Prescription Drug Pricing

Few products are viewed as being as vital as medicine. As drug prices have surged in recent years, however, the availability of prescription drugs in the U.S. has become a significant issue. Consumers pay more for prescription drugs in the U.S. than in any other country. For instance, they are estimated to spend 38% more than consumers in Canada and 45% more than consumers in France. One of the factors most often cited for that disparity is the presence of price controls in many foreign countries and their absence in the U.S.

Recently, various methods to control high prescription-drug prices have been proposed. Some have sought to legalize the practice of drug importation, whereby U.S. consumers arrange to have drugs shipped to them from countries with lower prices. The number of consumers importing drugs has grown in recent years as the Internet has made the process easier and as businesses facilitating the practice have sprung up.

Recent legislation has sought to legitimize drug importation, which in some cases violates current law. The city of Springfield, Mass. began to import drugs in 2002 under a voluntary program to save money on public employees' drug costs. Other cities and states have expressed interest in the idea.

Another measure designed to control rising drug prices involves state and local governments using their purchasing clout to negotiate better drug prices for their constituents. Such tactics are already employed by the governments of other countries to keep their drug prices low. A 2003 Supreme Court ruling upheld the right of a Maine program to use its leverage to demand low drug prices, but the practice remains controversial.

Prescription-drug prices were a particularly thorny issue in the debate leading up to the recent passage of legislation updating Medicare, the federal insurance program for the elderly. In the past, Medicare contained no prescription-drug benefit, despite the fact that seniors consumed more prescription drugs per capita than any other segment of the U.S. population and were often unable to afford the high prices.

In November 2003, Congress passed a Medicare bill favored by the administration of President Bush (R) and the pharmaceutical industry. The bill was passed over the objections of many Democrats, who argued that it did not go far enough in securing affordable prescription drugs for seniors. Some of the disagreements over the bill centered on the scope of the drug benefit and on earlier efforts to include a provision allowing drug importation. Observers say that the problem of rising drug prices is receiving increasing political attention. In the process, the debate over measures to control those prices has intensified.

Those who oppose regulation of prescription drug prices argue that such measures would deprive pharmaceutical companies of the money they need to develop new drugs to save lives and treat serious conditions. The lack of price controls in the U.S., they say, is part of the reason why U.S. companies dominate the international pharmaceutical industry. And only because the U.S. market is so large can high drug prices in the U.S. offset the lower prices paid by consumers in countries with price controls, opponents of regulation maintain.

Critics also express concern about the safety of imported drugs, warning that they can be tampered with or counterfeited. In addition, opponents say they are doubtful that importing drugs from countries such as Canada would work in the long run. Drug companies will respond to the resulting lost profits by cutting back their sales to those markets, ensuring that there will not be enough drugs for U.S. consumers to import, they warn. Ultimately, critics say, drug-price regulation is a political tactic designed to play well with the public rather than to solve problems.

Supporters of prescription drug-price regulation counter that price-control measures are popular with the public because they are needed, particularly by seniors who have a hard time affording the drugs on which they depend. The government should show its support for seniors by legitimizing drug importation, they say. Supporters argue that critics' reservations about the dangers posed by imported drugs are overblown, and that making the practice legal would actually help make it safer.

Proponents also question the assertion that pharmaceutical companies need to charge high prices in order to finance the development of new drugs. They contend that drug company profits are often spent on advertising, which has increased in recent years and which often encourages people to use the more-expensive brand-name versions of drugs when cheaper generic versions are available. Supporters charge that measures needed to regulate drug prices are being thwarted by the powerful lobbying efforts of the pharmaceutical industry.

Developments in the Pricing of Prescription Drugs

In recent years, the price of prescription drugs in the U.S. has risen markedly. During the 1980s, drug prices more than doubled, and in the 1990s they increased at a rate well ahead of other areas of the health-care industry. Some, including members of the pharmaceutical industry, pointed to increases in the cost of research, development and testing of new drugs as reasons for the higher prices.

Others, however, blamed the growth in certain types of prescription-drug advertising for the price increases. In 1997, the Food and Drug Administration (FDA), the government body charged with regulating the drug industry, issued a set of guidelines covering advertisements aimed at drug users, known as direct-to-consumer advertisements. Drug companies were required to list a summary of side effects, provide a way for the consumer to acquire more information, and encourage the consumer to ask a doctor or pharmacist about the product. The FDA also reserved the right to order drug companies to discontinue advertisements that were found to violate the regulations.

In the wake of the clarified FDA guidelines, drug makers began to allocate more money to direct-to-consumer advertising, spending a combined $3 billion in 2001, up from $1.1 billion in 1997. Some argued that advertising was prompting consumers and doctors to choose expensive brand-name versions of expensive drugs.

Meanwhile, rising prescription-drug prices, as well as increasing disparities in drug prices between the U.S. and other countries, were prompting a growing number of consumers to seek out foreign suppliers for their drugs. Many of those consumers were senior citizens, who had a greater need for drugs than any other segment of the population but who received no prescription drug coverage under Medicare. Close proximity to the U.S., a favorable exchange rate and government price controls on drugs made Canada a popular source for prescription-drug imports. Canadian drugs tended to be 30% to 70% cheaper than those in the U.S. During the 1990s, thousands of U.S. seniors purchased drugs from pharmacies in Canada, as well as Mexico.

Growing Internet use in the late 1990s made prescription-drug imports more popular, as consumers were made more aware of cheaper foreign drugs through online advertisements and could purchase them more easily. The FDA estimates that online drug orders from foreign sources grew to roughly two million packages in 2002, from around one million in 2001. The agency projects that orders will reach roughly five million packages by the end of 2003.

The legality of drug importing has remained vague. Although it is illegal under U.S. law to import pharmaceuticals, individuals are permitted to import 90 days' worth of medication for their own use. Some companies have attempted to meet the demands of consumers for imported drugs. In 2002, for instance, an Oklahoma entrepreneur named Carl Moore began operating a business called Rx Depot, which imported drugs from Canadian pharmacies on behalf of U.S. consumers. Rx Depot did not buy or sell drugs itself, and Moore maintained that he was facilitating transactions for individual drug purchasers.

At the same time, state governments were exploring methods of circumventing high drug prices similar to those used by Canada and other countries. In May 2002, the Supreme Court ruled in Pharmaceutical Research and Manufacturers v. Concannon that the state of Maine could proceed with a program meant to provide affordable prescription drugs.

Although Maine and other states already purchase drugs in bulk under state-run Medicaid health insurance programs for the poor, under the program at issue Maine requires drug companies to set low prices for consumers who do not receive Medicaid. If the companies refuse, the state makes it more difficult for them to sell their drugs to Medicaid patients. Following the Supreme Court ruling, a number of other states were expected to pursue similar programs.

Recently, state and local governments have announced their intent to purchase prescription drugs from Canadian sources. In July 2002, Springfield became the first U.S. city to import prescription drugs, enacting a voluntary program for city workers and retirees. Springfield Mayor Michael Albano (D) described the program as a way for the city to save money in a difficult economic climate, claiming that Springfield could save up to $4 million a year, depending on how many people signed up for the plan.

Officials elsewhere also supported plans to import prescription drugs. The governors of Minnesota, Wisconsin, Michigan, Ohio, Illinois and West Virginia established task forces to explore the idea, and New York City Mayor Michael Bloomberg (R) has spoken out in favor of importing drugs.

Others have resisted the idea, however. In November 2003, a federal judge in Oklahoma found Rx Depot in violation of the law, clearing the way for the FDA to shut down the 78 stores that the company operates nationwide. Rx Depot has appealed the ruling.

The issue of drug importation entered into the recent debate over the federal plan to provide prescription drug coverage to seniors enrolled in Medicare. An early version of the Medicare bill would have allowed the importation of drugs from Canada and Europe. The bill passed the House but, after objections from congressional Republicans and the Bush administration and heavy lobbying by the pharmaceutical industry, the drug import provision was modified.

In November 2003, the final version of the Medicare bill cleared the Senate, and Bush signed it into law in December. Backed by many Republicans and AARP, an influential lobbying group for older Americans, the bill allows seniors to purchase a discount card for about $30 a year beginning in 2004. Proponents of the bill say that the card would save seniors between 15% and 25% on prescription drugs, but critics of the bill dispute that claim. Starting in 2006, the plan would charge seniors $35 a month, as well as a $250 deductible, for prescription drug coverage.

Those who oppose the new plan charge that it benefits the pharmaceutical industry far more than it benefits seniors. They continue to call for legislation that would really make drugs more affordable for seniors.
Critics Question Effectiveness Of Price Regulation

Critics of government regulation of prescription-drug prices say that drug companies charge the prices that they do because a high profit margin is necessary to promote research and development. Because drug research and production is expensive, and because the FDA mandates costly testing for new drugs, the pharmaceutical industry requires a significant financial commitment, opponents contend.

William Tucker, a columnist and fellow at the Discovery Institute, a conservative think tank, reports that pharmaceutical companies invest 18% of their revenue in researching and developing new drugs. He writes in the conservative Weekly Standard that Americans "have enjoyed, and come to take for granted, a spectacular outpouring of new medicines for AIDS, cancer, Alzheimer's, congestive heart failure, cystic fibrosis, depression, and a host of other diseases. With fewer revenues to invest, that pipeline will eventually slow to a trickle."

Critics argue that the price controls imposed abroad have hurt those countries. They note that the U.S. produces half of the world's new drugs, or more new drugs than all the countries of continental Europe combined. Prescription-drug price regulations, they say, have led to a decline in pharmaceutical research and development in other countries. Emulation of foreign price controls or importation of drugs from foreign countries would damage the U.S. pharmaceutical industry and innovation worldwide, they warn. Furthermore, opponents contend that consumers in other countries are able to pay so little for drugs only because U.S. consumers effectively subsidize them by paying higher prices for their drugs.

Opponents caution that imported drugs could even be dangerous. Foreign drugs are not subject to FDA approval, they point out, and are more likely to be counterfeit. "I think the whole industry is looking at this problem, as drugs can be contaminated because they are being made in substandard manufacturing facilities," says Peter Corr, head of research and development at the drug company Pfizer Inc.

Critics also downplay the purported benefits of drug importation. For instance, they say, if drugs imported from Canada cut into drug company profits, then the drug companies would likely respond by reducing their Canadian sales to a level too low to support consumer demand in both countries. They argue that drug manufacturers, many of which are U.S.-based, would be willing to sacrifice some of their Canadian sales if it would help them keep U.S. customers, since the U.S. is a larger market with higher prices.

Critics of drug-price regulation dispute the charge that increased advertising is the reason for higher drug prices. FDA head Mark McClellan says that advertising directed at consumers accounts for less than 2% of spending by the U.S. drug industry. Furthermore, opponents add, such advertising serves a valuable purpose by making consumers aware of diseases and treatments, and by encouraging them to engage in dialogue with their doctors. "Lives saved by advertising are just as important as lives saved any other way," writes syndicated columnist Thomas Sowell. "No medicine will help anyone unless its uses are known."

Opponents contend that, in the long run, prescription drugs save money for individuals and society by making other types of medical care unnecessary. Drugs can treat conditions before they become more serious and require hospitalization or surgery, they argue. Such treatments are often more costly than drugs, they add.

Much of the debate over drug prices is politically motivated, critics maintain. Columnist Robert Samuelson points to a 2002 survey of Medicare recipients in which more than 86% of respondents said that getting the prescription medicine that they needed had not been a problem in the last six months. Politicians use the issue of prescription drugs to score points with the elderly, who vote in large numbers, and to capitalize on the negative public image of large pharmaceutical companies, critics contend.

"Allowing drug importation would amount to nothing more than populist rabble-rousing, as politicians denounce the 'obscene' profits of the pharmaceutical industry rather than offering real solutions [to the] problem of high drug prices," writes Gilbert Ross, medical and executive director of the American Council on Science and Health.

Some critics of government regulation say that scaling back the FDA approval process would help lower prescription drug prices. They point out that drug companies spend millions of dollars in getting their drugs approved, which results in higher prices for consumers. A simplified FDA approval process would still be effective and would cost less, resulting in lower drug prices, they say.

Price Regulation Advocated

Those who support regulation of prescription drug prices argue that, just as drugs are becoming more and more effective, rising prices are placing them out of reach for many consumers. The problem is compounded, they say, for senior citizens, who have more of a need for prescription drugs than other segments of the population but who often have fewer economic resources than other people. They note that public opinion polls have found a majority in support of prescription drug importation.

The government should help rather than hinder seniors who have been driven by desperation to seek drugs outside of the U.S., supporters say. "There's a lot of people already importing drugs on the Internet, using their credit card," says Rep. Richard Gephardt (D, Mo.), a 2004 presidential candidate. "I run into people at almost every meeting I'm at that are doing that, and we ought to make it safe and lawful to do it."

Supporters are skeptical of arguments about the potential dangerousness of imported drugs. Many foreign drugs, they say, are made by U.S. companies and are essentially the same as those sold in the U.S. "Both the U.S. and Canada have comparable requirements at virtually every level for warehousing and storage of pharmaceuticals," says Scott McKibbon, who chairs a committee appointed by Illinois Gov. Rod Blagojevich (D) to look into drug importation. In addition, supporters say that legalizing drug importation would actually make the practice safer by raising the level of accountability.

Proponents also maintain that drug companies' claim that they need to charge high prices in order to continue to develop new drugs is untrue. In reality, they say, most new drugs are so-called me-too drugs, which target conditions already treated by preexisting drugs. Supporters cite studies such as one conducted by Alan Sager of the Boston University School of Public Health, which found a decline in the number of employees working in research and development at drug companies from 1995 to 2000. "Drug companies trumpet the value of breakthrough research," says Sager, "but they seem to be devoting far fewer resources than their press releases suggest."

Some supporters of price regulation accuse drug companies of spending the revenue from high drug prices mainly on advertising. Noting the increase in direct-to-consumer spending in recent years, they charge that pharmaceutical companies are trying to encourage consumers to request that their doctors prescribe specific brand-name drugs that are often more expensive than generic versions that work just as well. Advertising, they say, might lead some patients to believe that they need a particular drug when in reality they do not.

Proponents contend that drug companies attempt to influence doctors to prescribe expensive brand-name drugs as well. They point to educational seminars sponsored by drug companies, where doctors are exposed to promotional materials about brand-name drugs. When doctors prescribe pharmaceuticals for patients, supporters say, they often prescribe the most aggressively advertised brands.

Supporters charge that the lack of effective prescription-drug price controls is a testament to the enormous political influence wielded by pharmaceutical companies. They point to the lobbying efforts of pharmaceutical trade groups such as the Pharmaceutical Research and Manufacturers of America (PhRMA). For example, supporters cite statistics from the Center for Responsive Politics indicating that the average amount of money that drug companies contributed to Republicans who supported the recent Medicare bill was $28,504. The average amount that they contributed to Republicans who did not support the bill was only $8,112.

Proponents argue that the pharmaceutical industry uses its influence to promote legislation that keeps drug prices high. "PhRMA, this lobby, has a death grip on Congress," says Sen. Richard Durbin (D, Ill.).

Many supporters call for prescription-drug price controls similar to those in other countries. Under those types of controls, national or provincial governments bargain with pharmaceutical companies to obtain favorable drug prices. Because governments represent the interests of large numbers of prescription-drug users, drug companies are pressured to provide low prices for fear of being undersold by their competitors.

Some recommend that Medicare be allowed to leverage its 40 million beneficiaries into obtaining lower prices from drug companies. "If you're serious about cost containment, you don't block Medicare from using its enormous purchasing power to bring drug prices down," says Robert Greenstein, executive director of the Center for Budget and Policy Priorities.
Debate over Drug Prices Continues

The final version of the Medicare bill did not contain a provision allowing for drug importation, although it allowed for the importation of drugs from Canada if their safety is certified by the U.S. Department of Health and Human Services. However, other legislation on the subject continues to be considered. In June, the Pharmaceutical Market Access Act of 2003 was introduced by Rep. Gil Gutknecht (R, Minn.) and backed by a bipartisan group of lawmakers. If enacted, it would allow for the importation of drugs produced under FDA-approved conditions in Canada and other specified countries. The bill was passed by the House in July and is currently under review in the Senate.

In the meantime, the U.S. and Canadian governments have continued to take steps to discourage prescription-drug importation to the U.S. In October, Canadian health officials sent a letter to pharmacists warning them that selling drugs to Americans could lead to drug shortages in Canada. More recently, in November, the FDA and Canadian agencies agreed to share information on unsafe drugs and related illegal activities.

Pharmaceutical companies have begun to take action as well. Within the past year, the drug company Eli Lilly and Co. has reduced its sales to Canada, and Britain's GlaxoSmithKline PLC has stopped selling to Canadian online pharmacies altogether. Some observers say that efforts by pharmaceutical companies to cut back on Canadian sales could increase. Others, however, say that they do not expect drug companies to go far beyond the measures that they have already implemented. "There are measures being taken to clamp down a bit," says Lee Bromberg, an intellectual property attorney. "But you would need a lot more threat economically for them to clamp down hard."

Some observers are waiting to see whether the new Medicare plan actually delivers affordable prescription drug coverage to seniors. The success or failure of that plan, they say, could determine the form that the debate over pharmaceutical companies and prescription drug costs takes in the future.

Sources:

Dionne, E. J. "Medicare Monstrosity." Washington Post (November 18, 2003): A25.

Farrelly, Maura. "U.S. Lawmakers Debate Re-importation of Medicines from Canada." VOANews (November 23, 2003)

"Is Oregon's Approach a Lesson for Everyone?" Frontline (June 19, 2003)

Lansbury, Peter. "An Innovative Drug Industry? Well, No." Washington Post (November 16, 2003): B2.