Paying for Life: The Issues Behind Drug Pricing
The happy fact is that thousands of people are alive today because of better medications and generous access that came about during the strong economy of the 1990s. But with Congress feeling less charitable these days, the trouble signs are clear. Increasingly, it seems that if the political will to pay the price of quality health care does not soon find a powerful voice, the combination of shrinking funding and runaway drug costs could put the health of large numbers of people in this country at risk. Already, historic -- and possibly catastrophic -- changes to Medicare and Medicaid are being decided, all driven by the unbearable cost of medications. Yet none of the proposed solutions attack the underlying problem. The implications for those with HIV are considerable, since drugs are generally the biggest contributor to the price of their continued health.
The U.S. is one of the only wealthy nations without universal health care or government limits on the price of prescription drugs, and American health care costs continue to spiral upward, with pharmaceuticals leading the way. Even though most consumers do not bear the cost of their drugs directly, rising prices affect the cost and quality of care for nearly everyone in the U.S. by way of increased insurance premiums, larger copayment amounts, and cuts in publicly-funded programs such as ADAP. As state governments explore ways to control costs, the powerful pharmaceutical industry is fighting to preserve the freedom to set prices without restraint in their largest and most profitable market in the world.
The drug industry has become addicted to revenue growth, which it tries to sustain in every possible way. Continually raising prices has been the central strategy, and U.S. prices have increased at more than double the rate of inflation every year for over ten years. Due to regulation, prices can't grow that fast anywhere else in the world, so the burden disproportionately falls on the U.S., which now accounts for over half of the worlds pharmaceutical sales. Increasing the volume of drug sales has been the other main engine for the industrys growth over the past decade, and since the advent of direct to consumer advertising in 1997, more U.S. customers than ever have begun demanding drugs for the ailments they see on television. Another profitable strategy has been to switch consumers from older, cheaper drugs to more expensive ones. Marketing is crucial to get doctors to switch patients to "new and improved" versions of drugs that mainly exist to push profits up a notch. Yet there are limits to how far this can be taken. Expenses for sales can be double what a company spends on scientific research, and increased spending for marketing in turn drives the demand for revenue growth. Lately, growth has been obtained by the consolidation of smaller firms into pharma powerhouses, but while these mergers may result in some cost efficiencies, the effect on the bottom line is short lived -- and the effect on the creative output of the research departments has been disastrous. Growth arising from true innovation by the pharma giants is becoming increasingly rare.
Meanwhile, government entitlement programs dig deeper and cut services to pay for drugs, and private insurance premiums have become all but unaffordable for anyone without coverage through a well-paying, full-time job. In todays economy, with unemployment high and many small businesses unable to meet the burden of escalating premiums, one in four Americans lack health insurance, and their ranks are growing.
Over the past couple of years state governments have begun to fight runaway drug costs by attacking the problem on two fronts. First, there has been an attempt to limit utilization by requiring doctors to obtain prior authorization for expensive drugs that are not included on a state-approved formulary list. In practice, the hurdle of seeking approval to prescribe certain drugs means that doctors often select a similar, cheaper substitute. Problems arise when patients are told at the pharmacy that their prescription cannot be filled because it is not on the list; many are likely to give up and go untreated. This sort of manipulation -- along with the political red meat issue of cracking down on waste and fraud -- may produce some small savings, but in reality, people with complex chronic diseases risk having their care compromised by these restrictive rules. Certainly any effort to cut utilization of anti-HIV medications would be met with anger and outrage.
On the price front, some states such as Michigan and Maine have been trying to win discounts from pharmaceutical manufacturers in exchange for adding their drugs to the approved Medicaid formulary, thus removing the barrier to prescribing. This is a powerful stick to wield, since drug companies are loath to yield any market share to their competitors. The pharmaceutical industry deplores this tactic and has fought back with courtroom challenges, sophisticated public relations campaigns, and drug giveaways via company-run disease management programs aimed at Medicaid patients. In Florida, the pharmaceutical lobby prevailed on Governor Jeb Bush to water down state formulary restrictions by allowing drug companies to offer case management of "high utilizers" instead of discounts. But the industry recently suffered a setback when the Supreme Court decided to allow a program to go forward in Maine that seeks additional rebates for its Medicaid drug purchases. Companies that don't comply will see their products parked on a prior authorization list.
At the federal level, a proposed drug benefit for Medicare beneficiaries has emerged in Congress that many say will provide a windfall for the pharmaceutical industry by dramatically expanding their markets without challenging the current pricing structure.
High prices can become a problem when a drug is available only as a brand-name product from a single manufacturer, as is the case with antiretrovirals in the U.S. Every approved anti-HIV drug sold in this country is still under patent protection. A patent guarantees the holder an exclusive right to market the protected product without competition for a period of at least 20 years. After the patent protection period has expired, other manufacturers are free to produce a nonbranded, generic version and sell it at a fraction of the price of the branded drug. In the pharmaceutical business, a good example is the case of fluoxetine (Prozac), which sold for $2.50 per pill until its patent ended in 2001 and a generic manufacturer brought its version to market for only $0.25 apiece.
The first anti-HIV drug expected to lose U.S. patent protection is AZT (zidovudine, Retrovir), which could become available generically in the U.S. sometime after 2005. Since most people who use AZT these days take it with 3TC (lamivudine, Epivir) in the form of Combivir, generic AZT is unlikely to have much impact in this country.
Several generic antiretrovirals are now produced in countries such as India and Brazil and these are promising to help to make treatment a possibility for millions of people who could never hope to afford expensive branded medications. One of the ironies of the marketplace is that some generic makers are now producing practical and convenient all-in-one formulations of individual drugs controlled by different patent holders. One such product, Triomune, is a combination of nevirapine, d4T and 3TC. Such drugs may be available for pennies a day in the developing world, but are unavailable in the U.S. A recent announcement by the Clinton Foundation indicates that manufacturing deals have been struck to bring the monthly cost of treatment to under $20 per person per month -- 40 to 80 times less than in the States. Although generics have not directly affected the cost of anti-HIV drugs in the U.S., the dramatic gap in prices, separated only by FedEx and U.S. Customs, is making the industry exceedingly nervous.
Historically, when a generic equivalent enters the market, the profit potential of the original branded drug virtually vanishes. The price of the generic is set at some margin above the cost of materials, manufacturing, and distribution, and the maker of the branded drug must lower its price or give up the market. The prices of generic equivalents can be set so low because their makers typically invest little or nothing in drug discovery, clinical research, and marketing.
Major pharmaceutical manufacturers argue that the significant cost of bringing new drugs to market justifies the high prices they charge. Furthermore, since the window of premium pricing is limited by a products patent life -- a good portion of which is used up during the approval process -- all of a drug's research and development costs must be recouped within a relatively short period of time. Finally, since drug development is far from a sure thing, successful drugs are called upon to pay for any number of past and future failures.
Critics of exorbitant drug prices point out that the pharmaceutical business, despite its complaints, remains one of the worlds most profitable industries, and that development costs are overstated and often subsidized by government. Corporate reports clearly show that R&D expenses typically run at a fraction of what is spent on marketing and reserved for profit. Drug pricing, critics say, is driven by greed and by the monopoly protection allowed by patents. The true cost of high drug prices, they say, is measured in lives lost.
But the generic price advantage may not be a reliable long-term solution to the current drug cost crunch. Consolidations among generic manufacturers are reducing competition, and generic manufacturers -- seeing the gap between their prices and those of branded products as a wasted opportunity -- recently have begun raising the sticker price on their knockoffs, thus further intensifying the squeeze on state and federal drug budgets.
One of the hardest things to understand about U.S. pharmaceutical pricing is that not everyone pays the same price. And the prices for different payers are often secret. The situation is much like passengers on a jet plane all headed to the same destination: no one knows how much the person in the next seat paid for their ticket. The only official price released by a pharmaceutical company is called the wholesale acquisition cost (WAC), which is the list price that industry middlemen are supposed to pay to the pharmaceutical maker. The wholesaler, in turn, distributes the drug to pharmacies for retail sale.
A more widely quoted price for drugs is the average wholesale price (AWP), which is an average of list prices quoted by wholesalers to pharmacies. But because of an arcane system of discounts, rebates, and charge-backs, almost no one pays the "official" price. The acquisition cost (AC) is the actual amount that a pharmacy pays for its drug inventory. This cost varies depending on the quantity purchased, as well as on the rebates and discounts available to the pharmacist. Large buyers can obtain significant discounts: you can almost be sure that a drugstore chain like Duane Reade is paying less for pharmaceuticals than an independent neighborhood drugstore, although this may not translate into lower prices for consumers. A recent survey of 155 New York City pharmacies found the highest prices at the biggest chain stores, which charged, on average, eight percent more than mom-and-pop stores. Shockingly, the report also found that chain stores in the poorest neighborhoods charged prices well above the citywide average, meaning that those who can least afford high drug prices in New York are paying the most.
After acquiring a drug, the pharmacy then resells it to consumers with or without an additional markup, plus something called a dispensing fee added on. The dispensing fee is a charge for the professional services of the pharmacist, plus an additional percentage of the drug's cost to cover overhead and profit. Each of these steps may be regulated or fixed by prior agreement. For example, some Medicaid programs may limit the dispensing fees charged by retail pharmacists.
A complex system of rebates for government purchasers has been negotiated to help control drug costs for the large entitlement programs. The size of the rebates paid by the manufacturer varies depending on who pays the bill when a prescription is filled. The average manufacturer price (AMP) is a government-calculated average of prices for a drug actually paid by nongovernment purchasers. Although not officially disclosed, the AMP is estimated to run about 20 percent below the AWP. Government programs use the AMP as a baseline to calculate rebates, with the Medicaid rebate statutorily set at 15.1 percent of the AMP.
For programs that distribute drugs directly to their clients, the Public Health Service has established a discount plan that guarantees something called the 340B price, which at minimum matches the Medicaid 15.1 percent price break, although participating programs are free to negotiate better discounts. Such federally approved 340B participants include hemophilia treatment centers, family planning clinics, and ADAPs that run their own distribution systems. Most big ADAPs, however, distribute their drugs through pharmacies and are organized as reimbursement programs. This means that, for each covered drug dispensed, the state reimburses the pharmacy the AWP minus any special negotiated discounts, plus the dispensing fee. The state then collects its negotiated rebate directly from the manufacturer.
The "best price" is a proprietary federal determination of the lowest price paid by a manufacturer's best customers after rebates and discounts have been applied. Best price is one of the factors used to calculate the rebates owed to state Medicaid programs. Yet certain customers getting some of the best deals are left out of the best price equation.
For example, some government agencies that purchase drugs directly from manufacturers may enjoy extra discounts, which, if included, would bring the average best price down. Another large government purchaser, the Department of Veterans Affairs (VA), negotiates a price that is published as the Federal Supply Schedule (FSS) price. The FSS price is based on what drug makers charge their "most favored" nonfederal customers -- which, again, may not be the lowest price in the marketplace if, for example, Wal-Mart negotiates a special promotional deal on atorvastatin (Lipitor). Both the 340B and the FSS prices are also excluded from the best price calculation.
So what is the price of any particular drug? It depends on whos paying and who's asking, since neither the government nor the manufacturers disclose that information. As an example, take tenofovir (Viread), produced by Gilead Sciences. The published WAC is $360 for a 30-day supply; an online pharmacy advertises it for $435; and a state ADAP program may pay $380. As a point of comparison, Gilead has offered tenofovir to antiretroviral treatment programs in developing countries at $39 per month, roughly the company's cost of manufacturing.
Another aspect of a drug's price is less often discussed: what is it worth to the individual? The advent of the eBay online auction model has rationalized the pricing of all kinds of products and services by offering them to a wide market and letting individual buyers decide what they are willing to pay. But for products that are necessary to preserve human health and life, society has decided that some unregulated markets are unacceptable. Governments and large private health systems such as Kaiser Permanente use their clout as huge purchasers of pharmaceuticals to demand lower prices, and now the states are attempting to control prices with rules legislation, and group bargaining power. Yet there are ways around these pressures. Statutory discounts can be thwarted by raising the base price until the discounted price matches what the company would prefer the customer to pay. Where price increases for existing products are capped, a company may introduce a new formulation of an old drug at a higher price.
Some prices are set where they are because that is how much other, similar products cost. For example, there are probably few similarities between the operating costs of cable and satellite television, yet remarkably both services are priced the same. And why does high-speed Internet access via DSL cost the same as access via cable? Well, providers reason, if that is what people are willing to pay, then why leave money on the table? When protease inhibitors (PIs) first entered the market in December 1995, they established a new benchmark for the price of HIV/AIDS medication, and the industry hasn't looked back since. This seems to be a lesson the generic drug industry is now putting into practice.
Some fear a new niche market may be on the horizon as several so-called salvage drugs, which work against highly drug-resistant HIV, proceed through the drug development pipeline. Some potential candidates might be the protease inhibitors tipranavir or TMC 114. Fuzeon (T-20), while best known as the first entry inhibitor, is also primarily a salvage drug. There have been reports of a market research company testing the waters for creating a new pricing category for salvage drugs, with Fuzeon's $20,000 per year price a benchmark. While pricing a difficult-to-tolerate PI that high may seem preposterous on the face of it, the limits of drug company audacity may be revealed when and if these drugs make it to market.
Price also reflects the value offered by a drug. For hepatitis C virus (HCV), for example, the price of a yearlong course of treatment includes the chance that one's infection may be permanently cured. Currently, the newest and best HCV therapies can run upwards of $35,000 per year. But with HIV, there is no cure, and the need for therapy lasts a lifetime. The cost of anti-HIV therapy in the U.S. currently runs between $10,000 and $18,000 per year.
The price of drugs may also be weighed against the cost of hospitalization and care for untreated HIV, and thereby judged to be a bargain. A new, pricier drug may have fewer side effects and require less medical management than its cheaper predecessors. In the big picture, it is a money saver (though in the short term it is still a drain on state budgets). Some economists have calculated the value of drug therapy in relation to lost productivity due to early death from AIDS. Few people who lived through the bad old days before PIs would say that the latest antiretrovirals aren't worth the cost.
Could we finally be entering an era in which political reality demands more reasonable cost controls? There are powerful forces influencing elected officials today. Health care costs continue to rise, even as demand is forecasted to balloon as the population ages. Yet the political will to pay for equitable health care remains weak; too few voters accept the connection between taxes and the social benefits that government provides. On the other hand, the biggest contributor to rising costs -- the pharmaceutical industry -- is represented by an extensive and pervasive lobby that makes significant contributions to influential members of Congress and the Administration. Beyond these commercial and political interests are conservative hardliners who argue that government has no right to levy taxes to pay for other peoples problems. These forces would just as soon see Medicaid and Medicare crash and burn; many view the Bush tax cuts as a shortcut to dismantling all entitlement programs. In the ongoing struggle between those who wish to downsize government spending, the taxpayers, and the growing number of people in need of affordable health care, it increasingly looks as if something has to give.
The major battlefield is turning out to be the question of whether Medicare, the medical insurance program for seniors and people with severe disabilities, will be able to offer a prescription drug plan that doesn't make things worse than they already are. Currently this government program does not cover outpatient prescription medicines. Without substantial extra insurance, people who rely on Medicare pay for their medications out of pocket -- which means that those who can least afford it often pay higher prices than almost anyone else.
The plight of seniors has received high-profile coverage on the nightly news, with footage of old folk boarding buses bound for discount pharmacies in Canada. Internet sites that fill prescriptions at the more affordable Canadian prices have come under attack as some major pharmaceutical companies have refused to sell their products to Canadian pharmacies that ship drugs back to the U.S. It is not clear whether there is a significant benefit to shopping in Canada for individuals with HIV: the listed Canadian pharmacy price for a months supply of 3TC (lamivudine, Epivir) is $230, compared with Walgreens U.S. price of $295. But recently, some big purchasers have expressed their intention to get into the reimportation act. The governor of Illinois and the mayor of New York have each begun demanding the right to acquire more affordable drugs from Canada and Europe and the principle has gained a surprising amount of support in the House of Representatives.
Faced with change, the industry initially tried to block a Medicare drug benefit, because they feared the leverage the government would gain if it were able to negotiate prices for seniors, the largest sector of drug consumers. As this paragraph from Pfizer's 2002 annual report cautions investors:
"In the U.S., many pharmaceutical products are subject to increasing pricing pressures, which could be significantly impacted by the outcome of the current national debate over Medicare reform. If the Medicare program provided outpatient pharmaceutical coverage for its beneficiaries, the federal government, through its enormous purchasing power under the program, could demand discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs."
Yet the next line in Pfizers report recognizes that change may present opportunity: "On the other hand, a Medicare drug reimbursement provision may increase the volume of pharmaceutical drug purchases, offsetting at least in part these potential price discounts." The plan that has emerged is beyond Pfizer's wildest dreams.
Congress is now proposing a Medicare revision that, while it may offer coverage to some of those hardest hit with the burden of drug costs, does so with the condition that Medicare wont use its new buying power to negotiate better prices. The impending deal throws a lifeline to an industry addicted to growth by dramatically expanding the size of the U.S. pharmaceutical market without touching the profit potential, in effect giving the drug companies a huge windfall paid for by taxpayers, the grandchildren of taxpayers and by seniors forced to go along with a stingy plan full of hidden, painful cost-sharing provisions.
For thousands of people with HIV, the details of this plan are especially frightening. It's currently estimated that around 50,000 people with HIV are beneficiaries of both Medicare and Medicaid. For these people, Medicaid provides a safety net to deliver essential drugs that Medicare does not. Under the new proposal, people on Medicare would be forbidden to draw on Medicaid benefits for uncovered drug costs, in effect forcing low income Medicare beneficiaries into the already reeling ADAP system or onto the streets. The full implications of these proposed changes still have not been realized.
As the reimportation cause moves to the mainstream and as drug costs become a bigger part of everyone's budget, price controls may no longer seem like a radical idea. House Speaker Dennis Hastert recently awoke to the realization that unfettered drug prices in the U.S. are in effect subsidizing price controls in Europe. Is this the birth of a new red meat issue based on outrage that France is getting a free ride at U.S. taxpayer expense? But Hastert, a foe of reimportation, is more concerned about raising prices elsewhere than capping prices here at home, and he has asked U.S. Trade Representative Robert Zoellick to look into the issue.
Virtually everyone agrees that mounting drug costs are causing distress, but no one has been able to forge a political accommodation that would assure access to needed medications for all, while continuing to support research into newer and better drugs for those who will need them tomorrow. Meanwhile, budgets continue to strain as more and more people come to depend on life-giving pharmaceuticals whose prices rise with no end in sight.
A version of this article originally appeared in BETA.
This article was provided by Gay Men's Health Crisis. It is a part of the publication GMHC Treatment Issues. Visit GMHC's website to find out more about their activities, publications and services.