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THE PRESCRIPTION DRUG
FAIRNESS FOR SENIORS
INDUSTRY MYTHS VS.
REALITY
Prepared by the Minority Staff
Special
Investigations Division
Committee on Government Reform
U.S. House of
Representatives
April 2000
Industry Allegation: The
legislation extends price controls to the pharmaceutical
industry.
The Facts: The Prescription
Drug Fairness for Seniors Act (H.R. 664) does not impose price
controls on the pharmaceutical industry. Instead, the legislation ends
price discrimination. Under the legislation, companies can set
their best price at whatever level they want. The goal of the bill is to
allow senior citizens access to prescription drugs at these same low
prices.
Since
drug companies closely guard their drug prices as trade secrets, the best
publicly available indicator of the industry's "best prices" are the
prices that the industry charges the federal government. For this reason,
the bill requires the drug companies to make their drugs available to
pharmacies for resale to senior citizens at the lowest prices the drug
companies charge the federal government.
If a drug company refuses to extend its
lowest federal prices to the senior citizen market, the only consequence
to the drug company is that the federal government will no longer buy
drugs from the company. In this way, the bill uses the buying power of the
federal government to end price discrimination and help seniors gain
access to the drug companies' lowest prices.
The nonpartisan Congressional Research
Service has concluded that H.R. 664 does not set drug prices. According to
CRS, the bill "would not establish a specific price at which prescription
drugs must be sold; the bill would require that prescription drugs
intended for senior citizens be sold to pharmacies at the best available
government price."(1)
Industry Allegation: The lowest federal
prices mandated by the bill are in effect price controls because the
prices are set by statute and are lower than the prices that
private-sector buyers must pay.
The Facts: The federal government
buys its drugs under a multitude of programs. Some of these programs (such
as the Federal Supply Schedule (FSS), the VA Formulary, and the VA
"Blanket Price" Program) determine prices through voluntary negotiations
between the federal government and each participating manufacturer. Other
programs (such as section 340B of the Public Health Services Act) use
statutory discounts. One government program (the Medicaid drug rebate
program) explicitly ties the statutory discounts for drugs participating
in the Medicaid program to the best private-sector prices, but is
prohibited by statute from making this "best price" information publicly
available. Although these programs use
different mechanisms for acquiring drugs, their common goal is to obtain
prices for the federal government that are as low as those offered to the
most favored private-sector purchasers.
It
may be true, as the drug companies assert, that some private-sector buyers
pay more for their drugs than the federal government. The crucial
question, however, is what are the prices that the industry charges its
most favored private-sector customers. The pharmaceutical industry has
never asserted that these most favored customers must pay more than
the federal government. Furthermore, GAO has confirmed that "federal supply schedule prices represent the best
publicly available information on the prices that pharmaceutical companies
charge their most favored customers."(2)
A recent study by the Department of
Health and Human Services investigated prescription drug pricing. This
study found that although FSS prices are lower than the prices that many
private-sector purchasers pay for prescription drugs, there are probably
"cases where ... third parties
achieved prices below this FSS price."(3)
Industry Allegation: The legislation will
force the pharmaceutical industry to reduce research and development
expenditures.
The Facts: Historically, there is
no evidence to support the industry's claim that preventing pharmaceutical
companies from overcharging for their products reduces research. In 1984,
Congress passed the Hatch-Waxman Act, which increased the availability of
generic drugs and provided more competition for brand name drugs. Before
the legislation was enacted, the pharmaceutical industry testified that,
"the bill under consideration today could result in a decline in
scientific research and innovation."(4)
According to the industry,
The bill's proposed restrictions . . .
could have far ranging adverse effects on the development of new
technology in this country, including serious implications for the future
of university-based research and the emerging and vitally important field
of biotechnology research . . . Investment in private pharmaceutical
research is likely to decline and will no longer provide the kind of
products that have brought such an improvement in public health over the
last 30 years.(5)
However, this legislation did not reduce
innovation in the pharmaceutical industry. Indeed, according to industry
data, over the next five years pharmaceutical companies more than doubled
their investment in research and development, from $4.1- billion to $8.4
billion.(6)
In 1990, Congress passed legislation that
created the Medicaid drug rebate, requiring drug companies to reduce their
prices for drugs sold to the Medicaid program. At the time, the
Pharmaceutical Manufacturers Association opposed legislation to reduce
Medicaid drug prices because "[i]ncentives for pharmaceutical research
will be reduced."(7)
This legislation, however, did not reduce innovation in the pharmaceutical
industry. Since 1990, pharmaceutical
companies again more than doubled their spending on research and
development, from $8.4 billion in 1990 to $21.1 billion in 1998.(8)
Industry spokesmen have themselves
conceded that the research and development argument is a red herring.
According to Jeffrey Trewhitt, a spokesman for the Pharmaceutical Research
and Manufacturers of America, competition within the drug industry will
keep the industry from reducing research and development: "Basically,
companies are going to do whatever they need to do to be able to have the
money necessary to spend on research and development, even if its $24
billion a year and still going up."(9)
Industry Allegation: If the
legislation is enacted, the pharmaceutical industry simply will not be
able to afford to pay for high levels of research and development.
The Facts: There is no support for
the industry's assertion that it could not afford its research and
development budget if the legislation were enacted. While the
pharmaceutical industry currently spends $17 billion annually on research
and development,(10)
it spends $11 billion annually on
advertising and marketing(11)
and reported $26.2 billion in profits in 1998.(12)
Its operating profit margin is 28.7% -- nearly three times higher than the
profit margin of other manufacturers of branded consumer goods.(13)
Even if the legislation had the effect of reducing industry revenues, the
industry could afford to maintain or even increase its spending on
research and development.
While the industry's research and
development expenditures are relatively large as a percentage of revenue,
they are not high as a percentage of profit when compared to other large
U.S. companies. For example, Ford's expenditures on research and
development in 1997 were equal to 90% of its profits, whereas Merck's
expenditures on research and development were equal to only 37% of its
profits.(14)
This industry assertion of reductions in
research also assumes a decrease in drug industry revenues - an assumption
that is not shared by independent analysts in the securities industry.
Reducing prescription drug prices will lead to an increase in the volume
of sales, as seniors that were previously unable to afford prescription
drugs would now be able to afford their medications. According to a recent
Merrill Lynch analysis:
Volume increases could overwhelm negative
pricing impact. It is important to remember that a reduction in
prescription drug prices, both with or without associated prescription
benefit coverage, is likely to be associated with price elasticity and
increased utilization (especially for Medicare recipients that currently
have no drug coverage).(15)
Industry Allegation: The legislation does
not guarantee lower prices because pharmacies, not drug companies, are
responsible for the high retail markups paid by senior citizens.
The Facts: At the retail level,
the pharmacy market is highly competitive: if consumers are unhappy with
the prices charged at one retail outlet, they can buy their prescription
drugs at a different outlet. This competitiveness guarantees that
pharmacies will pass on to senior citizens the benefits of any lower
prices for prescription drugs. According to a leading academic expert, Professor
Stephen W. Schondelmeyer, the head of the University of Minnesota's
Department of Pharmaceutical Care and Health Systems:
Once a patient is on a given prescription
medication, the patient becomes a price competitive consumer. . . . Any
discounts passed on to community pharmacies will be passed on to the
consumer, or payor, of the prescription because of the competitive retail
environment."(16)
The analyses by the minority staff of the
Committee on Government Reform demonstrate that the legislation will be
effective: lowering prices that pharmacies pay for prescription drugs will
lower retail prices for seniors. The studies compare the retail markup due
to pharmacies with the total markup paid by retail customers. They find
that drug companies, not retail pharmacies, are responsible for the
significant differential between the prices paid by retail customers and
the prices paid by the drug companies' most favored customers. The
analyses find that while the average retail price differential is over
100%, pharmacy markups account for only 22% of the price paid by retail
customers. This indicates that it is drug company pricing policies, not
pharmacies, that are responsible for the high prescription drug prices
paid by seniors.
Industry Allegation: The
legislation does not address the problems with Medicare. It fails to
provide seniors with what they really need: complete coverage for
prescription medicines.
The Facts: The ideal solution for
seniors would be to enact a Medicare drug benefit -- a solution supported
by many members of Congress. Questions have been raised about the price
tag of this benefit, however. A comprehensive Medicare drug benefit has
been estimated to cost $20 to $40 billion annually.(17)
In July, the Clinton administration announced a plan to provide
prescription drug benefits for all Medicare recipients.
The Prescription Drug Fairness for
Seniors Act is an intermediate step that reduces drug prices for seniors
without costing the federal government anything. It will measurably
improve the quality of life for senior citizens by lowering the price of
prescription drugs by as much as 40%. A senior citizen spending $150 a
month on prescription drugs could save over $700 annually under the
legislation.
It is ironic that the pharmaceutical
industry criticizes the legislation for failing to provide a comprehensive
Medicare drug benefit. Although the drug companies now say that they
support the inclusion of prescription drug benefits in private-sector
Medicare HMOs, they continue to resist including prescription drug
coverage as a universal Medicare benefit. As the New York Times recently
reported, "drug companies are gearing up to fight any plan for the
Government to provide prescription drugs as a basic benefit in the
traditional Medicare program."(18)
In July, the same companies began a
"multimillion-dollar" advertising campaign designed to fight efforts to
reduce prescription drug prices for seniors.(19)
1. Congressional Research Service, The Cost of
Prescription Drugs for the Uninsured Elderly and Legislative
Approaches, 17 (Nov. 24, 1999).
2. Letter from
William J. Scanlon, Director, GAO Health Financing and Public Health
Section (April 21, 1999).
3. Department of Health and Human Services, Report
to the President: Prescription Drug Coverage, Spending, Utilization, and
Prices, 108 (Apr. 2000).
4. Testimony of Jack Stafford, President, American
Home Products, before the Senate Subcommittee on Courts, Civil Liberties,
and the Administration of Justice (June 27, 1984).
5. Id.
6. Pharmaceutical Research and Manufacturers of
America (PhRMA), Leading the Way in the Search for Cures (1998)
(www.phrma.org/publications/brochure/leading/index.html).
7. Testimony of
Gerald J. Mossinghoff, President, Pharmaceutical Manufacturers
Association, before the House Subcommittee on Health and Environment
(September 14, 1990) (attachment to testimony dated May 22, 1990).
8. Leading the Way in the Search for Cures,
supra note 4; Drugs on Trial, Fort Lauderdale Sun
Sentinel (June 13, 1999).
9. Drug Lobby
Fights Bill for Senior Citizens, Portland Press Herald (Feb. 18,
1999).
10. Drug Dependency: U.S. Has Developed an
Expensive Habit, Wall Street Journal (Nov. 16, 1998).
11. Id.
12. 1999 Fortune 500 Industry Snapshot:
Pharmaceuticals (1999) (on line at
www.pathfinder.com/fortune/fortune500/ind21.html).
13. Houlihan
Lokey Howard & Zukin, Expert Analysis of Profitability (Feb.
1998).
14. Annual Report
of Ford Motor Co. for the Fiscal Year Ended Dec. 31, 1997; Annual Report
of Merck & Co, Inc. for the Fiscal Year Ended Dec. 31, 1997.
15. Merrill Lynch, Pharmaceuticals: A Medicare
Drug Benefit: May not be so Bad (June 23, 1999).
16. Schondelmeyer, Stephen W., PRIME Institute,
University of Minnesota, Competition and Pricing Issues in the
Pharmaceutical Market, University of Minnesota, 12 (August 1994).
17. Medicare
Reformers Seek, Once Again, to Implement Drug Benefits for Elderly,
Wall Street Journal (Nov. 17, 1998).
18. Clinton's Plan to Have Medicare Cover Drugs
Means a Big Debate Ahead in Congress, New York Times (Jan. 23, 1999).
19. Washington Post, Drugmakers Launch Campaign
on Medicare (July 28, 1999).
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