|
Prescription-drug
prices are medicine maze
February 2005
By LINDA LOYD
Knight Ridder Newspapers
KRT
PHOTOGRAPH BY CHRIS PEDOTA/THE RECORD
Mark Schneider, of Haddonfield, New Jersey, believes
that extreme calorie restriction will help him live
a longer life. His lunch includes one apple, a banana
and a container of yogurt. |
Al
Tiegs, 68, and his wife, Peggy, 64, shell out $1,100
a month for their medicines. They do not have prescription-drug
coverage, and they pay retail prices at their neighborhood
pharmacy.
A retired Philadelphia firefighter, Tiegs said he has
noticed that the prices keep going up. “I can pay
$100 one month, and $105 the next, for the same drug,”
he said.
More Americans, particularly senior citizens older than
65 who have no prescription-drug insurance, say they
have trouble paying for their medicines. Some buy from
Canada, where costs can be 30 percent to 50 percent
lower because of government price controls.
Why do Americans pay the high prices they do for prescription
medicines? What forces determine the cost of a vial
of pills?
The short answer is: A drug manufacturer can set whatever
price it chooses, and, unlike much of the rest of the
world, there are no government-negotiated price limits
in the United States.
“Drug companies are investor-owned, profit-making
businesses, and they will charge whatever the market
will bear,” said Marcia Angell, senior lecturer
at Harvard University’s department of social medicine.
The act of filling a prescription is the end of a circuitous,
complex and sometimes secret transaction that starts
with the manufacturer setting a price paid by wholesalers
and other large purchasers and ends with medication
bought at a retail pharmacy or by mail. Along the way,
there are rebates from manufacturers, charge-backs,
and up-front and back-end discounts.
The flow of money and interactions among the pharmaceutical
manufacturers, wholesalers, pharmacies, health plans,
pharmacy benefit managers (PBMs), physicians and consumers
is a maze, and the true costs are part of confidential
contracts.
What consumers pay for prescription drugs depends on
whether they have insurance and what their plan provides.
Those who pay the most — the uninsured — are
often stuck with bills that are more than double what
big buyers such as the federal government, through Medicaid
and the Department of Veterans Affairs, pay.
The markup on retail prices, without any discount card
or drug benefit, varies from pharmacy to pharmacy and
from day to day, and depends on myriad factors, ranging
from a store’s cost of doing business to the discount
the pharmacy received for the drug to even the neighborhood
the store is in.
There is no one price for any drug, even at the same
dosage strength. A 30-day supply of 20-mg Lipitor can
be one price at Rite Aid, another at CVS, and still
another at an independent pharmacy. The price will be
different if ordered by mail, or purchased from Canada,
and may vary even among stores in the same drug chain.
“It is virtually impossible for any of us to tell
what the price of drugs are,” said Gary Claxton,
vice president at the Kaiser Family Foundation, a nonprofit
health-care policy and research group.
If a person has insurance coverage and pays a co-payment,
“the price you pay the co-pay on is not the actual
cost,” Claxton said. “The manufacturer may
have given a rebate to the third-party pharmacy benefit
manager. The PBM may have passed some, or all, on to
the employer. You will never know what that is.”
Federal and state health programs can exert purchasing
clout to get one price for the medicines they use. Private
purchasers, such as health plans and employers, hospitals
and doctors, through pharmacy benefit managers and benefit
administrators, wield buying power to get another price.
(By law, manufacturers are supposed to give their “best,”
or lowest, price to the government.)
“It’s such a Byzantine system,” said
Alex Sugarman-Brozan, director of the Prescription Access
Litigation project, a Boston-based consumer group that
is suing 21 drug manufacturers for inflating the “average
wholesale price” of their drugs. “It’s
very hard to get even basic and accurate information
about who’s paying what to whom.”
Pharmacies get the medicine they dispense from wholesalers,
which purchase huge quantities from manufacturers. Some
large drugstore chains bypass wholesalers and buy directly
from manufacturers.
“We make our money on volume,” said Paul Tirotto,
pharmacist and co-owner of two pharmacies in Philadelphia.
“If people have insurance, we make $2 or $3 on
a prescription after all our costs. If someone has no
insurance, I’d guess we make $6 or $7. Sometimes
you can make $10. All the drugs are different, and we
don’t have a set price. We base it on average wholesale
price, and take a discount price from there.”
The California Healthcare Foundation said in a report
last year that the average cash-paying retail customer,
without prescription insurance, paid $50.17 for a prescription
in 2001. Of that, $37.93 went to the manufacturer, $1.67
to the wholesaler, and $10.57 to the pharmacy.
Tirotto said 95 percent to 98 percent of his customers
have some type of prescription insurance or a discount
card, such as an AARP card or a Peoples Choice Prescription
Plan card, that offers discounts on drugs.
Does the drug distribution and supply channel add to
the prices? “Of course,” said Angell, the
Harvard lecturer and former editor of the New England
Journal of Medicine. “Every hand that a drug passes
through creams off some of the money that’s paid
for the drug for their own overhead and profit. It adds
to the prices.”
Health plans and pharmacy benefit managers both contribute
to the higher prices of prescription drugs, according
to Associate U.S. Attorney James Sheehan, who has specialized
in cases involving the nation’s health-care system.
Health insurers sometimes seek to raise premiums based
on what they claim is the higher cost of prescription
drugs, he said. Yet the insurer receives money back
in rebates from drug companies whose medicines are included
on health-plan formulary lists of preferred medicines
for employees, Sheehan said.
“Health plans make money off rebates, directly
or indirectly, and there is no uniform requirement that
they report these in their filings with the state insurance
commissioner,” he said.
PBMs, which act as intermediaries between the employer
health plan, drug company and the pharmacy, make money
on the volume of drugs they move, by selling other services
to drugmakers, and from various manufacturer rebates,
Sheehan said.
Americans are taking more medicines, and new drugs are
more expensive than older drugs. As the population ages,
doctors are treating more chronic conditions with a
wider variety of drugs, adding to prescription spending.
PBMs manage the prescription benefits for more than
200 million Americans, and they receive fees for services
from pharmaceutical companies for putting their drugs
on formulary lists. They receive rebates as well. PBMs
share the rebates with the employer health plans, but
generally keep the fees.
In April 2000, the U.S. Department of Health and Human
Services estimated that PBMs received rebates from manufacturers
ranging from 2 percent to 35 percent of the sales price
of certain brand-name drugs and passed on about 70 percent
to 90 percent of those rebates to insurers or employers
that self-insure plans.
PBMs also reimburse pharmacies for dispensing the drugs.
The reimbursements are based on “average wholesale
price,” or AWP, which is a manufacturer’s
list price for a drug.
However, no one ever pays the average wholesale price.
“It’s fictitious,” said Albert I. Wertheimer,
founding director of Temple University’s Center
for Pharmaceutical Health Services Research. Astute
buyers can buy at 15 percent below that or more, he
said.
Prescription-drug spending rose more than 15 percent
a year between 2000 and 2002. But federal government
economists expect the upward trend to moderate somewhat
this year at 12.9 percent and next year at 12.4 percent.
The drug industry contends that high prices are necessary
to finance the discovery of innovative medicines. According
to the Pharmaceutical Research and Manufacturers of
America, drug companies spent $2 billion on research
and development in 1980. That spending had grown to
$12.7 billion by 1993. Last year, it was $32.2 billion.
But consumer groups say major drugmakers spend twice
as much on marketing, advertising and administration
than they spend on R&D. Families USA examined the
Securities and Exchange Commission filings of nine U.S.
drug companies in 2001 and found all spent considerably
more ($45.4 billion) on marketing, advertising and administration
than R&D ($19.1 billion).
A 2001 study by the Tufts Center for the Study of Drug
Development, financed in part by the pharmaceutical
industry, said it cost $802 million to bring a new drug
to market. But consumer groups have disputed that number.
“The figure is probably much closer to $100 million,”
Angell said, noting that Tufts looked at only a handful
of “very expensive, new molecular entities”
developed entirely by a drug company.
Many new medicines today are “me-too” drugs
— new versions of older products that have lost
patent protection — rather than breakthrough treatments.
Also, many new drugs are not being discovered in big
pharmaceutical company labs, but by smaller biotechnology
companies, or academic labs that receive federal funding,
Angell said.
Meanwhile, profits of pharmaceutical companies are among
the highest in the world. In 2003, the median profit
margin of nine large drug firms on the Fortune 500 was
14 percent to 15 percent, and, between 1990 and 2000,
profits of the biggest drug companies averaged between
19 percent and 25 percent, Angell said.
The pharmaceutical industry ranked third in 2003 —
behind oil companies and banks — in profits as
a percentage of revenues, according to Fortune magazine.
The Medicare prescription-drug benefit that goes into
effect in 2006 will help some senior citizens pay for
medicine, but it also will increase the role of private
insurance in Medicare.
“The thinking is, the new Medicare drug benefit
is going to somehow rein in pricing through competition.
We’ll see,” said Thomas Snedden, director
of Pennsylvania’s prescription programs for low-income
residents 65 and older, PACE and PACENET. “If it
doesn’t, or if the Medicare drug benefit isn’t
perceived as being a real benefit, there will be even
more pressure to control prices.”
Despite the pharmaceutical industry’s enormous
clout in Washington — nearly 700 lobbyists —
Congress “can’t create money,” Angell
said. “The money so far has come from taxpayers
and employers. They can’t afford it anymore.”
“These medicines are important and useful, and
they do save lives and help with pain and suffering,”
said Wertheimer, the Temple University center’s
director, who worked previously for Merck & Co.
Inc. and, before that, for a pharmacy benefit manager.
“The question is: How much should people pay for
them. That’s the $64,000 question.”
|
