Copyright 2000 Federal News Service, Inc.
Federal News Service
June 13, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 4167 words
HEADLINE:
PREPARED TESTIMONY OF US SENATOR BYRON L. DORGAN
BEFORE THE
SENATE COMMITTEE ON HEALTH, EDUCATION, LABOR AND PENSIONS
SUBJECT - DRUG SAFETY AND PRICING
BODY:
(NOTE: Charts not transmittable)
Mr. Chairman and members of
the Committee, I applaud your work to provide the Congress with better
information on the issue of prescription drug pricing. I appreciate the
opportunity to testify on this issue. Drug pricing has been a continuing concern
of mine, as I know it has been for many of you, and a problem for people both in
North Dakota and elsewhere in the U.S.
The rising price of drugs in the
U.S. is pushing needed therapies beyond the reach of many of our constituents.
Rising prices are one of the key drivers of the costs of a prescription drug
benefit for Medicare beneficiaries. And rising drug costs are a growing concern
to American companies that want to provide an affordable drug benefit for their
employees.
Findings of Public Hearings on Drug Costs As Chairman of the
Democratic Policy Committee, I have held public hearings across the U.S., where
Americans have informed me of the problems they have affording the high price of
drugs sold in this country. Many are forced to choose between their medicine and
other necessities like food and heating their home. Let me tell you about some
of the people I met: I've heard from Connie Pennucci of Rye Brook, New York. Ms.
Pennucci is 77 years old. She pays $200 out of pocket each
month for the treatment of her arthritis and osteoporosis. Because she has
limited means, Ms. Pennucci has had to resort to measures like cutting her pills
in half or skipping dosages of her medication. I've heard from Julie Garcia who
works at the South Eastern Medical Center. Ms. Garcia does screening and intake
of patients, and she also takes care of her mother's prescription drug needs
since her mother, Carol, is a cancer survivor with numerous medication needs and
no prescription drug covemge. Ms. Garcia's situation is typical of increasing
numbers of the "Baby Boom" generation, who have responsibility for care of both
their parents and their own children. I've also heard from transplant recipients
like Anita Milton, a Chicago resident who had a double lung transplant, and
every day must choose between buying her expensive anti-rejection drugs-driving
herself into greater debt- and saving her money by not buying the drugs but
risking the rejection of her new lungs. Ms. Milton receives
$940 in disability benefits each month. Due to complicated
rules of Medicaid covemge, she receives drug covemge every second month. On the
months when she has to buy her own drugs, she spends about
$2,500 buying the drugs she needs. And, at a hearing in
Dickinson, North Dakota, Dr. James Baumgartner told me about one of his patients
who had breast cancer. After surgery to remove the tumor, the doctor told her
she should take a certain prescription drug to reduce the chance of recurrence
of her breast cancer. When she found out what the drug cost, she said, "I can't
afford to take this drug. I will just have to take my chances."
Comparison of Drug Prices in U.S. vs. Canada
My constituents in
North Dakota include self-employed farmers, retired farmers without an
employer's retiree benefits, and employees in small businesses that have limited
access to affordable health insurance policies. Rising drug costs have been
hitting them pretty hard, but being close to Canada, my constituents have also
found that their neighbors to the north are able to get the same prescriptions
for a much lower price. To illustrate this, I'll describe the differences found
in the prices for three drugs that ranked among the top 20 in the US both in
terms of the number of prescriptions and sales volume in 1999. These drugs are
Zocor, Zoloft and Norvase. A comparison of the forms and strengths of these
drugs found that all are available in the same form and strengths in both
countries.
Chart 1 compares the U.S. wholesale prices for these 3
medications to their prices in Canada. (The Canadian prices have been converted
into U.S. dollars.)
Chart 1
U.S. Medications Are Up To 50
Percent Cheaper In Canada Zocor is used to lower cholesterol and generated
$1.7 billion in U.S. sales in 1999. The U.S. avemge wholesale
price is $3.82 for one 20 mg. tablet, compared to U.S.
$1.82 for the same 20 mg. tablet in Canada. The price in Canada
is less than half the price in the U.S. This translates to a cost of
$114.60 per month in the U.S. and a cost of
$54.60 per month for the same drug in Canada. (According to a
Families USA study, the U.S. price of a 20 mg tablet of Zocor increased by about
17 % between 1994.2000.) Zoloft is used to treat depression. This drug produced
$1.4 billion in U.S. sales. The price in the U.S. is
$2.34 per 50 mg. tablet compared to U.S. $1.28
per 50 mg. tablet in Canada - less than half the U.S. price. (According to
Families USA, the price of a 50 mg. tablet in the U.S. increased by 25.5%
between 1994-2000.) Norvase is used to lower blood pressure. This drug generated
about $1.3 billion in U.S. sales. The avemge wholesale price in
the U.S. is $1.25 per 5 mg. tablet, compared to the Canadian
price of 90 cents (U.S.) per 5 mg tablet. The Canadian price is 28 percent less
than in the U.S. (And Families USA reports that the price of a 5 mg tablet in
the U.S. increased by 20.4% between 1994-2000.)
These are not isolated
findings. In 1992, GAO found that a market basket of 121 identical prescription
drugs, available from the same manufacturers, would cost wholesalers 32 percent
more in the U.S. than in Canada. And these results don't just hold true for
Canada: A 1994 GAO study compared prescription drug pricing in France, Germany,
Sweden and the United Kingdom, and found that prescription drug prices in these
countries were lower, and had a much slower rate of growth compared to the same
drugs sold in the United States. Chart 2, comparing the 1997-98 prices in the
U.S. and these other countries, shows that the same price disparities continue
today.
Chart 2: Prices Paid to Drug Makers in Eight Nations: Relative
Prices and Price Increases
Source: A. Sager and D. Socolar, Boston
University School of Public Health.
U.S. Drug Industry is Enjoying the
Advantages of Free Trade
We all recognize that there are many reasons
why prices Can vary from one location to another. And purchasers-whether they
are buying raw materials or finished products- want to take advantage of those
price differences. I think most Americans, including members of Congress,
support the idea of free trade and open market competition to bring down prices.
For example, large drug companies with a transnational scope of
operations can take advantage of international price differences to save on the
cost of research. Congress has also secured advantages for drug companies by
passing bills to allow companies to avoid import tariffs on the chemicals used
in manufacturing their pharmaceuticals.
And current U.S. law allows drug
companies to take advantage of free trade by producing FDA-approved drugs in
FDA-inspected facilities that are located in other countries. The company is
then allowed to sell the drug in the U.S., taking advantage of differences in
production costs in those foreign countries.
U.S. Consumers Should Also
Benefit From Free Trade
Unfortunately, ordinary Americans are not
equally free to seek out the lowest price for their medications. Instead they
have to buy those drugs at inflated prices here in the United States. That's
because, under existing law, only the manufacturer can import prescription drugs
into the United States from another country-even if those drugs were made in the
United States. This law is supposed to protect consumers against unsafe
pharmaceuticals, but it has turned into a form of price protection for
pharmaceutical companies instead. The law effectively prevents American
pharmacists from purchasing medications at cheaper foreign prices and passing
those savings along to their customers here.
In other words, the drug
companies are free to buy the ingredients for their drugs on the world market
where they can find the lowest prices. We need to give Americans the same
ability to use the new global economy to their advantage when it comes to
FDA-approved prescription drugs.
The International Prescription Drug
Parity Act (S. 1191)
Last June I introduced a bill, with other
bipartisan co-sponsors in the Senate, that would give U.S. consumers more
free-trade benefits. As you know, Mr. Chairman, the bill - the International
Prescription Drug Parity Act (S. 1191) - has been referred to this Committee.
The bill would address the current disparity by allowing pharmacists to import
FDA-approved medications from other countries at lower prices.
More
recently, Mr. Chairman, I have joined you in cosponsoring a similar bill, S.
2520, the Medicine Equity and Drug Safety Act, which would allow individual
American consumers, as well as pharmacists, to import FDA-approved prescription
drugs.In particular, S. 1191 specifies that: if a drug that is covered by the
Food Drug and Cosmetics Act and is domestically approved and manufactured in the
U.S. and then exported, or if a drug is domestically approved for commercial
distribution and then manufactured in a foreign FDA-registered establishment,
then as a condition of maintaining its domestic FDA approval, the manufacturer
must maintain adequate records and labeling for each shipment in order to allow
for, and facilitate, importation of these medications by U.S. pharmacists and
licensed prescription drug wholesalers.
This will enable U.S.
pharmacists to import FDA-approved drugs that have met standards for product
safety and good manufacturing practices specified by FDA, while giving U.S.
consumers access to a more open and competitive market.
Since
introducing this bill in June of 1999, we have heard from different groups in
the industry, in response to this bill and other bills with some similar
features, that have been introduced by my colleagues in the Senate and in the
House of Representatives.
Community Pharmacists and Many Seniors are
Supportive
We have gotten a positive response to the international
parity bill from community pharmacists. Pharmacists see this as a way to get
more competitive acquisition prices while working with reputable wholesalers.
This offers a way to provide their customers safe products and pass along the
cost savings. And because of the competitive nature of these industries, we have
every reason to expect that the savings would be passed on to consumers. The net
profit margins for retail pharmacies are small - in the range of 1-2 percent of
the price of a prescription.
A number of consumer groups have also been
supportive of drug reimportation.
Pharmaceutical Industry Opposition
Not surprisingly, the pharmaceutical industry is opposed to this bill,
largely because it would give U.S. consumers access to the lower prices that the
industry charges for the same drugs in Canada or in other countries. They have
gone to considerable expense in an ad campaign to create public opposition to
this bill and other bills that would lower prices for U.S. consumers.
Pharmaceutical Research and Manufacturers of America (PhRMA) has raised a flag
about the safety of reimported drugs and it has raised the specter of reduced
drug research if Americans were allowed to pay the same prices available in
Europe and Canada. I'm going to talk briefly about each of these so- called
"threats."
1. Industry questions the safety of reimportation (if it's
done by others)PhRMA has criticized the proposed reimportation bills on the
grounds that the safety of re-imported products could not be assured. This seems
a little ironic when you consider that PhRMA's member companies are likely to be
those engaged in-- and benefitting from- foreign-based manufacturing and U.S.
re-importation under current law.
I would like to share what I have
heard, and what I conclude, about safety issues. First off, let me say that I do
not want to jeopardize the quality of medications available in the U.S., as I'm
sure my colleagues agree. I am committed to working with this Committee to make
whatever changes are necessary to my proposed legislation to ensure the safety
of imported medications. While I think some legitimate safety questions have
been raised, none of these are insurmountable.
I have heard a few
specific safety concerns related to reimportation. There is some concern about
tracking the "chain of custody" of a product from the manufacturer to the
retailer in order to ensure safe stomge until a drug reaches the customer. I
understand that recordkeeping to track custody is already required in many cases
and additional record keeping is being considered as part of Prescription Drug
Marketing Act (PDMA) regulations.
Another issue involves assuring the
proper identity of an imported drug, in other words, not a counterfeit, and
assuring that a drug has been handled safely en route from the manufacturing
plant to its final destination, the retail pharmacy. These safety questions have
technical answers, and they can be addressed.
A recent report in the
Wall Street Journal, on a different but analogous safety issue, suggests that
FDA has the technical expertise that would likely be involved in this safety
assurance work. The Journal report also illustrates that a scientific approach
is the most effective way to deal with the safety questions- rather than just
assuming the worst and passing up an opportunity to save the American people
some money.
The Wall Street Journal described FDA testing of the US
military's stockpile of drugs to determine if shelf life could be extended. With
a $1 billion stockpile of drugs, the Department Of Defense is
faced with the prospect of destroying and replacing its supply every two to
three years as the drug expiration dates arrive. Doing this testing requires FDA
to use its lab facilities and scientific expertise to do a chemical analysis of
each ingredient's identity, strength, quality, purity, and stability. The
manufacturer's data on the testing protocols for each drug are used to determine
whether the safety and efficacy of the drug have been maintained.
According to the article, this program's benefits have been "huge"- from
1993 through 1998 the U.S. military spent about $3.9 million on
FDA testing and saved $263.4 million on drug expenses because
of the findings of those FDA tests.
I wonder if similar scientific
methods can't be applied to the safety of drug reimportations. If similar
testing is involved, and manufacturer data is required, then it may be necessary
for Congress to revise the current law to allow the use of this data to screen
out counterfeits. It might also be necessary to provide extra resources for the
FDA to expand its safety assurance capabilities and its work in this area. But
the bottom-line is that the safety issues are fairly specific, solvable, and the
payoff for American consumers would be substantial.
2. Industry predicts
research cutbacks and a health system crisis if drug prices are lowered for
American consumers
The other theme of drug industry opposition has been
taken up by a group calling itself Citizens for Better Medicare. This group was
started by PhRMA and it is now estimated to be spending between
$20- $30 million on related issue ads. This
group is arguing that giving Americans access to the lower prices charged for
the same drugs in other countries will somehow inevitably lead to the U.S.
adopting the Canadians' health care system. I can't explain the logic of this to
you because I can't find any logic to it. The idea seems absurd and it seems to
be a rather cynical attempt to mislead the public.
As I described
earlier, many of the same drugs approved for use in America are available and
cost less in a number of European countries, in addition to Canada. Those
European countries have a wide variety of health care delivery and payment
systems, different from each other and different from Canada.
PhRMA has
also implied that if patients in the US don't pay more than consumers in other
countries, then the profits needed for industry to continue to do research will
no longer be there. PhRMA argues that the result will be a significant reduction
in research to develop new life-saving medicines and disease cures. Let's
examine this idea and its implications.
Implication 1: The US. drug
Industry's profit margins are already minimal so that reduced U.S. prices would
cause innovators and investors to leave in droves and go to other industries
where better profits can be made. Is this the case?
A Fortune 500 list
of the most profitable industries (as of April 3, 2000) shows that
pharmaceutical industry profitability is far greater than that of other leading
U.S. industries. Chart 3 shows the top 5 industries ranked by return on
shareholder equity and illustrates why the Wall Street Journal described drug
industry profits as "the envy of the corporate world."Chart 3 U.S. Drug Industry
Has Higher Profits Than Any Other Industry
One mason for such strong
profitability is the fact that the pharmaceutical industry has the lowest
effective tax rate of all US industries. According to the Congressional Research
Service, the drug industry benefits from favored tax treatment through at least
five tax provisions:
1) the foreign tax credit, 2) the possessions tax
credit, 3) the research and experimentation tax credit, 4) the orphan drug tax
credit, and 5) the expensing of research expenditures.
Together, these
provisions provide the pharmaceutical industry with an effective tax rate that
avemges 16.2 percent, compared to an avemge tax rate of 27.3 percent for all
U.S. industries, as you can see in Chart 4.
Chart 4 The U.S. Drug
Industry Pays Lower Taxes Than Any Other Industry Implication 2: The only area
where drug companies could pare back their spending, if forced to because of
lower U.S. sales revenues, is in the area of research and development of new
drugs.
To consider this implication, let's look at how the drug
manufacturers allocate their revenue, as shown in Chart 5: 28 percent goes for
the cost of materials 27 percent for General & Administrative (G&A)
expenses, including 13 percent for promotional spending 20 percent for Research
& Development (R&D) 7 percent for taxes 18 percent for net profit
Chart 5
The Drug Industry Spent $13.9 Billion
On Advertising And Promotion in 1999
Besides the spending on R&D,
industry reports a significant amount of spending on product promotion. That
amount is included in the 27 percent (or $28.5 billion) of
General & Administrative expenses shown on the chart, lMS Health reports
that drug company promotional spending directed toward physicians and consumers
in the U.S. totaled $13.9 billion in 1999. This is almost half
the total G&A allocation, and it is about two-thirds the size of the total
R&D budget. So promotional spending is a significant amount.
Yet we
don't hear about the risk of cutbacks in promotional spending, if drug revenues
were reduced by lower prices for Americans.I don't want to begrudge the
pharmaceutical industry the right to have a reasonable profit, so we should also
ask the question: If American consumers paid a lower price for drugs, how much
revenue loss would there actually be? I will talk about one particular scenario
that has been examined in detail.
In 1999 Merrill-Lynch did an analysis
that considered a so-called "worst-case" scenario in which all Medicare
beneficiaries paid the Federal Supply Schedule price. This is what MerrillLynch
predicted would happen: Beneficiaries without drug covemge would get a 40%
discount from the manufacturers price, and beneficiaries who now have drug
covemge would get a net 25 % reduction in price, but lower prices would also
produce increased demand, so the volume of sales would increase. The net effect
would be a 3.3 percent reduction in sales revenue for the drug industry.
In 1999, a 3.3 percent reduction would amount to a $3.5
billion reduction in sales revenue for the whole industry. To put this in
perspective, we can compare this $3.5 billion to industry
spending of $13.9 billion on product promotion.
Personally, I find it disappointing that, when faced with the
possibility of a reduction in revenues, however small, the first and only place
that the industry has identified for cutbacks is in their spending on research
and development.
Implication 3: U.S. research on new cures depends
primarily on the U.S. drug industry's commitment to fund research.
Drug
companies pay for valuable and lifesaving research, as I just described. But not
all of this work is devoted to finding new cures. A 1997 industry source
reported that, based on industry standards, less than 30 percent of R&D
expenditures is typically allocated to research that leads to the discovery of
new medicines.1 Instead, most of the spending is to develop products that are
variations of existing medicines.
The drug industry also relies heavily
on U.S. taxpayer-funded research through the National Institutes of Health
(NIH). A study just released by the Joint Economic Committee, in May of this
year, reports that of the 21 most important drugs introduced in recent years, 15
(over two- thirds) were developed using knowledge and techniques from federally-
funded research, and NIH research led directly to the development of 7 (about
half) of those drugs.
In fact, taxpayer-funded research has often been
the basis for the new patented and profit-making drugs later sold by private
drug companies, who market these drugs in the U.S. and in many other countries.
This path-breaking research will not be lessened by the actions of Congress
quite the opposite.
Chart 6 shows the trends in funding for NIH. As the
members of this Committee are aware, federal funding for NIH is now approaching
$20 billion per year. This research has lead to many of the
breakthroughs. This Congress is committed to doubling the NIH research budget by
2003.
Chart 6
Drug Research Will Continue to Grow At NIH
In other words, U.S. taxpayers are subsidizing the pharmaceutical
manufacturers several times over: through higher drug prices, lower taxes, and
NIH-funded search.
Implication 4: Drug companies in other countries are
not investing in R&D because they can't afford to, given the lower prices
they are able to charge consumers.
According to a recent report by
PhRMA, 37 percent of company-financed research was actually conducted in
European countries, 36 percent was performed in the U.S. and 19 percent was
performed in Japan. Chart 7 shows the percentage breakout reported.
Chart 7
European Drug Companies Spend More On R&D Despite
Lower Prices
As we can see, there continues to be a strong commitment to
R&D in Europe, even though many European countries have government policies
that result in lower drug prices than in the U.S.
Finally, we have heard
from industry that the best way to solve this problem is for Congress to
legislate increased private insurance covemge for prescription medicine for
Medicare beneficiaries. I certainly believe that American seniors need drug
covemge through Medicare, but covemge alone will not address the problem of drug
prices that I have been talking about.
Covemge alone would only succeed
in transferring payments for the high cost of drugs in this country from
out-of-the-pockets of American consumers, to out-of-the-pockets of American
taxpayers, who --the last time I checked- were also the American consumers.
And as Chart 8 shows, spending on prescription drugs in America is not a
slow-growing sort of problem. It is an accelerating problem, and one we must
tackle.
Chart 8
Real Spending for Prescription Drugs for the
Total Population. 1965- 1998 and Projected 1999-2008.
Conclusion Once
again, I want to applaud the Committee's efforts to seek more information on the
issue of prescription drug pricing. I appreciate your extending me the
opportunity to testify before this Committee on this important issue. I have
become convinced over the last few years that I have worked on this issue that
we as a country can and should provide American consumers with some pricing
parity, relative to their counterparts in other countries. And I am confident
that we can do this in a way that preserves the economic viability of the
pharmaceutical industry and, most importantly, the safety and efficacy of the
medications that American consumers need. I hope that the Senate can take action
on legislation to accomplish these goals yet this year. Mr. Chairman, I look
forward to working with you over the next several months to give the American
people a better deal.
FOOTNOTES:
1 The Pharmaceutical R&D
Compendium: CMR International/Scrip's Complete Guide to Trends in R&D, 1997,
cited by S.W. Schondelmeyer in Patent Extension of Pipeline
Drugs: Impact on U.S. Health Care Expenditures. July 28, 1999.
END
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