A Prescription for Health

Spending for prescription drugs is going up fast, doubling from 1990 to 1998, rising 15 percent between 1997 and 1998 and continuing to rise quickly. Increasing prescription drug costs accounted for 40 percent of the increase in cost of employer-based health insurance from 1998 to 1999. Many predict that prescription drug costs will rise even more quickly over the next 10 years, as more new drugs become available, including new classes of drugs based on research of genetic structures.

There is good news and bad news in the rising spending on drugs. Many new and better drugs (with higher prices) have entered the market, treating more conditions, and sometimes substituting for more invasive and more expensive treatments. People are using many more prescriptions. Between 1992 and 1998 the number of prescriptions issued in the United States rose from 1.9 billion to 2.6 billion. The new drugs reflect significant investment in research and development (R&D) by public and private sources.

Pharmaceutical companies claim to invest 17 percent of their income in R&D, though this has been challenged by some analysts. About a quarter of the R&D costs are offset by tax credits; plus, the companies have free access to a great deal of research funded by the federal government.

The bad news is that rising costs have placed great burdens on low-income people who need prescription drugs. Though almost everyone uses prescription drugs over the course of a lifetime, most prescriptions are needed by elderly people who are more likely to have medical conditions needing treatment, and by those with chronic conditions or disabilities who may have difficulty staying employed.

Even if 17 percent of prescription drug spending goes to R&D, it makes sense to ask about other reasons for high costs. Analysts have focused on two key sources of rising costs (which add nothing to the value of the product): profits and promotion. For 20 years the pharmaceutical industry has consistently been the most profitable, averaging 18.6 percent in profits compared to five percent for all Fortune 500 companies. But pharmaceutical companies also have very high advertising and marketing costs, and most of these costs are directed to new products which are patent protected.

It is very difficult to figure out what is going on in prescription drug prices because the wholesale prices that are officially quoted have little relationship to the wholesale price after rebates to pharmacy benefit managers and other wholesalers, rebates which are kept secret by contract. But there are three ways we can be sure that drugs are substantially over-priced.

• The very same drugs we buy in the U.S. are sold far more cheaply in other countries. The famous cross-border buying trips into Canada have found instances where the cost of a prescription in the U.S. is 80 percent higher, or more. (The difference is so marked that Congress almost passed a re-importation bill in 2000, a very clumsy way of reducing drug prices.)
• The Federal Supply Schedule for drugs, negotiated with the pharmaceutical companies by the Veterans Administration, allows some federal agencies to supply drugs to their patients at half the cost of prescription drugs purchased at local drug stores.
  
• When the 20-year patents on a drug finally run out, then other companies can offer the same drugs at lower prices. After about six months the price of such drugs has commonly been driven down by more than 50 percent.

Solutions

The most critical policy question at the heart of congressional proposals to provide prescription drug benefits is whether there will be real cost-containment in the legislation. Proposals by both Republicans and Democrats in the 106th Congress were both weak on cost-containment. Strong cost-containment provisions could probably lower the costs of prescription drugs 40 percent or more for everyone. This would mean great savings to everyone and not just those who would be eligible for subsidies through Medicare or some other means. Of course the pharmaceutical companies resist cost-cutting measures and repeatedly tell the public that this would destroy the research and development components of their business.

Most of the legislative action and rhetoric has been about providing a prescription drug benefit to the seniors and the disabled who are covered by Medicare. Most of the Republican and Democrat bills in the 106th Congress were weak on cost-containment provisions relying primarily on the procedures currently available to employer sponsored health insurance plans such as limiting prescriptions to approved formularies, encouraging the use of mail order pharmacies, and the encouragement of generic drug substitutions. They lack the kinds of cost-control mechanisms found in all European nations which have resulted in much lower prices. (It is ironic that the nation with the largest volume of drug purchasing and the touted advantages of a free market is paying dramatically higher prices than other nations.)

The only legislation that gets serious about cost-containment was put forward in the 106th Congress by Rep. Tom Allen (D-MA) and Sen. Tim Johnson (D-SD). It would use the purchasing power of Medicare to get the same kind of discounts found in the Federal Supply Schedule to provide drugs to Medicare beneficiaries. This would result in about 40 percent savings.

Democrats have tended to favor Medicare-related bills which recognize the structure of Medicare as a social insurance program designed to help all Medicare beneficiaries who have qualified by paying the equivalent of a health insurance premium through the Medicare payroll taxes that support the Part A (hospitalization) program and the direct premiums paid to qualify for Part B.

The Republicans have favored a welfare-type approach targeted to low-income beneficiaries. In 2000 both Democrat and Republican bills avoided large federal costs by proposing relatively modest benefits. Greater cost-savings would allow more generous benefits for the same cost to the government. The overall cost of the program depends on how much of the current surplus will be directed to tax cuts favoring the wealthy versus expenditures on pressing social needs, such as a Medicare out-patient prescription drug benefit, which could benefit all workers and their families at the point of retirement or disability.

General Assembly

The 211th General Assembly (1999) adopted two reports from the Advisory Committee on Social Witness Policy: Health Care: Policies and Activities and Managed Care. Concerns for beneficiaries of Medicare are addressed in both.