Cost Cutting Boosts Generic Drugs
As prices for prescription drugs continue to spiral upward, states and insurance companies are increasingly forcing doctors to justify expensive medication and requiring authorization before drugs are prescribed.
The rules take aim at some of the pharmaceutical industry’s most profitable drugs, such as heartburn and ulcer pill Prilosec, antidepressants Paxil and Zoloft, and arthritis drugs Vioxx and Celebrex.
Instead of paying for those high-cost, patent-protected drugs, insurers and state-run Medicaid programs are mandating that patients try low-cost generic drugs.
“First you start out with the most basic drug that can help this person, and if that works, great,” said Beverly Hayon, a spokeswoman for health insurer Kaiser Permanente. “But if it doesn’t, you work your way up the price scale.”
States, insurers and employers are fighting back as drug companies and other providers of medical care raise costs year after year at well above the rate of inflation. According to a survey of employers, health-care costs are expected to increase 12.7% in 2002, after an increase of 11.2% this year and 8.1% the year before.
Kevin Concannon, commissioner of Maine’s Human Services Department, helped implement the state’s program that requires patients covered by Medicaid to get clearance from physicians for certain expensive prescriptions.
“We simply want to not waste money on drugs that clinically, in the opinion of physicians groups and pharmacists, don’t offer much benefit,” Concannon said.
The stiff regulations will dim the earnings prospects of the pharmaceutical industry, whose double-digit profit growth has made it one of the best-performing sectors in the last decade. Profits at large U.S. drug makers are expected to slow dramatically in 2002. Their pipelines of experimental medicines are not producing blockbusters fast enough to make up for the loss of major drugs that face copycats after patents expire.
Drugs with annual sales of nearly $40 billion are slated to lose patent protection over the next five years, led by AstraZeneca’s Prilosec, which generates $6 billion a year in sales, and Claritin, an allergy drug that brings in $3 billion annually for Schering-Plough Corp.
Drug makers are feeling the sting of states, which are pouncing on patent expirations by implementing a rule called “prior authorization” for their Medicaid patients.
Physicians must cite a medically compelling reason a patient needs an expensive branded drug. Otherwise, the patient must pay full price for the branded drug or get a Medicaid-covered prescription for a generic.
Drug makers have taken notice and have told financial analysts their earnings will suffer.
“We did model in very steep sales declines because of generics,” said Merck & Co. Chief Executive Raymond Gilmartin two weeks ago after his company warned its profit would not grow next year. “The issue is with Vioxx.”
Many insurers are refusing to pay for Vioxx and Celebrex, citing studies that show the drugs are no more effective than other painkillers and offer advantages only to patients at risk of stomach ulcers.
The pharmaceutical industry says the prior authorization plans are unfair to patients because they withhold important medicines, and the industry is suing several states. But health maintenance organizations and states say they cannot keep up with the soaring costs of health care unless they rely on generic drugs, which can offer discounts of 80% or more.
“Our greater interest is slowing the rate of the spending growth in the pharmacy program,” said Martin Smith, a spokesman for the Georgia Department of Community Health, which oversees the state’s Medicaid program and the state-employee health insurance plan.
