Prescription Drug Pricing Hurting the Poor, Elderly : Health: The structure is also driving pharmacies out of business. System will be an issue as reform is debated.
From his office in the rear of Pelton’s Pharmacy, one of the nation’s oldest drugstores, owner Gerard H. Weitzman has a clear view of the pharmaceutical industry’s current pricing scheme. What he sees is a system that discriminates against his customers, particularly the elderly and the poor.
When Pelton’s Pharmacy purchases prescription medicine from drug manufacturers, Weitzman pays a standard wholesale price. But when he buys the very same drugs in his role as purchasing agent for a nearby hospital, he can negotiate deep discounts.
The price differential can be gigantic. For an inhaler used to treat asthma patients, for example, Pelton’s pays $18.84 while the hospital pays only $1.55.
“It’s simply not fair,” Weitzman said. His customers, he said, must pay higher prices for most of their prescriptions so that the pharmaceutical industry can afford to compete for high-volume business at hospitals, nursing homes, mail order houses and health maintenance organizations.
Weitzman’s lament, shared by most pharmacists around the country, recently has become the central issue in a series of lawsuits filed by drugstore chains against the pharmaceutical industry. Moreover, it is certain to be a major point of contention in the coming congressional debate over President Clinton’s proposal for health care reform.
While customers at Pelton’s and other pharmacies across the country frequently complain about the high cost of prescription drugs, few realize that they are not all paying the same price. The highest prices are charged to those who have no insurance coverage for drugs, including most low-wage workers and the majority of elderly people on Medicare.
Charles M. West, executive vice president of the National Assn. of Retail Druggists, contended that the higher pharmacy prices are “causing alarming numbers of seniors and others to go without much-needed prescription medication simply because they cannot afford it.”
Nor are patients at hospitals and HMOs getting much--if any--advantage from lower wholesale prices. While pharmacies normally mark up drug prices about 30%, hospitals and HMOs routinely add at least 70%, and some hospitals have been known to charge Medicare or the insurance companies as much as two or three times the retail price paid by customers at a drugstore.
This system hurts community druggists almost as much as consumers. Although 90% of Americans get their prescriptions filled at drugstores, the retail druggists’ group estimates that pricing problems have forced about 1,000 stores out of business in the last two years.
Net drugstore profits have fallen 32% in the last two decades, according to a survey in the Lilly Digest, published by the Eli Lilly pharmaceutical company. Pharmacies now earn an estimated 50 cents on the average $26 prescription price, which West called “barely enough to stay in business.”
“We can’t continue like this,” said Rick Carbray, an executive of Pelton’s. “It’s so outrageous and so threatening to our industry.”
The Pharmaceutical Manufacturers’ Assn., which represents the nation’s leading drug manufacturers, has declined to discuss the issue because of pending lawsuits. The association is known to strongly oppose efforts by the Clinton Administration to level the price differential for pharmacies.
Founded in 1800, Pelton’s Pharmacy has survived many adverse economic developments in its history. In recent decades it has endured competition from giant chain drugstores, losses of over-the-counter medicine sales to supermarkets, local redevelopment, the advent of the computer age and the scramble by pharmacies to join managed-care networks.
Once a social center for residents who gathered around Charles Abner Pelton’s pot-bellied stove on cold days, the pharmacy has been transformed into a thoroughly modern business with three retail outlets and a wide array of ancillary services, including contracts to act as drug-purchasing agent for three health care institutions in Connecticut.
While the pharmacy is still a thriving endeavor, Weitzman, whose pharmacist father inherited the business from Pelton, said prescription drug sales are one of his least profitable activities--far less lucrative than sales of greeting cards.
The current wholesale price differential began many years ago when pharmaceutical companies decided to sell infant formula to hospitals at a loss, presuming that mothers would keep buying the same brand after they took the baby home. Under federal law, drug companies have long been permitted to offer lower prices to nonprofit institutions such as charitable hospitals.
Over time, the discounts spread to most brand names purchased by hospitals and then to a variety of other institutions, including health maintenance organizations. Because these institutions buy large volumes of drugs, they have more leverage than the corner drugstore to negotiate lower prices.
High volume is not the only advantage enjoyed by the institutions.
Unlike community pharmacies, which must stock many brands to satisfy a wide variety of customers, hospitals and other institutions--including mail-order houses--have what is known as a “formulary,” a list of authorized brand names that they buy exclusively. Offering discounts, drug companies compete fiercely to get their products on the formulary.
While manufacturers insist that such discounts are entirely legal, the community pharmacists argue that this system has perverted the intention of the 1936 Robinson-Patman Act, which requires companies to sell products at the same price to competing retailers.
Even when pharmacies have banded together in an effort to obtain volume discounts, the drug companies have declined to cooperate. In fact, the biggest chain drugstores get no real price advantage over small, independent stores.
In lawsuits against the manufacturers, attorneys for community pharmacies have documented stunning disparities between the average wholesale price paid by retail drugstores and discounts to institutions: for example, $43.50 compared to $1.65 for Dupont-Merck’s Coumadin, an anticoagulant for heart attack victims.
Joseph L. Alioto, the former San Francisco mayor who is now a lawyer representing the California Pharmacy Defense Fund in one of several antitrust suits pending in the courts, called the manufacturers’ pricing practices “a Persian bazaar.”
As Alioto explained it, the same product can be shipped on the same day from the same manufacturer with “16 different prices,” the highest of which goes to the community pharmacy.
While Weitzman and his fellow druggists recognize that they are at a competitive disadvantage because they cannot promise to sell one brand exclusively, they see the huge disparities in wholesale prices as proof that manufactures are unfairly shifting costs onto retail drugstores.
Because of the discounts, the druggists contend, hospitals, HMOs and other institutions can make big profits even when they charge their customers slightly less for medicine than the retail drugstore price.
“How can I compete with the AARP (American Assn. of Retired Persons) pharmacy if they are starting out with a much lower cost base?” asked Peter J. Tyczkowski, Pelton’s chief pharmacist. “They can charge 10% less right off the bat and put other pharmacies out of business.”
Nevertheless, even though some hospitals are paying only a fraction of the average wholesale price, some charge more than retail prices to Medicare and insurers. The National Assn. of Retail Druggists estimates that hospitals paying only $3.50 for the painkiller Tylenol 3 with codeine often bill as much as $50 to $75 for it.
Stan Brooks, Pelton’s chief financial officer, said institutional pharmacies and mail-order houses are slowly robbing community drugstores of prescription business. “It is a vicious cycle, and we could be left out of the loop,” he said.
Nor is that the only pricing problem the drugstores face. They are also being squeezed by insurance companies that provide consumers with guaranteed drug benefits. To win the business of customers with paid prescription drug cards, druggists say they must often agree to accept smaller-than-normal markups on prescriptions.
John B. Rector, the druggist group’s chief lobbyist in Washington, said druggists have no option but to accept rates set by insurers, which vary widely. While some insurers will pay the druggist a few dollars more than the wholesale price, he said, many set reimbursements so low that community pharmacies actually lose money on each prescription they fill.
Weitzman estimated that his profit margin on drugs purchased with insurance cards often falls to nearly 10%. While he can make up some of the difference by charging a full price to uninsured customers, he noted, “you cannot bill all the differential to the cash customer or you will not be competitive.”
The upshot is that out-of-pocket customers--often those who can least afford it--are paying the most for their prescriptions. “The walk-in customer is paying the top price,” Carbray said.
Older people are a substantial part of the walk-in trade. While people over age 65 make up 12% of the U.S. population, according to the Consumers Union, they purchase 34% of all retail prescription drugs. In addition, it is estimated that 50% of all elderly people have no drug coverage because Medicare does not pay for prescription drugs.
With their future threatened, pharmacists have begun to rethink their way of doing business. By incorporating their own fee into retail drug prices, pharmacists now reason, they have minimized the value of their professional services--including computer billing, expert advice and monitoring against potentially lethal combinations of drugs.
“Anybody can count, pour, lick and stick--you don’t need five years of pharmacy school for that,” Carbray said, adding that most pharmacy customers are under the false impression that they are buying only pills, not a service.
Therefore, some industry leaders recommend that pharmacists simply pass along their wholesale drug prices to the customers and then add a fee for their services.
For the last few years, lobbyists for the retail druggists’ group and the National Assn. of Chain Drug Stores have tried without success to persuade Congress and the Federal Trade Commission to impose changes on the drug industry that would eliminate these pricing problems. But not until Clinton entered the White House did the druggists begin to get any satisfaction in Washington.
Among other things, Clinton’s health care reform bill would prohibit drug companies from offering discounts except for high volume and prompt payment.
Under that scheme, community pharmacies expect to join together in purchasing cooperatives to obtain lower wholesale prices, a practice that the drug makers could no longer legally resist.
In addition, the Clinton proposal would help pharmacists by providing a drug benefit for all Americans, including Medicare recipients, and paying pharmacists a $5 fee for dispensing each prescription under Medicare.
“Under the President’s health care reform package,” First Lady Hillary Rodham Clinton promised a national meeting of pharmacists last September, “we will level the playing field.”
Pharmacists are well aware that drug company executives have influence at the White House too. But Rector said his group expects Congress to satisfy its complaints, if for no other reason than because polls show druggists are more popular than drug manufacturers.
“We have the right opponents,” Rector said.
Drug Price Disparities
The highest drug prices are charged to those who have no insurance coverage for drugs, including most low-wage workers and the majority of elderly persons on Medicare. For example, here are the prices for Pelton’s Pharmacy in Middletown, Conn., and nearby hospitals.
AMERICAN AMERICAN G.D. HOME JOHNSON & DUPONT- SEARLE PRODUCTS JOHNSON MERICK Calan Inderal SCHERING Ortho- Coumadin 240 mg 20 mg Proventil Novum 2.5 mg 100s 100s inhaler 1 month 100s Price to hospitals $53.36 $2.99 $1.55 $4.85 $1.65 Wholesale price to Pelton’s $102.21 $31.35 $18.84 $19.06 $43.50 Retail price without insurance $117.40 $43.99 $23.33 $21.38 $59.00 Retail price with $113.91 $4.50- $21.85- $22.08 $48.90- insurance* $5.00** $22.00 $49.50
* includes both insurance reimbursement and consumer co-payment
** mandatory generic substitution
Sources: Pelton’s Pharmacy, National Assn. of Retail Druggists
