Metaforix@Health: Prescription Drug Pricing: Issues and Resources

Lois C. Ambash is President and Chief Infomaven of Metaforix Incorporated, whose services include organizational assessment and planning activities, web site and e-letter content development, and design and delivery of customized workshops for healthcare, education, business, and community organizations. Lois holds a PhD in American Culture and Writing, Master’s degrees in Library/Information Science and Public Policy, and a Bachelor’s degree in English. She serves on the board of the Internet Healthcare Coalition and on URAC’s Health Web Site Accreditation Committee, and is a frequent writer and speaker on e-health, Internet research, business communications, and organizational culture. Read or subscribe to Lois’s blog, Metaforix@.



The high cost of prescription drugs in the United States, combined with the ease of ordering drugs online, has brought the issue of prescription drug reimportation to the forefront of healthcare discussions.  The controversial Medicare prescription drug discount cards will take effect on June 1, adding to the volatility of the discussion. 

A growing number of individual Americans purchase drugs from pharmacies based in Canada (as well as other nations).  Some state and local governments have begun, or have plans in the works, to reimport drugs from Canada for patients who receive Medicaid and similar types of government assistance.

Legislation to promote this practice is pending in other states and municipalities, as well as in Congress, where both houses have previously passed similar bills but have not been able to reconcile their differences.  Last month, the Senate reached a bipartisan compromise on a bill that would allow individuals and licensed wholesalers to import prescription drugs from Canada, the European Union, and several other countries, under FDA oversight and regulation.  The law would “punish drug companies that hinder or thwart imports of prescription drugs.”  A Kaiser Daily Policy Report provides a balanced summary of arguments for and against the bill, which the Democrats have seized as an election-year issue.

U.S. spending for prescription drugs topped $140 billion in 2001 -- more than triple the amount spent in 1990 -- according to a summary of prescription drug trends released last May by the Kaiser Family Foundation.  Although drug expenses accounted for just 11% of personal health care expenditures, the percentage cost increase between 2000 and 2001 was 16%, double the rise for hospital care and almost double that for physician and clinical services. 

Kaiser’s analysis of data collected by the Centers for Medicare and Medicaid Services (CMS) shows three main drivers of drug cost increases over the four-year period between 1997 and 2001:

  • 47% is due to increased utilization, or numbers of prescriptions written
  • 27% is due to replacement of older drugs with newer, higher-priced drugs
  • 26% is due to manufacturers’ price increases for existing drugs.

Data from IMS Health, the leading provider of business intelligence and strategic consulting services for the pharmaceutical and healthcare industries,” puts the case in even more dramatic terms. Between 1992 and 2002, the annual number of prescriptions dispensed in the U.S. grew 74% (from 1.9 billion to 3.3 billion), while the population grew just 12%.  The price of the average prescription rose an average of 7.3% per year during that period, while inflation averaged 2.5%. 

In addition, there has been significant growth in two key drivers of shifts from older drugs to new ones. Research and development spending by pharmaceutical manufacturers rose from $10 billion to over $32 billion between 1991 and 2002, according to figures issued by PhRMA (the Pharmaceutical Research and Manufacturers Association).  And spending on direct-to-consumer drug advertising more than tripled between 1996 and 2002, according to IMS Health.  Television spending alone was 30 times greater in 2000 than in 1995.

The California HealthCare Foundation’s 2004 edition of “Snapshot: Health Care Costs 101” points out that, from 1982 to 2002, the share of the U.S. healthcare dollar spent on hospital costs slipped from 42% to 31%, while the share spent on prescription costs doubled, from 5% to 10%.  In addition, prescription drugs account for the greatest share of out-of-pocket spending, 23%, in contrast to 16% for physician and other clinician services and 7% for hospital care. However, out-of-pocket spending on healthcare has declined overall, while employer and public spending have increased.

Meanwhile, the pharmaceutical industry is still among the most profitable in the nation.  According to Fortune Magazine, its profits as a per cent of revenues were 17%, compared to a median 3% for all Fortune 500 companies, making it the nation’s most profitable industry in 2002.  Last year, Big Pharma came in third, at 14.3%, compared to a median 4.6%, after mining/crude oil (20.1%) and commercial banks (18.6%). 

In a 2003 analysis entitled “61 Percent of Medicare’s New Prescription Drug Subsidy Is Windfall Profit to Drug Makers,” researchers Alan Sager and Deborah Socolar of the Boston University School of Public Health calculated that if Congress were to pass a Medicare prescription drug benefit, the pharmaceutical industry would reap windfall profits of some 38% in the years from 2006 to 2013.  The windfall would result from a combination of factors:  the lack of price controls, the law’s prohibition on government negotiations with pharmaceutical manufacturers for bulk pricing, the low marginal cost of manufacturing and distributing additional supplies of existing medications, and the projection that “$228 billion of $400 billion in new federal spending over eight years would be used to buy drugs that patients previously did not get.”  (The report appeared in late October, before passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.)

In March of this year, PriceWaterhouseCoopers published a critique of Sager and Socolar’s report on behalf of the Pacific Research Institute, a “free-market think tank.”  The critique cites three major “shortcomings” in the Sager/Socolar analysis:  cost assumptions inconsistent with those of the Congressional Budget Office, a projected increase in drug spending that is four times higher than other estimates, and failure to account for expected price discounts.  The PWC/PRI study calculates that “the Medicare drug benefit could range between an increase in drug industry revenues . . . of 3.2 percent at most to a decrease in drug industry revenues of 1 percent,” or, at most, “an increase in revenues of about one-quarter of the Sager-Socolar estimate.” 

In addition, a supplement to the March issue of Managed Care, funded by AstraZenica Pharmaceuticals, incorporates the proceedings of a 2003 conference at the Center for Medication Use, Policy & Economics at the University Of Michigan College of Pharmacy (also sponsored by AstraZenica and cosponsored by Aventis and the Michigan Pharmacists Association). Virtually all the papers in the supplement, entitled “Reimportation of Pharmaceuticals: Economic and Policy Implications,” argue against reimportation.  Authors include “stakeholders” from the academia; the drug, pharmacy, and consulting industries; the Canadian government, and AARP.  (At the time of the conference, AARP”s endorsement of drug reimportation legislation was tepid by contrast to its testimony last week in favor of the compromise legislation pending in the Senate.)

Sager and Socolar responded in April with a lengthy defense of their three main assumptions and a rebuttal of the PWC/PRI calculations (“How Much Would Drug Makers’ Profits Rise under a Medicare Prescription Drug Benefit? A Response to PRI/PwC’s Undocumented and Disjointed Critique . . .”), followed by a report suggesting that U.S. manufacturers actually make money on Canadian drug reimportation (“Do Drug Makers Lose Money on Canadian Imports?”).  

FDA commissioners have testified against the pending legislation on the grounds that the costs of protecting consumers against unsafe counterfeit medications would be prohibitive, even with the 1% user fee contemplated in the legislation.  A Business Week analysis suggests the new law would “result in nasty trade disputes, wealthy middlemen, and worrisome shortages of drugs in some countries in exchange for only a small break on prices in the U.S.” The website of Vermont Independent Rep. Bernie Sanders has a collection of pro-reform documents and statements.  Both the Canadian Pharmacists Association and PhRMA (represented by Giuliani Partners LLC) also oppose the bill. As various individuals and groups submit position papers, pro and con, they are posted on the FDA dockets page.    

One impact of the American trend toward purchasing drugs from Canada has been the restriction of supplies by pharmaceutical companies. This has forced Canadian online pharmacies to purchase drugs from other countries, including England, New Zealand and member countries of the European Union.  Several states have posted links to Canadian online pharmacies on their official websites.

To further complicate the issue, the Wall Street Journal reports, the National Institutes of Health will hold a meeting this week to determine whether the government can “require drug companies to lower prices on drugs developed with the help of taxpayer dollars.”  The nonprofit company Essential Innovations petitioned the Department of Health and Human Services for permission to produce a generic version of Norvir, the Abbott Laboratories HIV/AIDS drug, citing a provision of the Bayh-Dole Act of 1980. Essential Innovations contends that the provision, which has never before been invoked, permits the government to issue a compulsory license without Abbott’s consent if it “determines the invention is not being made available to the public on a reasonable basis.”

Abbott raised the price of Norvir 400% last December, prompting the activist-run nonprofit to file its petition.  Drug industry analysts express little concern that a ruling in favor of Essential Innovations would send negative “ripples” through the industry as a whole. Abbott contends that the law would not permit revocation of its patent unless it had “not successfully commercialized the invention as a product." It is not clear what the impact of an NIH decision, favorable or unfavorable, might be on proponents of price controls and more stringent regulation of the pharmaceutical industry.