxane (for 6 percent of $5824)?”[xiii]

Although no large-scale studies, to our knowledge, have been done, an empirical study assessing the impact of the act on newly diagnosed lung cancer patients found physicians switched from administering those agents that experienced the largest cuts in profitability to other high-profit-margin drugs.[xiv]

Regardless of how incentives contributed to the current shortage of chemotherapy drugs, one thing is true: The act has created a conflict of interest for oncologists, higher costs for patients, and increased risk for potential legal liability.

The ethical and legal dilemmas

The American Medical Association’s Code of Medical Ethics is clear that in the face of a financial conflict of interest, the conflict must be resolved in favor of the patient.[xv]

For centuries, business relationships between physicians and pharmacies have been forbidden by laws and courts, recognizing that “where the professional practice of an individual may have an influence on the economic success of proprietary ventures, the best interest of the patient may not be the primary factor in selecting either the medication prescribed or dispensed.”[xvi]

Yet, as noted above, it is clear that in some circumstances the more expensive alternative drugs are being used to boost oncologists’ revenues. Without this revenue, oncologists may not be able to survive economically. Some oncologists are unable to remain financially viable under the current reimbursement scheme.[xvii]

Not only has the act created an economic and ethical quagmire for oncologists, but it has also put them in legal jeopardy. If an oncologist administers a brand-name drug when a generic equivalent is available and does not provide the patient this information so that the patient can choose which drug to take, this poses potential liability risks for oncologists based on several different legal theories.

The first is failure to obtain consent of the patient to use the brand-name drug in those circumstances when a generic equivalent is available. This theory resonates in those instances when a patient refuses care because of high costs and is injured as a result.[xviii] Patients who have suffered injuries due to a failure to provide information on consequences of foregoing treatment or alternatives to the form of treatment have successfully sued.[xix]

When there is no physical injury, and the patient claims to suffer only economic loss in the form of paying more for the brand-name drug, it is unlikely a suit brought on the basis of informed consent will prevail since such suits typically require proving physical injury resulted. But other legal theories exist upon which the patient may bring a lawsuit under these circumstances.[xx] The first is breach of fiduciary duty, which refers to the legal obligation one party in whom trust is placed has to act in the best interest of another. In this case, the trust would refer to the loyalty that doctors owe their patients.[xxi]

Because physicians must not enter into conflicts of interest that put their own economic interests in conflict with a patient’s best interest, the law presumes that in the face of conflict of interest, the fiduciary abused this trust and places the burden on the fiduciary to prove that he or she did not breach this fiduciary duty.[xxii] This means penalties for breach of fiduciary duty can result in punitive damages, as well as compensation for the loss.[xxiii]           

Finally, the doctor-patient relationship is also grounded in elements of contract law.[xxiv] A contract may not be entered into under conditions of duress or coercion.  Cases involving patients who claim they were coerced to accept exorbitantly high prices to receive necessary treatment have produced mixed results.[xxv]

The solution: Look to the federal government

It is the perfect storm. It remains a tale of woe that perfectly illustrates the Golden Rule of big business: “The one with the gold makes the rules.”[xxvi]

There is a serious shortage of generic chemotherapeutic drugs, which primarily appears to be the result of corporate decisions not to produce or to interrupt production of these drugs,[xxvii] despite the fact that some are curative, cost little, and may have no substitutes. With low demand and low margins relative to more expensive and thus profitable brand-name drugs, drugmakers simply are choosing not to produce adequate supplies. In some cases, these shortages force patients to take expensive brand-name drugs that are not curative but only extend life expectancy—at a cost of up to $90,000 per patient and in some instances at 100 times the cost of generics.[xxviii] In August 2011 there were shortages for 14 of the 34 generic cancer drugs on the market.[xxix]

Besides the conflicts of interest between doctor and patient now enshrined in law, conflicts of interest found in Congress and in regulatory agencies continue to run rampant. Until these conflicts are managed or eliminated, the American people will suffer in the most unconscionable of ways. New campaign reform measures are needed. At the time this act was passed, it was reported that there were two lobbyists for the pharmaceutical industry for every one congressman, and approximately $100 million per year is spent in campaign contributions and lobbying expenses by the pharmaceutical industry.[xxx]

For example, a law should be considered that would prohibit members of Congress who take campaign contributions from the pharmaceutical industry or related groups from voting on related legislation. In addition, other laws beyond those that currently exist are needed to prevent members of Congress and regulatory agencies from working for the pharmaceutical industry for an extended period of time after leaving office.[xxxi]

Finally, the business model currently used to reimburse oncologists is plagued with conflicts of interest and must be reformed. The reimbursement scheme must be adjusted so oncologists have economic incentives to use the more affordable generic agents when clinically acceptable and to discourage use of more expensive but not more effective brand-name equivalents. This should be considered along with other possible remedies.

The point is that we must start to address the root of the problem—conflicts of interest. Perhaps, the catastrophic shortage of chemotherapeutic agents will be the impetus needed to address the underlying problem of conflicts of interest in public policy.

Patricia Tereskerz is an associate professor for research and the director of the program in Ethics and Policy in Healthcare at the Center for Biomedical Ethics and Humanities at the University of Virginia. Ann Mills is an assistant professor at the Center for Biomedical Ethics and Humanities.


[i] Senate Committee on Finance, Drug Shortages: Why They Happen and What They Mean, 112th Cong. 2d sess., 2011, available at

[ii] Joyce Frieden, “No easy fix for drug shortage crisis,” MedPage Today, September 26, 2011, available at

[iii] Michelle Singer, “Under the influence,” 60 Minutes, February 11, 2009, available at

[iv] Ibid.

[v] Ibid.

[vi] Ibid.

[vii] Ibid.

[viii] Efforts to amend this law to allow for government negotiation of drug prices have not yet been successful. A bill is currently under consideration to allow for government negotiation. (H.R. 2248: Medicare Prescription Drug Price Negotiation Act of 2011). Former efforts to achieve this have failed.

[ix] Singer, “Under the influence.”

[x] M.L. Gatesman and T.J. Smith, “The shortage of essential chemotherapy drugs in the United States,” New England Journal of Medicine 365 (2011): 1653–1655.

[xi] R. Twombly, “Medicare cost containment strategy targets several oncology drugs,” Journal of the National Cancer Institute 96 (2004): 1268–1270.

[xii] Ibid.

[xiii] Ibid.

[xiv] M. Jacobson and others, “How Medicare’s payment cuts for cancer chemotherapy drugs changed patterns of treatment,” Health Affairs 29 (7) (2010): 1391–1399.

[xv] American Medical Association, “Opinion 8.03 – Conflicts of Interest: Guidelines” (1994), available at

[xvi] Magan Medical Clinic et al v. Calif. State Board of Medical Examiners, 57 Cal.Rptr 256 (1967).

[xvii] Parija Kavilanz, “Doctors going broke,”, January 5, 2012, available at

[xviii] E.H. Morreim, “High-deductible health plans: New twists on old challenges from tort and contract,” Vanderbilt Law Review 59 (2006): 1207–1261.

[xix] Ibid; Truman v. Thomas, 611 P.2d 902 (Cal. 1980); Smith v. Reisig, 686 P.2d 285 (Okl. 1984).

[xx] Morreim, “High-deductible health plans: New twists on old challenges from tort and contract.”

[xxi] Patricia Tereskerz, Clinical Research and the Law (Oxford, England: Wiley-Blackwell, 2012).

[xxii] Morreim, “High-deductible health plans: New twists on old challenges from tort and contract.”

[xxiii] Ibid; 793 P.2d 497 (Cal. 1990) Cert. denied 499 U.S. 936 (1992); Tereskerz, Clinical Research and the Law.

[xxiv] Morreim, “High-deductible health plans: New twists on old challenges from tort and contract.”

[xxv] Hall v. Humana Hosp. Daytona Beach, 686 So.2d 653 (Fla. Dist. App. Ct. 1996); Victory Mem’l Hosp. v. Rice, 493 N.E.2d 117 (Ill. App. Ct. 1986); Protestant Hosp. Builders Club, Inc. v. Goedde, 424 N.E.2d 1302 (Ill. App. Ct. 1981).

[xxvi] Dara Lind, “The one with the gold makes the rules,” American Prospect, available at

[xxvii] Ezekiel Emanuel, “Shortchanging cancer patients,” New York Times Sunday Review, August 6, 2011, available at

[xxviii] Ibid.

[xxix] Ibid.

[xxx] Singer, “Under the influence.”

[xxxi] 18 USC Section 207.

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