Feature
Drug prices, especially for brand names, are sky high and rising in the United States. According to a couple of University experts, the steep price of drugs depends on many factors--like the shielding of insured consumers from the true prices of drugs, patent laws, and the byzantine structure of an industry whose practices are all but impossible to track.
A hard pill to swallow: why U.S. drug prices are so high
Why U.S. drug prices are so high
by Deane Morrison
From M, spring 2004
The last thing Marie, a University employee, thinks about when
she reaches for her asthma medication is its cost. Thanks to her
Health Partners coverage, she pays only $20 for a three-month
supply of Advair. If Marie paid cash at the Nicollet Mall
Walgreen's in Minneapolis, she would pay $151.59 for a one-month
supply. If she were buying online from Canada, the price would be
about $99 a month, and if a generic form of the drug were on the
market, the price would probably be slightly lower than the
Canadian price. Marie is getting a good deal with her HMO coverage,
but her situation illustrates one reason why drug prices,
especially for brand names, are sky high and rising in the United
States. According to a couple of University experts, the steep
price of drugs depends on many factors--like the shielding of
insured consumers from the true prices of drugs, patent laws, and
the byzantine structure of an industry whose practices are all but
impossible to track.
Consumer price insulation
One simple factor in high drug costs is that the doctor who chooses
a drug doesn't pay for it and may have no idea of its price;
therefore, he or she may pick a high-priced brand name over a
generic version of the drug without a second thought. Doctors get
much of their information about drugs from the manufacturers, who
send "detail" people to doctors' offices--complete with free
samples--to extol the virtues of the latest brand-name drugs. Ads
aimed at consumers also tout brand names, increasing the demand for
more expensive drugs. If an HMO or other health plan is paying,
that's good for the consumer but not for prices. "Suppose each
refill costs you a flat $10 to $20 co-pay, whether it's a $50
brand-name drug or a $30 generic," says Roger Feldman, a University
professor of health services research and policy. "Demand for the
drug would be insensitive to price." Such arrangements help
insulate consumers like Marie from the true cost of their
medications, so they have no incentive to shop around. But an
insurance policy that requires the consumer to pay a certain
percentage of all costs would introduce some price sensitivity, and
encourage both consumer and insurer to seek better bargains.
Both Stephen Schondelmeyer and Roger Feldman
scoff at companies' claims that anti-reimportation laws serve to
ensure the safety of drugs from Canada. "Anti-reimportation laws
have little to do with safety and everything to do with profit,"
says Feldman.
Oh, Canada
U.S. prices got so high in the first place partly because, in the
1970s and 1980s, companies began pricing according to a percentage
of a country's median income, says Stephen Schondelmeyer, head of
the University's PRIME Institute, which monitors the pharmaceutical
industry. Drug prices in Canada run about 50 to 60 percent of the
U.S. figure; in Europe it's about 40 to 50 percent. But the U.S.
has huge income disparities; affluent people tend to have HMO or
other coverage, and those who don't have any coverage tend to be
the poor or elderly. "Many people paying cash are way below median
U.S. income, but prices were set according to the median," says
Schondelmeyer. "That's why seniors complain--many have only
Medicare, which doesn't cover most drugs." U.S. law allows only the
company that makes a drug to reimport it from Canada into the
United States, says Schondelmeyer. The law is routinely ignored by
U.S. consumers who order drugs from Canada or go there to buy them,
and several states, including Minnesota, have challenged the law.
But drug companies have threatened to limit sales to Canada if the
law were repealed or if the flow of drugs southward over the border
gets out of hand. "[If they did that], they would be acting like a
cartel, which is illegal in the United States," says Schondelmeyer.
Both Schondelmeyer and Feldman scoff at companies' claims that
anti-reimportation laws serve to ensure the safety of drugs from
Canada. "Anti-reimportation laws have little to do with safety and
everything to do with profit," says Feldman. In effect, says
Schondelmeyer, by paying high prices, Americans are subsidizing
lower prices in Canada and Europe.
Patents
Laws governing the patenting of drugs also play a role in how
they're priced. Drug patents give companies the exclusive right to
manufacture a drug for 20 years; without patents, companies would
be unable to protect their products long enough to recoup the huge
costs of drug development, and new drug research would suffer. But
loopholes like the one covering patent extension allow
manufacturers to keep their patents--and the relatively high
prices--longer, while keeping lower-priced generic equivalents off
the market. Patent extension law gives a patent holder an automatic
30-month extension on the patent whenever a second party challenges
the patent. A court decision could cut the 30-month extension, but
companies know how to keep cases in court longer than 30 months,
Schondelmeyer says. Drug companies can also ask Congress to extend
patents, a company can patent something besides the actual drug
chemical--such as a new process to make the drug, a new dosage
form, or a new use, as happened with Prozac. "Prozac is off patent,
but Eli Lilly found it could be used for PMS," says Schondelmeyer.
The company now has a new patent on the same chemical it uses in
Prozac, but it's called Serafem for PMS, he says. Thus, rival
companies can't market the off-patent Prozac chemical as a drug for
PMS.
The PBM labyrinth
During the last two decades--the PBM, or pharmacy benefit
management company--has arisen to manage drug benefits for HMOs.
PBMs contract with HMOs and other health plans to obtain discounts
from drug makers and retail pharmacies. PBMs recommend certain
drugs and try to get doctors to prescribe them and HMOs to include
them in their formularies (lists of approved drugs). When a
discount is negotiated, it appears as a rebate from the
manufacturer, which the PBM passes on to the HMO. But, says
Schondelmeyer, PBMs don't disclose to their HMO employers the total
amount of the manufacturer's rebate or other payments, which might
include administration fees, data acquisition fees, or other types
of compensation for the PBMs. Also, PBMs get more rebate dollars
from higher-priced drugs than from lower-priced drugs. "PBMs are
paid by HMOs to get low prices, but they benefit by preferring
higher-priced drugs in their recommendations to HMOs," says
Schondelmeyer. "It's a huge conflict of interest. I think
transparency is needed. If PBMs had to disclose their transactions,
maybe somebody could referee them." Adding to the complexity and
the conflicts of interest is the fact that some of the biggest PBMs
have become affiliated with, or even owned outright, by some
pharmaceutical companies.
What to do?
In Feldman's view, closing loopholes in patent laws and shortening
the 20-year life of patents would be a good first step towards
controlling prices. Schondelmeyer thinks the industry could
benefit, at least in the long run, if some of the veils hiding its
structure were swept away. "Companies argue that the United States
is the only 'free market' for drugs because other countries, for
example, in Western Europe, control prices," says Schondelmeyer.
"But that should lead to competition and lower prices. Instead, the
structure of the industry, hidden prices, and conflicts of interest
prevent those from happening." Neither Feldman nor Schondelmeyer
believes that the new Medicare prescription coverage will lead to
lower drug prices. For one thing, the legislation stripped the
federal government of any right to negotiate lower prices. What
Schondelmeyer calls the drug industry's "broken market"--a market
that doesn't have to play by the traditional rules of
economics--may eventually work against it. The inscrutable nature
of drug pricing makes the industry vulnerable to public anger, and
the longer that resentment simmers, the larger the potential for a
political showdown. Were that to occur, Congress may act in haste,
and price controls--or other remedies for outraged consumers--may
be used to treat the symptoms and little effort will go into
investigating the underlying causes of the problem. For now, the
best prescription may be to open up the closed and secretive world
of the drug industry to the light of day.
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