Backgrounder: The Pharmaceutical Industry And Consumers -- Key Factors Affecting Affordability Of Prescription Drugs

BACKGROUNDER:
THE PHARMACEUTICAL INDUSTRY AND CONSUMERS --
KEY FACTORS AFFECTING AFFORDABILITY
OF PRESCRIPTION DRUGS

Gail Shearer
Director, Health Policy Analysis

Janell Mayo Duncan
Legislative and Regulatory Counsel

Ami Gadhia
Esther Peterson Fellow

FEBRUARY 2003

Introduction

Year after year, the pharmaceutical industry is the country's most profitable industry, at a time when many consumers are unable to afford its products. U.S. consumers are paying high and escalating prices for their prescriptions, and are facing higher out-of-pocket expenditures as insurers (and employers) increase their cost-sharing. Nearly 100 million consumers lack adequate prescription drug insurance coverage. And the system is suffering: introduction of low-cost generics is often delayed by drug companies exploiting regulatory loopholes, while often-misleading direct-to-consumer advertising fuels increasing expenditures without providing the complete information that consumers need. In addition, the U.S. has been slow to adopt systems that effectively rein in prescription drug spending in other countries.

While consumers, insurance companies, and government programs pay exorbitant prices for drugs, drug companies are spending billions of dollars engaging in inappropriate gift-giving and other questionable marketing practices to increase demand for their products. They contribute millions to members of Congress with hopes of influencing them to enact industry-friendly legislation. They challenge pioneering state programs that would curb drug costs by taking these states to court. The 108th Congress is expected to consider legislation that would extend prescription drug coverage to Medicare beneficiaries and should also consider options for reining in prescription drug expenditures. This briefing paper pulls together data from various government and private sources to provide a context for the 2003 debates in Congress.

1. Expenditures for prescription drugs are increasing at double-digit rates, year after year, with annual prescription drugs expenditures now representing nearly ten percent of national health care spending. (1)

· Retail spending on prescription drugs increased to $155 billion in 2001 (a 17% increase from 2000), according to the National Institute of Health Care Management Foundation. (2)

· According to national health expenditure data, prescription drug spending was the fastest growing component of health spending in 2000 and 2001, increasing 17 percent during both years.(3) During 2001, the seventh consecutive year of double-digit expenditures, prescription drug expenditures were $141 billion.

· Between 1990 and 2000, per capita spending on prescription drug increased by 206.6 percent (4)

· These increases are linked to several factors, including manufacturer price increases, increased prescribing, and prescribing of newer, more expensive medicines.(5)

2. Consumers, whether insured or uninsured, are facing increasing out-of-pocket costs for their prescription drugs.

· Employers offering drug coverage are increasing co-payments for prescription drugs, and more are using tiered copayments that vary based on whether the medicine is generic or brand-name.

· The uninsured, including many Medicare beneficiaries, do not benefit from the lower prescription prices that insurers often negotiate for their enrollees.

· Overall, 98 million Americans (34 percent) lacked adequate prescription drug insurance coverage in 2000, according to research by Boston University School of Public Health's Alan Sager.(6)

· Aggressive employer efforts to curb prescription drug expenditures through higher employee cost-sharing increased average employee out-of-pocket costs nearly 60 percent, from $244 to $389 per year.(7)

· Many seniors are unable to afford needed medications. In New York, a state with a drug subsidy program for the poor, one-fifth of the elderly skip doses or go without their medicines, according to research by The Commonwealth Fund.(8)

3. Brand-name prescription drug manufacturers have exploited loopholes in the 1984 Hatch-Waxman patent law to delay introduction of low-cost generics, driving up consumer expenditures for prescription drugs.

· In 2000, the average retail price of a prescription for a brand-name drug was more than three times the price of a generic drug ($65.29 vs. $19.33).(9)

· The generic version of a drug can cost substantially less than the brand name drug, often less than 50 percent of the cost of the brand-name version. (10)

· The delay of the introduction of three new generic drugs -- Hytrin (hypertension); Cartizem CD (a heart drug); and K-Dur 20 (potassium supplement) -- cost consumers over $300 million in potential savings.(11)

· Twenty-nine state attorneys general sued Bristol-Myers-Squibb (BMS) accusing the company of illegally blocking cheaper generic alternatives to its cancer drug, Taxol. The states claimed that BMS' anticompetitive practices caused them to pay more for the drug, and are seeking the return of $200 million to $250 million in estimated overcharges.(12)

· A Federal Trade Commission (FTC) report released on July 30, 2002 found that the 30-month stay and the 180-day marketing exclusivity period were serious barriers to competition. The FTC called on Congress to limit brand name companies to one 30-month stay of approval of a generic and to address the issue of abuse of the 180-day grant of marketing exclusivity. (13)

4. Most FDA drug approvals are for "me-too" drugs.

· The National Institute for Health Care Management examined new drug application approvals from 1989 through 2000, and found that 65 percent of all drugs given approval during that time period used active ingredients already on the market.(14) In other words, most so-called "new" drugs approved by the FDA are variations of drugs already available; only 35 percent of the new drug approvals during this time period were for drugs with new active ingredients not already being sold on the market.(15)

· The FDA viewed 85 percent of all of the drugs approved from 1989-2000 as providing no significant clinical improvement.(16) Over half of all new drug application approvals (54 percent) during this time period were for new versions of medicines whose active ingredients were already available in an approved product. (17)

5. Heavy spending on direct-to-consumer (DTC) advertising is associated with large increases in drug spending.

· According to research by the National Institute for Health Care Management, nearly half (47.8 percent) of the increase in retail spending on prescription drugs from 1999 to 2000 resulted from increases in sales of the 50 most heavily advertised drugs. The number for prescriptions written for these drugs rose nearly 25 percent compared to an increase of only 4.3 percent for less heavily advertised drugs. (18)

· Spending on DTC advertising of prescription drugs increased 35 percent in 2000, reaching a level of $2.5 billion.(19)

· Sales of the most heavily advertised drug, Vioxx (an anti-arthritis drug), increased 360 percent in 2000 and accounted for 5.7 percent of the year's increased in drug spending.(20)

6. The United States lags behind other countries when it comes to negotiating fair prices that reflect evidence-based determinations of medicines' cost-effectiveness. Recent initiatives in some states suggest great potential for future cost reductions.

· When New Zealand introduced reference pricing in 1993, prescription expenditures had been increasing at a rate of 10 to 20 percent a year. With reference pricing, the rate of increase slowed and stabilized to only 3 percent per year since the mid-1990s.(21) (Under reference pricing, independent researchers study the comparative effectiveness of alternative drug therapies (e.g., Vioxx, Celebrex, or ibuprofen for arthritis), select the most effective treatments, negotiate low prices, and develop preferred drug lists that provide the most effective drugs at the lowest cost, thereby maximizing the cost-effectiveness of health care spending.)

· British Columbia established its "PharmaNet" system of evidence-based review of drugs in 1995. Research shows that reference-based pricing in British Columbia has achieved substantial savings. For example, after implementation of reference pricing, there was a 29 percent decline in the use of higher-priced ACE inhibitors (which control high blood pressure), with savings of $6.7 million in the first 12 months, without a change in the overall utilization of antihypertensives.(22)

· When the Oregon Health Sciences University and the Oregon Health Resources Commission reviewed opiods for treatment of non-cancer pain, they determined that there was insufficient evidence to draw any conclusions about the comparative effectiveness of different medications such as Oxycontin and morphine sulfate LA. After development of its preferred drug list (and under rules that allowed doctors to easily prescribe medicines not on the list), Oxycontin prescriptions dropped 28 percent while prescriptions of morphine sulfate LA (the preferred generic and benchmark drug for this category) increased by 20 percent. (23)

· Michigan began to phase-in its preferred drug list (which requires prior authorization for drugs not on the list) in February 2002. Within four months, well over 90 percent of prescriptions for drugs of most therapeutic categories were from the preferred list. Average weekly pharmacy cost per claim (in Medicaid fee-for-service) was cut by $3.39, a reduction of 7 percent from projected costs.(24)

7. Federally-funded research has played a major role in private sector research and development, contributing to medicines for conditions including cancer and AIDS.(25)

· As of 1997, 54 out of 84 cancer-fighting drugs approved by the FDA were the products of federal funding. (26)

· A 1998 Boston Globe study looked at 50 of the top-selling drugs approved by FDA between1992-1997. The researchers deemed 35 to be the most important or unique. Thirty-three of these thirty-five drugs had received money from NIH or the FDA to help with discovery, development or testing. (27)

· In a 1995 study conducted at the M.I.T.'s Sloan School of Management, reseachers found that of 11 of the 14 drugs it identified as the most significant over the preceding 25 years were developed or discovered using government funds (28)

· An example of a drug that was discovered at an NIH laboratory and developed by the biotechnology industry (Genzyme) is Ceradase, the first-approved medicine for Gaucher disease. (29)

8. The pharmaceutical industry assures its access and influence in Congress and the Administration by making large contributions to political campaigns.

· The Center for Responsive Politics reports that the pharmaceutical industry was the 9th-ranked industry in terms of total campaign contributions during 2002, contributing $23 million during the 2002 election cycle. (30)

· Brand-name drug companies gave 10 times the amount of contributions by smaller generic drug companies during the 2002 election cycle, contributing $10.9 million compared with $1.1 million by generic manufacturers, according to Public Citizen. (31)

· During the 2000 election cycle, in anticipation of congressional consideration of a Medicare prescription benefit, drug companies gave over $26 million in contributions; 68 percent went to Republicans. (32)

· All drug companies and their trade association (PhRMA) employed 623 lobbyists in 2001, more than six for each member of the Senate, and more than one for each member of the House. (33)

· The pharmaceutical industry funded an organization (disguised to be a consumer organization), United Seniors Association, that orchestrated a $8.7 million advertising campaign in support of the Republican Medicare prescription drug legislation in thirty-five targeted Congressional campaigns. (34)

9. The pharmaceutical industry has consistently been the most profitable industry over the past eight years, with profits about three times higher than the median Fortune 500 firm.

· In Fortune Magazine's 2002 survey of the top performing companies, the pharmaceutical industry ranked first on all three measures of profitability: return on revenues (18.5 percent); return on assets (16.3 percent), and return on shareholders' equity (33.2 percent).(35)

· Between 1994 and 2001, pharmaceutical industry profitability ranged between 14 percent and 19 percent, while the median for all Fortune 500 firms ranged between 3 percent and 5 percent. (36)

10. PhRMA has devoted a tremendous amount of resources to challenging state efforts to control drug costs, repeatedly initiating lawsuits that challenge and delay states' efforts to set up prescription drug programs for the poor.

· In Michigan, PhRMA challenged the state plan that requires prior authorization for drugs not on the state's preferred drug list. (37)

· In Maine, PhRMA sued to prevent the implementation of a Maine program to extend price reductions to other residents that lack health insurance. (38)

· In Florida, the U.S. District Court upheld Florida's policy to make drug manufacturers provide a rebate if they want their drugs covered by Medicaid. (39)

11. Promotional costs (e.g., providing samples to doctors, sending representatives to doctors, advertising to consumers, advertising in medical journals) have nearly doubled since 1997, rising to $19.1 billion in 2001, according to a GAO analysis of industry data. (40)

· Families USA reported that for 2001, based on analysis of companies' SEC filings and annual reports, on average, 11 percent of revenues went to research and development (R&D), and 27 percent went to marketing, advertising, and administration.(41)

· Eight of the nine companies studied by Families USA spent more than twice as much on marketing, advertising, and administration, as they did on R&D. (42)

· All nine companies spent less than 20 percent of revenues on R&D. However, eight of the nine companies spent over 20 percent of revenues on marketing, advertising, and administration. (43)

· While marketing and advertising includes print and television advertisements, the majority of it consists of direct-to-physician selling. (44)

12. Escalating prescription drug prices and new drug therapies are increasing prescription drug expenditures by the Medicare population. (Outpatient prescription drugs are not currently covered by Medicare.)

· Medicare beneficiaries are projected to spend a total of $1.84 trillion on prescription drugs between 2004 and 2013. (45)

· Average spending per Medicare beneficiary on outpatient prescription drugs is expected to increase from $2,400 in 2003 (36 percent of the average Medicare benefit) to $5,800 in 2012 (54% of the average Medicare benefit). (46)

· About 27 percent of Medicare beneficiaries lacked prescription drug coverage in 1998, and coverage has declined since then.(47) Millions have skimpy, expensive coverage through medigap. Employers are reducing retiree coverage for prescription drugs, and Medicare HMO drug coverage is a shrinking and an unreliable source of coverage.(48)

ENDNOTES

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(1) Katharine Levit et. al., "Inflation Spurs Health Spending in 2000," Health Affairs, vol. 21, no. 1, January/February 2002, p. 173.
(2) "Prescription Drug Expenditures in 2001: Another Year of Escalating Costs," National Institute for Health Care Management Foundation, Washington D.C., May 6, 2002. Available at: www.nihcm.org.
(3) Levit, p. 173 and 174; Katharine Levit et.al., "Trends in U.S. Health Care Spending, 2001," Health Affairs, vol. 22, no. 1, January/February 2003, p. 155 and 156. See also Steinbrook, Robert, M.D., "The Prescription Drug Problem," New England Journal of Medicine, Vol. 346, no. 11, March 14, 2002, p. 790. See also "Prescription Drug Expenditures in 2001: Another Year of Escalating Costs," National Institute for Health Care Management and Educational Foundation, April 2002.
(4) Carey, Mary Agnes, "Analysts See a Seismic Shift in Health Policy Debate," CQ Weekly, March 23, 2002, p. 794.
(5) "Prescription Drug Trends: A Chartbook," The Henry J. Kaiser Family Foundation, July 2000, p. 30. Available at www.kff.org.
(6) Alan Sager, "Protecting Consumers Completely and Rewarding Drug Makers Fairly: A Prescription Drug Peace Treaty for the U.S.A.," Trans-Atlantic Consumer Dialogue on Intellectual Property, November 1, 2002. Available at: www.healthreformprogram.org.
(7) Cindy Parks Thomas et. al., "Impact of Health Plan Design and Management of Retirees' Prescription Drug Use and Spending, 2001," Health Affairs Web Exclusive, December 4, 2002, p. W414. Available at: www.healthaffairs.org/WebExclusives/Thomas_Web_Excl_120402.htm.
(8) David Sandman et. al., "New York Seniors and Prescription Drugs: Seniors Remain at Risk Despite State Efforts," The Commonwealth Fund, December 5, 2002. Available at: www.cmwf.org.
(9) Kaiser Chartbook Update, November 2001, p. 7. Available at www.kff.org.
(10) "How Increased Competition from Generic Drugs has Affected Prices And Returns In the Pharmaceutical Industry," The Congress of the United States, Congressional Budget Office (July 1998), p. xiii.
(11) "The Stalling Game," Consumer Reports, July 2001, p. 38.
(12) Los Angeles Times, "Bristol-Myers Sued Over Taxol Generic," June 5, 2002.
(13) "Generic Drug Entry Prior to Patent Expiration: An FTC Study," July 30, 2002. Available at: http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf.
(14) National Institute for Health Care Management report, "Changing Patterns of Pharmaceutical Innovation," May 2002. Available at http://www.nihcm.org/innovations.pdf
(15) National Institute for Health Care Management report, "Changing Patterns of Pharmaceutical Innovation," May 2002. Available at http://www.nihcm.org/innovations.pdf.
(16) National Institute for Health Care Management report, "Changing Patterns of Pharmaceutical Innovation," May 2002. Available at http://www.nihcm.org/innovations.pdf.
(17) National Institute for Health Care Management report, "Changing Patterns of Pharmaceutical Innovation," May 2002. Available at http://www.nihcm.org/innovations.pdf.
(18) "Prescription Drugs and Mass Media Advertising 2000," National Institute for Health Care Management Foundation, November 2001. Available at www.nihcm.org, p. 7.
(19) "Prescription Drugs and Mass Media Advertising 2000," National Institute for Health Care Management Foundation, November 2001, pp. 2, 4.
(20) "Prescription Drugs and Mass Media Advertising 2000," National Institute for Health Care Management Foundation, November 2001, p. 7.
(21) "Post-Election Briefing on the Minister of Health," August 2002, Pharmaceutical Management Agency (PHARMAC), New Zealand, p. 24. Available at http://www.pharmac.govt.nz/download/2002_PEB.pdf .
(22) Sebastian Schneeweiss et. al., "Impact of Reference-Based Pricing for Angiotensin-Converting Enzyme Inhibitors on Drug Utilization," CMAJ, March 19, 2002, 166 (6), p. 737.
(23) Oregon Health Resources Draft Report and Remarks of Alan Bates D.O., Oregon's Evidence-Based Approach to Prescription Drugs. Remarks of Governor John A. Kitzhaber, M.D. Oregon Drug Conference, October 11-12, 2002. Available at www.oregonrx.org.
(24) Remarks of James K. Haveman, Jr., Director, Michigan Department of Community Health, "Michigan's Pharmaceutical Best Practices Initiative," October 10, 2002. Available at www.oregonrx.org.
(25) Michael E. Gluck, Ph.D., "Federal Policies Affecting The Cost and Availability of New Pharmaceuticals," prepared for The Kaiser Family Foundation, July 2002, p. 18. Available at www.kff.org.
(26) Arno, Peter and Davis, M., "Paying Twice for the Same Drugs," Washington Post, March 27, 2002, p. A21.
(27) Hunt, Michie I., "Prescription Drug Costs: Federal Regulation of the Industry," for the Blue Cross Blue Shield Association, September, 2000, p. 34.
(28) Gerth, Jeff, and Stohlberg, Sheryl G., "Medicine Merchants: Birth of a Blockbuster; Drug Makers Reap Profits on Tax Backed Research," New York Times, April 23, 2000, Sec. 1, Col. 1.
(29) Gluck, p. 18, citing: U.S. Congress, Office of Technology Assessment. Pharmaceutical R&D: Costs, Risks, and Rewards. OTA-H-522. (Washington, DC: U.S. Government Printing Office. February 1993). Chapter 9.
(30) Center for Responsive Politics, www.opensecrets.org.
(31) "America's Other Drug Problem: a Briefing Book on the Rx Drug Debate," 2002. http://www.citizen.org/documents/drugbriefingbk.pdf.
(32) The Center for Responsive Politics, www.opensecrets.org.
(33) Public Citizen. Available at www.citizen.org/congress/reform/drug_industry/contribution/articles.cfm?ID=7827.
(34) Will Lester, "About $1B Spent on Televised Midterm Ads," Washington Post, December 5, 2002.
(35) "The 2002 Fortune 500, Top Performing Companies and Industries," Fortune, April 2002. Available at www.fortune.com/fortune/fortune500/topperformers.
(36) C. Williams and J. Treloar, "Trends and Indicators in the Changing Health Care Marketplace 2002," Menlo Park, CA; The Henry J. Kaiser Family Foundation, May 2002, p. 46, cited in Michael E. Gluck, Ph.D., "Federal Policies Affecting the Cost and Availability of New Pharmaceuticals," The Henry J. Kaiser Family Foundation, July 2002, p. 35. Available at www.kff.org.
(37) Pharmaceutical Research and Manufacturers of America v. Thompson.
(38) PhRMA was initially granted an injunction that was overturned on appeal. On September 20, 2002 PhRMA filed a brief with the United States Supreme Court.
(39) The lower court decision was upheld on appeal September 13, 2002.
(40) Note that the GAO figure does not include administrative costs. The numbers are based on industry-provided data. General Accounting Office, "Prescription Drugs: FDA Oversight of Direct-to-Consumer Advertising Has Limitations," p. 10, October 2002.
(41) The companies themselves aggregated the figures on marketing, advertising, and administration. "Profiting from Pain: Where Prescription Drug Dollars Go," July 2002. Available at http://www.familiesusa.org/Ppreport.pdf.
(42) "Profiting from Pain: Where Prescription Drug Dollars Go," July 2002. Available at http://www.familiesusa.org/Ppreport.pdf.
(43) "Profiting from Pain: Where Prescription Drug Dollars Go," July 2002. Available at http://www.familiesusa.org/Ppreport.pdf.
(44) Meredith B. Rosenthal, et al. "Promotion of Prescription Drugs to Consumers," New England Journal of Medicine, vol. 346, no. 7, February 14, 2002, pp. 498-505.
(45) Memorandum from Tom Bradley, Congressional Budget Office, to Interested Parties, February 3, 2003.
(46) "Issues in Designing a Prescription Drug Benefit for Medicare," Congressional Budget Office, October 2002, p. 4. Available at: www.cbo.gov.
(47) "Prescription Drug Trends: A Chartbook, The Henry J. Kaiser Family Foundation, November 2001, p. 14. Available at www.kff.org.
(48) Lori Achman and Marsha Gold, Mathematica Policy Research, Inc., "Trends in Medicare+Choice Benefits and Premiums, 1999-2002, The Commonwealth Fund, November 2002. Available at www.cmwf.org.