The politicians hear him, and the 13 million other seniors who have no prescription-drug coverage. From the presidential race to the battle for Congress, candidates are bashing the high prices, and many consumers are clearly angry. But the most interesting–and largely untold–story is how the nation got here: why do our drugs cost so much? The answer sheds light not only on the factors that lead to drugstore sticker shock but also on the complex history of the pharmaceutical industry, one of the most innovative and profitable sectors in American business.
People in the United States enjoy the best health care in the world, but it comes at a high price, and drugs are the fastest-growing piece of the country’s medical bill. Between 1995 and 1999, drug expenditures in the United States more than doubled, from $65 billion to $125 billion. With millions of boomers pushing 60 and new drugs coming on the market, the nation’s drug tab is headed for the stratosphere. One government study predicts prescription-drug spending in the United States will reach $243 billion by 2008. There are three main reasons for the explosion in spending:
The Bush and Gore campaigns are staking out their ground on the issue, offering competing prescription-drug plans (sidebars: the candidates’ NEWSWEEK essays on the topic). The Senate, scrambling to get in on the action, plans to debate and vote on drug coverage for low-income seniors in the next few weeks. With the economy in its eighth year of a record expansion and with projected trillion-dollar surpluses, voters and politicians alike seem committed to redirecting some of the nation’s wealth to help elderly Americans pay for their medicine. But the costs are not just a problem for Medicare seniors with no prescription benefit. Whatever coverage Medicare seniors end up with, there will still be an additional 50 million or so Americans with no drug coverage, and millions more with limited coverage.
Bush and Gore both want to protect seniors from the rising toll. Bush’s plan relies on the private sector by offering the elderly a 25 percent subsidy on premiums so they can buy prescription-drug coverage from insurance companies. Gore wants to expand the role of the federal government by adding a prescription-drug benefit to Medicare. The Bush camp dismisses the Gore plan as a bureaucratic nightmare (the governor’s rats ad, with its alleged subliminal message, was an attack on the vice president’s prescription proposal), while Gore backers say the Bush plan leaves millions of middle-class seniors with no coverage. Both proposals guarantee coverage for pre-existing medical conditions.
The issue of which drugs should fairly cost is much more complicated than the political rhetoric would suggest. Alan Holmer, president of the Pharmaceutical Research and Manufacturers of America (PhRMA), has a short answer when asked if prescription drugs cost too much. “Compared to what?” he says. Holmer knows firsthand the value of effective drug treatment–his 20-year-old son and 18-year-old daughter have cystic fibrosis. “My kids don’t go to the hospital anymore.” Drugs that help patients avoid heart attacks, strokes and other medical disasters not only keep people alive and with their families, he says, they reduce spending for hospital stays, surgery and other costly treatments. “If you have a life-threatening disease, your best hope is the American pharmaceutical industry.”
From that point of view, the rise in prescription-drug spending makes sense. Each year the makers pump out new medicines that make patients more comfortable and save lives (and health-care costs). A National Institutes of Health study, for example, found that treating stroke patients with clot-busting drugs saves $4,400 per patient by cutting the need for a lengthy hospital stay. The average number of new drugs approved by the FDA each year doubled between 1980 and 1998, from 19 to 38. Some of these are entirely new categories of drugs, treating conditions that were largely untreatable even a few years ago. Many of the new drugs are targeted at major diseases, like the 339 AIDS medications that became available between 1987 and 1999. Others, like Pfizer’s Viagra, enhance life. Sales of the drug topped $660 million in 1999.
Americans also end up willingly spending millions switching from older, less costly drugs to newer, more expensive versions of the same basic treatment. Often the replacement drugs offer distinct advantages over the old. Before Schering-Plough’s Claritin and other new antihistamines came along, for example, allergy medications had a tendency to make users drowsy, which is why those old prescription bottles carried warnings about operating “heavy equipment.” But some improvements seem incremental. Dr. Stephen Schondelmeyer, a pharmaceutical expert at the University of Minnesota, says the only thing that changed as Aventis’s hypertension drug, Cardizem, evolved over 15 years into the more expensive Cardizem SR and then the patent-extending Cardizem CD was the dosage form, which went from four times a day to two to one. Aventis spokes- man Charles Rouse III said each new ver- sion of the drug involved extensive development costs and provided clear benefits over its predecessor.
New drugs don’t drop out of the sky; research and development is costly. According to PhRMA, U.S. drug companies will spend more than $22 billion on research and development this year, a 10 percent increase over 1999. Manufacturers say it costs $500 million and takes from 12 to 14 years to develop a new drug, and only one in 10 drugs developed ever gets through the complicated and expensive clinical-trial process and makes it to market. The ones that do make it have to recover not only their own costs, but also the costs of all those dry holes.
Then there’s cost-shifting, where American consumers pay more because people overseas pay less. Drugmakers are forced to give steep discounts in foreign countries, where government price controls are the norm. In Mexico, for instance, which negotiates bulk acquisitions, the popular ulcer drug Prilosec costs 68 percent less than it does in the United States. In Canada, the depression treatment Zoloft costs $125 for the average prescription, compared with $223 in America. As a result the pharmaceutical industry has to earn most of its profits in the United States, the only major country where drug prices remain unrestricted.
At home, Washington recognizes the industry’s essential role and its big challenges, and has long watched out for the drugmakers. For one thing, the companies have not had to bear the costs of R&D alone. For years the industry benefited from its relationship with a host of federal agencies, particularly the National Institutes of Health. Scores of profitable drugs, including Bristol-Myers Squibb’s cancer treatment, Taxol, were developed using basic research funded by the NIH. The NIH’s $16 billion budget represents about 29 percent of total health R&D in the United States. And in a parallel effort to defray the costs of complex drug development, the government will grant patent extensions to drugmakers because a medicine’s long journey to market can eat up years of patent protection.
Meanwhile, drugmakers are charging more for existing medicines. The role actual price increases play is one of the most complicated and disputed elements of the entire debate. Drugmakers say price hikes are just a small part of the overall increase in drug spending. Yet the Kaiser Family Foundation, a Menlo Park, Calif., health-care think tank, says that price increases accounted for 18 percent of the increase in overall drug spending in the ’90s. During that time, brand-name drug prices increased by 8.8 percent a year, versus a 2.6 percent annual increase for the consumer price index. Families USA, a nonprofit health-care research group, reported that the average wholesale prices of 15 of the 50 drugs used most frequently by seniors to treat arthritis, diabetes and other common problems of the elderly rose at more than three times the rate of inflation between January 1999 and January 2000. The price of Wyeth-Ayerst’s Premarin, an estrogen-replacement treatment that prevents osteoporosis and is the most prescribed drug in the United States with more than 47 million prescriptions dispensed, jumped 12.1 percent. “Percentages are not really reflective of the effectiveness or value of a drug,” said Audrey Ashby, a Wyeth-Ayerst spokesperson, noting that the retail cost of Premarin is about 60 cents a day.
The bottom line for the industry: profit margins that surpass almost every other major economic sector. In its annual ranking of America’s most profitable industries, Fortune magazine placed the pharmaceutical industry at the top in all three categories–return on revenues, return on assets and return on shareholders’ equity–for 1999. Critics of the industry, including Al Gore, who has blasted drug companies for “gouging the consumer unfairly,” say drug-company profits are excessive. Merck public-policy executive Ian Spatz says such criticism ignores the high-risk nature of the pharmaceutical industry. “If we are successful, if we develop great new medicines that have value, we believe we should be profitable,” he says. “If we don’t, then we’re not going to be that profitable.”
One other factor in keeping sales high: the industry understands marketing, which is especially important when you have a flow of new products to introduce. Last year the drugmakers spent nearly $14 billion on advertising and promotion. While most of that was spent pitching pills to doctors and hospitals, nearly $2 billion was spent on consumer advertising. That’s a 63 percent increase since 1997. The most heavily promoted drug in the 12 months through June of this year was the painkiller Celebrex, which Searle spent $170 million to promote. The investment helped generate $1.4 billion in sales for the new arthritis treatment. Drugmakers stress the educational value of such advertising, noting that many people who might benefit from a drug might not be aware of its existence. It works: one study notes that the 10 most heavily advertised drugs accounted for 22 percent of the increase in drug spending between 1993 and 1998.
It may take more than marketing to navigate in the coming storm. Big business, big labor and the government are joining forces against the drugmakers; Kaiser Permanente, General Motors and the AFL-CIO formed a coalition with 60 other groups representing 83 million members to fight rising prescription costs. With the political heat turned up, the pharmaceutical industry spent $83.6 million lobbying Congress and the White House in 1999, a 13 percent increase over 1998, according to Public Citizen. PhRMA spokesperson Jackie Cottrell said the industry’s main interest in Washington is to provide drug coverage for seniors through the private sector. Total lobbying costs from 1997 to May 2000 were put at $235.7 million, while federal campaign contributions and soft-money donations in the same period were said to total $17.9 million.
The stars seemed aligned for some kind of prescription-drug benefit for seniors. The details depend on who wins in November, but the drugmakers are already worrying about government price controls. The plus side for consumers: more-comprehensive insurance coverage and an end to spiraling prices on existing drugs. But relief could come with an unintended long-term cost: by cutting into industry profits, the reformers could stifle the innovation that’s made the flow of new drugs possible. Cheaper drugs could mean fewer drugs.
The nuances of industry pricing strategies don’t mean much to 83-year-old Jane Roberts of Pasadena, Texas. Roberts spends $150 of her $500 monthly Social Security check, her only income, on drugs to treat her diabetes, glaucoma and high blood pressure. Her children pay her house and car bills. “Those big shots up there in Washington get their medicine for free,” she says. “If it weren’t for my children helping me, I guess I’d be in the soup line.” The real task is to make sure people like Mrs. Roberts, who needs cheaper and better drugs, can get both.
