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this function include:

governance
fiscal management
personnel management
operations management
facilities management
external relations

The nature and extent of each activity within each health industry depend
on the product or service, the size of the industry, and such factors as the
role of the industry in relation to broader corporate structures (e.g., parent
companies, subsidiaries, etc.).



FUNCTIONS OF THE PHARMACEUTICAL INDUSTRY

In addition to the common function of institutional administration noted
above, the pharmaceutical industry is involved in research and develop-
ment, marketing and sales, production and distribution, and health pro-
motion. Each of these functions is examined below.

Research and Development in the Pharmaceutical Industry As is

evident from the historical overview provided earlier, research is a critical
function of the pharmaceutical industry. It is, in effect, the lifeblood of the
industry. In many ways, the research efforts of pharmaceutical companies
are at the center of patient care in the United States. As Schnee and
Caglarian noted, "The primary purpose of pharmaceutical research is to
aid in the prevention, diagnosis, and treatment of disease and general
promotion of health. "^^ Three specific activities are included within the
research function in the pharmaceutical industry: research, testing, and
regulatory submission and approval.

Research Pharmaceutical companies are involved in both basic and
applied drug research. ^^ In the past two decades, the trend has been to
focus less on basic research and more on applied research. ^^ Part of the
reason for this development is that the costs of basic research have
skyrocketed since the 1960s, and the financial return on investment in
basic research has not been as great as in the two decades following World
War II. Another reason for the decline in basic research activity is that
there is a limit to the new drugs that can be discovered. New chemical



PHARMACEUTICAL COMPANIES 191



entities, the essence of new drug discoveries, are rare, and after the surge
of discovery and development in the 1940s and 1950s (when over 3,500
new products and dosage forms were introduced) it became necessary to
move into other areas of innovation. Such areas include development of
duplicate products, compounded products, and alternate dosage forms. ^^
In the 1970s and 1980s, pharmaceutical companies increasingly put a
greater emphasis on these latter categories of drug innovation.

Testing In all types of drug research, a wide range of methods of drug
testing is undertaken, including toxicology tests and clinical studies. Al-
though most drug research takes place within pharmaceutical companies
at their own expense, some aspects of this testing, such as clinical trials
(the investigation of the effects of a drug administered to human subjects),
are undertaken on contract by laboratories and other for-profit organiza-
tions outside the companies. As noted in Chapter 4, a number of multimil-
lion dollar contracts between academic medical centers and pharmaceuti-
cal companies were signed in the 1980s. In fact, the pharmaceutical
industry has a substantial history of cooperative research with American
universities, beginning in the 1920s and 1930s with such collaborative
efforts as those between Abbott Laboratories and pharmacologists at the
University of Wisconsin. ^'^

Regulatory Submission and Approval Drug testing wdthin the phar-
maceutical companies is a direct result of regulatory stipulations placed on
these companies by federal legislation. Thus the activity of preparing a
new drug for submission to the FDA is an integral activity. The process of
regulation does not apply only to the actual submission of a proposed new
drug; governmental controls also exist for most aspects of premarketing
testing, from preclinical (animal) to clinical testing. The entire process of
bringing a drug to market, from innovation to marketing, is tightly woven
with regulatory guidelines and mandates.

Marketing and Sales in the Pharmaceutical Industry In the phar-
maceutical industry, the marketing and sales function is composed of the
separate activities of marketing research and planning, advertising, and
sales (or, in the industry's terminology, detailing). ^5 a study by the
Congressional Office of Technology Assessment found that the pharma-
ceutical industry's marketing and advertising costs average about $10
billion per year.^^

Marketing Research and Planning Marketing research and planning
is in itself a business within the business of the pharmaceutical industry.



1 92 HEALTH INDUSTRIES



Pharmaceutical companies as well as outside firms undertake extensive
research and analysis of physician needs and prescribing behavior, which
provides information used to devise strategies to develop and market
products. ^^

Advertising Advertising is key to the marketing strategies of pharma-
ceutical companies. Several hundred million dollars are expended annu-
ally in the United States on drug advertising. Again, depending on the type
of company, the nature and extent of advertising varies. Ethical compa-
nies traditionally have advertised strictly to health care providers, primar-
ily through professional journals. In recent years, appeals by ethical
companies aimed directly at lay consumers have appeared in television
and magazine advertising, the method most often used by OTC compa-
nies. These ads, however, generally are not for specific products but are
used to promote corporate visibility and goodwill for the industry. Some
medical publishers, returning to tactics used in the nineteenth century,
are producing books that contain pharmaceutical advertising interspersed
with the text.^^ Free samples distributed to physicians and then passed on
to patients are used not only as a form of informal clinical evaluation of a
product but also as an effective means of promoting the product. Expendi-
tures for samples approximate those for journal advertising among the
leading pharmaceutical companies. Other promotional campaigns, such
as giveaways of pens, pads, and notebooks advertising the company and
its products, are also used by the pharmaceutical companies. In recent
years the FDA and several medical societies have sought to place restric-
tions on these giveaways. ^^

Sales (Detailing) Depending on the type of pharmaceutical company
(see Types of Pharmaceutical Companies, above), the scope of sales varies,
but the focus is generally the same: introducing new products, new
dosages, and new medical uses as well as selling existing products. Phar-
maceutical companies employ sales representatives to call on physicians,
hospital pharmacists, wholesalers, and other health care providers. Com-
panies also use direct mail campaigns, telemarketing, and, of course,
media advertising to sell their products.

Production and Distribution in the Pharmaceutical Industry Pro-
duction of goods in the pharmaceutical industry is largely driven by the
two functions of research and development and marketing and sales.
After new products are developed and approved, production is the next
step. The role of marketing and sales, however, plays an equally (and



MEDICAL SUPPLIES AND EQUIPMENT MANUFACTURERS 1 93



some might argue more) important role in production of goods. In a
for-profit corporation, the demand for the product (often largely influ-
enced by marketing and sales activity) clearly guides production. Conse-
quently, the general function of corporate management comes into play
in the production process as the various activities of fiscal management,
materials management, and even plant management may determine
production quotas and directions.

Distribution of products in the pharmaceutical industry depends on
the type of company involved. Ethical companies distribute primarily to
health care providers, whereas OTC companies focus on consumers. In
each case, wholesalers play an important role as the conduit for indirect
drug sales.

Health Promotion in the Pharmaceutical Industry "The business
of the drug industry is human health," as David Siskind noted in 1978,^°
and therefore health promotion is an integral function of pharmaceutical
companies, although one that is of less importance than the other func-
tions discussed earlier in this chapter. Insofar as much of the focus of the
pharmaceutical industry is on health care providers, the preponderance of
health promotion by the industry is directed toward physicians and others
who decide what drugs should be used. Thus, health promotion in the
pharmaceutical industry is largely an "educational effort" (the preferred
term of the industry) aimed at practicing physicians. ^^ Most of this "edu-
cation" takes place in the advertising and sales effort of the companies.
Nevertheless, promotional advertisements directed at consumers have
begun to appear on television and in magazines. In addition, some phar-
maceutical companies, in response to the rise in drug abuse and the AIDS
epidemic, are sponsoring promotional campaigns tied in to increasing
public awareness of these issues.



MEDICAL SUPPLIES AND EQUIPMENT MANUFACTURERS

Medical supplies and equipment manufacturing is a large and diverse
component of the medical industrial complex. The spectrum of products
generated by this industry ranges from Band-Aids to high technology
equipment. The 1976 Medical Device Amendments (Public Law 94-295)
to the Federal Food, Drug, and Cosmetic Act defined a medical device as
"any instrument, apparatus, or similar or related article that is intended to
prevent, diagnose, mitigate, or treat disease or to affect the structure or
function of the body."^^



1 94 HEALTH INDUSTRIES



The range of this industry is vast. Nearly 3,000 manufacturing estab-
lishments are registered with the Bureau of Medical Devices of the FDA,
and these companies produce items that fall into more than 160 Standard
Industrial Classification codes. The bulk of these products fall into six
major categories: surgical and medical instruments; surgical appliances
and supplies, dental equipment and supplies, x-ray apparatus and tubes,
electromedical equipment, and ophthalmic goods. ^^

In 1991 three companies dominated the sales in the U.S. medical
supplies and equipment market — Johnson & Johnson, with $12.4 billion
in sales, Baxter International, with $8.9 billion, and Abbott Laboratories,
with $6.8 billion. Johnson & Johnson also was the fourteenth highest
profit earning company in 1991 and of the top twenty-five corporations in
profit earnings had the largest percentage increase in profit from 1990 to
1991 (28 percent). 54

MEDICAL SUPPLIES AND EQUIPMENT MANUFACTURERS' FUNCTIONS

The functions of medical supplies and equipment manufacturers are
similar to those of the pharmaceutical companies. Research and devel-
opment, marketing and sales, and production and distribution are the
primary functions; health promotion is a secondary function. Although
the medical supplies and equipment manufacturers do not undertake
biomedical research as do the pharmaceutical companies, they do rely
on research in such areas as engineering and product development to
strengthen their position in the marketplace and bring marketable
products to consumers as quickly as possible. As in the pharmaceutical
industry, competition is keen in the areas of innovation and product
delivery. Regulatory submission and approval, although not as strin-
gent as in the pharmaceutical industry, still play a major role in the
medical supplies and equipment industry. Within the marketing and
sales function, activities similar to those of the pharmaceutical industry
can be found in medical supplies and equipment manufacturers. Mar-
keting research and planning, advertising, and sales are important.
Production is driven by market needs and corporate directions. Distri-
bution and support services are a large part of the industry, with the
support service aspect being perhaps more prominent in the medical
equipment industry than in the pharmaceutical industry, owing to the
need for technical support for equipment and other devices. As with
the pharmaceutical companies, health promotion in the form of "edu-
cating" is a function of the medical supplies and equipment industry,
which similarly targets the health care providers to whom products are
sold.



INSURANCE COMPANIES 1 95



MEDICAL PUBLISHING

Recording medical advances, knowledge, and information is an aspect of
the U.S. health care system as old as the profession itself. The industry of
medical publishing might be said to date from the eighteenth century
when publishers of medical journals first appeared regularly in Europe
although scientific and medical books had been published for centuries. In
the two centuries since that time, medical publishing has become a critical
and central part of the U.S. health care system. After World War II, and
especially beginning in the 1960s, the volume of medical publishing
increased at a dramatic rate. The information explosion characteristic of
other fields was no less evident in health care. Expansion of the medical
publishing industry to include data base creation and distribution is a
phenomenon of the computer revolution, and the National Library of
Medicine's production of MEDLINE in the 1960s was one of the earliest
developments in this area. CD-ROM publications first appeared in the
1980s, and the first electronic medical journal appeared in 1992. '^

The two dominant functions of the medical publishing industry are
the marketing and sales and the production and distribution of goods.
Unlike the other industries examined thus far, there is no direct involve-
ment in research or health promotion. The publishing industry's goods,
however, are indispensable to the operation of the U.S. health care system
as a whole and to research in particular.



INSURANCE COMPANIES

The health insurance industry, like the other health industries discussed
in this chapter, is a big business in America. Joseph Califano, in his
analysis of the "profitable acolytes" of American health care, remarked
that "the commercial insurance companies and the Blues are the money
changers, particularly in the temples of hospital care."^^ Two U.S. health
insurance companies, Aetna Life & Casualty and CIGNA, had sales in
excess of $18 billion in 1991. ^^



TYPES OF HEALTH INSURANCE

There are four predominant forms of health insurance coverage in the
United States:'^

• private for-profit (commercial insurance companies)

• private nonprofit (Blue Cross and Blue Shield)



1 96 HEALTH INDUSTRIES



• nonprofit prepayment plans (HMOs, PPOs)

• government funded programs (Medicare and Medicaid)

Within these types of insurance providers there are four basic types of
health insurance:

• hospitalization

• surgery

• regular medical expenses

• major medical expenses

Hospitalization insurance includes normal and necessary hospital ex-
penses such as the cost of the hospital room and meals, use of the
operating room, x-ray and laboratory fees, and some medicines and
supplies. Surgical insurance covers the cost of operations, up to certain
limits. Regular medical expense policies also pay for doctors' services
other than surgical treatment, either in the hospital or elsewhere. Major
medical policies protect the insured against catastrophic charges, generally
paying most costs — up to a total ranging from $10,000 to as much as
$250,000 — above an initial deductible amount that is paid by the policy
holder.39

HISTORY

Despite the tremendous volume of business in the health insurance
industry, the industry itself is a relatively recent development on the
American health care scene. Although there are nineteenth-century prec-
edents for health insurance coverage, primarily associated with fraternal
orders and industries such as lumber and mining, health insurance on an
individual or national basis was not widely accepted or desired in the
nineteenth century. The American Medical Association (AMA), in fact,
long condemned the concept of "contract practices.'"**^ The passage of a
National Insurance Act in Great Britain in 1911, combined with increasing
costs for medical care, caused Americans in the Progressive Era to become
interested in compulsory health insurance. For a variety of reasons,
however, including wavering support from the AMA and U.S. involve-
ment in World War I, interest in compulsory health insurance had largely
subsided by the end of the second decade of the century. By 1925 the New
York State Medical Society reported that health insurance was "a dead
issue in the United States.'"*'

Although the spirit of compulsory health insurance was subdued for
over a decade, the basis for a revival in interest in and support for health
insurance continued to develop. From the 1 9 1 Os to the 1 940s, workmen's
compensation was the most common form of health insurance in America



INSURANCE COMPANIES 1 97



and helped to keep the notion of some type of medical assistance alive.
The Depression years of the 1930s created the appropriate mood for
addressing the issue of health insurance for workers and the needy.
During these years several hospitals began experimenting with hospital
prepayment or insurance plans. One of the most influential of these was
the Baylor University Hospital plan, considered to be the precursor of the
Blue Cross movement.'*^ The success of the Baylor plan attracted the
interest of other hospitals, and by 1937 twenty-six such plans were in
operation. During that year the American Hospital Association and the
AMA's House of Delegates began approving such plans, and the Health
Service Plan Commission (later the Blue Cross Commission) was organ-
ized.

In the late 1930s surgical-medical plans were also being developed;
the first was the California Physicians Service in 1939. This led to the
organization in 1946 of the Blue Shield Medical Care Plans, Inc. (later
Blue Shield Commission). Even the AMA became supportive of health
insurance and created its own Associated Medical Care Plan. The medical
profession had come to see the advantages of health insurance, particu-
larly the economic ones (e.g., regular payments). A key step forward for
health insurance came through litigation when in 1948 the Supreme
Court ruled that health insurance benefits could be included in collective
bargaining.

By the early 1950s, a majority of Americans had purchased health
insurance of some type.'^^ From the 1950s to the mid-1960s, the health
insurance industry saw continuous growth. In the mid-1960s, the health
insurance industry, as well as the health care industry as a whole, changed
even more dramatically with the enactment of Medicare and Medicaid
legislation. As Ronald Numbers points out, "In 1967, just two years after
the passage of Medicare, third parties for the first time paid more than half
of the nation's medical bills. '"^^ This historic watershed set the stage for
further growth of the health insurance industry as it developed into a
multibillion dollar institution in the following decades.

From the late 1970s to the late 1980s the health insurance market
changed significantly. In the 1970s the marketplace was dominated by
commercial insurers and Blue Cross/Blue Shield plans. A decade later the
predominance of commercial insurers and the "Blues" had been eroded
by the fact that many employers were self-insured and by the significant
growth of preferred provider organizations and health maintenance or-
ganizations. One result of this change in the health insurance market was
increased competition among health insurers. This trend is likely to foster
further change in the health insurance industry in the coming decade, as is
the rekindling of the debate over national health insurance.'^^



198



HEALTH INDUSTRIES




FIGURE 7-2 A group production manager (left) watches a process operator as he
examines a sample of the active ingredient for PROSCAR, a drug for treating
benign prostatic hyperplasia, in a sterile glove box, 1991 . Source: Merck & Co., Inc.,
Whitehouse Station, N.J.



FUNCTIONS OF THE HEALTH INSURANCE INDUSTRY

The primary function of the health insurance industry in the U.S. health
care system is to provide insurance coverage. The institutional functions
within the health insurance industry are similar to those in the pharma-
ceutical and medical equipment and supply manufacturers, although the
definition and dimensions of these functions differ in the service industry
of health insurance.



INSURANCE COMPANIES 1 99



Research and Development in the Health Insurance Industry

Much of the research done by insurance companies is sociological and
economic (examining the demographics and statistics of the U.S. society
and economy) rather than biomedical, as in the case of pharmaceutical
companies. Although insurance companies are interested in basic re-
search and sponsor significant amounts of such research, the type of
research undertaken by the industry itself is largely applied. Other aspects
of the research function, as discussed for the goods manufacturers, do not
apply to the health insurance companies.

Marketing and Sales in the Health Insurance Industry As with the
pharmaceutical companies examined earlier, the marketing and sales
function in the health insurance industry can be broken down into the
separate activities of

• marketing research and planning

• advertising

• sales

Marketing research and planning in the health insurance industry, as
noted above, center largely on sociological and economic areas. As with
the pharmaceutical companies, this activity is a business in itself.
Advertising is a major activity of the health insurance companies,
although, because of increasing participation in group plans, direct
advertising to the consumer for health insurance is not as prominent as
with other types of insurance coverage (e.g., automobile insurance).
Sales in the health insurance industry generally follow along the lines
of sales in the other industries discussed earlier. The difference is that a
large portion of the insurance covering Americans is not sold directly to
the consumer but is marketed through employers or outgroup buyers.
Although the insurance salesperson remains a fixture of American
society, the emphasis of these individuals has shifted away from health
insurance to other types of insurance coverage (such as life, automo-
bile, and mortgage insurance).

Production and Distribution in the Health Insurance Industry As

a service industry, insurance involves no production of goods, distinguish-
ing this industry from the pharmaceutical and medical suppliers and
equipment manufacturers. Distribution and support services in the health
insurance industry include such activities as claims reviews and process-
ing of payments.



200 HEALTH INDUSTRIES



Health Promotion in the Health Insurance Industry Health insur-
ance companies play a strong role in health promotion, as it is in their best
interest that their clients remain healthy. Primarily as an offshoot to
advertising and marketing campaigns, health insurance companies pro-
duce items, such as pamphlets on industrial safety and video tapes on child
care, as a way to make the public aware of good health practices as well as
of the services the insurance companies offer.



RECORDS OF HEALTH INDUSTRIES

As noted at the outset of this chapter, the for-profit nature of the health
industries is an important characteristic of this segment of the U.S. health
care system. It is also a dominant factor in the documentation issues
within these industries. Documentation generated within any component
of the U.S. health care system is preserved principally for purposes of
recording the history and functions of the respective institutions. Within
the health industries, however, the relationship of this documentation to
the ongoing viability of the organization is more critical. Within the
documentation generated by the health industries lies the very success
(and potential failure, from a for-profit standpoint) of the organization.

Each function of the health industries, as examined in this chapter,
produces records that hold varying degrees of corporate secrets, strategies,
and perhaps skeletons. Issues such as corporate security and litigation
present challenges to the maintenance and availability of these materials.
The nature of the documentation, from fiscal records to research data, is
sensitive and potentially a liability to the companies. The plethora of data


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Online LibraryJoan D KrizackDocumentation planning for the U.S. health care system → online text (page 21 of 26)