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1991).

63. EMOA-4, 649.

64. "American College of Cardiology Organizational Chart for Board and
Committees" (American College of Cardiology, Bethesda, Md., 1991).

65. "American Heart Association of Metropolitan Chicago Organizational Struc-
ture" (American Heart Association of Metropolitan Chicago, Chicago, 1991).

66. EMOA-4, 71.

67. EMOA-4, 459.

68. EMOA-4, 643.

69. EMOA-4, 23.

70. EMOA-4, 22.

71. EMOA-4, 415.

72. EMOA-4, 19.

73. EMOA-4, 7.

74. Letter from Linda Hudson, Vice President for Communications, Illinois State
Medical Society, to the author, 5 Feb. 1992. All information given about the
Illinois State Medical Society in this section is based on material provided by
the society itself.

75. This development coincided almost exactly with the founding of the



1 78 PROFESSIONAL AND VOLUNTARY ASSOCIATIONS



American College of Cardiology (ACC) in 1949; the ACC and AHA now have
a number of joint committees and task forces.

76. American Heart Association, History 1992, 1. All information about the AHA in
this section is drawn from recent publications provided by the association itself.

77. American Heart Association, History 1992, 6.

78. Ibid.

79. The single voluntary association represented is the American Alliance of
Health, Physical Education, Recreation and Dance, headquartered in Reston,
Virginia.

80. Part of the rationale for this procedure is that the Sophia Smith Collection also
holds the papers of early birth control advocate and Planned Parenthood
founder Margaret Sanger.

8 1 . AMA Archives staff are also responsible for answering public inquiries on
current AMA policies, so the proportion of time devoted to archival funaions is
lower than the 1 FTE figure might suggest. In addition, as of November 1993 the
AMA was engaged in significant cutbacks of its library and archival operations,
so this description of the archives' operations may soon be outdated.

82. This figure presumably excludes the incumbent's salary and benefits.

83. It should be noted, however, that AIDS documentation projects are being
carried out at the University of California at San Francisco and by volunteer
archivists Kathryn Hammond Baker, Stanley Moss, and Nancy Richard at
AIDS Action Committee in Boston.

84. Gay Men's Health Crisis reports that in 1991 it distributed exactly 1,468,256
such pieces (as well as 1 , 342, 317 condoms) . One hopes that, at least, GMHC is
preserving sample copies of its literature, as well as the periodic "AIDS Fact
Sheet" from which the above statistics are drawn.

85. However, the Gay Men's Health Crisis has successfully negotiated with the
New York Public Library to house their records.

86. The sources consulted include the National Union Catalog of Manuscript
Colleaions (NUCMC) and the online databases of the Research Libraries
Information Network (RLIN) and Online Computer Library Center (OCLC).
The total of 1 30 excludes duplicate entries for the same collection in more
than one source.

87. A very high proportion of these records represent New York State and are
held by the New York Academy of Medicine; the Downstate Medical Center,
Brooklyn; and the Cornell University Archives. Probably there are other
states whose medical societies are comparably well documented but that have
not benefited from grant funding to support the entry of cataloging
information into national databases, as has been the case in New York.



SELECT ANNOTATED BIBLIOGRAPHY

There appears to be no single book-length treatment of the history and role of
health care associations, either professional or voluntary. A brief overview of
the subject appears in James M. Rosser and Howard E. Mossberg, An Analysis



SELECT ANNOTATED BIBLIOGRAPHY 179



of Health Care Delivery (New York: John Wiley & Sons, 1977), 29-35. For an
article-length treatment of a single specialty see Bertram Slaff, "History of
Child and Adolescent Psychiatry Ideas and Organizations in the United States:
ATwenlieih-CentuvY Review," Adolescent Psychiatry 16 (1989): 31-52.

The legislative lobbying activities of selected health associations, including the
American Medical Association, American Dental Association, American
Nurses' Association, and American Hospital Association, are treated in Paul J.
Feldstein, Health Associations and the Demand for Legislation: The Political Econ-
omy of Health (Cambridge, Mass.: Ballinger, 1977).

The American Medical Association has been the subject of at least three book-
length historical works, namely James G. Burrow, AMA: Voice of American
Medicine (Baltimore: Johns Hopkins Press, 1963), Frank D. Campion, The
AMA and U.S. Health Policy Since 1940 (Chicago: Chicago Review Press, 1984);
and Morris Fishbein, A History of the American Medical Association, 1847 to 1947
(Philadelphia: W. B. Saunders Co. 1947).

The field is littered with histories of state, local, and specialty societies, of variable
quality and length. A small and arbitrary sample includes James Gilliam
Hughes, American Academy of Pediatrics: The First 50 Years (Evanston, 111.:
American Academy of Pediatrics, 1980); Joseph Roy Jones, History of the
Medical Society of the State of California (Sacramento: Historical Committee of
the Sacramento Society for Medical Improvement, 1964); and Leonard A.
Lewis, "The History of the American Society for Dermatologic Surgery and Its
Impaa on the Specialty of Dermatology," Journal of Dermatologic Surgery and
Oncology 16, no. 11 (1990): 1054-56.

Among voluntary associations, the American Cancer Society seems to be unique
in having been the subject of a book-length history: Walter Sanford Ross,
Crusade: The Official History of the American Cancer Society (New York: Arbor
House, ca. 1987). A few articles (again, greatly varied in both length and
quality) have been devoted specifically to archives and archival activities of
health organizations. These include T. A. Appel, "The Archives of the Ameri-
can Physiological Society," Physiologist 27 , no. 3 (1984), 131-32; Linda Cox,
Geraldine Hutner, and Robin Kennett, "Creating the Archives," New Jersey
Medicine 85, no. 9 (1985), 734-53; Robert S. Sparkman, "The Collection and
Preservation of the Archives of the Southern Surgical Association," Annals of
Surgery 207, no. 5 (1988), 533-37; and Manfred Waserman, "A Catalogue of
the Manuscripts and Archives of the Library of the College of Physicians of
Philadelphia, by Rudolf Hirsch" [essay review]. Transactions and Studies of the
College of Physicians of Philadelphia 5, no. 4 (1983), 385-87.

The standard reference on current health associations and organizations is Encyclo-
pedia of Medical Organizations and Agencies, 4th ed. (Detroit: Gale Research,
1992).



CHAPTER 7

Health Industries



JAMES J. KOPP



Providing the goods and services that support the U.S. health care system
is the principal function of one of the largest and most profitable compo-
nents of the U.S. health care system, the health industries. This "medical
industrial complex," as it has been labeled,^ supports the other compo-
nents of the health care system by inventing, developing, and distributing
such goods as drugs and medical equipment and by providing a broad
range of services from laundering to computing. The health industries not
only provide the foundation of the health care system, but also are a
dominant force in the world of corporate America. In 1991 five of the
twenty-five most profitable U.S. companies were in the health industries.-^

The for-profit nature of most of the health industries sets them apart
from the other institutions and organizations examined in this book. Like
other components of the U.S. health care system, these industries play a
significant role in helping people — saving lives and improving the quality
of life. Because these industries are driven by the profit motive, however,
the emphasis on getting a better product or service to market faster and
with as low an overhead as possible is the measure of success and even of
survival. This chapter examines the for-profit industries that compose the
medical industrial complex.^

Health industries can be broadly grouped into two categories: those
that manufacture and distribute goods to the medical marketplace and
those that provide health-related services to physicians, hospitals, other
health care providers, and the general consumer. The two major types of
manufacturers and distributors of health care goods are pharmaceutical
companies, and medical supplies and equipment companies. Pharmaceu-



181



1 82 HEALTH INDUSTRIES



tical companies, such as Eli Lilly and Company, Merck & Co., and Bristol-
Myers Squibb, develop and manufacture drugs and related products and
deliver and provide support for these goods. Medical supplies and equip-
ment manufacturers, such as Johnson & Johnson (which also manufac-
tures pharmaceuticals) and Baxter International, are responsible for the
design, manufacture, delivery, and support of a wide range of products,
including surgical and medical instruments, x-ray equipment, contact
lenses, and snakebite kits. A third type of industry, often overlooked in
examinations of the medical industrial complex but of significant impor-
tance in the delivery and support of health care in the late twentieth
century, is medical publishing. Medical publishers range from companies
that publish in all disciplines, such as McGraw-Hill, to companies that
focus solely on scientific and medical literature, such as Gower Medical
Publishing. Academic and association presses are other important players
in medical publishing, but they are often less profit driven than the
commercial publishing houses.

The service segment of the health industries is vast. The largest and
most influential service industry in the United States is the health insur-
ance industry. By the late 1980s over 86 percent of the civilian population
in the United States (more than 205 million Americans) was protected by
one or more forms of health care insurance. Health insurance companies
are a large part of the profit-making segment of the U.S. health care
system. Other types of service industries include firms that support the
health industries and other elements of the health care system, such as
drug testing companies, which perform clinical trials for pharmaceutical
manufacturers, and private independent laboratories, which perform
analyses for hospitals and physicians. Health care industries that provide
services also include a broad array of other enterprises such as hospital
management firms, food services, laundry services, computing centers,
and architecture and building consultants. An example of a service indus-
try is ARA Services, which started as a supplier of vending machines in
hospital waiting rooms and is now one of the largest food service compa-
nies in the United States as well as a leading provider of uniforms, linens,
and other services to hospitals and nursing homes. Another example is
American Medical Buildings, which develops, designs, and supervises
construction of medical buildings and clinics.

This chapter examines the largest sector within each of the two broad
categories of health industries, the goods providers and the service provid-
ers. Pharmaceutical companies are examined as an example of a goods
manufacturing industry; the medical supplies and equipment industry
and medical publishing are examined in less detail. In the service sector,
the health insurance industry is discussed. The examination of pharma-



PHARMACEUTICAL COMPANIES 1 83



ceutical companies and health insurance providers begins with a historical
overview of each industry, providing a foundation for discussing the
industry's functions. These functions are explored, and similarities and
differences are highlighted.



PHARMACEUTICAL COMPANIES

The pharmaceutical industry, considered the most profitable major manu-
facturing sector since the late nineteenth century, is a large and powerful
component of the U.S. economy and of the U.S. health care system's
health industries."^ There are over 500 pharmaceutical manufacturers in
the United States and several have annual sales of over $5 billion, led in
1991 by Bristol-Myers Squibb, with sales over $11 billion, and Merck &
Co., with sales of $8.6 billion. Merck and Bristol-Myers Squibb also
ranked fourth and fifth in total profits for all U.S. corporations in 1991.^

TYPES OF PHARMACEUTICAL COMPANIES

Pharmaceutical companies can be classified into four broad groupings
according to the type of drugs they produce and how the drugs are
distributed. These groupings are^:

• ethical companies

• "over-the-counter" (OTC) companies

• generic companies

• "start-up" biotechnology and experimental companies

As for other aspects of the health industries, the distinctions between
these groups have blurred in recent years. Companies that originally
focused on one type of drug have broadened their focus to include other
types.

Ethical companies are research-based drug companies that market
their products to health care providers and delivery facilities. The term
"ethical" was first used in the early twentieth century and was meant to
denote honest. It subsequently came to apply to medicines that were not
publicly advertised.^ Examples of ethical companies are Eli Lilly and
Company, Merck & Co., and the Upjohn Company. OTC companies are
marketing-based companies that sell products directly to the consumer.
Bristol-Myers Squibb and Warner-Lambert are examples of OTC compa-
nies (although both also have prescription drug divisions). Generic com-
panies also are marketing-based companies which on patent expiration
convert proprietary products to generic drugs and sell them to health care



1 84 HEALTH INDUSTRIES



providers and delivery facilities. Examples of these companies are Mylan
Laboratories, Quad Pharmaceuticals, and Bolar Pharmaceutical Com-
pany. The biotechnology and experimental companies within the phar-
maceutical industry are research-based companies that use new tech-
niques, in particular genetic engineering and structure-based design, to
develop new products. Amgen, Biogen, and Vertex are examples of these
types of companies.

HISTORY

Some pharmaceutical companies have their roots in centuries-old tradi-
tions. Merck & Co., for example, traces its antecedents to 1668, when
Friedrich Jacob Merck purchased an apothecary in Darmstadt, Germany.^
Several American firms started in the first half of the nineteenth century,
and many others were founded later in the 1800s. The history of the
pharmaceutical industry itself, however, is little more than a century old,
its growth and development coinciding with the rise of scientific medicine
in the late nineteenth century and the simultaneous emergence of en-
trepreneurial tendencies in the U.S. health care system. The formation of
the American pharmaceutical industry was influenced by such factors as
the public health movements of the period, initial efforts at government
regulation, scientific breakthroughs such as the discovery of salvarsan
(used in the treatment of protozoan infections), changes in the educa-
tional system that produced scientists to work in this growing economy,
and even the chain drugstore movement.

Some scholars argue that the pharmaceutical industry did not evolve
into its modern form until World War II, when the focus of the industry
shifted from drug manufacturing to drug innovation. This transformation
took place in part because of the discovery of the therapeutic powers of
drugs such as the sulfonamides in the 1930s and the increased demand for
drugs during World War II. After penicillin was released for civilian use in
1945, the rate of drug innovation increased dramatically. The first half of
the 1940s saw 67 new drugs introduced into the U.S. market; by the last
half of the 1950s, this number had reached 248."^

The history of the pharmaceutical industry following World War II is
dominated by a rapid increase in scientific research and development
efforts, but other factors also played large roles. One factor was govern-
mental regulation of therapeutic drug manufacturing. Although govern-
mental control of drugs generally dates back to the 1906 Pure Food and
Drug Act, the focus of the 1906 act was largely on food adulteration and
abuse and less on drug regulation.'^ It was not until 1938, when a new
Food, Drug, and Cosmetic Act was passed, that more emphasis was



PHARMACEUTICAL COMPANIES 185



placed on drug regulation. The 1938 act, a result in part of the deaths
associated with inadequately tested new drugs such as sulfanilamide,
called for premarketing testing of drugs. However, this legislation failed to
provide an adequate regulatory agency, as the legal powers of the Food
and Drug Administration (FDA) were considered "somewhat ambigu-
ous."^^ It was not until the early 1960s when another tragedy, precipi-
tated by the use of thalidomide, led to the strengthening of the regulatory
powers of the 1938 act.^^ The 1962 amendments "empowered the FDA to
specify the testing procedure a manufacturer must use to produce accept-
able information for evaluating the NDA [new drug application]."'^ These
amendments also required for the first time that manufacturers provide
proof of the efficacy as well as safety of new drugs. Although the 1962
amendments have left a trail of controversy in the thirty years since their
passage, they have continued to serve as the basis for drug regulatory
actions. In the 1980s, largely as a result of the acquired immunodeficiency
syndrome (AIDS) epidemic, substantial rethinking of the federal regula-
tory role and of specific policies was initiated and certain changes were
proposed. One result was that in May 1987, the FDA adopted a new rule
that allowed the release of experimental drugs to individuals with AIDS
and other serious diseases before final approval of the drugs. Azidothy-
midine (AZT), shown to be an effective drug against the human immu-
nodeficiency virus, was one of the first drugs released in this manner.'"^

Governmental control of the release of new drugs is not the only
aspect of regulation that is significant in the pharmaceutical industry. The
FDA has also become increasingly involved in economic aspects of the
pharmaceutical industry, including pricing, marketing, and competition.
The Federal Trade Commission monitors economic aspects of the pharma-
ceutical industry, such as the industry's high return on equity and also
controls the advertising of OTC drugs. '^

These concerns about the pharmaceutical industry highlight another
major area of the development of the industry in the post-World War II
period: economic growth and the competition, diversification, and consol-
idation that resulted from this growth. The extent of this growth can be
demonstrated in a number of ways but perhaps none more dramatic than
the seventeenfold increase in sales of prescription drugs in the thirty years
following the end of World War II. In addition to the fact that there were
more drugs in the marketplace as a result of effective research and
development efforts, events such as the passage of Medicare and Medicaid
legislation in the mid-1960s made it easier and often cheaper for Ameri-
cans to receive drug treatment. Increased advertising, especially on televi-
sion, contributed to this growth in drug sales. Even cultural and societal
changes, ranging from such factors as an increase in stressful white collar



186



HEALTH INDUSTRIES




FIGURE 7-1 Dr. Randolph T. Major (center), Merck vice president and scientific
director, meets in 1949 with Dr. Selman A. Waksman (left), in whose Rutgers
University laboratory streptomycin was discovered, and with Sir Alexander Flem-
ing, nobel laureate and discoverer of penicillin. Source: Merck & Co., Inc., Whitehouse
Station, N.J.



occupations to the civil, political, and social upheavals that affected
Americans in the postwar decades, may have played a part in the eco-
nomic growth of the industry. As Walter Measday noted in 1977, "It may
be a commentary on our society that shipments of tranquilizers alone
today exceed the entire output of the industry in 1939 by a wide mar-
gin. "'^

The industry's growth led to significant and often brutal competition.
According to David Schwarfzman, two competitive strategies are available
to a pharmaceutical manufacturer: cutting prices or seeking innova-
tions.'^ Both tactics have been used in the pharmaceutical industry over
the past forty years to obtain a larger market share and to seek a more
favorable profit margin.

The economic growth of the pharmaceutical industry also led to
diversification and consolidation among companies involved in producing



PHARMACEUTICAL COMPANIES 1 87



drugs for the U.S. health care system. In similar fashion to other compo-
nents of the U.S. health care system, pharmaceutical companies have
increasingly become economically and organizationally parts of larger
institutions dealing with a variety of products and services. The Upjohn
Company had its origins in the late nineteenth century as the Upjohn Pill
and Granule Company with the manufacture of pills as its primary focus.
However, like other long-standing American drug-producing firms such
as Lilly and SmithKline, in the post- 1950 period Upjohn began to diversify
into such areas as agricultural and aerospace products. The diversification
at Lilly, which began pill manufacturing in 1876, included agricultural
products, which by the 1980s accounted for 30% of sales, and cosmetics,
which represented 10% of sales. ^^ In the late twentieth century, other
leading research-based drug manufacturers, such as American Home
Products, emerged as pharmaceutical giants after years of producing a
variety of other consumer products, some of which were health related. In
another aspect of economic diversification, the leading pharmaceutical
companies have become international in scope, combining with estab-
lished foreign companies or extending their own sales and manufacturing
operations beyond U.S. boundaries.

The development of the pharmaceutical industry in the twentieth
century focuses on research, innovation, and the swift delivery of prod-
ucts to the marketplace. In these characteristics, it is similar to the other
health industries discussed in this chapter. Similarly, the impact of regula-
tory agencies on health industries has become a major factor in the
post-World War II period. All these factors have an impact on the profita-
bility of these industries, which is, of course, the most critical measure of
their success.

HEALTH INDUSTRY FUNCTIONS

As noted at the outset of this chapter, the primary function of the health
industries in the U.S. health care system is the provision of goods and
services (see Table 7-1), which is composed of several activities: research
and development, marketing and sales, and production and distribution.
In addition, certain health industries are minimally involved in the health
promotion function and all engage in institutional administration.'^ (See
Table 7-2.) Most of these functions comprise specific activities within each
type of health industry, and these are discussed below. Institutional
administration, which is common to all the health industries, is discussed
briefly here for the sake of convenience. Although the discussion is brief,
the importance of the administration function in the health industries
should not be overlooked.



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1 90 HEALTH INDUSTRIES



CORPORATE MANAGEMENT IN THE HEALTH INDUSTRIES

As expected with for-profit businesses, the function of corporate manage-
ment is a major one in the health industries. The principal activities within


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Online LibraryJoan D KrizackDocumentation planning for the U.S. health care system → online text (page 20 of 26)