Prescription
Drug Pricing Pathfinder
OVERVIEW
1. Introduction
Last year Americans filled approximately 2.8 billion prescriptions at an estimated cost of $100 billion. Between 1993 and 1998, spending nationwide for prescription drugs increased at an annual rate of 12 percent compared to about 5 percent for all other types of health spending. The high price of many prescription drugs has stormed into the news recently, as senior citizens and others dependent upon prescription drugs force the issue before state legislatures and Congress. But finding a way to control drug spending is a political minefield, pitting the powerful pharmaceutical industry against the elderly and others dependent on the drugs for maintaining their health or even their lives. The image of senior citizens in New England boarding buses for Canada in order to purchase their medications at cheaper Canadian prices will surely loom over the fall elections.
Although the Canadian-bound seniors, and many in the popular press, would have us believe that pharmaceutical company greed is the sole reason for high prices and increased spending on drugs, many factors contribute to the statistics. Among these are rapidly increasing utilization of drugs, the industry's enormous research and development costs, and the extended patent protection granted to pharmaceuticals by Congress. Of course, the reason that prescription drugs are so much cheaper in Canada (and Mexico) is that the governments of those countries impose price controls on prescription drugs. Many people would like to see the U.S. government regulate the price of pharmaceuticals--but the drug industry promises us price controls would mean the end of drug research, innovation, and availability as we know it. This Pathfinder explores the reasons why drugs are priced the way they are, and looks at possible ways to ease the price crunch on those who can least afford it: the sick, the elderly, and the uninsured. The Pathfinder examines past attempts at curbing drug prices, as well as current attempts by the states and by Congress.
We often use the words price, spending, and cost interchangeably, but in the prescription drug debate they mean three separate things:
1. Drug Prices
The price of the drug is the amount of money it takes to purchase the drug, whether the purchaser is an individual, an insurance company, or a government.The drug-pricing spotlight is currently on Medicare, the nation's insurance plan for people over 65. Medicare does not cover prescription drugs, so seniors covered by Medicare must pay the full retail price for their drugs. When Medicare was created in the 1960s the price of drugs was nominal, and their use was minimal. Many Medicare patients purchase supplemental insurance to cover their prescription drugs, but such "Medi-Gap" insurance is often extremely expensive or inadequate or both. President Clinton has been sparring with the drug industry over the high price of drugs for uninsured senior citizens, and has proposed adding some form of drug coverage for Medicare. Numerous pieces of legislation are wending their way through Congress to address the Medicare coverage gap.
Obviously individuals who lack health insurance entirely are also feeling the pinch of increased drug prices. Forced to pay the entire cost of a prescription out-of-pocket, many people will not take medicine when it is prescribed for them because they cannot afford to purchase it.
People with insurance that does cover prescription drugs will likely be the next to enter the pricing fray, as insurance companies wrestle with controlling their own spiraling drug costs. Insured consumers have been more or less "shielded" from drug prices to this point. According to one study, third-party spending on drugs (i.e. by insurance companies and employers) increased 123% between 1992 and 1997, while consumer out-of-pocket spending increased only 13%. Insurers have avoided, for the most part, passing the increasing cost of drugs onto consumers but that is not likely to last much longer. Spending on drugs is outpacing many types of more traditional health insurance spending. For example, in 1990 the Maine Medicaid program, which provides health insurance to low-income individuals, spent 40% as much on drugs as it did on hospitalization ; in 1999, it spent more on prescriptions than on all hospital spending. New York's insurance industry reports similar figures.
2. Drug Spending
Drug spending is the amount of actual dollars American consumers and insurers are spending on all prescription drugs.
Increased drug use is outpacing increased drug pricing, which means that drug spending is outpacing drug pricing. This is important to remember when looking at figures showing the ever-rising dollars being spent on prescriptions. Drugs today can treat things that were not previously treatable, or that would have required surgery. Drugs can now lower cholesterol and blood pressure, stabilize weak hearts, combat nausea in cancer patients undergoing chemotherapy, and treat glaucoma and mental illness. Surgery for ulcers has been almost completely replaced with drug treatment. Drugs help people live longer lives in better health. For example, in Maine, there are 35% fewer people in nursing homes today than there were 12 years ago, in large part because of drug therapy.So-called "lifestyle drugs," like baldness treatments and of course impotency treatments, are in high demand by consumers. This demand has been stoked by the lifting, in the mid-1990s, on most restrictions on advertising prescription drugs directly to consumers. In 1999 the drug industry spent an estimated $2 billion on direct-to-consumer advertising; many other countries still ban such advertising. A recent Deloitte Consulting survey found that 95% of doctors say their patients ask for specific products by name, as opposed to only 10% five years ago.
These newer drugs do also tend to be priced higher than older drugs, however. One study found that in 1998, the average per-prescription price for drugs that became available after 1992 was $71.49, while the average per-prescription price for older drugs was only $30.46.
3. Drug Costs
Drug costs here means what the pharmaceutical company must actually spend to develop, manufacture, and market a drug.
Drug companies counter that the prices are necessary to recover their enormous research and development (R & D) costs. New drugs taking years and years to develop, and for every drug that comes to market, countless expensive research paths dead-end. Tax subsidies and federally-funded research offset some of the costs, and patent law allows drug companies to recoup costs over the patent's 20-year life. However, because many years of the patent life can be taken up with the FDA approval process (an average of 12 years by some estimates), and because research is so expensive, the drug companies insist that lowering prices would devastate new drug development.
2. How to Use this Pathfinder
This Pathfinder is designed to assist policymakers interested in prescription drug price reform, or anyone interested in why drugs cost so much and what can be done about it. The Pathfinder attempts to lay out, in non-technical language, the most important sub-issues within the problem, and then point the way to sources of more information on that sub-issue. Because of its structure, some sources are referenced in more than one place within the Pathfinder. All pages are linked to the Table of Contents.
Prescription drug pricing legislation, and the drug industry's response, is evolving extremely quickly at this writing. This Pathfinder should be used as a guide to finding the latest information, not as the last word on the subject. Because the issue is so current, nearly all pertinent information is available on the web. I have provided as many links as possible, but have also included non-electronic contact information in case the links disappear. In some cases the only available information or analysis at this point is from popular news sources. Many publications provide no more than anecdotal or minimal information, but the New York Times in particular has done a good job of covering the issue since late 1999. The Washington Post is another good news source. Both are available on-line. Viewing the current day's edition is free, and searching past issues is free and fairly easy. The Times charges about $2.50 to retrieve archived articles; the Post charges $2.95 between 6 a.m. and 6 p.m. (E.T.) Monday-Friday, $1.50 at other times.
A small but important research note:
Although the industry prefers the more formal term, "pharmaceutical,"
your searches are likely to be more fruitful if you use the term "drug."
Most legislation, news, and analysis employs the phrase "prescription drug
price" (or "pricing").
I found virtually all the sources listed here via what I like to think of as
an "organic" (rather than "unorganized") method. I became
interested in the topic after reading newspaper accounts of pharmaceutical pricing
and talking with an economist at Kaiser Permanente. I began my research by reading
current newspaper articles covering Medicare prescription proposals and efforts
by New England states to rein in prescription prices. By noting who the articles
were citing, looking up state and federal legislation and laws, and combing
around the web for pharmacy-related sites and information, I found most of what
is presented here.
Link to Additional Introductory Materials Below:
3. Pharmaceutical / Health Care Glossary
4. Current
Prices and Recent Increases
5. Who manufactures & sells drugs?
6. Who has the power to regulate drugs?