Out of Reach?
Dorothy and Clarence Cardella, a retired couple in their 70s living in Pasadena, pay more than $300 a month out of pocket for prescription drugs to maintain their health. Clarence has had two heart surgeries and requires costly medications, while Dorothy takes drugs to treat her diabetes and a thyroid condition.
Medicare covers their doctor bills and any hospital visits, but the federal health program doesn’t cover prescriptions. While the Cardellas’ household income is fixed, the cost of their medications is anything but: The prices just keep going up.
Recently, Dorothy’s doctor suggested a new insulin drug for her diabetes. It costs $230 a month. The cash-strapped Cardellas can’t afford it, so Dorothy’s doctor has given her free samples.
“At this rate,” she says, “we’ll soon be broke.”
The Cardellas’ situation is hardly unique. Prescription drug prices are rising much faster than the rate of general consumer inflation. The burden for this ballooning bill falls most heavily on those who can least afford it--older Americans living on fixed incomes, and the working poor with inadequate or no health insurance.
Most Americans don’t feel the rise in drug prices directly because they purchase prescription medicines through their employee health plans or their HMOs, where they don’t pay the full price, often making only a $10 or $20 co-payment. The rise in drug prices does hit this group indirectly: Many health insurers have blamed higher drug costs as the reason behind hikes in medical premiums or restriction of benefits.
But drug inflation is felt most keenly by people like the Cardellas, who are among an estimated 15 million Medicare recipients who pay out-of-pocket for arthritis medications that ease their pain, or heart drugs that help them stay alive. (The Cardellas could get drug coverage by joining a Medicare HMO, but they have long-standing relationships with doctors who aren’t in HMOs.) So they and millions of others essentially pay retail for their medications. And it is this group of people that has prompted consumer groups, politicians and the elderly to question why medicines cost so much and why prices keep going up.
Are there legitimate reasons behind this trend? Or are we just being gouged? Experts say there are a host of factors nudging prices upward, including the shift of patients into HMOs, and increased costs for advertising and research and development.
One reason why retail prices are going up is the rise of managed care, which now covers 60% of the insured population in the United States and an even higher percentage in California. Large HMOs and other managed care plans use their bargaining clout to demand discounts when they make bulk purchases of prescription drugs. Pharmaceutical companies, critics say, have tried to recoup some of this lost revenue by charging more to patients who have no one to bargain on their behalf--people without drug coverage who must pay full retail prices. This practice is known in the health industry as cost shifting.
Another factor is that the new generation of designer drugs is expensive to produce. When Genentech introduced Activase, a genetically engineered drug that dissolves artery clots that can cause heart attacks, the price was $2,200 a dose. Company officials defended the cost, citing very high research and development expenses. Creating a complex, genetically engineered drug versus producing a conventional drug is like the difference between making a $20 watch and crafting a fine Swiss timepiece.
Indeed, the process of taking a drug from the laboratory to the patient’s bedside is a lengthy one, requiring as much as 15 years and costing from $300 million to $500 million. And success is not guaranteed. Often there is a vast difference between how a compound behaves in the test tube and how it acts on humans.
New drugs typically require three phases of tests on human subjects to demonstrate that they work and don’t produce serious side effects. Most therapies founder along the way, perhaps proving less effective on humans than when tested on animals, or producing unexpected toxic effects. Only one medicine out of five makes it through human clinical tests, said Jeffrey Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America, an industry trade group in Washington, D.C.
For drug companies, these research duds are a necessary cost of doing business, much as a dry well is to an oil-exploration company. The drug makers argue, however, that prices for the one in five therapies that do make it to market must compensate for the costs associated with those that don’t. Consequently, the successful drugs have higher prices. How exactly pharmaceutical firms set prices for a particular drug is a closely guarded trade secret; it’s safe to say, however, that the price often bears little relation to development or manufacturing expenses for the that product.
When new drugs are patented, competitors are prohibited from copying the drug for 17 years. Because it may take 10 years or so from the time of patent for a new drug to reach the market, however, the patent protection may be lost several years after the drug actually goes on sale. The idea behind patent protection is that it encourages innovation by giving companies the market to themselves for a while so they can recoup their development costs.
“While drugs are under patent, pharmaceutical companies act like any other monopoly and charge what the market will bear,” says Jeffrey McCombs, a pharmaceutical economist at USC. “But that doesn’t make them bad guys.”
And drug makers’ pricing practices aren’t much different from those of other industries that have a monopoly. What is different, though, is that even when rival products are introduced, prices usually don’t tumble. What’s more, prices of older drugs continue to rise, even after, presumably, they’ve made their money back. That’s because a drug’s effectiveness--how well it works--not cost, is the key selling point when it comes to medicine.
Consequently, the drug companies shelled out $8.3 billion in 1999 for advertising and promotion in order to influence treatment decisions. Physicians are barraged by information aimed at convincing them that a particular drug is the best. Pretty soon, these new treatments become the accepted standard practice. And even when equally effective drugs that cost less are introduced, doctors tend to continue giving their patients the more expensive medicine, which means prices remain high.
In recent years, drug companies have also boosted efforts to pitch their products directly to consumers in TV, radio, magazines and newspaper ads to create brand-name awareness. In 1999, the industry spent nearly $2 billion to persuade patients to ask their doctor about products such as Zyrtec and Allegra, both allergy treatments, and Premarin, an estrogen supplement for post-menopausal women.
This strategy seems to work. According to a 1999 study by the National Institute for Health Care Management, the 10 most heavily advertised drugs accounted for about 22% of the total increase in drug spending between 1993 and 1998. But a byproduct of these promotional campaigns, says Frank Clemente of Public Citizen, a consumer health watchdog group in Washington, D.C., is that “the most heavily advertised drugs are the ones whose prices increased the most.”
Consumer Groups Push for Controls
The continued rise in prescription drug costs has touched off intense political debate on how best to give people like the Cardellas relief. Some politicians and consumer groups have pushed for some form of price controls. Not surprisingly, drug companies oppose price regulation. They contend it would curtail innovation in an industry that invests upward of $24 billion annually on research.
“The drug companies,” says William S. Comanor, a pharmaceutical economist at UCLA, “are not going to spend the $300 million or so it takes to develop a drug if the government is telling them what to charge.”
Others, though, say this is a scare tactic.
“If there are reduced revenues, it might have some impact on research and development,” says Ronald Pollack, executive director of Families USA, a consumer health group in Washington, D.C. “But the drug makers have far more latitude than they would have you believe.”
Pollack and others note that the pharmaceutical industry is the most profitable industry in America--with a level of profits that is three times higher than that of many Fortune 500 companies. Drug makers insist that such hefty profits are needed to pay for research that could produce therapies or cures for cancer, Alzheimer’s disease and a host of other illnesses.
Says Trewhitt of the drug industry trade group: “It’s very important to get a decisive return on investments. Otherwise, people won’t put their money in research-dependent ventures that have such a high failure rate.”
Taxpayers Shoulder Much of the Risk
But is that accurate? The reality is that U.S. taxpayers--not the companies and their shareholders--are shouldering a lot of the risk. The federal government pays for the bulk of the research by funding studies by the National Institutes of Health and through grants to academic research centers, such as USC and UCLA. This money pays for much of the highly speculative basic scientific research that results in quantum leaps forward in our understanding of diseases. And these discoveries become the springboard for devising new therapies.
In contrast, most drug company research is aimed at developing products, not basic research, said Public Citizen’s Clemente. And much of the research backed by corporations is aimed at developing “copycat” drugs to compete with successful medicines, rather than on basic research, he said.
A 1995 Massachusetts Institute of Technology study found that 11 of 14 new drugs introduced in the prior 25 years that were considered significant therapeutic advances were derived--at least in part--from government-funded research.
So are drug prices inflated? The answer depends upon whom you ask. Drug company executives and some health care economists argue that even the costliest medications are an incredible bargain. Many breakthrough drugs have revolutionized medicine, they say, enhancing the quality of life, leading to shorter and less costly hospital stays, and putting patients back on their feet faster.
The average heart disease medication, for instance, costs $1,200 a year. That, however, is far cheaper than a $40,000 bypass operation, not to mention the inestimable benefits of avoiding surgery.
But Dorothy Cardella, like many other older Americans, is fed up.
“The situation is really depressing,” she says. “Every time I turn around, it’s more bills with no end in sight.”
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Targeting Consumers
The federal government used to prohibit the advertising of prescription drugs directly to the public. But several revisions to federal rules between 1985 and 1997 have led to a dramatic increase in direct-to-consumer advertising by drug companies. Here is a list of the top 10 drugs, ranked by how much money was spent on TV, newspaper, magazine and other advertisements aimed at consumers.
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Rank Product Name Consumer Advertising (1999) (use) (in million of dollars) 1 Claritin $137 (allergy) 2 Propecia 99 (hair loss) 3 Viagra 93 (impotence) 4 Prilosec 79 (anti-ulcer) 5 Xenical 75 (weight reduction) 6 Zyrtec 57 (allergy) 7 Lipitor 55 (cholesterol reduction) 8 Zyban 54 (smoking deterrent) 9 Nolvadex 54 (breast cancer) 10 Flonase 53 (allergy)
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Source: IMS Health Inc.
A Hardship on Older Americans
Older, low-income people spend a larger share of their income on medical care than do wealthier Americans. Although they would especially benefit from prescription drug coverage, they are also less likely to have it.
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Household Share of older Americans Income spent income without drug coverage on health care* Below $10,000 35% 37% $10,000-$19,999 38% 19% $20,000-$29,999 32% 15% $30,000-$49,000 30% 10% $50,000 and above 26% 6% All 34% 13%
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* (median share of household income after taxes)
Source: Health Affairs, March/April 2000, “Prescription Drugs: What’s Next,” Volume 19, Page 30.
Drugs Lead Rising Health Costs
Hospitals and doctors have traditionally comprised the biggest chunk of U.S. spending on health care. In recent years, however, spending on prescription drugs has been rising faster than other areas of health care. While prescription drugs accounted for about 5% of overall spending in 1992, some experts have predicted that that figure could rise to about 15% within 10 years.
