For years, Priority Pharmacy has been a pillar of this city's gay community, known for its business and charitable efforts on behalf of people with AIDS.
The company's founder, pharmacist David C. Zeiger, is said to have filled San Diego's first private prescription for the AIDS-fighting drug AZT in 1987. And Joy Galloway, a top Priority executive and its best-known representative, is a beloved figure to many of the city's AIDS-stricken. The grandmotherly Galloway, a former grand marshal of AIDS Walk San Diego, gives much of her time to volunteer work with terminally ill AIDS patients. She is known for the bright red hearts she sews on quilts when one of those patients, called "Joy's kids," dies.
But some AIDS activists charge that Priority is getting far more than it gives--specifically that Zeiger's mail-order pharmacy business is profiteering from the disease.
They contend that the company charges prices for AIDS-related medications that are more than double its local competitors' and often higher than rival mail-order pharmacies. Zeiger acknowledges that Priority's prices are higher than its competitors, but says the prices are justified because of the extra services his company provides that other pharmacies don't.
Drug prices have been a highly visible issue in the health reform debate that is raging in Washington and across the country. The Clinton Administration has turned up the heat on the pharmaceutical industry as part of its drive to combat soaring health-care costs. In response, some drug makers have voluntarily agreed to limit price increases to the rate of consumer inflation.
While the health reform debate has spotlighted the giant companies that develop and manufacture drugs, much less attention has been paid to the other end of the drug-buying chain--the pharmacy. Industry experts say it is not uncommon for there to be sharp differences in prescription drug prices among pharmacies in the same city, although pharmaceutical industry officials say that market competition tends to prevent big price gaps.
It was such price disparities that prompted AIDS activists in San Diego and elsewhere to go public last month with accusations that Priority and other national mail-order pharmacies are "price-gouging."
These pharmacies "position themselves as caring and responsible and loving, but the smoke behind the screen is . . . profit," said William J. Freeman, executive director of the National Assn. of People with AIDS, a Washington-based advocacy group, and a former consultant to Priority. "There is no way to defend the kinds of profit margins that are being made here."
Freeman and others contend that high prices charged by pharmacies contribute to a common problem of AIDS patients: a rapid depletion of their insurance benefits.
Two of the best-known mail-order pharmacies specializing in drugs for AIDS or HIV-positive patients are Aerican Preferred Prescription Inc., or APP, and Stadtlanders Pharmacy. Mail-order drug delivery--a fast growing business, with industrywide sales that have soared to $4 billion a year, from $100 million in 1981--is popular with HIV and AIDS patients because it offers confidentiality, convenience and, often, no out-of-pocket expenses.
Indeed, because mail-order firms' prices are generally lower than walk-in pharmacies, many health plans require members to buy prescription drugs from mail-order companies in order to be reimbursed.
Like Zeiger, spokespersons for APP, of Farmingdale, N.Y., and Stadtlanders, of Pittsburgh, say their prices are fair. They say comparisons between their prices and those offered by walk-in pharmacies are misleading. They offer comprehensive AIDS-related services, such as nutrition and medication counseling, that the typical pharmacy does not provide, the firms say.
Zeiger is an intense man and dapper dresser who likes to collect art and exotic cars, including a 1988 Ferrari Testarossa, a 1990 Jaguar and a 1990 Chevrolet Corvette that carries the vanity license plate PILPUSR. He acquired the mail-order firm in 1979, changing its name from University Pharmacy to Priority earlier this year.
Galloway, a pharmacy industry veteran, joined Zeiger's company in 1985. Priority declined to make her available for an interview.
Zeiger is also an owner of a company that buys the life insurance policies of people dying from AIDS. Known as "viatical settlement" firms, these companies offer a way for cash-strapped AIDS patients to meet medical and other living expenses.
Members of the San Diego branch of ACT UP, the gay activist group that has criticized Priority's drug prices, contend that Zeiger's dual business interests are in conflict. Priority is charging excessive prices, they say, while the viatical settlement firm, LifeCare, is catering to--and capitalizing on--the financial woes of the terminally ill.
Zeiger bristles at such comments and accuses disgruntled employees of distributing false and misleading information about Priority's prices. He says his ownership of the pharmacy and LifeCare is not a conflict, noting that "they are two separate companies that do not engage in cross-selling."
But former and current Priority employees, physicians and insurance company claims adjusters say Priority's prices are attracting increasing criticism and scrutiny.
"After I was there a short while it became clear that profit was the driving factor," said Hattie Byland, a social worker and AIDS specialist who joined Priority in 1990 as director of the company's national mail-order AIDS-drug business. "It's reasonable for any business to make a profit, but not to the extent that I felt they were doing it . . . . It became untenable for me to stay in a situation that was making money off the epidemic." Byland resigned after less than a year on the job.
Linda Lamb, a former insurance analyst who left Priority in September, said she often fielded insurers' complaints about the pharmacy's prices. "They'd say, 'You've got to be kidding. You guys are charging $300 or so for this medicine when they can go to a neighborhood pharmacy and get it for half,' " she said.
And one San Diego doctor who treats many AIDS patients said he used to regularly refer patients to Priority until he began hearing complaints about "outrageous prices."
Priority says it bills insurers $265 for 100 tablets of the drug Retrovir, popularly known as AZT. By comparison, Stadtlanders charges $227 for the same prescription, while APP charges an average of $171, according to data supplied by the companies.
The manufacturer, Burroughs Wellcome Co., wholesales the drug for about $120. Mail-order pharmacies usually pay slightly less than the wholesale price--their reward for buying in bulk, according to pharmacists.
For another AIDS-related medication, Bactrim DS, Priority's insurance-billed price is $298. Stadtlanders charges $183 for the same prescription, and APP charges insurers an average of $126, according to company figures.
A customer who pays cash for the same AZT prescription at Park Boulevard Pharmacy, a neighborhood drug store in San Diego, is charged $141--or $124 less than Priority bills insurance firms. To cover paperwork costs, Park Boulevard adds 10%--in this case $14--for prescriptions billed to insurers, said Rolland Hammerness, the pharmacy's owner.
"I'm not making a mint, but I think we're making a legitimate profit," says Hammerness, who accuses Priority of overcharging.
Zeiger also owns a walk-in drug store in San Diego, known as University Pharmacy Health Center, which charges lower prices for cash purchases. The walk-in pharmacy, which Zeiger is trying to sell, is a much smaller business than Priority.
According to Zeiger, Priority sets prices based on its "cost of doing business." The company, he noted, handles all insurance paperwork, freeing customers from that hassle, and provides overnight mail delivery, nutritional brochures and a toll-free telephone hot line with information about AIDS.
"We're a premium service," Zeiger said. "Our clients choose to come here." He describes Priority's typical client as "a fairly well-educated individual who has private insurance"--usually a fee-for-service plan that allows patients to select their own doctors.
Zeiger, who says Priority has begun a review of its prices, notes that the firm accepts as full payment whatever amount the insurance company is willing to pay--even if that is significantly less than Priority bills. Most insurers, he noted, have so-called "usual, customary and reasonable" fees that limit how much they'll reimburse pharmacies for medications.
But Laurie Lehne, an ACT UP member and former manager at Priority, said Zeiger isn't telling the full story. "They charge those high prices," she says, "because often enough they get that price."
While insurers routinely review medical bills to spot excessive charges, industry experts said many bills are paid with no questions asked. "In many cases, you could say these insurers are catatonic in their oversight of the bills," said Joel Hay, a health economist at USC's School of Pharmacy. HMOs--some of which run their own prescription drug programs--tend to be more vigilant about monitoring drug costs than insurers with fee-for-service plans, he said.
A claims adjuster who handles HIV/AIDS medication billing for one Southwest-based insurer said the industry does not have well-established "usual and customary" rates for pharmaceutical prices like those for surgical procedures and other physician services. "People can charge whatever they want," she said, "and they do."
One of the main attractions for Priority customers is its promise of "no upfront costs." Once clients meet their annual insurance deductibles, Priority usually doesn't require any out-of-pocket payments from them, even if their insurance calls for co-payments with every prescription.
The Clinton Administration's health plan would impose a federal ban on this practice, known as "waiving the co-pay," on the grounds that it discourages people from being cost-conscious consumers of health care.
Some states have declared the practice to be illegal. A spokesman for the California Department of Insurance said the agency believes the practice is illegal, but concedes that state law is vague in this area.
Zeiger said the company does not always waive co-payment and believes its policies are legal.
Priority's critics contend that the company's higher prices hurt AIDS patients by depleting their maximum lifetime insurance benefits more quickly. That's what angered former Priority customer Rick Stadler, a 37-year-old San Diegan with AIDS.
"I saw (Priority's) advertisement that they do all the insurance billing for you, so I went and used them," Stadler said. "A month and a half later I got my first EOB (explanation of benefits) from Travelers (Insurance Co.), and I was just outraged . . . . Everything was a minimum of $75 to $200 more per prescription."
Stadler complained of overbilling to Travelers, then submitted a claim of damages to Priority. Priority refunded $945 to Travelers and made a cash payment to Stadler, according to a copy of the settlement agreement provided to The Times. Priority denied in the agreement that it had done anything improper. Despite the criticism, Priority has strong supporters within the San Diego community.
Dr. Gary R. Lewis, a clinical psychologist at San Diego's Mission Bay Hospital, noted that Priority has sometimes provided drugs at no cost to indigent AIDS patients or those having trouble getting insurance.
"When insurance was denied, they just wrote off the amount that was owed," Lewis said.