[Senate Hearing 107-644]
[From the U.S. Government Publishing Office]
S. Hrg. 107-644
COMPARATIVE PRICING OF PRESCRIPTION DRUGS SOLD IN THE UNITED STATES AND
CANADA AND THE EFFECTS ON U.S. CUSTOMERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 5, 2001
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Mark Buse, Republican Staff Director
Jeanne Bumpus, Republican General Counsel
------
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE
AND TOURISM
BYRON L. DORGAN, North Dakota, Chairman
JOHN D. ROCKEFELLER IV, West PETER G. FITZGERALD, Illinois
Virginia CONRAD BURNS, Montana
RON WYDEN, Oregon SAM BROWNBACK, Kansas
BARBARA BOXER, California GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
C O N T E N T S
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Page
Hearing held on September 5, 2001................................ 1
Statement of Senator Dorgan...................................... 1
Statement of Senator McCain...................................... 7
Witnesses
Giroux, Stephen L., Community Pharmacist, Middleport Family
Health Center, and Member of the National Community Pharmacists
Association, accompanied by John M. Rector, Senior Vice
President for Government Affairs and General Counsel to NCPA... 62
Prepared statement........................................... 65
Hubbard, William K., Senior Associate Commissioner for Policy,
Planning and Legislation, Food and Drug Administration,
accompanied by David Horowitz and Matthew Eckel................ 8
Prepared statement........................................... 10
Jeffords, Hon. James M., U.S. Senator from Vermont............... 3
Marvin, John, Member of the Alliance for Retired Americans....... 32
Report by the Alliance for Retired Americans................. 33
Prepared statement........................................... 52
Powell, Marjorie E., Assistant General Counsel, Pharmaceutical
Research and Manufacturers of America.......................... 55
Prepared statement........................................... 56
Sager, Ph.D., Alan, Professor of Health Services and Co-Director,
Health Reform Program, Boston University School of Public
Health......................................................... 68
Prepared statement........................................... 71
Stabenow, Hon. Debbie, U.S. Senator from Michigan................ 5
Wennar, Elizabeth A., President and Chief Executive Officer,
United Health Alliance......................................... 26
Prepared statement........................................... 28
COMPARATIVE PRICING OF PRESCRIPTION DRUGS SOLD IN THE UNITED STATES AND
CANADA AND THE EFFECTS ON U.S. CUSTOMERS
----------
WEDNESDAY, SEPTEMBER 5, 2001
U.S. Senate,
Subcommittee on Consumer Affairs, Foreign Commerce and
Tourism,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:15 a.m. in
room SR-253, Russell Senate Office Building, Hon. Byron Dorgan,
presiding.
Staff members assigned to this hearing: Moses Boyd,
Democratic Chief Counsel; David Strickland, Democratic Counsel;
Carlos Fierro, Republican Senior Counsel; and Ken Nahigian,
Republican Counsel.
OPENING STATEMENT OF HON. BYRON DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. The hearing will come to order. This is a
hearing of the Subcommittee on Consumer Affairs, Foreign
Commerce and Tourism of the Senate Commerce Committee. I
apologize for my delay. I was in a leadership meeting that
began earlier this morning, and I'm sorry I'm late.
To begin, I would like to make a brief comment after which
I will call on my colleague Senator Jeffords, who I think will
also introduce someone he sponsors here today, followed by
Senator Stabenow.
Let me describe the purpose of this hearing. The Congress
has grappled with the question of the cost of prescription
drugs for some time. Many of us feel, and many Americans feel
for that matter, that the cost of prescription drugs has risen
so rapidly that it is very difficult for some who need
prescription drugs to be able to have access to those drugs. We
are talking about a range of issues, including providing a
prescription drug benefit through the Medicare program and
other issues.
One of the issues that a number of us have worked on,
Senator Jeffords, myself, Senator Stabenow and others, is to
allow access to lower priced prescription drugs in other
countries for the American consumers. We have enacted
legislation in Congress that would allow pharmacists and
licensed distributors to go to other countries and access a
lower price prescription drug, the identical drug, the same
pill put in the same bottle, produced in the same FDA-inspected
plant, bring it back to this country and pass the savings along
to the consumers.
The legislation had an amendment attached to it that said
it must, if implemented, demonstrate cost savings and that it
be safe.
Both the previous Administration and this Administration
decided that they could not or would not implement this
legislation. We will look at reasons for that during this
hearing. I happen to disagree strongly with both the previous
Administration and this Administration when they say there
could not be demonstrated cost savings. In my judgment, that is
false on its face. There are clearly cost savings demonstrated
every day by those Americans who cross the border into Canada
to access the identical prescription drug for a substantially
lower price than they could acquire it for in this country.
The issue of safety is in my judgment equally specious. I
do not think that, as an American, we will discuss some of that
this morning, but we are holding a hearing to evaluate this
from several perspectives. We need to get this done, and having
the previous Administration and this Administration refuse to
implement this law is a setback but it is not terminal.
Let me give you some examples of the price disparity. This
is Zocor. The head football coach of the Atlanta Falcons talks
about Zocor on television commercials nearly every day. He
talks about how his life has improved because of Zocor. Zocor
is a cholesterol lowering drug. It is purchased in this country
for $3.82 per tablet, 20 milligrams, so it was $229.00 for this
bottle. In Canada, for exactly the same pill purchased, made by
the same company, in the same plastic bottle, the cost is $1.82
per tablet. The difference: the American consumer pays more
than twice as much, no other difference.
This is Zoloft, commonly used for depression: the cost is
$2.34 for the American consumer, $1.28 for the Canadian
consumer.
This medicine is Norvasc, used for high blood pressure.
When purchased in North Dakota, $1.25 per tablet; when
purchased in Canada, 90 cents per tablet.
I went to Emerson, Canada one day and took with me a number
of North Dakotans, one of whom was Sylvia Miller, a wonderful
lady from Fargo, North Dakota. Sylvia Miller has diabetes,
heart problems and emphysema. She takes seven different
medications every day for her various ailments. Sylvia told me
she receives $4,700 a year in Social Security benefits and she
pays $4,900 a year for prescription drugs. On the way to Canada
she said, ``Things don't add up, do they?'' But in Canada, she
was able to cut her monthly prescription drug bill in half. The
same FDA-approved medicine produced in the same plant.
Now, the question is, why should Sylvia, at age 70, have to
go to Canada to access these cheaper drugs. In my judgment, she
should not be required to do that. So legislation we have
drafted would allow pharmacists to purchase in Canada and bring
those drugs back and to pass those savings along to the
American consumers. We have been stymied, during both the
previous Administration and this Administration, by HHS
refusing to implement it, and we will talk a fair amount about
that today in this hearing.
That is the purpose of the hearing. Let me say again,
prescription drug costs are increasing dramatically, 16, 18, 19
percent a year, year after year after year. Price inflation and
increased utilization are the causes.
The fact that we have suffered setbacks from two
Administrations who have refused to implement this legislation
should not persuade people we are going to quit. Senator
Jeffords and I offered this legislation in the Senate, and I
would stay from my standpoint, and I assume from his, that we
intend to continue this until we get it done.
And frankly, my goal is not to force people to go to Canada
to access cheaper drugs. My goal is that when we allow that to
happen, the pharmaceutical industry will be forced to reprice
their pharmaceutical products in this country so that the
American people are not paying the highest prices for
prescription drugs of any other consumers in the entire world.
That is the goal.
So, that is the purpose of this hearing. I appreciate those
who have made an effort to be here today, and let me call first
on Senator Jeffords. Senator Jeffords, let me say how much I
appreciate your leadership on this legislation in the Senate.
You have worked hard and long on this, and I know that this is
the first chapter, that we are going to continue and we are
going to complete it. Senator Jeffords.
STATEMENT OF HON. JAMES M. JEFFORDS,
U.S. SENATOR FROM VERMONT
Senator Jeffords. Absolutely, and I can assure you that I
have the same beliefs that you have and that we must proceed,
and there is no reason why we cannot with this one. I want to
thank you for holding the hearing and for letting me take a few
moments to talk as you have about the unacceptable high cost of
prescription medicine facing virtually all American consumers.
Those high prices are even more unacceptable when they are
compared to the relatively low prices paid by consumers of
other industrialized nations.
I want to also applaud the leadership you and our friend
Senator Stabenow have continued to show on this important
issue. The hearing today is especially important because it
keeps all of us focused on finding ways to reduce the high cost
of medicine and making it more available to our citizens.
You will hear more about the pricing disparities from a
number of witnesses today, but I want to take a minute to
welcome one in particular. Beth Wennar, who is the President of
the United Health Alliance in Bennington, Vermont, has been at
the forefront of finding policy solutions to high prices
experienced by Vermonters. Beth's experience and expertise has
been invaluable to me in framing both the extent of the problem
and the potential solutions for addressing it, and I urge the
Committee to pay close attention to this.
Last year we were able to enact the Medical Equity and Drug
Safety, or MEDS Act. It was designed to allow safe FDA-approved
medicines that are manufactured in plants approved by FDA and
sold abroad to be purchased by American pharmacists and
wholesalers to reimport them to the United States. We worked
closely with the FDA.
I want to emphasize that. We worked closely with the FDA in
developing this law. We sought the agency's advice about
provisions which were necessary to insure safety and quality of
these medicines. We accepted that advice and included stringent
controls in the MEDS Act, but now we are essentially being told
that the goal posts have moved. We are now being told that what
FDA then said would have worked to ensure safety now no longer
would work, that the controls FDA advised us to include in the
MEDS Act are now inadequate.
Mr. Chairman, I can accept that the MEDS Act was not
flawless. I can accept that there were some disagreements about
whether and how it would work, but few doubted the notion that
it should work. No one argued that the Americans should
continue to pay prices higher than those of other consumers in
other countries.
President Clinton supported and signed the MEDS Act, and
then Presidential Candidate George Bush supported it during the
campaign. This is not a partisan issue. It is supported by
Democrats, Republicans and Independents in the House and
Senate, all of whom are looking for the right answers.
So today I would argue that the FDA must stop telling us
what will not work and must now tell us what will work. I hope
that your witness from the FDA can begin to tell us what is
necessary, what conditions are needed to make this program
available to our citizens. We can then take that advice, write
the necessary law and get to the matter at hand, to insure that
Americans have better access to more fairly priced medicine.
Mr. Chairman, I apologize, but I have to attend another
Committee hearing that is examining the issue of stem cell
research, but before I go, I want to again comment you and
Senator Stabenow for your leadership on this issue, and thank
you for holding this hearing. I know the Committee will listen
closely to my friend and fellow Vermonter, Beth Wennar, and I
will look forward to hearing the answers FDA is prepared to
share with you about how to move forward with this program, and
we must move forward. Thank you, Mr. Chairman.
Senator Dorgan. Senator Jeffords, again, let me say thanks
for your leadership. You offered the amendment, I was proud to
join you in the Senate, that actually launched the effort to
get this in law, and we have been thwarted with respect to its
administration at this point, but we will get it done. Your
leadership is very important on this, and I deeply appreciate
it.
Let me also say that, Senator, you are welcome to go to
your other hearing.
Senator Jeffords. Thank you.
Senator Dorgan. Senator Stabenow, you of course were a
leader in the U.S. House on this issue, and we are delighted
that you have now joined us in the Senate. As I indicated to
Senator Jeffords, I look very much forward to working with you
on this issue. Although the Administration has not seen fit to
implement this legislation, we will get this done and, in my
judgment, the sooner the better. I feel more confident in
getting it done in the Senate with you here, and we very much
appreciate your efforts.
STATEMENT OF HON. DEBBIE STABENOW,
U.S. SENATOR FROM MICHIGAN
Senator Stabenow. Thank you, Mr. Chairman. I very much
appreciate the opportunity to testify today on an issue that
can dramatically lower health care costs for all of our
citizens, and that is the issue of allowing Americans to
purchase safe FDA-approved prescription drugs from other
countries.
I want to particularly thank you, Mr. Chairman, for your
leadership, as well as Senator Jeffords. You have been the
leaders in the Senate, I am very proud to have the opportunity
to be in the Senate and to join you in that effort. As you
indicated, I was involved in cosponsoring this legislation in
the House of Representatives and this has been an issue that
has been very very important to people that I represent in
Michigan.
It affects every American family, particularly our seniors,
who as we know, use the majority of prescription drugs.
Frankly, Mr. Chairman, too many seniors got up, sat down at the
kitchen table, and have to decide do I eat today, do I pay the
utility bill, or do I take my medicine. I know you join me in
saying that this is simply not acceptable in the United States
of America.
I find it ironic, Mr. Chairman, that in an era of free
trade, that we have effectively erected barriers on our borders
that force our citizens in the United States to pay prices for
prescription drugs that are often twice those paid by our
neighbors even in Canada, as well as around the world.
Particularly coming from Michigan, we look at the Canadian
border, it is a 5-minute trip across the bridge or by tunnel,
and there is such a dramatic difference in price, it is
absolutely unacceptable.
As you may remember, during my Senate campaign last year I
organized bus trips to Canada, took a number of seniors who
went to physicians and pharmacies in Canada to be able to
demonstrate the differences in prices. It was a quick 5-minute
trip, and we saw night and day price differences, and I would
like to share those with the Subcommittee at this time.
Mr. Chairman, you have spoken to some of the prescriptions
as well that we have, but in our trips, we found the
differences in Michigan, Zocor, a drug to reduce cholesterol,
cost $109.73 for 50 5-milligram tablets. In Canada the exact
same prescription cost just $46.17, a 138 percent difference in
price.
In Michigan, Prilosec, a drug to treat ulcers, cost $115.37
for 20 20-milligram tablets. In Canada the same prescription
cost just $55.10, a 109 percent difference in price.
In Michigan, Procardia XL, a drug to treat heart problems,
cost $133.36 for 100 30-milligram tablets. In Canada the same
prescription cost just $74.25, an 80 percent difference in
price.
And there are certainly, Mr. Chairman, other examples that
are on the chart. This literally is the difference between a
senior being able to eat or be able to pay the utility bill,
pay the telephone bill, pay the rent, pay the mortgage, and I
found as I was at home this month again, over and over again,
the No. 1 issue people want to speak about is the struggle that
they are having being able to pay the high cost in the United
States of prescription drugs.
All of these drugs were manufactured in the United States
and met all the FDA requirements for manufacturing, safety and
purity.
Furthermore, we should note that Americans paid for much of
the research that led to the breakthroughs in many of these
prescription drugs. I support the R&D tax plan, the efforts at
federal labs through NIH to provide critical research and
funding for that research, and yet we in America pay twice as
much as anyone else around the world while supporting this
research. It only makes sense that Americans should get the
best possible prices on these life saving medicines as a return
on their investment.
Mr. Chairman, as you know, the very first bill I introduced
into the Senate as the junior Senator from Michigan was a bill
that would eliminate this health care tariff, and it builds on
the legislation that you and Senator Jeffords introduced into
the Senate, the amendment that was passed.
We have looked at concerns raised by the previous and
current Secretaries of Health and Human Services, and made some
corrections to address what we felt were legitimate issues that
could be put into this bill to make it crystal clear that there
are no safety issues, and clearly there is a price savings.
I welcome anyone who does not believe that there is a price
savings to join me in Michigan, it is a beautiful time in the
fall, the leaves are turning, we welcome it, and I would be
happy in a 5-minute trip across the border to show you the
difference.
Mr. Chairman, I look forward to working with you, to
working with Senator Jeffords, members of the Committee, and
Senator Wellstone I know is very involved in legislation as
well, to make sure that we can finally address this issue. The
problem is clear and frankly, we have an immediate solution at
hand. I know that, Mr. Chairman, you join me in a commitment to
modernizing Medicare for prescription drugs, but I also know
that in the Budget Committee that we are going to have a
difficult struggle within the confines of this budget this year
to really put forward the comprehensive prescription drug
benefit that we all want.
And most importantly, that we take the time to do that,
time our seniors and families do not have. We need to have the
same sense of urgency in our Congress that our seniors and our
families have at home when the are trying to pay for life
saving medicines that they need. We can do something now that
does not involve a large amount of dollars. We can do something
immediately to lower costs, and I know Mr. Chairman, that you
have that same sense of urgency that I have that this needs to
be done immediately, and I look forward to working with you.
Thank you again for providing this critical hearing.
Senator Dorgan. Senator Stabenow, thank you very much. In
my comments, I failed to mention that Senator Snowe and former
Senator Slade Gorton also were actively involved in introducing
and sponsoring legislation in this area. We appreciate your
testimony and thank you for being with us.
We are joined today by Senator McCain. Senator McCain, do
you have a statement?
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Thank you, Mr. Chairman. I want to thank
you for convening the hearing on the explosion of prescription
drug prices. This is of critical importance, and I thank you
for your decision efforts on this issue for several years now.
I joined with my colleagues Senator Dorgan, and Senator
Schumer in introducing a bill that would, among other things,
streamline FDA approval of generic drugs by closing the
loophole that allows brand name manufacturers to receive an
automatic 30 month stay by simply filing a patent infringement
suit against a generic manufacturer's patent challenge or
application. The bill would also prevent brand name
manufacturers from using financial advantage to keep generic
products from entering the market.
Mr. Chairman, I think this is a multifaceted issue. I think
there are a number of parts and pieces of legislation that have
been introduced, but the issue of delaying generic drugs from
entering the marketplace is an important part of this
discussion. It is unconscionable on the part of both the patent
drug manufacturers as well as the generic manufacturers that
there are cases where a patenting drug company will pay a
generic drug company not to introduce that product into the
market. There are records of that, and they have also used
various other legal tactics in order to delay entry as well.
I think that is a fairly easy thing for us to at least make
some fixes on, but I still have been unable to explain to my
constituents, and I know you have the exact same situation in
the north, why they can drive to Mexico and buy a prescription
drug at considerably less cost than in the United States of
America. I would like to ask our witnesses that question
because I still do not get it. And frankly, nor do a lot of the
seniors who live in my state who by a simple trip down to
Mexico, can buy the exact same drug for sometimes half or less
than half the price of its brand name counterpart.
Thank you, Mr. Chairman.
Senator Dorgan. Senator McCain, I share your concern about
the issue of generics, and it does come to the same point, it
is all about the price and pricing practices, in most cases the
American consumers are paying the highest prices anywhere in
the world.
And your point about borders, if this truly is a global
economy, then why doesn't it work for ordinary folks to give
them access to prescription drugs made in the same plant,
inspected by the FDA? In short, why should Americans be
prevented from crossing a border to access a prescription drug
that was made in America, for a fraction of the cost that was
charged in their retail outlet. Those are the right questions
and that is why we are determined to do something about this
issue. I appreciate your comments and support them.
We have two panels today. The first consists of Mr. William
Hubbard, Senior Associate Commissioner for Policy, Planning and
Legislation of the FDA. Then we will have a second panel with
five persons, and I will introduce them as we ask them to come
forward.
First let me welcome Mr. William Hubbard, Senior Associate
Commissioner, Policy, Planning and Legislation of the Food and
Drug Administration. Mr. Hubbard, thank you for joining us. Why
don't you proceed.
STATEMENT OF WILLIAM K. HUBBARD, SENIOR ASSOCIATE COMMISSIONER
FOR POLICY, PLANNING AND LEGISLATION, FOOD AND DRUG
ADMINISTRATION, ACCOMPANIED BY DAVID HOROWITZ AND MATTHEW ECKEL
Mr. Hubbard. Thank you, Mr. Chairman. If I may, we are
cluttering up the table here with drug samples, to complement
those that you have.
I would like to introduce my co-witnesses if I may, Mr.
Chairman, David Horowitz, in charge of our compliance branch in
the Center for Drugs, and Matt Eckel is in our counsel's
office. I, of course, have written testimony but, I won't read
that today. I will just make some comments.
You are holding these hearings to examine drug pricing and
while prices are not FDA's responsibility, we agree with you
that prices in other countries are a little lower than in the
United States. As Alan Sager and others have pointed out,
prescription drugs are sold in Canada and Europe for up to one
half of the U.S. price. This is because most developed
countries have controls on drug prices and the U.S. does not.
We are the only major developed country that does not set such
price limitations.
It is also apparent that the patient paying cash pays more
than those who are third party payers and who negotiate a lower
price. Thus, folks like the elderly, who often lack drug
insurance coverage and must pay cash for their prescriptions,
are often hit the hardest, and I think for the Senators from
areas with large rural populations, there is even more concern
because the rural people get hit even harder than that because
they don't have the access to several competing pharmacies.
So, clearly, your constituents' needs here are real and
significant, and we do not at all at FDA disagree with them. We
have great sympathy for that. The question that gets asked of
us as a drug safety regulatory agency, is whether we can find a
way for patients to access these cheaper drugs if, in fact,
they are clearly there.
The answer unfortunately from our perspective is that
Congress can change the law to let these drugs in, but only at
the risk of lowering safety assurances for the drugs. The
current drug regulatory system in the United States is highly
protective.
We believe, Mr. Chairman, that Congress got it right in
1938 and 1962 when it set up a system that said that drugs had
to be approved for a demonstrated safety and efficacy before
marketing and, therefore, we have the safest and most
technologically advanced drug system, in both development and
manufacturing, in the world.
The current system is fairly closed, it requires high
standards of drug manufacturing. It utilizes a network of
highly skilled pharmacists and other professionals to control
the movement of these drugs, and it requires that imported
drugs meet those same high standards.
This system means that drug counterfeiting is a rare event
in the United States, despite the fact that, worldwide,
counterfeiting is endemic. In some countries, there are
estimates that perhaps half of the drugs on the market are
counterfeited.
I will just give a few examples. These are counterfeit
drugs that we found in FDA, and it is very very rare we find
these. This is a recent one, an injectable called Serostim. One
of these is counterfeit and one of these is real. If they
weren't marked as counterfeit and genuine, none of us in this
room could tell the difference, no pharmacist could tell, no
physician could tell. That is part of the problem.
These particular drugs are hormones and they were brought
in from overseas and introduced into the market here, and in
the package are vials of a saline solution and a powder. You
pull the saline solution into a syringe and then you inject it
into the other ampule which contains the powder, and you shake
it up to actually formulate the drug for the person. Well, the
problem is the drug was counterfeited, and it may be
pharmacologically effective, but the problem with this drug is
that the saline solution was not sterile. It was contaminated
with bacteria and endotoxins so using it would inject people
with septicemia.
So, this is the problem we worry about with counterfeiting.
These are very very real counterfeiting issues, although they
are, and I will repeat, they are rare in this country.
Now these examples are drugs that people have bought on the
Internet from other countries.
This probably was bought by a weight lifter, it is a human
growth hormone. This purports to be an Eli Lilly product. We
have no idea whether that's really an Eli Lilly product or not
but it says it is. Then in other cases, we just have bags of
pills.
Now, we can look at some of these and try to determine what
these are, but it is virtually impossible for any pharmacist or
physician or anyone else to know what's in these packages.
This one apparently is a Roche product called Valium, or at
least it's marked that way. But we don't know if it really is
Valium or not, and of course Valium is a controlled substance
and should not be sold in this country without a prescription.
So, these products are coming in every day. We estimate
that perhaps as many as two million of these small shipments
are being purchased by American citizens every year.
Senator Dorgan. Mr. Hubbard, sorry to interrupt you, but
when you say these products, you're not saying these products
here, every day there is counterfeiting. When you are referring
to these products, you are talking about products coming in
from other countries.
Mr. Hubbard. Right.
Senator Dorgan. You had been talking about counterfeit
drugs, so I just don't want people to misunderstand what you
just said.
Mr. Hubbard. Right. We know that some of these are
counterfeit. These that I have most recently displayed were
ones we pulled out of the Dulles mail facility just yesterday.
They come in every day, and we have no idea whether they're
counterfeit. We don't know.
And so, the FDA's job is to make sure that when you go to
your doctor and get a prescription and take it down to the
pharmacy and get the drug, that you're getting the real drug, a
drug that will be safe, a drug that will treat your condition.
Of course we believe in that, and I'm sure you believe in that
too.
The problem is, we have no way of insuring, when they're
coming in from these other countries in this way, to know
whether they are the real drug or know whether they are safe,
know where they are coming from, or know where they have been,
or whether the drug may have been held in some sort of poor
condition or in high heat, or cold, or it expired and was
repackaged, or whatever.
So while we understand the Senators' concerns about drug
prices, we think that opening the doors to these foreign drugs
undermines the safety and protection that has served us so
well, and that's been the FDA's concern because our job is
safety, and the drug price issue is one that we feel ill suited
to solve. Thank you.
[The prepared statement of Mr. Hubbard follows:]
Prepared Statement of William K. Hubbard, Senior Associate Commissioner
for Policy, Planning and Legislation, Food and Drug Administration
Introduction
Mr. Chairman and Members of the Committee, I am William K. Hubbard,
Senior Associate Commissioner for Policy, Planning and Legislation,
Food and Drug Administration (FDA or the Agency). I appreciate the
opportunity to discuss our mutual concerns related to the importation
of drugs into the United States. This topic encompasses a range of
issues, including the importation by individuals of prescription drugs
at land borders or through the mail; the introduction into the U.S. of
controlled substances from foreign sources under the guise of personal
importation; the potential introduction of counterfeit bulk drugs into
the U.S. drug supply; and the purchase of drugs from foreign sources
over the Internet. Let me begin by discussing one of our greatest
challenges in this area.
Personal Importation of Drugs Through the Mail
The amount of prescription drugs for personal use imported through
the mail has increased in recent years. According to testimony by the
U.S. Customs Service (Customs) before the Government Reform Committee
in May of last year, seizures of parcels containing scheduled or
controlled substances at international mail facilities increased by 450
percent in FY 1999, primarily due to drug sales over the Internet. We
estimate that approximately two million parcels containing FDA-
regulated products for personal use enter the U.S. each year through
international mail facilities that Customs could set aside for FDA
review for possible violations of the Federal Food, Drug, and Cosmetic
(FD&C) Act. This estimate is based on an extrapolation of data obtained
during a pilot project conducted at the international mail facility in
Carson, California (see below).
Under the FD&C Act, unapproved, misbranded, and adulterated drugs
are prohibited from importation into the U.S., including foreign
versions of U.S.-approved medications, as is reimportation of approved
drugs made in the U.S. In general, all drugs imported by individuals
fall into one of these prohibited categories.
From a public health standpoint, importing prescription drugs for
personal use is a potentially dangerous practice. FDA and the public do
not have any assurance that unapproved products are effective or safe,
or have been produced under U.S. good manufacturing practices.
U.S.-made drugs that are reimported may not have been stored under
proper conditions, or may not be the real product, because the U.S.
does not regulate foreign distributors or pharmacies. Therefore,
unapproved drugs and reimported approved medications may be
contaminated, subpotent, superpotent, or counterfeit. In addition, some
foreign websites offer to prescribe medicines without a physical
examination, bypassing the traditional doctor-patient relationship. As
a result, patients may receive inappropriate medications because of
misdiagnoses, or fail to receive appropriate medications or other
medical care, or take a product that could be harmful, or fatal, if
taken in combination with other medicines they might be taking.
Personal Importation Policy
Under FDA's personal importation policy, as described in guidance
to the Agency's field personnel, FDA inspectors may exercise
enforcement discretion to permit the importation of certain unapproved
prescription medication for personal use.
First adopted in 1954, the policy has been modified several times
over the succeeding years. It was last modified in 1988, in response to
concerns that certain potentially effective treatments for AIDS
patients were not available in the U.S., but were available in other
countries. The Agency expanded the guidance for humanitarian purposes
to allow individuals suffering from serious medical conditions to
acquire medical treatments legally available in foreign countries but
not approved in the U.S.
The current policy permits the exercise of enforcement discretion
to allow entry of an unapproved prescription drug if:
the product is for personal use (a 90-day supply or less,
and not for resale);
the intended use is for a serious condition for which
effective treatment may not be available domestically (and,
therefore, the policy does not permit inspectors to allow
foreign versions of U.S.-approved drugs into the U.S.);
there is no known commercialization or promotion to U.S.
residents by those involved in the distribution of the product;
the product is considered not to represent an unreasonable
risk; and
the individual seeking to import the product affirms in
writing that it is for the patient's own use and provides the
name and address of the U.S. licensed doctor responsible for
his or her treatment with the product or provides evidence that
the product is for the continuation of a treatment begun in a
foreign country.
FDA has not officially permitted the importation of foreign
versions of U.S.-approved medications, even if sold under the same
name, because these products are unapproved, and the Agency has no
assurance that these products are safe or effective, while safe and
effective versions are already available in the U.S.
FDA believes that the need for its personal importation policy is
far less now than it was when the current version of the policy was
developed in 1988. Now, due to faster review times and various
regulatory mechanisms through which patients can obtain unapproved
treatments for humanitarian purposes, the need to import therapies not
available in the U.S. has diminished. According to a Tufts University
study presented in September 2000, 80 percent of new molecular entities
approved in the U.S. in 1996 through 1998 received that approval within
a year of its first introduction on the world market, almost double the
rate during the years 1991 through 1995.
Implementation of the Personal Importation Policy
At mail facilities, Customs officials identify parcels that may be
violative of the FD&C Act. FDA inspectors then determine if these
products should or should not be permitted to enter the country. If
detained, FDA must issue a notice to the addressee describing the
potential Federal violation and provide the individual with an
opportunity to respond. If the addressee does not respond or provides
an inadequate response, FDA will give the parcel back to Customs to
have it returned to the exporter. Due to the requirements for notice
and the opportunity to respond, the process for detaining and further
processing mail parcels consumes large amounts of FDA resources. In
addition, much storage space would be needed to hold the large number
of detained parcels pending replies from the addressees.
FDA's personal importation policy, as written, is difficult to
implement. This is due, at least in part, to the difficulty faced by
FDA inspectors, or even health care practitioners, in identifying a
medicine by its appearance, and labeling may falsely identify a
product. From a practical standpoint, FDA inspectors cannot examine
drug products contained in a mailed parcel and accurately determine the
identity of such drugs or the degree of risk posed to the individual
who will receive these drugs.
FDA detains and refuses few mail imports for personal use. As a
consequence, the tens of thousands of parcels that FDA does not review
are eventually released by Customs and sent on to their addressees,
even though the products contained in these parcels may appear to
violate the FD&C Act and may pose a health risk to consumers. We do not
believe this is an acceptable public health outcome and are working to
develop a solution.
HHS Plan to Address Mail Imports for Personal Use
Due to the inability of FDA to cope with the volume of medications
imported for personal use through the mail, and because of the public
health risks associated with these products (as discussed below), FDA
has been working to develop a more effective personal importation
policy. In addition, we recognize that Customs is dependent on guidance
from FDA, and one of our goals is to provide clear and simple standards
for assessing parcels containing drug products. We are discussing
options for revisions to the Agency's personal importation policy with
Secretary Thompson.
Carson Mail Facility Pilot
Earlier this year, FDA and Customs conducted a survey of imported
drug products entering the U.S. through the Carson City, California
mail facility (the Carson pilot). The Carson pilot was proposed by
Customs as a means to examine incoming mail shipments of pharmaceutical
products over a specified time frame in order to identify both the
volume and the types of drug products entering the U.S. We also hoped
to better assess the efforts required to cover drug importations at a
mail facility, and to gain a better understanding of the public health
implications these importations may have for U.S. consumers.
The Carson pilot ran for a five-week period, with FDA inspectors
present for 40 hours per week. At the onset, Customs took a
``baseline'' sample in the first week by setting aside all
international packages that were suspect, or that they would have set
aside for FDA review had FDA been able to process them. The number of
packages set aside was approximately 3,300. Multiplying that number by
five weeks provides an estimated total of 16,500 international packages
(650 packages per day) that Customs could have set aside for FDA review
during the Carson pilot, if the ability to process them was not a
factor. After the first week, however, Customs actually set aside the
number of packages they believed FDA would be able to examine. In
general, during each week of the Carson pilot, more packages were set
aside than FDA was able to handle.
FDA was actually able to examine 1,908 packages during the five-
week pilot, an average of approximately 381 packages per week. Neither
FDA nor Customs kept a count of the packages that were set aside but
not examined. Unexamined packages were sent on to the addressees.
Of the 1,908 packages examined by FDA, 721 parcels were detained
and the addressees notified that the products appeared to be unapproved
for use in the U.S., misbranded and/or a drug requiring a doctor's
prescription. The parcels were shipped from a total of 19 countries,
and overall, there was no obvious evidence of the products being
imported for further commercial distribution. On average, the Agency
was detaining at a rate of 144 packages per week, or about 38 percent
of those examined.
Clearly, the Carson pilot demonstrated that the rate of packages
coming into the U.S. exceeds FDA's capacity to manage, thus, Customs is
left with little choice but to forward the majority of packages to
addressees. As we stated, we do not believe this is an acceptable
public health outcome, and we are working to develop a solution.
Analysis of the Carson Pilot Drug Parcels
In order to define better the nature of the risk to public health
from the types of products coming into the U.S. through personal
importation, FDA's Center for Drug Evaluation and Research (CDER)
reviewed listings of the products detained during the Carson pilot.
CDER's review demonstrates that there are serious public health risks
associated with many of the 721 drug shipments (composed of 197
different drugs) intercepted at Carson. In general, there are two types
of risks that consumers of these drugs would face. The first type of
risk is that associated with taking drugs of unknown origin or quality.
Second are the very significant risks associated with taking many of
these drugs without first obtaining a physician's prescription and
without the continued oversight of the physician.
Risks Associated with Drugs of Unknown Origin or Quality
In general, FDA has no information to establish where these drugs
were actually manufactured and whether necessary current Good
Manufacturing Practice requirements were followed. There is also no
assurance that the drugs were packaged and stored under appropriate
conditions to avoid degradation or contamination.
Approximately eight percent of the shipments contained drugs that
could not be identified because they contained no labeling; some of
these contain only foreign language labeling. Most of these drug
shipments were contained in plastic bags; one shipment contained drugs
taped between magazine pages.
Several drugs do not appear to correspond with any U.S.-approved
drugs and the risks are therefore difficult to assess. One drug was
evaluated for FDA approval but was denied approval. This drug is
associated with cardiac abnormalities and its efficacy could not be
successfully demonstrated. Another drug approved abroad but not in the
U.S. is associated with medically serious gastro-intestinal
complications. Several shipments contained three drugs that were once
approved by FDA but have been withdrawn from the market based on
serious safety concerns, including:
fatal arrhythmia and dangerous drug interactions;
loss of white blood cells (agranulocytosis) associated with
fatal infections; and
hemorrhagic stroke.
Risks Associated with the Absence of Physician Oversight
The vast majority of the shipments were identified as containing
prescription drugs, which by definition, have serious toxicities and
risks associated with them such that they are ``not safe for use except
under the supervision of a practitioner licensed by law to administer
such drug.'' (Title 21, United States Code, section 353(b)). Although
some foreign Internet sites might offer an online questionnaire, we
believe that very few, if any, require a prescription from a
practitioner licensed in the U.S. before dispensing such drugs to U.S.
residents. Moreover, after detention notices were issued to the
intended recipients of the 721 drug shipments, fewer than four percent
presented evidence of prescriptions to document their relationship with
a physician in association with the drugs purchased from abroad. The
lack of adequate English language labeling accompanying many of these
shipments exacerbates the risks associated with the absence of
physician oversight.
During the Carson pilot, as in normal practice, Customs generally
separated out controlled substances for processing by the Drug
Enforcement Administration (DEA) before the remaining shipments were
provided for FDA review. However, in FDA's review, six controlled
substances were identified, including lorazepam, codeine sulfate,
loperamide, chlordiazepoxide, chloral hydrate, and diphenoxylate. These
drugs have the potential to cause addiction or be abused. Life-
threatening overdoses are possible. A physician's prescription and
oversight are essential for managing these risks.
There are numerous drugs identified on the Carson list that are
intended to treat conditions that consumers need physicians to properly
diagnose. As a result, consumers who bypass physician diagnosis and
prescribing may be exposing themselves to risks and toxicities that
cannot be justified by offsetting benefits to those patients.
For example, almost ten percent of the shipments were for
antibiotics, despite the fact that consumers are generally not
able to diagnose whether their symptoms are caused by bacterial
infections. The overuse of antibiotics continues to be a
serious public health concern because it is linked to the
growth of antibiotic resistant-bacteria.
Several drugs listed are potent steroids, which are
generally prescribed for conditions that are not self-
diagnosable. In addition, potential adverse events associated
with these drugs, including diabetes, hypertension, and serious
infection require prompt attention and careful monitoring.
There are many drugs on the list for which it is essential that the
proper dose be delivered into the bloodstream at the proper rate. Some
of these drugs have a narrow range in which they can safely achieve
their therapeutic effect. At least seven such drugs were identified on
the Carson list. Without FDA oversight, there is the risk that these
drugs may not have been manufactured with the necessary quality
controls to ensure a consistently safe and effective product.
One seizure medication on the Carson list, for which there
were three shipments, could be very dangerous if not
manufactured to these rigorous standards. Any change in potency
could render the drug ineffective or highly toxic.
Another seizure drug on the list for which physician
monitoring is also essential has a narrow therapeutic range and
FDA labeling provides a black-box warning for hepatoxicity,
teratogenicity, and pancreatitis.
More than 30 drugs on the list have serious contraindications and/
or drug interactions for which physician oversight is essential. For
instance, almost 20 percent of the shipments were for various estrogen
products for which there are multiple serious contraindications that a
physician needs to consider before making prescribing decisions and in
monitoring the patient.
It is impossible to make a scientifically definitive statement on
the public health impact of the drug shipments encountered during the
Carson pilot without extensive chemical testing and analysis of the
incoming pharmaceuticals, which would be prohibitively expensive. Based
on the observations noted above, however, FDA believes that these drugs
pose substantial risks to the public health, and we further believe
that significant changes to the policies governing personal
importations through the mail are warranted.
Border Surveys
Over the last year, FDA has initiated three other surveys to gather
data on drug products imported by individuals into the U.S. Although
these border surveys involve land traffic rather than mail importation,
the results of these surveys show some similarities to the findings
from the Carson mail pilot, as well as some significant differences.
Southwest Border Survey (August 2000)
A survey of prescription drugs being brought by pedestrians into
the U.S. at eight ports of entry along the 2,000 mile border with
Mexico was conducted by FDA's Southwest Import District (SWID) with the
assistance of other agencies including Customs, the DEA, the U.S.
Department of Agriculture, and others. The survey looked at activity
during four hours on a Saturday (August 12, 2000) at eight border ports
in California, Arizona, and Texas. The purpose of the survey was to
interview individuals walking across the border into the U.S. from
Mexico who had purchased prescription drugs in Mexico to determine 1)
what specific types of products are being imported, and 2) who is
importing these products.
The data collected from over 600 interviews indicated that the most
common importer of prescription drugs during the survey was an older
male Caucasian with a prescription from the U.S., bringing back
primarily antibiotics or pain relievers for his own use. Prescriptions
were held by 63 percent of the persons interviewed (59 percent U.S.
prescriptions and 41 percent Mexican). The most common drugs and their
indications that were purchased in Mexico during the survey were as
follows: Amoxicillin (antibiotic), Glucophage (diabetes), Premarin
(estrogen), Dolo Neurobion (vitamin supplement), Vioxx (inflamation),
Retin-A (acne), Tafil (anxiety), Celebrex (arthritis), Penicillin
(antibiotic), Viagra (impotence), Carisoprodal (analgesic).
Canadian Border Survey
On January 6, 2001, in cooperation with Customs, FDA conducted a
survey to obtain a snapshot of prescription drug products being brought
into the U.S. from Canada via passenger vehicles. During the eight-hour
survey at three ports of entry in New York, Michigan and Washington, a
total of 10,374 passenger vehicles and 58 buses crossed into the U.S.
Of these, 33 passenger vehicles (35 individuals) were referred by
Customs to be interviewed. These individuals brought in a total of 47
containers of drug products from Canada.
The types of products included pain medicines--primarily ``222'' (a
combination of acetaminophen, caffeine, and codeine) or similar
products. The indicated reason for import was that the products were
available over-the-counter (OTC) in Canada and cost less than in the
U.S. The next largest group of products was herbal products, with the
reason for importation being that the products were not available in
the U.S. Other products included Tobradex (antibiotic/steroid opthalmic
for individuals having laser eye surgery); Claritin and Allegra
(allergies) purchased OTC in Canada; Sibelium capsules (calcium channel
blocker); and a variety of OTC products sold in Canada and not
available in the U.S.
Southwest Border Survey (April 2001)
On April 11, 2001, FDA, Customs, and other agencies conducted a
survey of prescription drugs being brought into the U.S. at seven ports
of entry along the U.S./Mexican border. This survey coincided with both
Easter vacations from many colleges and the end of the ``snowbird''
season, when tourists from Northern states visiting along the Southern
border return home.
During the four hour ``blitz'' a total of 586 persons brought in a
total of 1,120 drugs. Approximately 56 percent had a prescription for
the medicines (61 percent were U.S. prescriptions, 39 percent were
Mexican). The most common drugs purchased in Mexico were: Amoxicillin
(antibiotic), Premarin (estrogen), Claritine (allergy), Terramicinia
(antibiotic), Ampicillin (antibiotic), Ibuprofen (analgesic),
Penicillin (antibiotic), Vioxx (inflammation), Tafil (anxiety), Dolo
Neuorobian (vitamin supplement), Glucophage (diabetes), Celebrex
(arthritis), Naproxen (analgesic), Retin-A (acne), Ventolin (pulmonary
disease), and Valium (controlled substance/nervous system depressant).
Controlled Substances
Although we do not know, nor is it possible to clearly determine,
the amount of controlled substances brought into the U.S. purportedly
for personal use, it is likely that such medicines are frequently
imported for resale and pose a public health risk. The Agency has been
working with both Customs and DEA to streamline and clarify Federal
import policies specifically related to the importation of controlled
substances.
Internet Drug Sales
Based on surveys conducted in early 2000 by Office of Criminal
Investigations (OCI) and subsequently by the General Accounting Office
(GAO), it appears that there are roughly 300 to 400 Internet sites
selling prescription drugs, with approximately half located
domestically and half located outside the U.S. FDA has long taken the
position that consumers are exposed to a number of risks when they
purchase drugs from Internet sites or other mail order outlets that
dispense foreign drugs. These outlets may dispense expired, subpotent,
contaminated or counterfeit product, the wrong product, a
contraindicated product, an incorrect dose, or medication unaccompanied
by adequate directions for use. FDA cannot provide consumers with any
assurance that these products were manufactured under current good
manufacturing practice standards. Taking an unsafe or inappropriate
medication puts consumers at risk for dangerous drug interactions and
other serious health consequences.
Internet sites that provide prescription drugs by having consumers
fill out a questionnaire rather than seeing a doctor pose serious
health risks. A questionnaire generally does not provide sufficient
information for a healthcare professional to determine if that drug is
appropriate or safe to use, if another treatment is more appropriate,
or if the consumer has an underlying medical condition where using that
drug may be harmful.
FDA has undertaken widespread public relations efforts to warn
consumers about the dangers of buying drugs online, and we have
provided extensive information on these dangers on FDA's own Internet
site. FDA's Buying Medical Products Online web page is one of the most
frequently requested pages on FDA's website. It consistently ranks
among the top twenty requested pages, averaging almost 13,000 hits per
month.
Currently, FDA has 90 sites under active review for possible
regulatory or civil action. Warning letters have been sent to 48
domestic online sellers. Additionally, FDA has sent 121 ``cyber
letters'' to operators of Internet sites offering to sell online
prescription drugs or unapproved drugs. These sites may be engaged in
illegal activity such as offering to sell prescription drugs to U.S.
citizens without valid (or in some cases without any) prescriptions.
Cyber letters are sent over the Internet to the suspect websites to
warn the operators that they may be engaged in illegal activities, and
inform them of the laws that govern prescription drug sales in the U.S.
Cyber letters have a deterrent effect and FDA has seen positive results
from using them. FDA has received positive responses from 20 percent of
the cyber letter recipients and we are continuing to monitor these
sites.
FDA also sends copies of its cyber letters to the home governments
of targeted websites, when the locations can be identified. Follow-up
depends on the ability and willingness of the foreign regulatory bodies
to investigate and take actions against website operators who are
illegally shipping drugs to other countries.
In cooperation with the Department of Justice (DOJ), five
preliminary injunctions have been imposed on the sale of illegal
products, including one product marketed as a weight-loss aid
containing a potent thyroid hormone which could cause heart attacks or
strokes, and an unapproved cancer therapy. FDA and DOJ also are
pursuing an injunction against the sale of another unapproved cancer
therapy over the Internet. Additionally, 15 product seizures, 11
product recalls, and the voluntary destruction of 18 violative products
have been achieved, generally pertaining to unapproved new drug
products including gamma hydroxybutyric acid, gamma butyrolactone,
Triax, 1,4 butanediol, and laetrile. Thirty-six foreign shippers have
been placed on Detention Without Physical Examination and added to
Import Alert 66-57 for targeting sales of unapproved new drug products
to the U.S.
During FY 2001, FDA's OCI initiated approximately 40 Internet-
related investigations and will continue to conduct investigations
involving suspected criminal activity related to Internet drug sales as
well as other Internet-facilitated criminal violations of the FD&C Act.
Of the 133 currently open Internet-related investigations, 64 are
Internet pharmacy cases, where the focus is on the possible dispensing
of prescription drugs without a prescription.
In recent years, OCI has initiated 285 Internet investigations and
each of these investigations have involved a variable number of actual
websites--typically ranging from one to 25 or more. OCI has effected 88
Internet-related arrests, 70 of these in drug-related investigations.
Of the 70 drug-related arrests, 11 have involved Internet pharmacy
cases. These arrests have resulted, thus far, in 48 Internet-related
convictions, 42 of these in drug-related investigations. Of the 42
drug-related convictions, five have involved cases involving the sale
of prescription drugs without a valid prescription.
In addition, OCI has an ongoing initiative at the Dulles
International Airport Mail Facility that had its genesis in their first
Internet case, which began in 1994. The case, which involved a site
selling steroids over the Internet, resulted in a successful
prosecution and shutdown of the website. The partnership resulting from
this case has continued, and in the past 18 months, OCI has been
involved with local law enforcement in the Washington metropolitan area
in 98 drug seizures. The seizures represent dozens of types of drugs
coming in from 13 different countries. Of the 98 seizures, 87 of the
drug seizures were ordered over the Internet and mailed to U.S.
citizens; six were mailed to the U.S. by family or friends living
abroad; four were ordered via a 1-800 telephone number from Canada and
mailed to the U.S.; and one was transported via an airline passenger in
two suitcases from Romania. The efforts of OCI, Customs, and local law
enforcement have yielded the execution of eight search and seizure
warrants and led to the arrest and prosecution of nine people.
Conclusion
Mr. Chairman, FDA remains concerned about any possibility that
unsafe drugs may find their way into the American drug supply. We will
remain vigilant as we refine and improve the programs and procedures
that we use to ensure the availability of safe medications for
consumers.
We appreciate the Committee's interest in assuring that the
American public has access to safe and affordable medicines. We look
forward to continuing to work with you. Thank you again for the
opportunity to participate in today's hearing. I will be happy to
answer any questions.
Senator Dorgan. Mr. Hubbard, thank you very much. I have
read your entire testimony. Let me ask you some questions about
this, because I am curious. You have spent most of your time
referring to counterfeit drugs and the issue of safety. We have
about $14 billion worth of drugs imported into this country by
manufacturers; is that correct?
Mr. Hubbard. I don't know the number, but generally a
majority of the raw material for drugs come in from foreign
sources and the finished pharmaceuticals are made in this
country.
Senator Dorgan. Now let me ask you a question about the
Canadian system, and I want to focus on that just for a moment,
if I might. Do we have a system in this country that is
substantially safer than Canada's?
Mr. Hubbard. I'm not well prepared to describe the safety
or conditions in any other country. We certainly believe that,
we certainly believe that we have the safest.
Senator Dorgan. Let me just focus on Canada for a moment,
because if you are saying the reimportation of prescription
drugs from Canada by the pharmacist or licensed distributor
compromises safety, then you must be prepared to tell me
whether you think our system is safer than Canada's. Let me
tell you why I am asking the question.
Some, perhaps sometime in the next hour up in Binford,
North Dakota, a truck is going to come across the border from
Canada, it is going to have a load of fresh meat on it, cows or
hogs have been slaughtered and they come over in the form of
fresh meat. We are not going to inspect that fresh meat. You
know why? Because our country decided that the Canadian
inspection system is fine for us, and so we will not inspect
that meat. And that is an FDA and USDA decision.
I am asking a question about Canada. If a pill is produced,
a tablet is produced in an FDA approved plant either in the
U.S. or Canada, it goes to a distributor or pharmacist in
Canada and ends up in a one-room pharmacy in Emerson, Canada,
and then a pharmacist from Binford, North Dakota wants to go to
that one-room pharmacy in Emerson and pay one-tenth the cost
for Tamoxifen and bring it back across the border and pass the
savings along to the senior citizens or the women who have
breast cancer in Binford, and they are told no, they are not
allowed to do that because there is a safety issue.
The question is, what is the safety issue? I want to
specifically talk about Canada. What is the safety issue?
Mr. Hubbard. Let me say in the case of the meat situation
that you mentioned, by law the Canadian meat processor in
Canada has to be approved by the U.S. Department of Agriculture
and inspected by the Department of Agriculture, and must be
what is known as equivalent. It is under a very rigorous U.S.
set of standards in meat processing. It is likely to be
inspected again at the border by a USDA inspector.
Senator McCain. That is not likely.
Mr. Hubbard. In the case of drugs, that is not true, that
is not required for drugs sold in Canada. It may be in fact
that the same manufacturing plant assigned to a Canadian
pharmacy and to a U.S. pharmacy can manufacture the medicine,
so you are correct on that point. The problem is when the drug
leaves the manufacturing facility and arrives, and goes out
into the Canadian market, it is outside FDA's jurisdiction and
therefore, when the pharmacist procures that drug, we would
have no way of knowing if, in fact, that was the real drug.
Senator Dorgan. Mr. Hubbard, I understand that, but the
same is true with the cow, or the steer that's slaughtered in
Canada. That is outside the U.S. inspection system. We have
simply determined that the Canadian inspection system is
sufficient for us to allow that meat to come in uninspected.
Now the question is this: If an FDA inspector finds--and
this is all our legislation deals with, FDA-approved drugs
manufactured in an FDA-inspected plant, if an FDA-inspected
plant produces a bottle of medicine and sends it to a pharmacy
in Winnipeg, Canada, you are saying that you cannot determine
whether the Canadian system of providing safety in the chain of
supply is sufficient to allow us to have confidence in it? We
do it in a dozen other areas, but you cannot do it with respect
to medicine?
Mr. Hubbard. We are not authorized to do that. In your
example, USDA is authorized to go to Canada and inspect and set
standards for the Canadian meat packing and, in fact, the
Canadians do not send meat until they meet those standards. In
the case of drugs, that is not the case at all.
Senator Dorgan. But you are answering a question I am not
asking. I am not asking you whether you are authorized, I am
asking whether you have the capability to determine whether the
chain of supply in Canada is sufficient so that we have
confidence in it just as we do in this country. Why would you
not be able to do that, and then allow only pharmacists and
distributors to be able to reimport only those drugs that are
produced in an FDA approved plant and only those drugs that are
FDA approved? How on earth can that be rocket science?
That does not seem to me to be difficult, and yet, the FDA
and HHS keep saying there is this huge safety problem. I
understand there could be a safety problem from some areas, but
I am trying to take the most logical instance here of Canada,
where we have a lot of reciprocal agreements on what both sides
are doing. I am assuming that the chain of custody in Canada is
equivalent to ours with respect to----
Mr. Hubbard. Well, you can make that assumption and I can
make that assumption as well.
Senator Dorgan. Do you know it is not?
Mr. Hubbard. I do not know whether it is or not. We don't
have authority, we have not looked at the Canadian system,
that's not our job.
Senator Dorgan. So you are telling me that you, you say
there are safety concerns but you have not looked at the
treatment of prescription drugs in Canada?
Mr. Hubbard. Mr. Chairman, there are safety concerns about
any drug that goes outside the approval process, and is subject
to the intermingling of counterfeit drugs, to abuse of the drug
or to some sort of diversion. Diversion is a very real problem
for us in the world. Drugs get moved around and go places that,
where they just lose control, and all kinds of malevolent
things can happen to them in that process, and that's our
concern. Sure, you or I might go to Canada today on a trip and
get sick, go to a doctor and get a drug and feel confident that
that drug from that Canadian pharmacy is good, but the FDA
can't assure that.
And once you have said Canada is the entree to this big
U.S. market where the real money is, as it were, then the
Canadian system becomes vulnerable to the sorts of
international charlatans that deal in counterfeit drugs. So
even if the Canadian system is every bit as good as ours, and I
don't know whether it is or not, you are certainly saying that
the Canadian system then is open to vulnerabilities by people
who will try to enter the U.S. market because, again, that's
where the money is.
Senator Dorgan. Mr. Hubbard, I think from the first moment
I have understood that the position of both the last
Administration and this Administration is that there are safety
concerns and you have made that judgment without understanding
what the circumstances are in other countries, especially
Canada. I mean, you are making it without knowledge of what is
happening in Canada, and that concerns me.
Mr. Hubbard. I think we're saying that there are 200
countries that import products into this country and we are
neither authorized nor empowered nor resourced, nor interested
in examining the systems in those countries because that's not
what we do, Mr. Chairman.
Senator Dorgan. We do it for other products. I just
mentioned meat, fresh meat, we do it in fresh meat. Right now
there is a truck stopping at the border coming through, and you
know what they will do? They will look at a strip that was cut
to lay on the back. They don't inspect the meat. They look at a
strip that is cut. Why? Because we have already been to Canada,
and we have said your plants meet our standards. We are willing
to accept that. Your trucks come through, and we are not going
to stop you.
Mr. Hubbard. That's right, Mr. Chairman.
Senator Dorgan. Now why can that not work with respect to
prescription drugs that are made in a U.S. manufacturing plant,
sent to a pharmacy in Winnipeg, Canada, and then brought back
across the border by a pharmacist in Binford, North Dakota, why
can that not work?
Mr. Hubbard. I suppose that it could be designed and
situated in a way where the Canadian manufacturing plant would
have to meet U.S. requirements.
Senator Dorgan. What if it is a U.S. manufacturing plant
that makes the pill and sells it to Winnipeg through a
distributor, and a pharmacist brings it--don't talk about a
foreign pill, let's just talk about an American pill made in an
American plant, FDA-approved plant that is then through a
distributor sent to a pharmacy in Canada, and you are saying
that you cannot assure safety if a registered U.S. pharmacist
goes to a Winnipeg pharmacy and brings it back and passes the
savings along to the consumer.
Mr. Hubbard. That's correct, Mr. Chairman. Our concern is
that once that U.S. manufactured product that we would give an
FDA seal of approval to leaves the United States, it goes
wherever it goes, whether it be 10 miles across the border in
Canada, or 10,000 miles to Asia, we have lost control of it. We
do not know if it comes back what it is, where it came from,
whether it's safe. That's our problem, Mr. Chairman.
Senator Dorgan. Well, you have more problems than that. I
want to come back in a second round. Senator McCain.
Senator McCain. Mr. Hubbard, I am sure you are aware of the
North American Free Trade Agreement.
Mr. Hubbard. Yes, Mr. Chairman.
Senator McCain. That free flow of goods and services
between three countries has been a spectacular success. I am
sure you are aware of that. Why should prescription drugs be an
exception to the North American Free Trade Agreement?
Mr. Hubbard. Well, the free trade agreements with both the
GATT arrangement and the North American are to give the
individual countries the right to set specific safety standards
for any product for that country. So for instance, a
contaminated food in Honduras could be sold legally in Honduras
but could not come into the United States.
Senator McCain. Mr. Hubbard, I am talking about the North
American Free Trade Agreement.
Mr. Hubbard. The point is that those agreements allow
countries to set safety standards that may be different from--
--
Senator McCain. But not so as to impede the flow of goods
and services between----
Mr. Hubbard. Right, they can't be a so-called trade
barrier.
Senator McCain. Exactly. And clearly what you are talking
about is a trade barrier, because you are saying that Canadian
manufacturers cannot manufacture a product or drug that is the
same whether it goes to the United States or Canada, or
certainly not one that would allow it to flow freely into the
United States. Is there a manufacturing facility of a U.S. drug
company located in Canada?
Mr. Hubbard. There probably is, I don't know.
Senator McCain. What do you do about--you don't even know
that?
Mr. Hubbard. Oh, drug manufacturers register with the FDA,
and if there is one there that is registered with the FDA, we
inspect it.
Senator McCain. You don't know.
Mr. Hubbard. I don't know. There is a registration with
thousands of manufacturers, so I don't know.
Senator McCain. You don't know if any of them are from
Canada. You come to this hearing well informed, Mr. Hubbard.
Let me just say, or ask this question. If a U.S. drug
company has a manufacturing facility, obviously it has to be
approved by the FDA in Canada, could that product then meet all
of your requirements if it were sent to the pharmacy in Canada
and then sent to the United States?
Mr. Hubbard. Well, there is a specific law passed by
Congress in 1988 that prohibits the reimportation of a drug
made in this country that goes to another country and then
attempts to return. It can only be returned to this country if
it was by an original manufacturer who basically never lost
control of it. So the answer to your question is no, it cannot
come back in.
Senator Dorgan. Might I just point out that that specific
law is the one that we repealed effectively and asked you to
implement, and you refused to implement it based on what you
say are safety and cost issues. So I think that I might point
out, Senator McCain, that you are asking the right question
here. If a U.S. pharmaceutical company is manufacturing in
Canada, the FDA is up there inspecting the plant because they
are going to ship those drugs down to Grand Forks, Minnesota,
to sell them, the question is, can a Grand Forks pharmacist go
up to Canada and access those drugs for half the price and
bring them down and pass the savings along to the consumer. The
answer from Mr. Hubbard is no, they cannot do that because we
do not think we can assure safety. Is that it?
Mr. Hubbard. Well, there are certain requirements that
relate to safety of drugs and in order for it to be technically
feasible for us to do that, there are certain requirements.
For instance, a Canadian drug will have a foreign label on
it and we would require the American label so the patient can
be warned of whatever. Also, in other countries, manufacturers
may change the product slightly, the milligrams may be slightly
more or less, the color may be different, there may be so-
called inactive ingredients. There may be lots of changes that
occur in the drug that make it not the drug that the U.S.
patient receives.
Senator McCain. I don't know why they would want to do that
if they are manufacturing a product that is being sent to the
United States of America. It seems to me it would cost them
more to do all those things.
Mr. Hubbard. In fact, that's a business decision and, in
fact, they do do that.
Senator McCain. Why is it, do you think, that the cost is
so much lower in Canada and Mexico for the same drugs?
Mr. Hubbard. In Canada they use a system called a reference
price in which they take the lowest price the drug is sold
across seven countries, that's mostly European countries and
the United States. In the United States they use what is called
the federal supply schedule, which is the price paid by the
Defense Department and the VA and other public hospitals. They
then say to the manufacturer, you can charge no more than the
average of these seven countries' prices, so it is a price
controlled system, and they are maintaining the price that can
be charged. They may say, you can make so much profit.
In France they set a price of their own. Different
countries set their prices differently, but they say this is
the price you can sell that drug at.
And of course, generic drugs in this country are
competitive on the world market. I think the biggest problem is
the so-called brand name drugs that are still patented. When
generic competition occurs, as you yourself said, Mr. McCain,
the prices do in fact drop dramatically.
Senator McCain. I am a deregulator, I do not believe in
price control, but it seems to me that if it costs one-tenth
for the same drug in Canada, do you think then, that we should
look at price controls?
Mr. Hubbard. I don't think that's--I mean, our job is
safety. I think price controls are an issue for others in the
Administration to consider.
Senator McCain. Do you not have obligations to the consumer
here?
Mr. Hubbard. Well, we do. I think we care a lot about this
in the sense that we try to get generics on the market as soon
as we can, we work with drug companies to get newly developed
drugs on the market as rapidly as possible. I think we do try
to do things to provide access to patients, but this issue of
how much they charge for a drug is outside our area of
expertise.
Senator McCain. Are you aware of the abuses that are being
exercised by some drug companies with the generic drug
manufacturers?
Mr. Hubbard. Yes, Mr. McCain.
Senator McCain. Do you think that ought to be changed?
Mr. Hubbard. We have expressed willingness to work with
committees in Congress to discuss those issues. I don't believe
that we have been specifically asked about the particular
legislation at this point, but we are certainly willing to
discuss it.
Senator McCain. We would like to have your opinion on the
legislation, specifically where patent drug companies pay
generic drug companies to keep a particular generic drug from
being manufactured. Are you aware of that?
Mr. Hubbard. Yes.
Senator McCain. I would like to know your opinion on this
legislation. It would be helpful.
I want to say Mr. Hubbard, that disparity in pricing,
particularly where our two neighbors are concerned, for the
exact same drug today, forces seniors all over America to make
a choice between their health and their income, because of the
high cost of prescription drugs. So I hope you understand why
we are so concerned about this particular situation and why it
is hard for us to respond to our constituents as to why it is
that the citizens of our two neighboring countries pay less for
prescription drugs, as opposed to our own constituents. I hope
you understand the problem we're trying to address.
Mr. Hubbard. Absolutely.
Senator McCain. I thank you for your forthright testimony.
Senator Dorgan. Senator McCain, thank you. Let me just
observe that I think there are price controls on restricted
drugs in this country by the pharmaceutical companies; they
control the price, and they do that with this law that prevents
the reimportation. And when Dan Reeves, the coach of the
Atlanta Falcons, goes on television every night and says Zocor
is a lifesaving drug, he will describe the miracles of modern
medicine of lowering cholesterol and so forth. The problem is
that the Canadian that buys Zocor pays $1.82 per tablet and the
American pays $3.82 per tablet. The question the American
consumer asks, as Senator McCain asked, why can they not go to
a pharmacy in Winnipeg and pay the $1.82?
You say, Mr. Hubbard, it is because of your concern about
safety. Let me again focus just on Canada, and I think what we
would like to do is reintroduce this legislation and pass it
dealing just with Canada, just taking a first step.
Let me read to you Dr. David Kessler's letter. He says,
``The Senate bill''--and he's talking about our bill that we
passed that is now law--``allows only the importation of FDA-
approved drugs manufactured in approved FDA facilities and for
which the chain of custody has been maintained, addresses my
fundamental concerns. I believe the importation of these
products can be done without causing a greater health risk to
American consumers.'' I would be interested in your response to
Dr. Kessler's letter.
Mr. Hubbard. I think as a potential patient, were I to be
ill and purchase a drug from Canada, I think I would have a
relatively high degree of confidence in Canadian drugs,
speaking personally, because they are close by, our approval
systems work together, we know them, people go there and
purchase drugs, so you know----
Senator Dorgan. What do you mean, our approval systems work
together?
Mr. Hubbard. Well, we often talk to our counterparts in
Canada when we approve drugs, they will approve them at the
same time, and there is----
Senator Dorgan. You have more knowledge than you were
allowing earlier.
Mr. Hubbard. Well, the scientists talk. We talk with the
Europeans quite a bit, and there is a lot of collaboration on
the underlying data about whether a drug should be approved and
its safety, so sure, the Canadian system is one we have some
knowledge of, and I would have some degree of confidence to say
as opposed to a Third World country.
But the problem is the system is set up, the way the law is
and the FDA implements it is designed to deal very specifically
with the production of drugs and their movement, and drugs in
Canada are not part of that system, and therefore, we're saying
that we cannot provide the assurance of safety. And I will
repeat that I am concerned that any country that became the
entree to the United States could then become a trans-shipment
point for problem drugs.
Senator Dorgan. Mr. Hubbard, in a global economy, every
country has entree to every other country, that's a given.
Let me ask you how you respond to Dr. Kessler's evaluation,
if we just deal with Canada. Just dealing with Canada, is he
correct that really that dissolves the issue? Because we are
going to give you a chance to do that, we are going to pass
this legislation again, and we are just going to take the first
step, just Canada, and then see if the Administration or the
previous, or anybody else involved in this thing can honestly
say there are safety issues.
Mr. Hubbard. I just don't think that we would be able to
provide the same assurances of a drug imported from Canada or
any other country as we could for American drugs. On some
level, or some scale of----
Senator Dorgan. So you think Dr. Kessler is wrong?
Mr. Hubbard. I would never second-guess any former
commissioner, I'm sure they are all right about anything they
say.
Senator Dorgan. First of all, I am really disappointed that
you seem to suggest that the only way you can assure the safety
of the drug supply of FDA-approved drugs produced in FDA-
approved facilities, the only way you can assure that safety is
if reimportation is only by a manufacturer. What makes the
manufacturer such a much better importer than a licensed
pharmacist?
Mr. Hubbard. I think it is possibly the closeness issue,
but as I said earlier, when this product appears in a North
Dakota pharmacy, how do we know, it came from Canada, how do we
know it's not a counterfeit? In fact, this one appeared in a
pharmacy in Chicago and it was a counterfeit, and no one knew.
Senator Dorgan. And how did you find that?
Mr. Hubbard. I believe there were some questions raised by
physicians and our criminal investigators inspected, and found
some very difficult to find variations in a label, and then
after some follow-up testing and all, discovered that a Long
Island, New York drug wholesaler was purchasing counterfeit
drugs from the Middle East and bringing it in. It wasn't really
a counterfeit drug, and working out of a storeroom in the back,
just using water out of a tap that wasn't sterile and,
therefore, introducing a very dangerous product.
Senator Dorgan. You are saying it happens rarely here?
Mr. Hubbard. It happens very rarely here.
Senator Dorgan. And it happens more often in Canada, is
that your point?
Mr. Hubbard. We know that in the world it happens----
Senator Dorgan. I am talking about Canada.
Mr. Hubbard. I can't specifically speak to counterfeiting
in Canada, I will have to do some research and get back to you
on that.
Senator Dorgan. Well, we are going to give you a chance to
implement a piece of legislation dealing specifically with
Canada, and my hope is that we will have the FDA and HHS
support on behalf of consumers, and support consumers both by
assuring safety and assuring reduction in costs by being able
to access the same drug, the same company, and that we import
it to this country.
Now let me tell you, I respect your opinion, I do not mean
to bring you here to cast disrespect on your opinion. We
disagree about this, but I am convinced, as are many many
experts in this country, that we have the will and we can do
with prescription drugs, just as we have with many other
sensitive products, provide a safety net with respect to the
chain of supply, and allow our American consumers to be able to
access the identical drug produced in an FDA-approved plant
from a Canadian pharmacist and to be able to allow the
pharmacists in this country on behalf of consumers to do the
same thing.
Let me make just one additional point through a question
about costs. I have not spent a lot of time on costs, there
will be some testimony about that, but it is also the case that
the HHS and FDA, I think primarily HHS, saying that there
cannot be a demonstrated cost savings, that on its face will
fly in the face of reality. Anyone who has purchased drugs in
Canada understands that there is a very dramatic cost savings
for the identical drug produced in an FDA-approved plant.
So, can you just describe for me if the Administration
still believes that you cannot demonstrate a cost saving, and
if so, why?
Mr. Hubbard. When Secretary Thompson was asked to relook at
this issue, he asked his Office of Planning and Evaluation,
which has cognizance over this, to look at the cost issue. And
while it's very clear, as you pointed out, that the purchase
price in a foreign country and the purchase price here is
different, the Secretary's staff also included concerns about
the various middlemen that would want profit from this, and
concluded that it was basically inconclusive that cost savings
would be as great, the costs that you would have in this
country. For instance, the wholesaler who received the drug
perhaps from the Canadian pharmacy, the pharmacist himself in
the United States, would add to the price they would pay,
assuming they paid what they would view as a wholesale price,
which might be a retail price in Canada, and that the ultimate
saving to the consumer at the end of the line might not be
anywhere near what the price would be if the citizen actually
traveled to Canada and actually bought it in Canada.
And so, that was I think their concern that there would be
costs in the system to get the drug here and move it around
and, therefore, these middlemen would be taking their 10 or 20
profit would eat up much of the savings. I think that was their
concern, so therefore, they concluded that they couldn't really
determine whether these cost savings that would seem to be
apparent are really there.
Senator Dorgan. And who are they again?
Mr. Hubbard. Well, it was the Office of Planning and
Evaluation in the Secretary's office who did the study
essentially. FDA did not do that particular examination. We
examined the MEDS Act from more of the process of the testing
and the documentation and those other requirements from the
act.
Senator Dorgan. Well, I will not dwell on this. I think it
is quite apparent there are very substantial savings and for
the very reason that you indicated in your written testimony
today, that there are limits on what can be charged by the
pharmacies in the other countries, and the result is, our
consumers pay the highest prices in the world for prescription
drugs. The ability to access the identical drug from an FDA-
approved plant for a fraction of the price, it seems to me,
clearly demonstrates savings, but we will leave that for
another day for experts in that particular area.
Let me again say that I think we will give you the
opportunity to deal just with the issue of Canada, and the
issue of safety and chain of supply and cost. It will be my
intention, along with my colleagues, to pass legislation in
this Congress, and I am confident that we will do it, that
focuses just on Canada for the moment. We will just take the
first step, and then we are going to have another hearing if
there is not an implementation, and I will not be nearly as
gentle in my nature.
I should tell you, I am very frustrated by this, enormously
frustrated, largely because I think that both the previous
Administration and this Administration have gone out of their
way to find ways not to implement this. The Clinton
Administration and the Bush Administration have both tried to
find ways to not do something.
Now, I have a lot of folks from my home town, and I come
from a real small town, and I can identify folks who sit around
and find ways not to do things, you know, they are crabby all
day, and every community has people like that. The people that
make things happen and make changes in this country are the
people that are looking for ways to get things done and make
progress.
I do not want to compromise the safety of our drug supply,
that is not my intention. Nor do I want our consumers to be
handcuffed to the highest prices for prescription drugs of
anyone in the world and then be told that they are prevented
from going across the border to purchase a prescription drug
made in an FDA-approved plant, an FDA-approved drug made in an
FDA-approved plant, and pay 50 percent or 10 percent of the
price because of some arcane piece of legislation was passed
that represents, in my judgment, a sweetheart deal for the
pharmaceutical industry. I am hopeful that we can change this.
Mr. Hubbard, you have answered our questions, and I again
respect your opinion. I am not disrespectful to someone who
disagrees with me, but I expect we will go at this again at
some point because we are going to pass some legislation in
this Congress and have additional hearings. I hope that our
paths will cross again, and I hope perhaps you will be able to
say to me that you all have taken a good look at the Canadian
system, you have some confidence in that system, you have
engaged with the Canadians with respect to the chain of supply
issues, and tell us that there are no safety concerns with
respect to the way we have reconstructed this law.
So let me give you my thanks for coming here today with
other members of your staff.
Mr. Hubbard. Thank you, Mr. Chairman. We certainly
understand that your interests are in protecting the patients
as well, and obviously we will continue to do this the best
that we can.
Senator Dorgan. Thank you very much, Mr. Hubbard.
We will call the next panel forward. Ms. Elizabeth Wennar,
President and CEO of United Health Alliance in Bennington,
Vermont; Mr. John Marvin, member of the Alliance for Retired
Americans; Ms. Marjorie Powell, Assistant General Counsel,
Pharmaceutical Research and Manufacturers of America; Mr.
Stephen Giroux, Community Pharmacist, Middleport Family Health
Center, and Member of the National Community Pharmacists
Association in Middleport, New York; and Dr. Alan Sager,
Professor of Health Services and Co-Director of Health Reform
Program, Boston University School of Public Health.
We appreciate all of your being with us today. We have
received the testimony that you have prepared, and we ask that
you present a summary of your testimony. We will begin with
Elizabeth Wennar, the President and CEO of United Health
Alliance. Ms. Wennar, as you know, Senator Jeffords was here
and spoke of you earlier. Welcome.
STATEMENT OF ELIZABETH A. WENNAR, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, UNITED HEALTH ALLIANCE
Ms. Wennar. Thank you very much for having me here. As you
mentioned, I am the President and CEO of United Health
Alliance. By way of a little background, I have a nursing
background, I have a masters in public health from Yale
University, I have a doctorate from the Medical University of
South Carolina in health administration and policy, and I
completed my doctoral dissertation on the importation of
prescription drugs, particularly looking at Canada.
Having said that, quite a few things that I have in my
testimony have already been covered so I will try and not be
repetitive, and I understand I only have about 5 minutes, so
stop me when you think you've heard enough.
Senator Dorgan. We have a light system, actually. When the
red light comes on, a trap door opens.
Ms. Wennar. Well then, let that trap door fall into Canada,
please.
Mr. Chairman and Members of the Committee, as you are
aware, today's healthcare market presents many challenges for
consumers, purchasers and our political leaders. None is more
controversial than that of technology in the form of a pill.
More often than ever, our policymakers and physician providers
are being queried as to why it is that Americans, particularly
senior citizens, must pay many times more than their Canadian
counterparts for the same drug.
By way of background, what I'm going to do is to share with
you a little bit of what we have done from a grass roots level
in Bennington, Vermont.
United Health Alliance is a nonprofit physician health
system organization located in the southwestern corner of
Vermont. Our partners include a rural hospital and nursing
home, a home health agency, and just over 100 community-based
physicians. We serve residents in Vermont, Massachusetts, and
New York. Our mission is to promote a physician-driven
organization whose principal services are to provide advocacy
and leadership in the areas of care management, contracting,
performance improvement and educational programs to maximize
value for our membership.
Although we have committed to 10 guiding principles, none
is more important to us than assisting the communities we serve
at becoming the healthiest in the nation. Approximately one
year ago we found although this was an admirable objective,
this objective was going to be difficult to achieve given the
circumstances that existed for some of our elderly. Very
simply, they did not have access to affordable prescription
drugs and, therefore, they were not able to comply with the
treatment plans prescribed by their physicians.
Although we had individuals that we knew were seeking their
medications affordably via bus trips to Canada, this was not an
option for the majority of the elderly in the communities we
serve by virtue of either their medical condition or their
financial ability of doing so.
One of our physicians came to us and requested our
assistance at investigating how we could help a patient of his
with breast cancer access her medications from Canada without
having to get on the bus. Today that patient takes her
medication because she can afford it. It cost her 90 percent
less.
We compared the costs for 145 seniors for 6 months, and I
have provided copies of that graph in my testimony. We compared
the cost for the 145. As you can see, these individuals would
have paid $81,000 in the U.S. and they paid approximately
$22,000 for their medications in Canada. Our understanding is
that there were no substitutes made for these medications, all
medications accessed were for the treatment of chronic diseases
such as diabetes, heart disease and cancer.
A price comparison of more commonly prescribed medications
is also included in my testimony and you can see here, they are
significant. Although there are minor variations across Canada,
the savings are still significant, and have been reported
anywhere from 30 to 95 percent.
Although the majority of the individuals using what we call
MedicineAssist are the elderly on fixed incomes with no
prescription drug coverage, we are beginning to see individuals
that have depleted their pharmacy benefits also attempting to
access their medications from Canada.
We have had multiple conversations with employers located
in our communities and they have told us that they now must
consider cutting benefits because they no longer can afford to
supply the coverage that they have historically. The
implications are frightening to all of us.
I'm now going to move to quality. I have heard quite a bit
discussed concerning quality. Clearly as a provider network,
our major concern is the ability of our patients to comply with
a given treatment plan. When a patient cannot afford their
medications, it's costly for all of us. Are we concerned about
quality? Absolutely, Mr. Chairman, we are concerned about
quality, and there is a quality issue and it exists on this
side of the border, we would propose.
When a patient cannot take their medications, they most
definitely will consume services elsewhere in our system such
as the emergency room or by being admitted to the hospital.
That is simply not rational. This is not about people that
won't comply with a treatment plan, this is about individuals
that can't afford to purchase prescription drugs in the country
they live in.
Also, let's keep in mind that we are talking about Canada,
not a Third World country. Having said this, these individuals
are looking to take the risks associated with crossing the
border. Many of them have told us that they are willing to take
these risks.
I'm going to skip over the portion on why we think that
drugs are less costly in Canada, but I will tell you clearly,
there is no simple answer with regard to these issues. Barring
any type of regulation of the pharmaceutical industry on this
side of the border, personal reimportation from Canada under
controlled circumstances can provide an interim solution for
those who need access to a prescription drug.
I do believe with the cooperation of the industry, the FDA,
the Canadian regulators and the U.S. physicians, that under a
controlled demonstration project we could achieve a policy that
would prove beneficial for all the stakeholders until we can
produce a better solution.
In conclusion, I was asked to share something with you by a
physician who recently called me. He basically had a patient
that came to him and asked him to help him get his medications
in Canada for his high cholesterol. The physician reached into
the trash can and retrieved a prescription with a note attached
to it that had been delivered to him earlier that day by his
staff. The note read: Dear Doctor, Thank you for the
prescription but I am returning it to you because I went to the
pharmacy to get it filled today and when they gave it to me, I
could not afford it.
According to the physician, this was a diabetic amputee
that he had given samples to and had responded extremely well.
He did what came next, he wrote a prescription. He had no idea
that this one medication would cost this gentleman on a fixed
income over $140 a month. He [the physician] noted that that
man was on the medication and had done extremely well on it. As
this patient's caregiver, he felt that instead of solving a
problem for his patient, he had indirectly created one. Not a
good feeling to know your patient will not be able to comply
with a treatment plan you prescribe for them because he or she
cannot afford it, and that you unknowingly contributed to that
situation. His answer to the patient sitting in front of him
was you bet.
The medication for that amputee would have cost $65 in
Canada versus $140 here.
Thank you very much for this opportunity.
[The prepared statement of Ms. Wennar follows:]
Prepared Statement of Elizabeth A. Wennar,
President and Chief Executive Officer, United Health Alliance
Mr. Chairman, and Members of the Committee:
Thank you for inviting me to discuss the issues associated with the
pricing of pharmaceuticals for U.S. consumers.
As you are aware today's healthcare market presents many challenges
for consumers, purchasers and our political leaders. None is more
controversial than that of technology in the form of a ``pill.''
Pharmaceutical spending has almost doubled in less than a decade. More
often than ever, our policymakers and physician providers are being
queried as to why it is that Americans, particularly the elderly, must
pay many times more than their Canadian counterparts for the same drug.
Background on United Health Alliance and MedicineAssist
United Health Alliance is a nonprofit physician health system
organization located in Southwestern Vermont. Our partners include a
rural hospital, nursing home, home health agency and just over one
hundred (100) community physicians. We serve residents of Vermont, New
York and Massachusetts. Our mission is to promote a physician-driven
organization whose principle services are to provide advocacy and
leadership in the areas of care management, contracting, performance
improvement and educational programs to maximize value for our
membership and customers. Although we have committed to ten (10)
guiding principles, none is more important to us than assisting the
communities we serve at becoming the healthiest in the nation.
Approximately one year ago we found that although admirable, this
objective was going to be very difficult to achieve given the
circumstances that existed for some of our elderly. Very simply, they
did not have access to affordable prescription drugs, therefore they
were not able to comply with the treatment plans prescribed by their
physicians. Although we had individuals that were seeking affordable
medications via bus trips to Canada, we knew that this was not an
option for the majority of the elderly in the communities we serve by
virtue of their medical condition and/or their limited resources. One
of our physicians came to us and requested our assistance at
investigating how we could help a patient of his with breast cancer
access her medications from Canada without having to get on a bus.
Today that patient takes her medication because she can afford them. It
cost her ninety (90) percent less in Canada. We compared the costs for
145 seniors for the first six months to see if what we had heard about
the differences in pricing was in fact true. While these individuals
would have had to pay just over $81,000 in the U.S., they paid
approximately $22,000 for their medications in Canada. Our
understanding is that there were no substitutions for the medications
they were currently on. All medications accessed were for the treatment
of chronic diseases such diabetes, heart disease and cancer. A price
comparison of some of the more commonly prescribed medications for the
treatment of these diseases has been provided along with this
testimony. Although there is minor variation with some pricing in
Canada, the savings are still significant and have been reported
anywhere from thirty (30%) to (95%) percent. Although the majority of
the individuals using MedicineAssist are the elderly on fixed incomes,
with no prescription coverage, we are beginning to see individuals that
have depleted their pharmacy benefits also attempting to access their
medications from Canada. As we have conversations with employers
located in the communities we serve about benefits and coverage for
their employees we find many are concerned about how to continue the
level of coverage they currently provide, particularly with the growth
in their expenditures for prescription drugs. The implications are
frightening for all of us.
Quality
Clearly as a provider network, our major concern is the ability of
patients to comply with a given treatment plan. When a patient cannot
afford their medications it is costly for all of us. Are we concerned
about quality? Absolutely. And there is a quality issue and exist on
this side of the border. When a patient cannot take their medications,
they most definitely will consume services elsewhere in our system,
such as the emergency room or by being admitted to the hospital. That
simply is not rational. This is not about people that won't comply with
a treatment plan, this is about individuals that can't afford to
purchase prescription drugs in the country they live in. Also, let's
keep in mind that we are talking about Canada not some third world
country. Having said this, these individuals are willing to take the
risk to access their medications across the border. Many of them have
told us that there is certainly no more risk in doing this than they
are at by not taking their medications as prescribed or not at all.
Reasons for Price Differential in Canada and the U.S.
To put it in the simplest of terms: the Canadian government is the
purchaser, therefore they have implemented controls over the costs.
Next, they do not allow direct-to consumer advertising. My
understanding is that this type of marketing is only allowed in the
United States and New Zealand. Essentially our major mode of control is
through the approval process by the FDA that essentially controls entry
into the market, not pricing. In the U.S. with its non-universal
coverage structure, cost containment is undertaken by a myriad of
public and private decision-makers, each with their own agenda and
objectives. The price differential is of course going to appear even
greater when you compare a group that has no coverage and pays out of
pocket. They have no purchasing power, because they have no coverage.
This is particularly true for about one-third (30 million) of the
Medicare population.
I recently visited with health care providers in France and in
Canada and they seemed quite perplexed by how we could rationalize the
cost/benefit of allowing the prescription drugs to be advertised in the
manner that they were on television. Their point was well taken on two
fronts: (1) someone has to pay for the costs associated with this
advertising and (2) when I proposed that it was intended to educate
consumers so that they could be more informed about what was available
for their treatment: they asked where's the data to support that this
was anything more than ``marketing'' the drugs the industry wants to
sell or promote. They used the example of a drug for chronic
indigestion allowing you to continue to eat foods that are clearly not
good for you.
Reimportation/Importation from Canada
Clearly, there is no simple answer with regard to the issues we are
discussing. Barring any type of regulation of the pharmaceutical
industry on this side of the border, personal reimportation from Canada
under controlled circumstances can provide an interim solution for
those in need of access to affordable prescription drugs. I do believe
that with the cooperation of the industry, the FDA, the Canadian
regulators and U.S. physicians that under a controlled demonstration
project we could achieve a policy that would prove beneficial for all
the stakeholders until we can produce a better solution.
Conclusion
Before departing to attend this hearing, I received a call from a
physician that requested that I share a recent situation that he was
presented with. He had a patient that asked if he [the physician] would
help him get his medications from Canada so that he could afford to
take them? The physician said he listened as the patient began to
explain the differences in pricing for the medication recently
prescribed for his high cholesterol. The physician reached into his
trash can and retrieved a prescription with a note attached to it. The
note had been delivered to him earlier in the day by one of his staff.
The note read: Dear Doctor, Thank you for the prescription, but I am
returning it to you because I went to the pharmacy to get this filled
and when they gave it to me, I couldn't afford to pay for it. According
to the physician this was a diabetic amputee that he had given samples
to and had responded extremely well, so he did what came next, wrote a
prescription. He had no idea that this one medication would cost this
gentleman on a fixed income over $140 for a one-month supply. He noted
that the man was on other medications as well. As this patient's
caregiver, he felt that instead of solving a problem for his patient he
had indirectly created one. Not a good feeling to know your patient
will not be able to comply with the treatment plan that you prescribed
because he or she can't afford it and that you unknowingly contributed
to the situation.
His answer to the patient that was now sitting in front of him
requesting help with purchasing his medications . . . you bet.
By the way the medication for the diabetic amputee would have cost
approximately $65 in Canada.
This concludes my prepared remarks. Thank you again for this
opportunity and I would be happy to try to address your questions.
UHAMedicineAssist
Six-month Summary Analysis
Time Frame: July-December 2000
Number of patients participating: 145
Number of physicians participating: 19
Number of drug names ordered: 106
Total cost of prescriptions in U.S. $81,006.17
Total cost of prescriptions in Canada $22,361.53
Total savings: $58,963.84
Percent savings: 72.8%
Overall average savings: 68.4%
Range of savings by drug: 28%-97%
Source: United Health Alliance 2000 (MedicineAssist)
Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic
area and by individual pharmacies.
Sample Drug Pricing
Number of
Drug Tabs Canada U.S. Savings
Tamoxifen 10 mg---------------------------------------------------------60---------$7.05-----$142.44------95%---
Lipitor 10 mg 90 $106.33 $230.58 54%
Plaxil 10 mg 30 $33.01 $94.57 60%
Prozac 10 mg 100 $115.93 $361.28 68%
Coumadin 5 mg 100 $25.52 $90.07 72%
Glucophage 500mg 100 $15.70 $86.26 82%
Prilosec 10 mg 30 $33.88 $144.62 77%
Fosamax 10 mg 30 $36.40 $85.99 58%
----------------------------------------------------------------------------------------------------------------
Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic
area and by individual pharmacies. All dollar figures are reflected in U.S. Currency.
Senator Dorgan. Ms. Wennar, thank you very much. We
appreciate your testimony.
Mr. John Marvin, a member of the Alliance for Retired
Americans.
STATEMENT OF JOHN MARVIN, MEMBER OF THE ALLIANCE FOR RETIRED
AMERICANS
Mr. Marvin. Thank you, Senator Dorgan. I appreciate the
opportunity to testify today. I am representing the Alliance
for Retired Americans, where I serve as a Regional Board Member
for the northeastern part of the nation. The Alliance, which
was established on January 1 of this year, now has 2.6 million
members across the nation. It is made up of retirees from
affiliates of the AFL-CIO, community-based organizations,
individual seniors who joined the Alliance to fight for social
and economic justice and civil rights for all Americans. I am
also representing the Maine Council of Senior Citizens.
Today I submitted testimony which I hope you will read. I
really want to testify from the gut, if you will. You are
talking--you've heard of the angry young man. Today you're
going to hear from an angry old man. The current policy seems
to result in a kind of people export into Canada act instead of
a workable reimportation act into this country.
This is the fourth year that I have spent organizing bus
trips to Canada for prescription drugs run on an average of
one-third to one-half cheaper than here. Last year 25 people
caught a bus, saved $10,000 from the costs over what they would
have paid in this country had they bought those same drugs
here.
We always have on most trips at least one person and
usually more, women who are suffering from breast cancer, which
means they must take Tamoxifen for virtually the rest of their
lives. At my local drug store in Augusta, Maine, a month's
supply of Tamoxifen costs $114.99. Last August, that same
month's supply in St. Stephen's, New Brunswick, just across the
border, cost $14.50. That's why I am an angry old man about the
situation as it relates to prescription drugs.
The trips do two things in addition to being of immediate
help to those fortunate enough to be able to ride the bus. They
highlight the fact that persons without drug coverage in this
country literally pay the highest prices in the world, as you
were pointing out, for drugs made mostly in Puerto Rico and
heavily subsidized by the U.S. taxpayer.
In that respect, I want to point out that the major reason
why the drug prices in the United States are so high is the
pharmaceutical industry has a lock on the supply of needed
drugs, backed up by law and power. It controls the development
process for new drugs both here and throughout the world. The
laws of this nation then protect the market power of the
industry by providing patent protection for almost two decades.
To make sure this patent protection stays secure, we add in
public financing of the highest risks of development process.
The industry spends hundreds of millions of dollars to
influence government at all levels. The result is the exploited
pricing policies that we are discussing here today.
A publication of the Alliance, The Profit in Pills: A
Primer on Prescription Drug Prices, documents why prescription
drug prices have increased so dramatically, and the various
ways that the pharmaceutical industry protects its interests at
the expense of the American public. Most affected are older
persons and those with disabilities who take more medications
than other segments of the population and are most likely to
pay the full retail prices.
I respectfully request that this report be included in the
hearing record and I would also ask that you, Senator Dorgan,
put it into the Congressional Record so that all of your can
colleagues may also have an opportunity to read it.
Senator Dorgan. Without objection, the publication will be
part of the hearing record.
[The information referred to follows:]
the profit in pills: a primer on prescription drug prices, a report by
the alliance for retired americans
[Reprinted from The Profit in Pills: A Primer on Prescription Drug
Prices with permission of the Alliance for Retired Americans.]
Dear Reader:
Our purpose in producing this report is to make the public aware of
how price gouging by the pharmaceutical industry is allowing industry
profits to soar at the expense of every American citizen and every
American company with health benefits. Even the health plans covering
younger and working citizens are being squeezed because of
hyperinflation of prescription drug prices.
Unfortunately, those ages 65 and older and persons with
disabilities suffer the most because they take more medications than
other segments of the population. More than 40 percent of all
prescriptions written are for retired Americans, who make up 13 percent
of the U.S. population. While more than 13 million older Americans and
people with disabilities have no prescription drug coverage at all, the
coverage other Medicare beneficiaries have is often very expensive
(some policies cost more than $3,000 a year), inadequate and
unreliable. Almost half of all Medicare beneficiaries lack coverage for
at least part of each year. In addition, health maintenance
organizations (HMOs) have dropped more than two million Medicare
beneficiaries, many of whom have been unable to find another HMO, and
employer-provided health and prescription drug insurance is declining.
The Alliance for Retired Americans believes the time has come for
the federal government to act decisively to resolve the crisis. There
is overwhelming support for the government to provide prescription drug
coverage for the elderly and persons with disabilities and to confront
drug prices. That support must be translated into political action.
The more than 2.5 million members of the Alliance for Retired
Americans, organized in 2001 and growing rapidly, are making the fight
for prescription drug coverage for all Medicare beneficiaries their No.
1 legislative priority in Congress. Including pharmaceuticals as a
basic, defined Medicare benefit would equip the Centers for Medicare
and Medicaid Services, the agency of the U.S. Department of Health and
Human Services that administers Medicare, to use its national
purchasing power to bring outrageously high prescription drug prices
under control and set national standards for reasonable prices.
Medicare drug coverage also would provide current workers with the
peace of mind of knowing they will be able to get the medicines they
need when they retire. Even such corporate giants as General Motors are
calling for the addition of a universal prescription drug component to
Medicare. Other approaches to use government authority to control and
moderate drug prices also must be explored and adopted.
The Alliance believes that drug benefits, like other Medicare
benefits, should be available to all Medicare beneficiaries with no
income test; all medically necessary and approved treatments should be
covered; enrollment must be voluntary so people who now have plans can
keep them; provision should be made to encourage current employer
retiree plans to maintain at least their current levels of benefits;
premiums, deductibles and co-payments must be affordable; there must be
reasonable limits on beneficiary out-of-pocket expenses; and lower-
income beneficiaries should have all costs covered. Most importantly,
to make the benefit affordable to taxpayers and beneficiaries, drug
price cost controls are essential.
In the longer term, the Alliance believes the enactment of a
universal health system that includes pharmaceutical treatments as a
basic benefit is required to fully address the challenge of
availability and reasonably priced drugs.
Our immediate challenge on behalf of older and retired Americans is
to serve as a strong voice for the enactment of a drug benefit under
Medicare, and for strengthening and improving Medicare and Social
Security. For more information on the Alliance and to find out what you
can do to help put an end to the outrageous price gouging by the
pharmaceutical industry, we invite you to visit our website at
www.retiredamericans.org.
Sincerely,
George J. Kourpias,
President
Edward F. Coyle,
Executive Director
Serious Choices
Too many older Americans are forced to choose between paying for
their prescription drugs and buying food. But one woman's choice was
even more critical.
Ms. H had moved recently into Council House, a housing project for
seniors in Maryland. One day at the elevator she met a neighbor
awaiting a delivery from her pharmacy. The deliveryman arrived--but
when the woman saw how much her drugs cost she sent them back. She said
she didn't have enough money to pay for them.
Two weeks later she was dead.
Summary
Prescription drug prices are rising rapidly and are projected to
continue to do so through at least the next decade. This increase has
the most adverse effect on the segments of the population without some
type of insurance protection.
Drug spending overall is increasing largely because of three
factors: utilization or volume increases; availability of new drugs for
treating diseases; and rising prices for existing drugs. While a number
of new drugs have extended and enhanced the quality of everyday life
for many Americans, they remain too costly and out of the reach of
millions.
The pricing chain for drugs is complex and difficult to trace
because much of the information regarding prices is considered
proprietary and hence is not publicly available.
The pharmaceutical market is unique in several ways. Manufacturers
charge different prices for different customers and allow for discounts
and rebates in order to maintain inclusion of their products on the
formularies of large purchasers. It is the individual consumer without
insurance coverage who pays the highest prices for prescription drugs.
Drug manufacturers also enjoy a lower tax rate than other
industries. And although they maintain that high prices for new drugs
are justified as their recovery for research and development expenses,
most core research for drugs is funded by the federal government,
primarily through the National Institutes of Health. Much of the
companies' development of drugs actually is for derivatives of existing
drugs rather than new drugs.
While the precise cost of drugs is difficult to pinpoint, the
profit levels are not. In 2000, pharmaceutical companies had after-tax
median profits of 18.6 percent, compared with 4.9 percent for all other
Fortune 500 companies combined.
Drug manufacturers spend more of their revenues on profits than on
research and development--and even more on marketing. They dedicate
more than 18 percent of revenues to profits and 30 percent to marketing
and administration, compared with 12 percent to research and
development.
Promotional spending is directed toward doctors primarily through
distribution of samples. Since 1997, direct-to-consumer (DTC)
advertising has become a more significant part of marketing, accounting
for $1.3 billion in advertising outlays in the first half of 2000
alone. Drug companies also spend millions in contributions to political
candidates and to lobby Congress.
Almost half of all prescription drugs sold in the United States are
generic drugs--but this accounts only for about 10 percent of the costs
of all pharmaceuticals. Generic drugs, which cost less than brand-name
drugs, are able to enter the market only after the brand-name company's
patent expires. These patents often are extended by various means,
including deals with generic companies.
Since the enactment of Medicare 36 years ago, prescription drug
treatment has become an essential component of medical treatment for
older people and those with disabilities. For Medicare beneficiaries
with serious chronic medical conditions, access to drugs is critical to
survival and to the maintenance of an acceptable quality of life.
The most comprehensive approach to providing affordable
prescription drugs for all Americans is to enact a universal, national
health care system that includes a prescription drug benefit. Among
Medicare beneficiaries, however, a crisis over both declining coverage
and price escalation has been a top political and medical issue.
National and state lawmakers are exploring a variety of interim
approaches. This primer responds to the immediate need of Medicare
beneficiaries and discusses a number of measures being pursued toward
the goal of affordable, comprehensive drug coverage for such
beneficiaries.
Introduction
The high costs of prescription drugs in the United States are not
new but in recent years have made it to the front of the nation's radar
screen. Prescription drug prices are rising rapidly, having the most
adverse effect on the segments of the population without some type of
insurance protection, including Medicare beneficiaries. As a policy
issue, coverage of prescription drugs for Medicare beneficiaries became
a major component in the 2000 presidential campaign and in many
congressional races; it continues to be a major issue in the 107th
Congress.
This report attempts to present the trends and reasons why
prescription drug prices have increased so dramatically, where the
money goes, examine proposals to address the issue and present
recommendations from the Alliance for Retired Americans.
Principles for a Medicare Prescription Drug Benefit
The Alliance for Retired Americans is committed to the enactment by
Congress of a universal, comprehensive and affordable defined
prescription drug benefit under Medicare.
The Medicare program is a vital and effective program on which more
than 98 percent of older Americans and millions of persons with
disabilities depend. However, Medicare lacks a core component of any
comprehensive medical system--prescription drugs.
Prescription drug prices are rising rapidly, having the most
adverse effect on the segments of the population without some type of
drug coverage. Older Americans spend more out of pocket than the rest
of the population because they have more acute and chronic illnesses,
use more prescription drugs for treatment and are less likely to have
insurance coverage.
Older Americans, 13 percent of the U.S. population, account for 34
percent of all prescriptions dispensed and 42 cents of every dollar
spent on prescription drugs. Employer-provided health coverage for
retirees is declining, and managed care plans are capping or dropping
drug benefits and dropping out of the Medicare+ Choice program.
The recent proposal to give block grants to the states to create
prescription benefits for low-income seniors would be ineffective for
the following reasons:
It would leave millions of moderate-income older and
disabled persons without protection;
It would take years to create;
It would give states wide latitude to restrict benefits;
It would delay the passage of a true universal and defined
Medicare drug benefit; and
The record of states in enrolling persons in the QMB and
SLMB programs gives little cause for optimism for expanded
coverage.
The Alliance for Retired Americans believes that a Medicare
pharmaceutical benefit must incorporate the following principles:
Universal coverage for all who qualify for Medicare
benefits;
The benefit must be comprehensive and include the most
current and effective treatments and quality controls;
Enrollment in the benefit should be voluntary so that those
who have superior benefits can remain in their employer's plan
while assuring enrollment later for persons facing erosion or
loss of current drug benefits;
The benefit must have affordable premiums and co-pays and
should protect all beneficiaries from high out-of-pocket
expenses;
The benefit must not be means-tested; however, low-income
persons should have all costs covered;
Dollar coverage of the benefit should be high enough to
protect the out-of-pocket costs of average-to-higher
pharmaceutical users and contain a reasonable cap on costs for
those with catastrophic bills;
Employers should be required and/or provided with incentives
to maintain and expand the level of coverage of current,
employer-provided prescription drug benefits; and
Pharmaceutical prices for all consumers must be brought
under some system of control, including, for example,
enforcement of patent limits; negotiations on fair prices by
the federal government where there is significant public
investment in drug development; and provisions to achieve price
discounts for Medicare beneficiaries based on the Federal
Supply Schedule and comparable to prices charged to larger HMOs
and hospital chains. Without action on the rising price of
pharmaceuticals, the cost of a Medicare benefit will not be
affordable and millions of Americans of all ages will be denied
their right to first-class health services.
Recent Trends in the Price of Prescription Drugs
According to Bureau of Labor Statistics figures, drug prices
rose 306 percent between 1981 and 1999, while the consumer
price index (CPI) rose 99 percent during the same period.\1\
In 2000, total spending in the United States for
prescription drugs was $116 billion--more than twice the $51
billion spent in 1993. And that amount is expected to more than
triple to $366 billion by 2010.\2\
Older Americans and people with disabilities spend more out
of pocket than the rest of the population because they have
more acute and chronic illnesses, use more prescription drugs
for treatment and are less likely to have insurance coverage.
Older Americans, 13 percent of the U.S. population, account for
34 percent of all prescriptions dispensed and 42 cents of every
dollar spent on prescription drugs.\3\ The average Medicare
beneficiary fills 18 prescriptions a year.
Annual spending per capita in the Medicare population for
prescription drugs has jumped from $674 in 1996 to $1,539 in
2000 and is expected to climb to $3,751 in 2010, an average
rate of increase of 9.3 percent. Total prescription spending in
the Medicare population will rise from $61.2 billion in 2000 to
$174.4 billion in 2010, an average annual rate of increase of
11 percent.\4\ The Congressional Budget Office (CBO) estimates
prescription drug spending for Medicare enrollees will total
nearly $1.5 trillion over the next decade.\5\
Although nearly one-third (30 percent) of Medicare
beneficiaries are expected to incur less than $250 in drug
expenses in 2001, more than four in 10 (43 percent) will have
drug expenses greater than $1,000--and 8 percent will have
expenses of at least $4,000.\6\
Out-of-pocket spending for prescription drugs by Medicare
beneficiaries in 2001 is estimated to average about $686, with
20 percent expected to spend more than $1,100.\7\
Medicare beneficiaries without prescription drug coverage
spend on average 83 percent more for their medicines than those
with drug coverage. About half of Medicare beneficiaries
without any form of prescription drug coverage have incomes
less than 175 percent of poverty, which is $15,000 in 2001.\8\
As Social Security benefit increases are tied to the CPI and
prescription drug prices are increasing much faster than the
CPI, these trends make prescription drugs increasingly less
affordable for Social Security beneficiaries.
Why Are the Prices Going Up So Rapidly?
Toward the end of the last century, changes were made in the way
hospitals were compensated that prompted them to reduce the length of
stay of patients. This ``quicker and sicker'' discharge from hospitals
led physicians to increasingly rely on prescription drugs for treating
patients. Drug interventions, in turn, forestall the hospitalization of
many other older persons and help them to maintain lives outside of
institutions. Consequently, the role prescription drugs play in the
lives of older persons, in particular, has become much greater.
There is no doubt the introduction of many new drugs has extended
and enhanced the quality of everyday life for millions of Americans.
Technological advances in treating diseases include the utilization of
new drugs that can arrest or cure many cancers, heart disease, high
blood pressure, AIDS and other life-threatening conditions. Drugs have
contributed to reducing costs of hospitalizations and surgeries, but
new drugs are more expensive than older drugs, and three times more
costly than generic drugs.
The spending increases for prescription drugs are attributed
largely to three factors:
Utilization increases;
Availability of new drugs for treating diseases; and
Rising prices for existing drugs.
The volume of drugs sold has increased dramatically. Between 1992
and 1998, the number of prescription drugs sold has increased 37
percent. The 3 billion prescriptions sold in 2000 are expected to rise
to 4 billion by 2004.\9\
The increase in utilization or volume of drugs prescribed is
greatly affected by promotional advertising by manufacturers.
Manufacturers promote the use of new drug therapies in a number of
ways. The most common practice is for thousands of drug company
representatives to leave samples when visiting physicians and
hospitals. Advertising directed at consumers is a relatively new
practice that has grown considerably over the past 15 years.
Promotional spending by drug companies reached $13.9 billion in 1999,
an 11 percent increase from 1998 levels. Of that total, direct-to-
consumer (DTC) advertising accounted for $1.8 billion, a 40 percent
increase from 1998.\10\
The price of older drugs is increasing also, but at a rate of less
than 4 percent per year. Additionally, in order to extend patents, drug
manufacturers often will issue older drugs in new dosage forms or with
other minor changes and charge higher prices. A Congressional Budget
Office study found the average list price of brand-name drugs increases
faster than inflation even after the entry of other therapeutically
equivalent (``me too'') drugs on the market.\11\
Distribution Chain
Generally, the chain of distribution begins with the manufacturer
who distributes the drug by selling it to drug wholesalers, the
middlemen between the manufacturer and the pharmacies. The wholesaler
sells the drug to the retail pharmacy at the price of obtaining the
drug plus a markup, usually between 2 percent and 4 percent. The
pharmacist sells to the consumer at the acquisition price plus a markup
of 20 percent to 25 percent. If the customer is insured, he or she will
not pay the full amount, but rather a copayment of differing amounts
depending on the insurance plan. If the customer is uninsured, he or
she will pay the full cost or highest price for the drug.\12\
For every dollar that a consumer pays for a prescription drug at
the pharmacy, 74 cents goes to the drug manufacturer, 3 cents goes to
the wholesale distributor and 23 cents to the pharmacy.\13\
Pricing Chain
It is extremely difficult to identify the actual cost of a drug
because the pricing chains are more complex than the distribution
chain. This table summarizes key pricing terms and the levels at which
prices are and are not publicly accessible. Some prices are not
publicly available, as they are considered to be manufacturers'
proprietary information.
------------------------------------------------------------------------
PRICE DEFINITION
------------------------------------------------------------------------
Retail price The price charged by retail pharmacies to
individuals without insurance, known as
``cash-paying'' customers.
Average wholesale price The average list price that a manufacturer
(AWP) suggests wholesalers charge pharmacies.
AWP typically is less than the retail
price, which will include the pharmacy's
own price markup. AWP is referred to as a
``sticker'' price because it is not the
actual price that large purchasers
normally pay. For example, in a study of
prices paid by retail pharmacies in 11
states, the average acquisition price was
18.3 percent below AWP. Discounts for
HMOs and other large purchasers can be
even greater. AWP information is
available publicly.
Average manufacturer price The average price paid to a manufacturer
(AMP) by wholesalers for drugs distributed to
retail pharmacies. Federal Supply
Schedule prices and prices associated
with direct sales to HMOs and hospitals
are excluded. AMP has a benchmark created
by the Omnibus Budget Reconciliation Act
(OBRA) in 1990 to use in determining
Medicaid rebates and is not publicly
available. The Congressional Budget
Office (CBO) estimated AMP to be about 20
percent less than AWP for more than 200
drug products frequently purchased by
Medicaid beneficiaries.
Nonfederal average The average price paid to a manufacturer
manufacturer price (NFAMP) by wholesalers for drugs distributed to
nonfederal purchasers. NFAMP is not
available publicly.
Federal Supply Schedule The price available to all federal
(FSS) purchasers for drugs listed on the
Federal Supply Schedule. FSS prices are
intended to equal or better the prices
manufacturers charge their ``most-
favored'' nonfederal customers under
comparable terms and conditions. Because
terms and conditions can vary by drug,
the most-favored customer price may not
be the lowest price in the market. FSS
prices are available publicly.
Federal ceiling price (FCP) The maximum price manufacturers can charge
for FSS-listed brand-name drugs to the
Veterans Administration, Department of
Defense, Public Health Service and the
Coast Guard, even if the FSS price is
higher. FCP must be at least 24 percent
of NFAMP. FCP is not available publicly.
Medicaid rebate net price The effective outpatient drug price after
manufacturer rebates to state Medicaid
programs. The basic rebate on brand-name
drugs is the greater of 15.1 percent of
the AMP or the difference between AMP and
the lowest or ``best'' price the
manufacturer charges any purchaser other
than Medicaid. Rebates for generic drugs
are 11 percent of the AMP. Rebates are
larger for brand-name drugs whose AMP
increases exceed inflation in the
consumer price index. Information on
rebate amounts is available publicly; AMP
and best price are not available
publicly.
VA national contract price The price the VA has obtained through
competitive bids from manufacturers for
select drugs in exchange for their
inclusion on the VA formulary. Contract
prices are available publicly.
------------------------------------------------------------------------
Source: GAO, Prescription Drugs: Expanding Access to Federal Prices
Could Cause Other Price Changes, August 2000
Variations in the price can take place because of the power the
drug companies have in their market and also because purchasers can be
separated into groups that vary by their price sensitivity. This
practice is known as price discrimination. Price-sensitive group health
maintenance organizations (HMOs, see glossary), for example, would
decrease the amount of a particular drug they purchase if the price of
that drug increased, particularly if there are equivalent substitutions
available. Doctors who prescribe medications and consumers with
insurance coverage that covers most of the costs of drugs are
considered to be price insensitive. An individual consumer without
coverage and without bargaining power would be ``price sensitive'' to
costs and more willing or forced either to use a substitute or decrease
use.
Consequently, drug manufacturers charge different prices to
different purchasers for the same drug. Agencies of the federal
government, state Medicaid programs and many nonfederal public health
entities have access to substantially lower prices through the Federal
Supply Schedule (FSS) for pharmaceuticals.
Under the Omnibus Budget Reconciliation Act of 1990 (OBRA), drug
manufacturers must provide rebates to state Medicaid programs for their
outpatient drugs in exchange for Medicaid coverage. The minimum rebate
for a brand-name drug is 15.1 percent of the average manufacturer price
(AMP). Medicaid pays the pharmacy its acquisition price plus a
dispensing fee and gets an average cash rebate of 19 percent to 21
percent from the manufacturer. Favored private purchasers with their
own outpatient pharmacies, such as HMOs and hospitals, may deal
directly with the manufacturers and consequently pay a price lower than
that offered to wholesalers.
Insurers and pharmacy benefit managers (PBMs, see glossary) obtain
both a retail discount and a rebate from the manufacturer wielding
their bargaining power through the use of formularies, i.e. lists of
drugs approved for use and reimbursement. It is of significant economic
importance to manufacturers to have their drugs included in the
formularies of large purchasers. The amount of rebates can vary
considerably by type of arrangement and by drug. Thus, together with
co-pays from covered beneficiaries, discounts and rebates, an insurer
and PBM likely would pay between $30 and $44 for a drug for which the
uninsured cash customer would pay $52. With rebates, Medicaid would pay
about $34 for the same drug.
Most retail pharmacies, however, do not have the bargaining power
for discounts that other favored purchasers have, as they must stock a
full range of drugs, not just those in specified formularies, in order
to fill all prescriptions presented to them. At the bottom of the
chain, it is the noninsured consumer who pays the most for a
prescription drug.\14\
Who Pays?
On average, Americans use about 10 prescriptions a year, but most
do not pay full price for them. Slightly more than three in four (77
percent) of the non-Medicare population have prescription drug
coverage. Sixty-one percent have coverage from their employer; 11
percent have coverage under Medicaid and 5 percent have private
coverage. Nearly one-fourth of the non-Medicare population has no drug
coverage, primarily because they do not have health insurance.
Since Medicare does not have an outpatient prescription drug
benefit, at least one in three people in the Medicare population--
approximately 13 million--have no drug coverage at all in the course of
a year; nearly half have no coverage for at least part of an entire
year. Employers cover prescription drugs for 24 percent of the Medicare
population. Seventeen percent are covered by Medicare HMOs. Others rely
on Medicaid (12 percent) and other sources (5 percent) for
coverage.\15\ Another 8 percent purchase Medigap plans, but they must
pay for the coverage and are subject to high administrative costs and
high premiums as well as adverse selection.
The prescription drug benefit has been a major reason many Medicare
beneficiaries are attracted to Medicare HMO plans. However, many of
them are losing their prescription drug benefit either because of the
withdrawal of HMOs from Medicare or a decline in the number of plans
covering the benefit. Many rural counties now have either no carriers
or only one noncompetitive plan. At the end of 2000, more than 900,000
Medicare beneficiaries were dropped from their HMOs; they encountered
more difficulty finding an alternative HMO than the 700,000 who were
dropped in 1998 and 1999. Of 237 HMOs once in the Medicare program,
only 90 continue.\16\ A study of benefits under Medicare+ Choice plans
during the 1999-2000 period shows there was a decline in the number of
contracts covering prescription drugs from 73 percent to 68
percent.\17\
Source: Adapted from Jack Hoadley, Ph.D., Office of the Assistant
Secretary for Planning and Evaluation (ASPE), DHHS. Presentation to
ASPE Conference on Pharmaceutical Pricing, Utilization and Costs,
Washington, D.C., Aug. 8-9, 2000.
There also is evidence of decline in either the generosity of the
benefit or an increase in cost-sharing. Seventy percent of plans have
an annual $1,000 or less limit on drugs and 32 percent have caps of
$500 or less per enrollee.\18\ A survey of enrollees in Medicare HMOs
found that 72 percent of them saw their annual HMO premiums increase by
at least $500 within one year.\19\
Similarly, employer coverage for retirees and the scope of their
benefits has been declining in the past decade because of rising costs.
Among employers with more than 200 workers offering retiree health
benefits, 67 percent offered them to Medicare-eligible retirees in
2000, down from 80 percent in 1999, a 16 percent decline. Sixty-seven
percent of firms of all sizes report that higher spending for drugs
contributed ``a lot'' to increases in health insurance premiums in
2000.\20\ Another survey of employers reports that drug costs
represented 40 percent to 60 percent of employers' retiree plan costs.
Large employers (1,000 employees) are most likely to offer retiree
health plans. However, 40 percent of them are seriously considering
cutting back on drug benefits for their retirees in the next three to
five years and 30 percent would consider terminating coverage
prospectively for retirees ages 65 and older.\21\
Consequently, the number of Medicare beneficiaries without
prescription drug coverage can be expected to grow considerably,
leaving millions more to pay the highest prices for their
prescriptions.
The Money Chain: How Are Drug Revenues Spent?
Drug manufacturers devote more of their revenues to profits and
marketing than to research and development (R&D). The 12 drug companies
with the highest revenues spent three times as much on marketing as on
R&D in 2000. More than 18 percent of revenues are dedicated to profits,
compared with 12 percent spent on R&D and 30 percent on marketing and
administration.\22\
Profits
The pharmaceutical market differs from other markets in a number of
ways:
There is a ready demand for the old as well as the higher-
priced new therapeutic products, so marketing is intense;
There is insurance coverage and subsidization for the
product;
Government pays for a substantial share of research that
leads to drug development;
There is government compliance in supporting drug monopolies
through allowing market exclusivity under a patent and the
extension of patents; and
There are hidden prices, discounts and rebates.\23\
The pharmaceutical market differs also in the profits the industry
makes compared with others. As can be seen in the following chart, data
from the list of Fortune 500 companies show that in 2000, the after-tax
median profits of pharmaceutical companies was 18.6 percent, higher
than any other industry and considerably higher than the median after-
tax profit level of 4.9 percent for the other Fortune 500 companies
combined. This translates into $192 billion in revenues and $28 billion
in profits in 2000 for drug companies. In fact, Fortune magazine places
the pharmaceutical companies at the top in two of three categories--
returns on revenues and returns on assets--and second in returns on
shareholders' equity.\24\
Source: FORTUNE magazine
Not only are pharmaceutical companies more profitable than other
industries, they also have a lower tax rate. There are five federal tax
provisions that result in greater tax savings for the drug companies
than other major industrial categories. A Congressional Research
Service report found that while the average tax rate for all industries
was 27.3 percent between 1993 and 1996, the rate for drug companies was
only 16.2 percent.\25\
Research and Development
Although pharmaceutical companies claim the prices of new drugs are
necessary to fund ongoing research and development, it is the federal
government, primarily through the National Institutes of Health (NIH),
that pays for the majority of the initial drug research in the United
States.
A congressional committee found that of the 21 most important drugs
introduced between 1965 and 1992, 15 were developed using knowledge and
techniques originating in federally funded research.\26\ A team of
journalists from The Boston Globe looked at 50 top-selling drugs
approved by the FDA over a five-year period. Thirty-five were new
bestseller drugs that the FDA considered most important or most unique,
and 15 were so-called ``orphan'' drugs that treat rare diseases.
Thirty-three of the 35 new drugs and 12 of the 15 orphan drugs received
money from NIH or the FDA to help in discovery, development or
testing.\27\
Drug manufacturers also maintain that the most expensive aspect of
their research is in the clinical trials,\28\ yet NIH and other federal
agencies are sponsoring 60 percent of current clinical trials and the
industry is sponsoring just 11 percent.\29\
During the 1980s and early 1990s, NIH required drug companies to
charge a ``fair and reasonable'' price for drugs originally developed
by taxpayer-funded research and development. This requirement was
dropped by NIH in 1995. Reinstatement of this requirement is part of a
proposal now in Congress, but it may not have sufficient support in the
face of intensive industry lobbying.
In addition, a review of the government's invention reporting
system shows NIH does not keep track of the drugs invented with
taxpayer monies; NIH tracks its spending by disease, not by
drug.30, 31
Much of drug manufacturers' development of drugs is not for
new drugs but rather copies of existing drugs. This is particularly
important to them, as a number of patents are expiring between 2000 and
2004.
Until 1992, the FDA classified every new drug it approved according
to its significance for human health. One classification was 1C,
meaning little or no therapeutic gain, since a drug so ranked was a
duplicate of products already available. During the period from 1982-
1991, more than half of newly approved drugs (53 percent) were 1C or
copycat drugs, indicating that much of drug manufacturers' so-called
research and development of drugs is actually of the ``me too''
variety--therapeutically equivalent drugs. Thirty-one percent of the
approved drugs were classified as modest therapeutic gain, such as a
change in formulation, so the drug could be taken less frequently. Only
16 percent were ranked as important therapeutic gain or a breakthrough
drug. Because of industry pressure, the Bush administration eliminated
these rankings in 1992.\32\
In the 1990s, the FDA approved 857 new drug applications. More than
one-third (311) were new molecular entities (NMEs), compounds that have
never been sold on the U.S. market. Nearly half (426) were ``new
formulations'' or ``new combinations'' of compounds already approved.
New formulations consist of active ingredients already on the market
that have been modified; new combinations contain two or more
previously approved active ingredients in a new single medicine.\33\
Marketing
Pharmaceutical companies' promotional spending directed toward
doctors and consumers topped $8 billion in the first six months of
2000, up 14.3 percent for the same period in 1999. The industry employs
one of the largest sales forces among all manufacturing sectors.
Distribution of prescription samples to doctors accounted for nearly 50
percent of promotional spending. Nearly half of the samples (45.1
percent) were given to patients over the age of 60.\34\
Changes to FDA policy in 1997 have allowed drug manufacturers to
expand advertising via mass media to consumers. Direct-to-consumer
(DTC) advertising, primarily through television ads, totaled $1.3
billion for the first half of 2000 only, compared with $1.3 billion for
all of 1998 and $1.8 billion for 1999.\35\
The direct-to-consumer advertising and dispensing of free brand
samples by physicians generate market demand whereby consumers are
introduced to and encouraged to request the brand-name drugs from their
physicians. In a telephone poll conducted in 2000, 91 percent of
Americans said they had seen or heard an advertisement for prescription
drugs in the past year; 34 percent said they had talked with their
doctor about a specific medicine they saw or heard advertised; and 7
percent said they asked their doctor to prescribe a medicine they saw
advertised.\36\ DTC ads can produce significant returns. In the first
10 months of 2000, pharmaceutical companies Merck and Pfizer together
spent $206 million combined on advertising for their arthritis drugs,
Vioxx and Celebrex respectively, resulting in combined sales of $3.7
billion.\37\
Lobbying
The drug industry spends a considerable amount on lobbying efforts
to protect their interests. Overall, the industry spent $278.5 million
from 1997 to mid-2000 lobbying the Clinton administration and members
of Congress on both sides of the aisle. During this period, nearly 300
lobbyists, many former members of Congress or former congressional/
administration staffers, were hired to fight bills that would control
their prices and limit their profits.\38\ During the 2000 election
cycle, pharmaceutical companies contributed $26 million to
congressional and presidential campaigns, about 30 percent to
Democratic candidates and 70 percent to Republican candidates.\39\
In addition, drug companies are financial backers of such front
groups as ``Citizens for Better Medicare.'' In 2000, CBM waged a $50
million ad campaign against a prescription drug benefit under the
Medicare program.\40\ Also, at least $20 million was funneled through
the U.S. Chamber of Commerce during the 2000 election cycle for ads
defending candidates who oppose governmental solutions to the high
costs of drugs and attacking members of Congress who favored a
universal Medicare benefit and systems designed to moderate drug
prices.\41\
Why Not Have More Substitution of Generic Drugs?
During the 1950s and 1960s, drug manufacturers persuaded doctors to
prescribe brand-name drugs and state legislatures to prevent
pharmacists from substituting generic drugs. Those laws were repealed
during the 1970s and the drug companies then turned their attention to
protecting their interests by obtaining patent extensions and using
loopholes to stall the introduction of generic drugs.\42\ For example,
many patents on drugs can be extended beyond the 17 years of a patent
by altering dosages or shapes of the drugs for the sole purpose of
obtaining another patent on essentially the same drug. Companies also
are able to acquire 30-month extensions on brand patents when they
obtain FDA approval to switch the patented prescription drug to an
over-the-counter drug. During the extension periods, generic drug
makers thereby are prevented from introducing their products.
In 1984, Congress attempted to keep drug prices down through the
Drug Price Competition and Patent Term Restoration Act--also called the
Hatch-Waxman Act. The intent of this legislation was to speed up the
entry of generic drugs and encourage competition between companies
producing generic and brand-name drugs. When the first generic is
allowed to enter the market after expiration of a patent, it has six
months' exclusivity and its price is 75 percent to 80 percent of the
brand. After other generics are allowed to enter the market, within a
12- to 18-month period, the average generic drug price will be one-
third the price of the brand-name drug price.\43\ As part of a
legislative compromise, the Act allows for brand patent extensions
based on time spent in the FDA review process.
Today, more than 40 percent of all prescription drugs sold in the
United States are off-patent generic drugs, but the dollar share of the
market is less than 10 percent, indicating how far less costly generic
drugs are.\44\ However, a Congressional Budget Office study shows that
increased competition from generics has not reduced the profitability
of the prescription drug industry.\45\
In recent years, the intent and benefits of the Hatch-Waxman law
have been undermined by generic as well as brand companies. Through
federal investigations or lawsuits, several cases have come to light in
which brand companies have made agreements with generic companies.
Typically, the generic company agrees not to produce the generic drug
in return for substantial compensation from the brand-name
company.46, 47
In applying for approval from the FDA, generic drug firms are
hampered by having to address nearly every aspect of a brand-name
patent in the FDA's registry, including patents on such nonessential
features as color, size, shape and types of containers. Another
obstacle is the practice by brand-name companies of filing ``citizens
petitions'' that require FDA investigation of issues raised in the
petition. Citizens petitions originally were created to allow
individuals to voice concerns to the FDA about the safety or efficacy
of a generic drug. However, the drug firms abuse this provision by
filing petitions for the purpose of delaying entry of generic
competition.
Currently, drug patents in force prior to June 8, 1995, have a term
of either 17 years from date of issuance of the patent award or 20
years from the date of filing an application for a patent, whichever is
longer, plus allowance for up to a five-year extension under the
Waxman-Hatch Act. Under the Uruguay Round Agreements Act (URAA) of
1994, patents issued after June 8, 1995, have a term of 20 years from
date of filing plus allowance for a five-year extension for court
appeals, interference actions and certain other delays. The effective
patent life, the portion of patent term remaining after clinical
testing and FDA review, generally is less. Nevertheless, the average
effective patent life of many drugs has increased by 50 percent over
the past two decades. The Hatch-Waxman Act, URAA and other laws could
add 4.4 to 5.9 years to effective patent lives of some new drugs, for a
total of 13.9 to 15.4 years.\48\
Proposed Solutions
Aside from plans that would expand or provide an affordable
prescription drug benefit for seniors, a number of proposals have been
made to alleviate the high cost of prescription drugs and check the
growth in prices. A partial list includes:
Allow the re-importation of drugs by pharmacies and health
plans;
Require drug companies to give local pharmacies the ``best''
price they give their most favored customers, or the average
foreign price;
Enact state initiatives to control prices;
Close loopholes in the Hatch-Waxman Act that allow brand-
name drug companies to obstruct entry of generic competitors;
Elevate cost-consciousness of doctors and patients;
Reinstate requirement for ``reasonable pricing'' on products
that were researched and developed using taxpayer monies via
NIH;
Authorize the federal government to buy drugs in bulk and at
discount for Medicare beneficiaries;
Open the market to more competition by shortening the length
of patents and/or eliminating the practice of patent
extensions;
Enact compulsory licensing; and
Authorize the NIH to develop a yardstick for comparing
prices.
Allow the re-importation of drugs by pharmacies and health plans.
In the past, only drug manufacturers were allowed to re-import
drugs made in the United States from countries where the drugs are
available at lower prices.
A provision allowing the re-importation of FDA-approved
prescription drugs was included in the FDA and Agriculture Department
appropriations bill (H.R. 4461) passed by Congress and signed by
President Clinton Oct. 28, 2000. It included $23 million in funding for
FDA implementation in the first year. However, Health and Human
Services Secretary Donna Shalala did not request the monies to begin
the program because of ``flaws and loopholes.'' Some members of the
107th Congress have asked President Bush to proceed with
implementation.
Many in Congress and others have opposed the measure on the basis
of the ``loopholes'' rather than the concept. That is, drug companies
can refuse to allow re-importers to use the FDA-approved labels on
their products, effectively blocking re-importation. The measure also
does not prevent drug companies from imposing restrictive contract
terms on foreign distributors, and a sunset stipulation ending the re-
importation system after five years is seen as a disincentive for
public and private investment in the program. There is also concern
that the benefits of the Prescription Drug Marketing Act (PDMA) of 1987
are undermined. PDMA protects consumers from foreign counterfeits and
improper storage in foreign countries. Legislation (H.R. 1512) has been
proposed in the 107th Congress to close most of the loopholes.
Require drug companies to give local pharmacies the ``best'' price they
give their most favored customers, or the average foreign
price.
Legislation introduced in the 107th Congress (S. 125, H.R. 1512)
would make it possible for pharmacies to purchase drugs for seniors and
disabled persons on Medicare at the lowest price pharmaceutical
manufacturers give to such federal agencies as the Veterans
Administration and military treatment facilities. A report from the
federal General Accounting Office concluded that enactment of this
proposal would not necessarily control the increase in drug prices
overall, because drug companies likely would raise their prices to the
federal agencies to offset losses in the reduction of prices to
Medicare beneficiaries.\49\ However, an increase in the volume of drugs
sold would be sufficient to compensate the drug firms for the reduced
prices. One analysis of a similar bill estimates that after adjusting
for increased utilization, the net drop in total pharmaceutical
industry revenues would be just 3.3 percent.\50\ A variation on this
proposal, also introduced in the 107th Congress (S. 699, H.R. 1400),
would allow pharmacies to purchase the drugs at the average price at
which the drugs are sold in other developed nations.
Enact state initiatives to control prices.
A number of states have taken on the problem of high prescription
drug costs, largely because of inertia on the national level. More than
40 states considered legislation to lower prescription drug costs in
their 2001 sessions.
The state of Maine enacted the ``Maine Rx Program'' in 2000, which
would have allowed the state to negotiate lower drug prices with drug
manufacturers for Maine residents who lack prescription drug coverage.
Drug companies found guilty of overcharging for drugs or restricting
supplies would have incurred fines. The law also authorized the state
to establish price caps. The Pharmaceutical Research and Manufacturers
of America (PhRMA) filed a lawsuit challenging the constitutionality of
the law. The case has subsequently moved through the courts. In May,
2001, a federal appeals court ruled in favor of Maine. PhRMA has
appealed the case to the U.S. Supreme Court.\51\
Legislation has been introduced in a number of other states
focusing on lowering pharmaceutical costs by various means. Thirty-four
states plan to create rebate or discount prescription drug cards in
2002 and 32 states are considering purchasing pools.\52\
Several states have already formed bulk purchasing alliances to
negotiate lower prices for segments of their populations, such as
Medicaid recipients or public employees. Attorneys general in several
states are considering or taking legal action to require drug companies
to lower prescription drug prices. At least two states have filed
lawsuits charging pharmaceutical companies with illegally inflating
prices.\53\
Close loopholes in the Hatch-Waxman Act that allow brand-name drug
companies to obstruct entry of generic competitors.
Legislation introduced in the 107th Congress (S. 812) would
streamline the approval process for generic drugs from the FDA. If a
brand-name firm pays a generic firm to stay off the market, that
company's 180-day market exclusivity as first generic would roll over
to the next generic applicant. The measure also addresses abuse of
``citizens petitions.''
Elevate cost-consciousness of doctors and patients.
Survey data indicate that current Medicare beneficiaries rely on
their physicians for guidance regarding selection of drugs.
Furthermore, generic companies do not promote their products to doctors
as brand-name companies do.
To enhance doctor and patient decision making and to ensure patient
safety, Rx Health Value, a coalition of insurers, unions, private
employers, academics and consumer and senior advocacy groups,
recommends independent research to provide usable, reliable data for
practitioners and consumers in deciding on the use of new drugs and how
to evaluate relative merits of different drugs within the same
class.\54\ Another recommendation is to publicly fund an independent
organization as a reliable source of information on the quality of
generic drugs and the equivalence across brand-name drugs in the same
drug categories.\55\ Presumably, doctor and consumer education also
will lead to increased price sensitivity without coercion.
Reinstate requirement for ``reasonable pricing'' on products that were
researched and developed using taxpayer monies via NIH.
In effect, this would eliminate the subsidy supplied to the drug
makers. An amendment to that effect was passed in the House in the
106th Congress by a vote of 313-109. It is included in other drug cost-
containment legislation (H.R. 1512) introduced in the 107th Congress.
However, reinstatement of the requirement may not allow for
retroactivity, meaning it would not apply to products already on the
market. Additionally, NIH's reporting system needs to be shored up
considerably for this requirement to be effective.
Authorize the federal government to buy drugs in bulk and at discount
for Medicare beneficiaries.
The Health Care Financing Administration (HCFA), which administers
the Medicare program, could be given the authority to negotiate price
reductions with pharmaceutical companies much as it does with such
providers as hospitals, doctors and nursing homes. HCFA also could be
authorized to use the prescription drug fee schedule the Veterans
Affairs Department and other federal agencies have negotiated with the
drug makers.\56\
Open the market to more competition by shortening the length of patents
and/or eliminating the practice of patent extensions.
This approach actually might produce greater technological
breakthroughs because, without the 17 to 20 years of exclusivity on
patents, the drug manufacturers would have greater incentive to develop
the next money-making drug. Patents spur innovation, but so do their
expiration. Once a drug manufacturer has a blockbuster drug, it is
inclined to protect the patent on that drug as long as possible,
including making copycat drugs, in order to continue reaping
substantial profits. Closing loopholes on patent extensions could shift
attention to new research.\57\
Enact compulsory licensing.
This option is discussed most recently in regard to measures
African countries and Brazil are taking to obtain drugs for treating
citizens with AIDS and HIV. A 1994 international trade agreement
protecting intellectual property grants 20-year patents to drug
manufacturers. However, compulsory licensing allows a government in a
national emergency to license local or other manufacturers to produce
cheaper versions of drugs whose patents are held by multinational
companies. Compulsory licensing in the United States could take the
form of allowing the originator of the drug to have a monopoly for a
few years with no extensions, then compelling that company to license
the drug to other manufacturers in return for a royalty payment.
Authorize the NIH to develop a yardstick for comparing prices.
The NIH could be designated the federal agency for developing,
testing and producing new medicines. Using this experience to measure
costs of research and development, NIH would be in a position to gauge
whether prices charged by manufacturers are reasonable or excessive.
Federal and state agencies then would contract only with manufacturers
whose prices were reasonable.\58\
A variation on this would be to endow a private, nonprofit
institute as an independent source of research to verify whether drugs
are new or just variations of old drugs.\59\
Conclusion
Whatever solution or solutions are devised and implemented, the
excessive rise in prices indicates that immediate action is necessary.
All developed countries that have lower drug prices than the United
States also have some form of universal health insurance coverage.
While the presence of insurance coverage increases utilization and
expenditures for prescription drugs, it also provides the means and
incentives for governments to control expenditures. For Medicare
beneficiaries, the urgent need for such coverage is self-evident, as is
the need for mechanisms to assure the affordability of such a benefit.
Ultimately, the best and most comprehensive approach to providing
affordable prescription drugs for all the American people is to enact a
universal, national health system based on a single-payer financing
model.
Glossary of Key Prescription Drug Pricing Terms
Average manufacturer's price (AMP). Average price paid by
wholesalers to manufacturer. Established by manufacturers as a
suggested list price for wholesalers selling to pharmacies. Also called
the wholesaler acquisition cost (WAC).
Average wholesale price (AWP). Published wholesale price (``list
price'') suggested by the drug manufacturer. It is comparable to a
sticker price on an automobile.
Cost-sharing. Consumers pay a portion or percentage of the price.
Co-payments are consumer payments of a fixed cost per prescription (for
example, $5); co-insurance is payment of a proportion of costs (perhaps
20 percent). (See Tiers below.)
Discount. The price lower than the base price paid by certain
purchasers to the retail pharmacy; amount is negotiated.
Formulary. List of drugs approved for use or payment--in other
words, covered or reimbursable drugs. An open formulary includes all
drugs; a restricted or closed formulary covers only the listed drugs. A
partially closed formulary specifies drugs covered but allows
exceptions with prior approval and/or with increased co-payments.
Generic drug. A generic drug is one that is chemically identical
and bioequivalent to the brand-name drug. FDA approval requires that a
generic drug must be absorbed into the body at essentially the same
rate and to the same extent as the brand-name drug.
Health maintenance organization (HMO). A structure for providing
managed care resulting in lower costs. HMOs under the Medicare+ Choice
program are paid a fixed monthly amount adjusted for beneficiary's age,
gender, institutional status and Medicaid enrollment. They typically
yield lower costs and provide benefits, such as prescription drugs, not
covered under Medicare for enrolled participants.
Indemnity coverage. As it pertains to prescription drugs, the
insured pays for the prescription and then is reimbursed or indemnified
by the insurance plan.
Launch price. The price of a new drug as established by a
manufacturer when the drug is introduced on the market.
Market power. The degree to which a company exercises influence
over the price and output in a particular market. Market power is
related to the availability of substitute products. A drug manufacturer
with a patent on an unrivaled drug has great market power.
Monopoly. A market in which there is only one supplier. A drug
manufacturer with a drug patent has a monopoly on that drug. The patent
protects the manufacturer from competition of chemically identical (but
not therapeutically equivalent) drugs and allows it to set the market
price.
Oligopoly. A market in which relatively few firms have significant
influence over the price of a product in the market, such as when two
or three drugs dominate a therapeutic category.
Patent. A patent on a drug protects it from replication competition
for a number of years. The effective patent life is the portion of the
patent term remaining after safety and efficacy testing, clinical
trials and FDA approval for marketing.
Pharmacy benefit managers (PBMs). Private companies that contract
with health plans to arrange discounts from retail pharmacies and
manage distribution of drugs. They may also perform such functions as
paying claims and negotiating price discounts via rebates.
PhRMA. Pharmaceutical Research and Manufacturers of America, an
association of prescription drug manufacturers.
Price discrimination. The selling of the same product to different
purchasers at different prices.
Price sensitivity. Refers to the extent to which a purchaser would
change the amount of a product it would buy if the price of that
product should rise or fall.
Rebate. Money that is returned to the purchaser by the seller after
the purchase has taken place. Usually a percent of the value of the
drug dispensed.
Retail price. The price charged by retail pharmacies to individuals
without insurance, known as ``cash-paying'' customers.
Therapeutically equivalent drugs. Drugs that perform the same
function as another drug even though they may be different chemically.
Therapeutically equivalent drugs can be in competition with each other
for listing on formularies.
Tiers of co-payments. Refers to the co-payment amount health plans
may require for purchasing drugs from a formulary with the purpose of
encouraging the use of generic drugs. The first tier co-payment would
be for generic drugs and require the lowest co-payment, for example $1;
the second tier would be for brand-name drugs listed on the formulary
with a co-payment of $10, for example; the highest co-payment would be
for drugs not listed on the formulary, perhaps $20.
Endnotes
\1\ Bureau of National Affairs. Special Health Care Policy Report:
Drug Prices. Vol. 8, No. 19. (May 8, 2000)
\2\ Health Care Financing Administration. National Health Care
Expenditures Projections: 2000-2010. (March 2001) [www.hcfa.gov]
\3\ Families USA. Cost Overdose: Growth in Drug Spending for the
Elderly, 1992-2010. (July 2000) [www.familiesusa.org]
\4\ Congressional Research Service. Medicare Prescription Drug
Coverage for Beneficiaries: Background and Issues. (Jan. 26, 2001)
\5\ Congressional Budget Office. Laying the Groundwork for a
Medicare Prescription Drug Benefit. Statement of Daniel L. Crippen,
Director, before Subcommittee on Health of the House Ways and Means
Committee. (March 27, 2001)
\6\ Kaiser Family Foundation. The Medicare Program: Medicare and
Prescription Drugs. Fact Sheet. (February 2001)
\7\ Ibid.
\8\ Ibid.
\9\ Bureau of National Affairs. Special Health Care Policy Report:
Drug Prices. Vol. 8, No. 19. (May 8, 2000)
\10\ Noonan, David. Why Drugs Cost So Much. Newsweek. (Sept. 25,
2000)
\11\ Congressional Budget Office. How Increased Competition from
Generic Drugs Has Affected Returns in the Pharmaceutical Industry.
(July 1998) [www.cbo.gov]
\12\ U.S. Department of Health and Human Services. Prescription
Drug Coverage, Spending, Utilization, and Prices. Report to the
President (April 2000). [aspe.hhs.gov/health/report/drugstudy]
\13\ Kaiser Family Foundation. Prescription Drug Trends: A
Chartbook by Kreling DH, Mott DA, Widerhold JB, Lundy J, Levitt L.
(July 2000) [www.kff.org]
\14\ U.S. Department of Health and Human Services. Prescription
Drug Coverage, Spending, Utilization, and Prices. Report to the
President. (April 2000) [aspe.hhs.gov/health/report/drugstudy/exec.htm]
\15\ Public Citizen. D.C. Area Consumers Pay More for Prescription
Drugs While Pharmaceutical Profits Soar. (Oct. 24, 2000)
\16\ Weiss Ratings. Few Options Available for the Nearly One
Million Seniors To Be Dropped from HMOs by Year-End.
[www.weissratings.com]
\17\ Cassidy, Amanda, Gold, Marsha. Medicare Choice in 2000: Will
Enrollees Spend More and Receive Less? Commonwealth Fund. (August 2000)
[www.cmwf.org]
\18\ U.S. Department of Health and Human Services. Prescription
Drug Coverage, Spending, Utilization, and Prices. Report to the
President. (April 2000) [aspe.hhs.gov/health/report/drugstudy/exec.htm]
\19\ Medicare Rights Center. Trying to Fill the Medicare Gaps.
(Winter 2000) [www.medicarerights.org]
\20\ Kaiser Family Foundation and Health Research and Educational
Trust. Employer Health Benefits 2000 Annual Survey.
\21\ Hewitt Associates. Retiree Health Coverage: Recent Trends and
Employer Perspectives on Future Benefits. Report prepared for Henry J.
Kaiser Family Foundation. (October 1999)
\22\ Public Citizen. Drug Industry Most Profitable Again: New
Fortune 500 Report Confirms ``Druggernaut'' Tops Other Industries in
Profitability Last Year, 2001.
\23\ Schondelmeyer, Stephen. Role of Price Transparency in the
Pharmaceutical Market. Presentation to ASPE Conference on
Pharmaceutical Pricing, Utilization, and Costs, Washington, D.C., Aug.
8-9, 2000.
\24\ FORTUNE magazine. [www.fortune.com]
\25\ Congressional Research Service. Federal Taxation of the Drug
Industry from 1990 to 1996, Memorandum to Joint Economic Committee.
(Dec. 13, 1999)
\26\ Congressional Joint Economic Committee Report. The Benefits of
Medical Research and the Role of the NIH. (May 2000)
\27\ The Boston Globe. Public Handouts Enrich Drug Makers,
Scientists. (April 5, 1998)
\28\ PhRMA, Pharmaceutical Industry Profile 2000. [www.phrma.org/
publications]
\29\ National Institutes of Health. Linking Patients to Research.
[clinicaltrials.gov]
\30\ The Boston Globe. Public Handouts Enrich Drug Makers,
Scientists. (April 5, 1998)
\31\ U.S. General Accounting Office. Technology Transfer: Reporting
Requirements for Federally Sponsored Inventions Need Revisions. (August
1999)
\32\ Public Citizen. Why the Pharmaceutical Industry's ``R&D Scare
Card'' Does Not Justify High and Rapidly Increasing U.S. Drug Prices.
(Jan. 26, 2000)
\33\ National Institute for Health Care Management. Prescription
Drugs and Intellectual Property Protection. (August 2000)
\34\ IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8
Billion in First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad
Investment in U.S. Reaches $1.3 Billion in First-Half 2000. (October
2000) [www.imshealth.com]
\35\ National Institute for Health Care Management. Prescription
Drugs & Mass Media Advertising. (September 2000)
\36\ ``The NewsHour'' with Jim Lehrer/Kaiser Family Foundation/
Harvard School of Public Health. National Survey on Prescription Drugs.
(September 2000)
\37\ IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8
Billion in First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad
Investment in U.S. Reaches $1.3 Billion in First-Half 2000. (October
2000) [www.imshealth.com]
\38\ Public Citizen. Addicting Congress: Drug Companies' Campaign
Cash & Lobbying Expenses. (July 2000) [www.citizen.org]
\39\ Center for Responsive Politics. Pharmaceuticals/Health
Products: Top Contributors, and, Long-Term Contribution Trends.
[www.opensecrets.org/industries]
\40\ The New York Times. With Quiet, Unseen Ties, Drug Makers Sway
Debate. (Oct. 5, 2000)
\41\ The Wall Street Journal. Drug Firms Underwrite U.S. Chamber's
TV Ads. (Oct. 6, 2000)
\42\ Surowiecki, James. Big Pharma's Drug Problem. The New Yorker.
(Oct. 16 and 23, 2000)
\43\ Schondelmeyer, Stephen. Prescription Drugs: Demystifying the
Industry. Presentation to Health Action 2001 National Grassroots
meeting. (Jan. 27, 2001)
\44\ National Institute for Health Care Management. Prescription
Drugs and Intellectual Property Protection. (August 2000)
\45\ Congressional Budget Office. How Increased Competition from
Generic Drugs Has Affected Returns in the Pharmaceutical Industry.
(July 1998) [www.cbo.gov]
\46\ The New York Times. Medicine Merchants Holding Down the
Competition: How Companies Stall Generics and Keep Themselves Healthy.
(July 23, 2000)
\47\ Federal Trade Commission. Health Care Antitrust
Report...Health Care Services and Products. [www.ftc.gov/bc/hcindex/
conduct.htm]
\48\ National Institute for Health Care Management. Prescription
Drugs and Intellectual Property Protection. (August 2000)
\49\ Merrill Lynch. A Medicare Drug Benefit: May Not Be So Bad.
(June 23, 1999)
\50\ U.S. General Accounting Office. Prescription Drugs: Expanding
Access to Federal Prices Could Cause Other Price Changes. (August 2000)
\51\ Academy for Health Services Research and Health Policy. State
of the States. State Coverage Initiatives. (January 2002)
[www.statecoverage.net]
\52\ Bureau of National Affairs. Northeast Lawmakers to Discuss
Prescription Drug Pricing Issues. Vol. 10, No. 10. (March 11, 2002)
\53\ Bureau of National Affairs. State Sues Pharamaceutical
Companies Charging Inflation of Prescription Drug Prices. Vol. 10, No.
9. (March 4, 2002)
\54\ Rx Health Value: The Independent Information Center.
[RxHealthValue
@aol.com]
\55\ Moon, Marilyn. Prescription Drugs as a Starting Point for
Medicare Reform. Testimony before the Senate Budget Committee. (Feb.
15, 2001)
\56\ Public Citizen. D.C. Area Consumers Pay More for Prescription
Drugs While Pharmaceutical Profits Soar. (Oct. 24, 2000)
\57\ Surowiecki, James. Big Pharma's Drug Problem. The New Yorker.
(Oct. 16 and 23, 2000)
\58\ Mintz, Morton. Still Hard to Swallow. The Washington Post.
(Feb. 10, 2001) (Jan. 2, 2001)
\59\ Reinhardt, Uwe. How to Lower the Cost of Drugs, The New York
Times. (Jan. 2, 2001)
About the Alliance for Retired Americans
The Alliance for Retired Americans is a new senior advocacy
organization that was created in January 2001 by national and local
affiliates of the AFL-CIO, together with community-based organizations,
to provide a voice for the rapidly growing numbers of union retirees
and older Americans.
The mission of the Alliance for Retired Americans is to ensure
social and economic justice and full civil rights for all citizens so
they may enjoy lives of dignity, personal and family fulfillment and
security. The Alliance believes that all older and retired persons have
a responsibility to strive to create a society that incorporates these
goals and rights; and that retirement provides them with opportunities
to pursue new and expanded activities with their unions, civic
organizations and their communities. The Alliance's public policy and
legislative goals will be achieved through mobilization of members in
an extensive grassroots network in every region, state and district in
the country.
Acknowledgments
This report was researched and written by Dianna M. Porter, public
policy analyst with the Alliance for Retired Americans. Ms. Porter
previously worked as public policy director at the Older Women's League
and National Council on the Aging, and as a professional staff member
with the U.S. Senate Special Committee on Aging. More recently, she
assisted the government of Macedonia in the development of a private
pension system. Ruby Scott and Brenda Brooks assisted Ms. Porter in
preparing the original manuscript for this report.
Case Studies
Coverage Doesn't Mean Full Coverage--Ms. M of Suitland, Md., has
congestive heart disease and is required to take 10 medications. Even
though she is under a Medicare HMO, she pays full payments and co-
payments of about $300 per month. The HMO plan has a cap of $1,000 per
year for prescription drugs. When Ms. M surpasses that amount in June,
she must assume the total costs of her prescriptions. She is ineligible
for her state's drug assistance program because her income is just
above the allowable level of 116 percent of poverty.
Prescription Drug Costs Lead to Impoverishment--Ms. FM of Rossville,
Ga., is 73 and widowed. Her annual prescription drug costs are about
$4,200 ($350 per month). Her income is $608.50 a month--$569 from
Social Security and $39.50 from her husband's pension. She has had both
a heart attack and a hiatal hernia. She lost her insurance coverage and
used her savings to pay for prescriptions, to the point where she
doesn't have enough to pay her Medicare premiums. Fortunately, Family
Services pays for her Medicare premiums now.
Limited Coverage Lost When HMO Fails--Ms. D of Lebanon, Tenn., has
annual prescription drug costs of $2,900. In September 1998, Ms. D was
forced to join an HMO or pay for all of her supplemental insurance,
which she could not afford. She had a minimal prescription drug
benefit, but the HMO folded in January 2001. Ms. D's pension is $322.50
a month and her Social Security is $538 a month. ``It isn't always easy
skimping and scraping to stay on top,'' she says.
Health Plan Coverage Not Enough--Mr. and Ms. R of Lansing, Ill., have
annual prescription drug costs of more than $4,000. They do not have
prescription drug coverage because it would cost about $2,000 to
$3,000, while the policy would only pay about $1,600.
Some Must Rely on Samples--Ms. N of Los Angeles is 87 and widowed. She
pays $135.99 for an antibiotic and $59.69 for prescription eyedrops.
She is only able to take two other prescriptions her doctor has
recommended by getting free samples.
Dosage Decreases, But Prices Stay the Same--Mr. S of Yarmouthport,
Mass., is 87 and married. His annual prescription drug costs are about
$4,500. Originally, Mr. S's doctor prescribed 10 mg. of one of the
drugs, which cost $251.99. The dosage was later decreased to 5 mg., but
the cost remained $251.99 for the prescription.
Prescription Drug Costs Wipe Out Life Savings--Ms. H of Springfield,
Ill., has prescription drug costs of $4,000 per year. Over a decade,
this has amounted to $40,000, depleting most of her life savings.
Food Comes Last--Ms. H of Monroe, Ga., is 83 and widowed. Her annual
prescription drug costs are about $3,400 ($283 per month). Ms. H's
monthly income is $691 from Social Security. Her daughter, who was born
with cerebral palsy, lives with her. After paying for utilities (about
$250 a month) and her prescriptions, Ms. H has only $158 for food and
other necessities.
Returning to Work Only Way to Pay for Prescription Drugs--Mr. S of
Medford, Ore., is 71. His prescription drug costs per year are $2,760
($230 per month). Social Security benefits cover the cost of rent,
utilities and food, but not prescriptions. He has diabetes, high blood
pressure and high cholesterol, all of which require medication. His
savings were depleted by treatments for his wife's ovarian cancer. To
pay for the drugs they need, Mr. S has gone back to work. ``Our budget
would be in serious trouble if this old 71-year-old man couldn't put on
his boots and overalls and go to work every day,'' he says.
Mr. Marvin. The trips remind the public of how serious the
drug problems are for seniors and their families, but bus trips
are not the answer. While there are dozens of people riding the
bus and going across to Canada, there are literally hundreds of
others who physically cannot ride a bus to Canada and have even
greater needs for prescription drugs than those who are
fortunate enough to be going three.
Getting drugs through the mail is sketchy at best, thanks
to the FDA, which always seems to imply that somehow, as we
have heard this morning, that the Canadians have lesser
standards than we do. Some diplomacy that represents with our
Canadian brothers across the border.
Senator you can help seniors by finding out just what the
U.S. Customs policy really is. Can we go to Canada and bring
out a 3-month supply? We do that on the bus and the U.S.
Customs Service has no problems with our bringing it across,
but what about getting drugs through the mail? Sometimes they
come and sometimes they are intercepted by the FDA. We need to
get some firm information even now as to what the correct
policy is.
Our people in Maine are well aware that the Canadian
government represents its citizens in dealing with the most
profitable industry in the world. They want to know why the
American government cannot do the same. Our people in Maine
know well that the Canadian government bans advertising in
professional journals, it bans advertising in other than
professional journals. That's not done in the United States and
our people want to know why the U.S. Government doesn't
reinstitute the ban on advertising which contributes heavily to
the cost of drugs in this country.
Our people want to know why the government in the name of
health and safety of its citizens cannot regulate the drug
industry in the same way that the government is involved with
regulating the utilities.
I am proud to be a part of Medicare and the Medicare
insurance program. But I want to demonstrate for you what's
wrong with the program. This stool that I brought is a milking
stool, and I know some of you will be concerned about what
happens to the milk program, but nonetheless, it represents the
Medicare program, if you will. This first leg is Part A of the
Medicare program, it deals with the hospitals. I happen to have
hepatitis B and through Part A, the tests are taken care of, if
I wind up in a hospital because of deterioration of the liver,
it will be taken care of through Part A of the program.
Part B, this is supposed to be white, if you will,
represents the heart of the Medicare program providing for
expenses for the doctors.
But you will notice that my $750 pill bottle, which is the
cost that I pay for a 6-month supply to deal with hepatitis B,
Eupaverin HB, that won't stand on this platform, it falls over.
There really needs to be a third leg, and I would suggest
to you that that third leg which is absolutely essential for a
total Medicare program is a Medicare prescription drug program.
The ARA, the Alliance for Retired Americans, has some ideas
on how to approach this issue and how the Congress could make
positive steps. We are calling for enactment of a new Medicare
pharmaceutical benefit using the $300 billion reserved in the
tax cut legislation for an affordable benefit program.
Congress should consider a change in Medicare sending by
spending these funds over a 6-year period as opposed to the
proposed 10-year period. By doing that, we could deepen the
benefit, make it more affordable for the average income persons
in the Medicare program, but let's do it and stop debating.
That's what the seniors I know in Maine and across the country
are saying.
Senator this angry old man begs you to do something so that
I can get out of the bus tour business. Thank you for the
opportunity.
[The prepared statement of Mr. Marvin follows:]
Prepared Statement of John Marvin, Member of the
Alliance for Retired Americans
Thank you, Senator Dorgan and all of the Members of this
Subcommittee, for this invitation to testify today. I am John Marvin
representing the Alliance for Retired Americans where I serve as a
Regional Board member for the northeastern part of the nation. The
Alliance, which was established on January 1 of this year, now has 2.6
million members across the nation. Retirees from affiliates of the AFL-
CIO, community-based organizations and individual seniors have joined
the Alliance to fight for social and economic justice and civil rights
for all Americans. I am also representing the Maine Council of Senior
Citizens.
I am here today because of my work in Maine and New England to
organize bus trips to Canada so that seniors can buy prescription drugs
at much lower prices than are available in the U.S.
In Maine, we are now organizing our 4th annual trip to Canada which
is scheduled for September 19-20. On the first trip, I saved $400 on a
12-month supply of 40 mg. Zocor. I now take Epivirim HB 100 mg.
instead. While the savings are not nearly as dramatic, I will still pay
$150 less in Canada than at my local pharmacy. That adds up to about a
$300 annual savings to me alone.
On our second trip, we hit the jackpot. We were well aware of the
festering problems for seniors caused by the price of prescription
drugs. But Mike Wallace and the 60 Minutes television program which
featured our trip two years ago escalated awareness of the seriousness
of the problem by putting a human face on it. In the recent elections,
it was the rare candidate indeed who did not pledge to do something
about the problem even if little has been done.
This work organizing trips and advocating for programs to meet the
prescription drug needs of seniors puts me in almost daily contact with
people like Vi Quirion of Waterville, Maine. She retired from a shirt
factory there and has a very modest retirement income--primarily from
Social Security. Instead of paying $1290 at her local pharmacy, she
will pay $660 in Canada for a 6-month supply of Prilosec and Relaten.
Another couple who will ride with us are Pauline and Leopold
Nolette of Biddeford, Maine. Between the two of them, they have
prescriptions for drugs like Anucil, Zocor and Celebrex. Their Canadian
bill will be right around $1162. Their local pharmacy in Biddeford
would charge $3,879 for the same drugs, an incredible savings of
$2,717.
And we will have on the bus at least one breast cancer patient who
must take Tamoxifen. A year ago, a month's supply at her pharmacy in
Augusta was $115. The same quantity cost $15 in St. Stephens, New
Brunswick, an astounding 79% savings.
What infuriates Vi Quirion, the Nolettes, myself and all the others
on the bus is that we are buying these drugs in Canada which are for
the most part manufactured in the United States of America and shipped
there.
Seniors are upset and we have a right to be. Fewer of us have
access to retiree drug benefits and frequently our incomes exceed that
which would qualify us for state low-income drug programs. We are asked
to pay literally the highest price in the world for prescription drugs.
It is even more insane when you realize that most people with
substantial incomes in this country have prescription benefits from
their employers. So seniors wind up paying even more for drugs than do
the relatively well-to-do. Now that's wrong.
In Maine we grew impatient with federal inaction. We pushed the
legislature into passing the Maine Rx program which will ultimately
result in price controls applied to the products of the most profitable
industry in this country. Is it unreasonable for U.S. citizens to think
that we might pay about the same price for prescription drugs as our
Canadian neighbors?
PhRMA, Pharmaceutical Research and Manufacturers of America (which
badly underestimated the citizen power behind this Maine legislative
initiative), chose to fight the law rather than to see if there is any
truth to Professor Alan Sager's proposition that lower prices for
prescription drugs will induce more volume in business so that profits
should remain constant. However, it will be unlikely that this law--
even with tremendous citizen support--will yield much help for
consumers for several years.
Bus trips get a lot of publicity. We filled two buses in less than
48 hours this year. They highlight the problem. Laws providing for re-
importation are interesting ideas. But neither solves the fundamental
problem. To begin with, for every person making the trip there are
others far worse-off physically who need the lower-priced medications
even more, but they cannot physically board a bus. Ultimately, we want
our local pharmacies to serve as they are intended--community sources
of affordable drugs.
This hearing to review the cost of pharmaceuticals in this country
in contrast with prices in Canada is right on point. The more
information that hearings like this provide to the Congress and to the
public, the closer we will come to agreement on what can and should be
done. For the Alliance, and I think that I can speak for most seniors
in Maine and across the northeastern part of this country, the reasons
for these contrasts in price are clear.
Why are prices better in Canada? Well in part, Canadians have a
national health care system and people of all ages obtain a more
comprehensive system of health care beginning in childhood and
continuing into their older years. Only about 10% of Canadian seniors
do not have either public or private coverage for drugs while up to
half of U.S. seniors lack coverage during some time of the year. Only
about 4% of Canadian seniors pay more than $100 in out-of-pocket costs
for drugs per month while 20% of U.S. seniors do.
More important, Canadians pay less for drugs because their
government bargains on their behalf with the pharmaceutical industry.
Their drug prices are cheaper because the Canadian government believes,
as should this government, that the role and impact of pharmaceuticals
in people's lives are too important to leave to market forces. On
behalf of the Canadian people, their government forces the
pharmaceutical industry to bargain and to peg prices close to the
average prices of pharmaceuticals in other industrial nations or face a
denial of opportunities to market the drug in Canada. We should take
the same direction on behalf of all U.S. citizens needing medications.
We are also forced to go to Canada to purchase lower cost drugs
because of the lack of a pharmaceutical benefit within the Medicare
program.
I, and the Alliance for Retired Americans, have some ideas on how
to approach this issue and how the Congress could take positive steps.
The Alliance for Retired Americans is calling for the enactment of a
new Medicare defined pharmaceutical benefit using the $300 billion
reserved in the tax cut legislation for an affordable benefit. Congress
should consider a change in Medicare by spending these funds over a
shorter period of time than 10 years. By doing that, we can deepen the
benefit and make it more affordable for average income persons in the
Medicare program. But let's do it and stop debating--that is what the
seniors I know in Maine and across the country are saying.
To emphasize the contrast between Canadian and U.S. prescription
drug prices, members of the Alliance for Retired Americans will board
buses later this month and travel to Canada from every State that
borders our northern neighbor to have their prescriptions filled. We
hope to show that seniors can save hundreds of thousands of dollars in
just one week of short trips. But, we also want to demonstrate the
absurdity of having U.S. Citizens go to Canada to get the savings. Your
enactment of an affordable, comprehensive Medicare drug benefit will
end these burdensome trips north and end this national embarrassment.
The major reason that prices are so high in the U.S. is that the
pharmaceutical industry has a lock on the supply of needed drugs backed
up by law and power. It controls the development process for new drugs
both here and throughout the world. The laws of this nation then
protect the market power of the industry by providing patent protection
for almost two decades. To make sure this patent protection stays
secure, together with public financing of the highest risks in the
development process, the industry spends hundreds of millions of
dollars to influence government at all levels. The result is the
exploitative pricing policies that we are discussing here today.
The inaugural publication of the Alliance, The Profit in Pills: A
Primer on Prescription Drug Prices, documents why prescription drug
prices have increased so dramatically and the various ways that the
pharmaceutical industry protects its interests at the expense of the
American public. Most affected are older persons and those with
disabilities who take more medications than other segments of the
population and are the mostly likely to pay full retail prices. I
respectfully request that this report be included in the hearing
record. I would also ask that you, Senator Dorgan, put it into the
Congressional Record so that all of your colleagues may read it.
As I mentioned earlier, some states, like Maine, have become
frustrated by the lack of action here in Washington. They are trying to
take steps on behalf of their own citizens to curb prices. But, they
are being fought all of the way by the industry in the courts and in
the press. We support state action to push prices down but this is a
national policy problem. Most states cannot take on a global industry
that so vigorously holds on to its privileged economic position. The
industry has spent millions of dollars lobbying against a Medicare drug
benefit because they believe that such a benefit may cut into their
profit margins and lead to greater public regulation of their industry.
Why is it that the Federal Government is so vigorous in bargaining
with all parts of the health industry to set prices but not with the
pharmaceutical industry? Why does the Department of Health and Human
Services force hospitals and doctors and other health providers to take
lower payments or compete for government business but not force the
same constraints on the prices we pay for out-patient pharmaceuticals?
There is something wrong with the process and millions of citizens--
older people and persons with disabilities--are paying the price for
government's timidity. It's got to end.
In short, we don't have the luxury of time to wait while nothing
happens. Thousands of us face continued deterioration of our health,
loss of savings, increased burdens on our families, unnecessary
institutionalizations, and, yes death, while the pharmaceutical
industry seems to be able to stop Congress from acting. Please--listen
to our plea.
I, for one, want to get out of the tour bus business.
Thank you.
Senator Dorgan. Mr. Marvin, thank you very much for your
testimony.
Ms. Marjorie Powell represents the Assistant General
Counsel of the Pharmaceutical Research and Manufacturers of
America, and I imagine you are really excited to follow Mr.
Marvin, but why don't you proceed? We are glad you are here.
STATEMENT OF MARJORIE E. POWELL, ASSISTANT GENERAL COUNSEL,
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA
Ms. Powell. Thank you, Senator Dorgan. My name is Marjorie
Powell, I am the Assistant General Counsel of the
Pharmaceutical Research and Manufacturers of America, PhRMA,
and I represent the companies who discover and develop and
secure FDA approval to market the innovative drugs.
I actually am quite pleased to follow Mr. Marvin this
morning because he did a much more effective job than I could
of illustrating what we believe is the primary source of the
problem and the primary reason why this hearing is being held,
which is that seniors do need access to prescription
medications. They have access to health care through the
existing Medicare system, but if anybody designed Medicare
today, they would definitely include a prescription drug
benefit, because drugs are the most cost effective, beneficial
portion of the health care system and we would urge this
Committee and Members of Congress to enact a Medicare drug
benefit.
We think that the issue of importing drugs from Canada or
from any other country has come up in part because of the
political debate about the need for and how to structure a
Medicare drug benefit.
When you look at prescription drug costs within Canada and
the U.S., you do need to look at the context within which
prescription drugs are provided in Canada. They are part of a
government-run health care system where the government imposes
price controls on drugs, hospital services, physician services,
medical specialist services. Those restrictions result in
shortages of not only physician services and specialist
services, access to a variety of medical care treatments, but
also restrictions on drugs. These restrictions have an effect
on the health care of people in Canada.
A recent study found that 20 percent of the physicians in
British Columbia said that they had admitted patients to either
emergency rooms or hospitals because those patients had been
switched from one drug to another because of the restrictive
system in British Columbia on the cost and availability of
drugs.
The price controls don't actually have the effect of
lowering the proportion of health care expenditures for drugs.
A study found, in 2000, 15.5 percent of Canadian health care
expenditures went for prescription drugs. In the United States,
in the same year, 2000, approximately 8.6 percent of health
care dollars were spent on prescription drugs.
There are a variety of reasons why some drugs are less
expensive in Canada. One of those reasons is that it takes a
longer time to get new drugs approved to go on the market in
Canada today. It takes anywhere from one to 2 years longer in
Canada than in the United States. We used to, back when I first
became involved with this industry, talk about an FDA drug lag,
and because of at least two actions by Members of Congress, and
because of FDA monitoring this issue, there is no longer a drug
lag between the United States and Canada, or the United States
and a variety of other countries.
And those two Congressional actions, Senator, are the
Prescription Drug User Fee Act of 1992, allowing the FDA to
hire additional reviewers, and the FDA Modernization Act of
1997.
Let me talk for about a minute about the approval process
in Canada. There is in Canada a review of drug safety and
effectiveness just like there is here. Once the Canadian
authorities have approved a drug for marketing, however, that
drug must go through two additional steps that do not occur in
the United States.
First they must go to the PMPRB, the Prescription Medicines
Price Review Board, which is a national board that decides on
the maximum price that a manufacturer can charge to
wholesalers. Once that happens, and that can take anywhere from
2 weeks to 2 years, then the manufacturer must go province by
province and determine a price that the province will reimburse
for that drug, if the province will reimburse for that drug at
all.
Back in the period from December 1997 to November 1999,
Health Canada approved 134 new drugs. During that same period,
Manitoba authorized 36 of those drugs to be on the Manitoba
formulary.
Quebec, which was the most generous of the various
provincial plans, approved 64 of them. So more than half of
those products are not available to people in Canada or to U.S.
citizens going to Canada today attempting to purchase drugs.
There have been a number of studies of price differences
between the United States and Canada, and most of the studies
are seriously flawed because of selection of products to be
sampled, comparisons of retail prices in the United States and
wholesale prices in Canada, ignoring discounts given to large
U.S. purchasers, such as insurers, HMOs or PBMs, changes in
value of the U.S. dollar.
But, I come back to my starting point, that the issue of
seniors having to take buses to Canada is an issue of seniors
having coverage for prescription drugs just as they have
coverage for hospital expenditures, and we have been urging
Members of Congress to enact a Medicare drug reform benefit.
Thank you.
[The prepared statement of Ms. Powell follows:]
Prepared Statement of Marjorie E. Powell, Assistant General Counsel,
Pharmaceutical Research and Manufacturers of America
Mr. Chairman and Members of the Subcommittee:
On behalf of the Pharmaceutical Research and Manufacturers of
America (PhRMA), I want to thank you for providing the opportunity to
testify on pharmaceutical price differences between the United States
and Canada.
As part of the Medicare reform debate, the cost of some drugs for
American seniors and price differences between Canada and the U.S. have
attracted the attention of U.S. legislators and the media. Before I
address these two topics, however, I think it is important to briefly
discuss in a general way the Canadian health-care system. Members of
Congress should be aware of the Canadian experience with health-care
cost-containment policies for pharmaceuticals and other health-care
services when considering changes to the U.S. health-care system.
The unintended, adverse consequences of government-driven cost-
containment policies on access to appropriate medical and
pharmaceutical care are not widely known. However, the results of such
government intervention have been widely felt by patients. With respect
to pharmaceuticals, cost-containment and price-control mechanisms have
led to less choice and delays in access to the newest and most
innovative medicines. In addition, these policies have also led to
increases in other forms of more costly health care, such as
hospitalization.
Canadian Health-Care System
Health care in Canada is administered through the Ministry of
Health in each of the Canadian provinces and territories. The Canadian
system is primarily publicly financed through taxes collected at the
federal and provincial levels to provide coverage for hospital and
physician services. Although often portrayed as ``comprehensive
coverage,'' Canadian health care is not truly comprehensive in that
provinces are obligated to finance only ``medically necessary''
hospital and physician services. Since neither the federal government
nor any of the provinces has defined ``medically necessary,'' this term
has often been inconsistently interpreted.
An outpatient pharmaceutical benefit is also not nationally
mandated. All provinces do provide coverage for seniors and low-income
residents and four provinces have instituted universal coverage for all
age groups and utilize cost-sharing arrangements such as significant
co-payments and/or deductibles.\1\ The majority of provinces, including
Ontario, provide drug coverage only for seniors and low-income
residents. Therefore, 56 percent of Canadians live without universal
prescription-drug coverage. These individuals often receive
pharmaceutical coverage through employers, unions, or private insurers.
---------------------------------------------------------------------------
\1\ The Canadian Pharmacists Association, Provincial Drug Benefit
Programs, 1999, (21st Edition).
---------------------------------------------------------------------------
In order to control rising health-care costs, Canada over time has
implemented a number of cost-containment measures. Unlike the U.S.,
which has a market-based system, the Canadian system has controlled
costs by relying on government financing and price-control mechanisms.
In response to dwindling federal funds, provinces have cut spending
on health-care services through de-listing or de-insuring ancillary
services, like home health care, and increasing cost-sharing for
pharmaceutical services. Although successful in reducing the rate of
increase in health-care costs, the impact on patients has not been
positive. For example, according to the Fraser Institute, a leading
Canadian think tank, over 200,000 Canadians are waiting for surgical
procedures.\2\ In 1998, the average Canadian patient needing care
waited:
---------------------------------------------------------------------------
\2\ Michael Walker and Martin Zelder, Critical Issues Bulletin:
Waiting Your Turn, The Fraser Institute (Vancouver), 1999.
13.3 weeks for treatment from a specialist (6 weeks to see a
---------------------------------------------------------------------------
specialist, and nearly 7.3 more weeks to receive treatment);
11.4 weeks for an MRI scan;
25.4 weeks for orthopedic surgery, and
About twice as long as is considered ``clinically
reasonable'' for radiation for cancer and internal medicine.\3\
---------------------------------------------------------------------------
\3\ Id.
A December 1999 Washington Post article described the Canadian
health system as ``on the critical list, overwhelmed, and under
attack.'' For example, ``[In] Ontario, the waiting list for MRIs is so
long that one Ontario resident booked himself into a private veterinary
clinic that happened to have one of the machines, listing himself as
`Fido.' ''\4\ Wait times for prostate cancer patients became so long
that a patient group actually formed the Society of those Awaiting
Cancer Therapy, according to The Wall Street Journal.
---------------------------------------------------------------------------
\4\ S. Pearlstein, ``Health Care on the Critical List: Canada's
Public System is Overwhelmed, and Under Attack,'' The Washington Post,
December 18, 1999, p. A20.
---------------------------------------------------------------------------
Clearly, public dissatisfaction with health-care services in Canada
is high and on the rise. Recent polls show that 78 percent of Canadians
now say that their health care system is in crisis.\5\ In a poll taken
in December 1999 by Ekos Research Associates, 93 percent of the 3,000
Canadians interviewed reported that improving health care should be the
federal government's top priority.
---------------------------------------------------------------------------
\5\ Angus Reid Group, Inc., February 2000.
---------------------------------------------------------------------------
Drug Pricing in Canada
In sharp contrast to the U.S. where pharmaceutical prices are
largely determined by market forces, drug pricing in Canada is
regulated by two separate governmental bodies. Canada's Patented
Medicine Prices Review Board (PMPRB) is a federal government board that
sets the maximum prices for innovative, patented medicines in Canada.
Prior to product launch, a manufacturer can either have discussion
with pricing-board officials and submit cost-benefit information used
to assist the company in determining its price, or make a formal
request for an Advanced Ruling Certificate (ARC) for pricing, which
occurs only rarely.
If a manufacturer has not received pre-approval for a price for a
new product from the PMPRB, the price charged by the manufacturer must
be submitted to the Canadian government pricing board within 60 days
after introduction so that it can rule whether the manufacturer price
is excessive. If the price of the medicine is deemed excessive by the
Canadian government pricing board, manufacturers have two options:
Make a Voluntary Compliance Undertaking (VCU). A VCU is an
agreement by the manufacturer with the PMPRB to reimburse the
government for the difference between the price it had been
charging and the price set by the PMPRB, and to accept the
maximum price set by the pricing board rather than take the
dispute further. This, however, does not mean that a
manufacturer agrees that the price it established was
excessive.
Appeal for Consideration. If no agreement on a maximum price
is reached with an appeal, the manufacturer can either agree to
reduce the price and reimburse the government for differential
revenues or it can appeal in the courts.
Ultimately, if there is no agreement on the maximum price a
manufacturer can charge for a product, the Canadian government can:
Impose a fine on the manufacturer equal to twice the amount
of difference between the price actually charged and the
government-controlled price;
Annul the manufacturer's patent, and
License the product to another pharmaceutical manufacturer.
In addition, if the government believes that a manufacturer
knowingly sets the price of a product in excess of the Canadian
government pricing board's maximum price, the manufacturer can be
charged with a criminal offense. Not only must the price differential
be reimbursed, but monetary penalties and jail terms are possible.
Maximum prices are determined by the Canadian government pricing
board. The PMPRB uses several ``tests'' in controlling the prices of
innovative medicines:
The Reasonable Relationship Test is designed to ensure that
the prices of different dosages or formulations of the same
medicine are reasonably related.
The Therapeutic Class Comparison Test compares the new
medicine to other medicines in the same therapeutic class and
sold in the same markets to ensure that prices are reasonably
related.
The International Price Comparison Test compares the average
transaction price in Canada with prices in other price-
controlled countries.
The CPI Adjusted Price measures changes in the price of a
medicine over time. It is designed to ensure that the price
does not rise more quickly than CPI.
The Canadian government pricing board also establishes classes of
new patented medicines for which price reviews are conducted.
Once the maximum price has been set by the PMPRB, the second tier
of price regulation occurs at the provincial level. Provincial
governments have separate health-care systems and drug-benefit programs
that further restrict access to both care and drugs.
For example, Ontario, the province with the largest number of
beneficiaries in its health-care system, has historically had one of
the most restrictive formularies in Canada. From 1990 to 1997, Ontario
only gave 35 new, innovative medicines full listings. From December
1996 to November 1997, this low rate of listing continued--Ontario gave
full formulary listings to only 13 of the 80 innovative medicines
introduced in Canada.
This double layer of price controls, along with restrictive
provincial formularies, makes it difficult for Canadians to have access
to and coverage for new, innovative, life-saving medicines.
How Canada's Drug Pricing System Affects Public Health
Cost-containment mechanisms have had a negative effect on access to
pharmaceuticals and overall public health. For example, 27 percent of
the physicians in British Columbia reported that they had to admit
patients to the emergency room or the hospital as a result of mandated
medicine switching.\6\ Confusion or uncertainty by cardiovascular or
hypertension patients due to mandated medicine switching was reported
by 68 percent of doctors, while 60 percent observed worsening or
accelerating symptoms.\7\ British Columbia doctors reported similar
problems, with the end result being an increase in patients who stopped
taking their medications, which led to increased emergency-room
visits.\8\
---------------------------------------------------------------------------
\6\ Dr. Bill McArthur, Think Tank Warns Clintonization is
Candianization of Health Care, The Fraser Institute, January 27, 2000.
\7\ Id.
\8\ Id.
---------------------------------------------------------------------------
As compared to the U.S., Canadians experience longer delays in both
access to and reimbursement for new pharmaceuticals due to:
Delays in market approval dates.
Delays in coverage until formulary decisions are made.
Restrictions in product reimbursement because of restrictive
formularies, reference-pricing schemes, and patient cost-
sharing.\9\
---------------------------------------------------------------------------
\9\ The Lewin Group, The Impact of the Canadian System on Access to
New Medical Technology Including Prescription Drugs, March 7, 2000.
---------------------------------------------------------------------------
Delays in Market Approval Dates
Although regulatory review times for new products have decreased
over the past several years, the Canadian regulatory process has
consistently taken 1.5 times as long as the U.S. system for drug review
and approval.\10\ For example, in 1998 the FDA approved new drugs in an
average of 365 days, while the Canadian Therapeutic Products Programme
(TPP) took an average of 570 days.\11\
---------------------------------------------------------------------------
\10\ Id.
\11\ Id.
---------------------------------------------------------------------------
Postponing Coverage Until Formulary Decisions are Made
The delays continue at the provincial level where various
government ``gatekeepers'' review the ``therapeutic value'' of
prescription drugs before they are included in the formulary. In the
U.S., most health plans will cover new products either with no
restrictions or through prior authorization until a formulary decision
is made. In Canada, new products are not publicly reimbursed until
formulary listing has been completed. Formulary access rates at six
months post-product approval in Canada ranged from 51 percent in Quebec
to less than 10 percent in Alberta, British Columbia, and Ontario.
Eighteen months following new product approval, formulary access rates
in Ontario, the province containing almost 40 percent of Canada's
population, were still only 23 percent.
Restriction in Product Reimbursement
Canadian provinces limit product reimbursement based on formulary
restrictions, referenced-based pricing, and patient cost-sharing.
Although these cost-containment mechanisms have lowered utilization of
prescription drugs by seniors and low-income adults, emergency-room
visits and the use of other medical services increased.
For example, in the first 10 months following increased patient
cost sharing in Quebec, savings of $17 million (Canadian dollars) were
achieved for income security recipients who regularly took drugs for
chronic diseases. However, due to the new cost-sharing structure,
recipients financed one-third of the savings. Drug savings were all
offset by a $4.1 million increase in other health-care
expenditures.\12\ In another example, British Columbia will only
reimburse for two arthritic drugs as first-line therapy. Three
commonly-used anti-arthritic drugs in the U.S. are not covered under
any circumstances.
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
U.S.-Canadian Price Differences
Many have asked why drug prices are sometimes higher in the U.S.
than in Canada. The answer is based on many variables. However, the
main reason is that in the U.S. each individual company is generally
able to price its own medications based on normal market factors, such
as supply, demand, quality, value, and cost-effectiveness.
The prices set for medicines reflect the cost of drug development,
not only for drugs that make it to the market, but also for those that
do not. In 2001 alone, the pharmaceutical industry is expected to
invest $30.5 billion in drug research and development. Estimates by the
Boston Consulting Group indicate that the pre-tax cost of developing a
medicine introduced in 1990 was $500 million.\13\ And just because a
drug makes it to market does not mean it is a commercial success. A
1994 study conducted by economists at Duke University found that only
three out of every 10 drug products, or new chemical entities,
introduced from 1980 to 1984 had returns higher than average after-tax
R&D costs.\14\
---------------------------------------------------------------------------
\13\ The Boston Consulting Group analysis based on J.A. DiMasi et
al. (1991) as quoted by the Office of Technology Assessment in
Pharmaceutical R&D: Costs, Risks, and Rewards, February 1993.
\14\ Henry J. Grabowski and John M. Vernon, ``Returns to R&D on New
Drug Introductions in the 1980's,'' Journal of Health Economics 13
(1994) 338-406.
---------------------------------------------------------------------------
The prices also need to generate revenues that meet investors'
expectations to continue to attract private investment. Investors seek
to be compensated for their investment commensurate with risk; drug
discovery and development are high-risk and require substantial funds
over many years before medicines may reach the market.
In Canada, each company is denied the freedom to set prices for its
own innovative prescription medicines. Prices are controlled by the
Canadian government. The only choice a manufacturer has is to sell at
the price set by the Canadian government--or not to sell its product.
If a manufacturer opts not to sell its product, the government is
allowed to authorize a Canadian company to copy and sell the drug, even
without the patent holder's permission. In other words, if a
manufacturer does not sell at a price Canada allows, the government
effectively expropriates the value of the patent; the patent holder
receives only royalties, which historically have been only 4-5 percent.
Outside the United States, most countries choose to interfere in
the market and set limits or controls on pharmaceutical prices,
particularly for new, innovative products, to control health-care
expenditures. Unfortunately, these practices have not worked. As a part
of Canada's total health-care spending in 2000, total expenditures on
drugs at the retail level, excluding drugs prescribed for use in
hospital settings, have increased faster than other major components of
health care, and reached a forecast level of 15.5 percent of total
health-care expenditures.\15\ In contrast, in the United States,
outpatient prescription drugs as a percentage of U.S. National Health
Expenditures was estimated to be 8.6 percent for 2000.\16\
---------------------------------------------------------------------------
\15\ See the National Health Expenditure Trends, 1975-2000,
published by the Canadian Institute for Health Information (CIHI),
2000.
\16\ Health Care Financing Administration, OACT, 2001.
---------------------------------------------------------------------------
In addition to the use by Canada of price controls on prescription
drugs, there are other reasons why prices for prescription drugs differ
in the U.S. and Canada. Prices vary from country to country for a host
of reasons, including living standards, income differences, willingness
to pay, differences in medical practice, product volume, exchange
rates, the level of competitive medical service or product prices,
patent term and expiration dates, the length of time and costs of drug-
marketing approval, as well as government-imposed reimbursement and
price controls.
Another common reason that price differences exist between the U.S.
and Canada and the U.S. is product liability. Questions of whether to
sue, the nature of the forum, the level of proof needed to prevail, the
nature or size of the case, and the level of damages awarded often make
product-liability cases in the U.S. more costly to pharmaceutical
manufacturers than in other countries, particularly in Canada.
A study released in December 2000 by the U.S. International Trade
Office (ITC) explored foreign markets and U.S. prices, pharmaceutical
development and approval processes in various countries, and how prices
are established within countries. The report also considered how to
measure the differences in prices between countries and concluded, ``A
single, definitive, unbiased measure of comprehensive price differences
does not exist.'' \17\
---------------------------------------------------------------------------
\17\ ``Pricing of Prescription Drugs,'' United States International
Trade Commission, Investigation No. 332-419, Publication 3333, December
2000.
---------------------------------------------------------------------------
Most Cross-National Price Comparisons are Flawed
Recently, snapshot cross-border comparisons of pharmaceutical
prices have gained great popularity as ``demonstrating'' that prices
charged in the U.S. are higher than those charged abroad. Like any
still frame out of a movie, these snapshots often mislead and fail to
tell the whole story.
The ITC report examined several studies relating to pricing and
determined that there are methodological flaws with each. Sample
selection issues biased comparisons and ``severely limit the generality
of the conclusions of this research.'' The report also identifies the
replacement cost benefit that pharmaceuticals can play in overall
health care, stating, ``At times, pharmaceutical products are used
instead of costlier options such as hospitalizations.'' \18\
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
Virtually all of the cross-border ``studies'' comparing drug prices
have been flawed by faulty methodology. Professor Patricia Danzon of
the Wharton School, and Fredrik Andersson and colleagues at the
Battelle Medical Technology and Policy Research Center, have published
extensively on the shortcomings of different approaches for comparing
drug prices internationally. They conclude that international price
comparisons are misleading and generally based on flawed methodologies,
and suggest that public policy is all too often influenced by price
studies without an understanding of their technical limitations.\19\
---------------------------------------------------------------------------
\19\ See e.g. Danzon, P., Pharmaceutical Price Regulation: National
Policies versus Global Interests, (AEI Press: Washington, DC, 1997).
---------------------------------------------------------------------------
One of the most common flaws of many price comparisons is comparing
manufacturers' list prices for drugs in the U.S. with list prices in
other countries. This practice leads to erroneous conclusions because
the actual transaction price in the U.S. is often significantly lower
than the list price, unlike in many other countries.
Another common flaw is that price comparisons are also typically
made on the basis of simple averages of the top-selling drugs in a
given country for which matching products are available in other
countries. This often results in the use of extremely small samples.
The studies also typically make no attempt to include the most
frequently used drugs in comparison countries, nor do they attempt to
weigh the prices based on the consumption of drugs in countries
examined.
Yet another flaw in many comparisons is that the sampled drugs are
not always directly comparable. Differences in package size, dosage
forms, strengths, indications, and dispensing methods need to be taken
into account, but rarely are. In short, apples-to-apples comparisons
are rare, so reported results must be viewed with care.
Converting foreign prices to local prices for comparison purposes
produces another type of error, given that changes in exchange rates
over time create considerable variability in price relationships.
This problem is further exacerbated by foreign government price
setting. When faced with a devaluation, U.S. exporters of most products
try to raise their price in local currency to keep constant in U.S.
dollars. This is evident to anyone visiting a local bookstore. A $25
book in the U.S. is actually priced on the jacket at Canadian $33.
Newspapers costing $1.50 in the U.S. are listed at Canadian $2. But
with pharmaceuticals, the price ceiling imposed in Canada by the
PMPRB--totally disconnected from exchange rates--has no mechanism that
allows U.S. exporters of medicines to adjust their prices in Canada due
to exchange-rate fluctuations.
Many studies have focused on the final prices to patients or third
parties rather than revenue received by the manufacturers. However, in
most countries, pharmaceutical wholesalers and retail pharmacies are
reimbursed at fixed percentage mark-ups over the ex-manufacturer price.
The margins are set by law and differ substantially from one country to
another. Many countries also impose a value-added tax. Even if a
manufacturer were to set a uniform wholesale price in all
industrialized countries, the final retail price to consumers would
vary by as much as 90 percent due to these mark-ups. If a manufacturer
sold a product for $1.00 in North American and European markets, the
final price to a consumer would range from a low of $1.14 in the UK to
a high of $2.08 in Finland. The U.S. price would be $1.43. Only the UK
and Sweden would have a consumer price lower than that available to
U.S. consumers.
There are numerous ways in which ``simple'' cross-border
comparisons result in inaccurate conclusions. While these problems may
be well known in academia, they are often missing from the public
debate. On top of all of the technical problems discussed above, it is
also important to remember that for U.S., non-government purchases,
market forces set the price. In other countries, like Canada,
governments, directly or indirectly, set the price and no government
bureaucracy has ever been able to mimic a market-based price for a
large number of products on a sustainable basis.
Many Products, Not Just Prescription Drugs, Are Less Expensive in
Canada
Many products, not just prescription medicines, are generally less
expensive in Canada than in the United States. This is because the
Canadian government imposes price controls and unnecessary regulations
on many industries. The Canadian government runs marketing boards for
most industries. The boards operate within a specific province or
throughout the entire country. For example, one such board is the Wheat
Board. As Chairman Dorgan is keenly aware, the Wheat Board in Canada
monitors and sets prices on the sale of wheat in Canada. Therefore, the
cost of wheat products, such as bread, are directly related to the
price dictated by the Wheat Board.
Reimportation of Pharmaceutical Products into the U.S.
Although some seniors in the U.S. are traveling to countries like
Canada or using foreign-based web sites in search of less expensive
pharmaceuticals, they may be putting their health at risk by doing so.
Government investigation into the reimportation of pharmaceuticals has
shown that it opens our nation's borders to counterfeit medicines and
places vulnerable populations at risk. Reimportation proposals are a
distraction to the real solution--a Medicare prescription drug benefit.
Conclusion
In conclusion, although pharmaceutical prices in Canada are
sometimes less than what they are in the U.S., it is important to
remember why this is so. As discussed above, there are many reasons for
price differences between countries. But the primary reason is
government-mandated price controls. In Canada, this has meant limited
choice and access to the newest and most innovative medicines. It has
also meant lengthy delays for other health-care treatments and less
access to medical technology. So although government-imposed price
controls can appear as an attractive choice, they hurt the very people
they are designed to help--patients.
We should learn from Canada's mistakes--not import them. Nor should
we make the mistake of adopting a risky and dangerous reimportation
scheme instead of addressing the underlying problem by reforming the
Medicare program, including enacting a prescription-drug benefit.
That concludes my formal presentation. I will be pleased to answer
any questions that the Chairman or Members of the Subcommittee may
have.
Senator Dorgan. Ms. Powell, thank you very much.
Next we will hear from Stephen Giroux, Community
Pharmacist, Middleport Family Health Center in Middleport, New
York, and Member of the National Community Pharmacists
Association. Mr. Giroux, thank you for being here.
STATEMENT OF STEPHEN L. GIROUX, COMMUNITY PHARMACIST,
MIDDLEPORT FAMILY HEALTH CARE CENTER, AND MEMBER OF THE
NATIONAL COMMUNITY PHARMACISTS ASSOCIATION, ACCOMPANIED BY JOHN
M. RECTOR, SENIOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND
GENERAL COUNSEL TO NCPA
Mr. Giroux. Thank you, Senator, I am pleased to be here,
and I might add that I come from western New York, Niagara
County, home of Niagara Falls, and it is a small community not
unlike those in North Dakota that you have described several
times. When someone knows I am from New York, they have a
little bit different picture than where I am actually from. I
have heard you tell that story and I related very closely to it
because my little village in Middleport has about 1,800
residents, so it's a similar size community.
Senator Dorgan. That is a big town.
Mr. Giroux. Also, in addition to being an actively
practicing community pharmacist and owning three community
pharmacies as well as a home medical equipment business, I am
the past president and current board member of the board of
directors of the Rochester Drug Co-Op, which is a regional drug
wholesaler that sells about $300 million worth of
pharmaceuticals and we do business in New York and
Pennsylvania. I am also a past president and board member of
the Medina Memorial Health System, a nonprofit hospital which
buys products far lower than I can as a retailer, even though I
do a lot more business than the hospital does. And I am pleased
to serve on the executive committee of the National Community
Pharmacists Association, formerly known as the National
Association of Retail Druggists. I am accompanied today by John
Rector, Senior Vice President for Government Affairs and
General Counsel to NCPA.
I thank you, Senator, for having this hearing today, and
these are very very crucial issues, both to consumers and to
small businesses.
NCPA, the National Community Pharmacists Association,
represents more than 25,000 independent pharmacies where over
75,000 pharmacists dispense more than 50 percent of the
nation's prescription drugs and related services. Independent
pharmacists serve 18 million people daily. NCPA has long been
acknowledged as the sole advocate for this vital component of
the free enterprise system, and for decades has been the only
national pharmacy association with universal state association
membership, including those of the committee members.
Our members function in the market in a variety of forms.
We do business as single stores ranging from small apothecaries
to full line high volume pharmacies; as independent chains,
sometimes ranging as large as a hundred locations; also as
franchises, such as NCPA members involved with the Medicine
Shop franchise. Whatever form of business entity, however,
independent pharmacists are the decisionmakers for this wide
variety of NCPA members companies. As owners and managers and
employees of independent pharmacies, our members are committed
to legislative and regulatory initiatives designed to protect
the public and to provide them a level playing field with a
fair chance to compete.
We appreciate the opportunity to assist the Committee in
assessing the differences between American and Canadian
pharmaceutical prices, and how these prices affect the American
consumer, and means to bring American prices in line with
Canadian prices.
In May 1999 we endorsed a bipartisan International
Prescription Drug Parity Act by Representatives Marion Berry,
Bernard Sanders and Jo Ann Emerson, and S. 1191, sponsored by
you, as well as Senator Wellstone, Olympia Snowe, and Tim
Johnson. We work closely with you, Senator, and Senator
Jeffords, and House and Senate allies in this important and
crucial legislation.
With the exception of the sunset provision, that
legislation was nearly identical to the language that was
overwhelmingly approved by the U.S. Senate, and we have
examples of that in the packet.
Our business, my own business is located about 40 miles
from the Canadian border. Never a day goes by that in the
course of my practice of pharmacy that I don't have a
conversation with a patient or a patient's family member that
is concerned with the astronomically high costs of prescription
drugs.
And, at the outset, I must say that we do need a Medicare
prescription drug benefit for our nation's elderly, not some
scam like President Bush's cash discount card that gives
absolutely no benefit to our seniors by picking PBM's as market
favorites, creating an anticompetitive environment that will
severely harm the small businesses that we represent. In any
case, we need to get some relief from the high cost of
prescription drugs for the elderly and the uninsured.
This legislation provides an excellent free market safe
approach to allow our patients access to safe and lower priced
FDA-approved prescription drugs without bypassing established
distribution channels or the important professional services of
a pharmacist. After all, it is the pharmacist who has the well
established trust relationship with patients.
As our President John Carson observed last May, we are
deeply disappointed that President Bush reconsidered his
announced support for this new law and the resulting delay by
HHS Secretary Thompson and his failure to implement this bill.
Our house of delegates unanimously approved a resolution
last year calling for the expeditious implementation of this
new law. Today we reiterate our views.
The nation's retail pharmacists operate in an extremely
competitive marketplace on razor thin margins averaging less
than 3 percent. My drug wholesaler mark-ups are even slimmer.
My wholesaler will use an alternative vendor supplier for
pharmaceuticals for a savings of as little as 1 to 2 percent.
We will move our market share to an alternate vendor supplier.
If we are afforded, through the implementation of this
legislation, the opportunity to import or reimport safe FDA-
approved drugs for a 40 to 60 percent savings, we will do that
in a heart beat, and these savings will be shared with our
members who will pass those savings along to the patients that
we serve. The competitive nature of our marketplace demands
that.
Importation can be achieved safely and cost effectively by
our small regional wholesalers and our buying groups through
existing distribution channels. The large wholesalers and chain
pharmacy corporations are potentially opposed to this
implementation, which would not require any authorized
purchaser, not require, but it would be voluntarily to do this
reimportation. Perhaps these companies that oppose that,
already operate in an international marketplace and do not want
to give up their competitive advantage.
This current law, we do not want to allow the bypassing of
the valuable counsel that's available from the trusted
relationship with the community pharmacist. We do want to give
access to the benefits of lower global pricing to American
consumers.
The Bush Administration is denying American consumers,
especially the elderly and the uninsured, equal access to the
benefit of global prescription drug pricing. This legislation
takes this opportunity to do it in a--to allow these
pharmacists and their consumers this access in a free market
and nonbureaucratic way.
I have taken the opportunity to bring eight examples, not
any duplicates of those that you brought, Senator, of Canadian
products and their American counterparts. We have eight
examples, they range anywhere from a discount of 6 percent less
expensive to a maximum of 83 percent in the eight examples I
brought. On average that represents a 40 percent lower Canadian
dollar price difference between the American price and the
Canadian price.
This is a significant difference. It does not take into
consideration the Canadian exchange rate, which is additionally
about 40 percent as we speak today.
I have an example here, a bottle of 100 tablets, that sells
at the Canadian pharmacist for $33. That same bottle, same size
to the U.S. market, nets down to the American pharmacist at
$194. That is the 83 percent example.
The next one, this purple pill, which goes off patent, is
available in Canada for $50.88, and available in the United
States for $100.48, same dose, a 41 percent lower price, not
taking into consideration the 40 cents on the dollar when we
take our American dollars over there.
A blood pressure medication, this is the 6 percent
difference, blood pressure medication widely used, $73.94 cents
for a bottle of 90 in the United States and $70.63 in Canada,
not taking into account the exchange difference of 40 cents on
a dollar, and it's a real bargain.
The next example is a lipid lowering medication, Lipitor, a
cholesterol lowering drug I should say, and hormones, female
hormones--47% lower in Canada. A bottle of a thousand Wyeth
Ayerst, manufactured right up on the New York-Canadian border,
and in Canada nets down to $121.50 for a bottle of a thousand,
and in the United States the cheapest price I can get is
$531.91 for that same thousand. That's a difference of 77
percent, again, before we take into consideration the American
exchange on the dollar.
We think this is a dramatic impact, we think it's criminal
in fact for our American consumers not to have access to these
lower prices. We calculated that based on just the 40 percent
savings not having anything to do with the exchange rate, but
that's about $845 million a week or $120 million a day that our
American consumers are paying in higher prices every day that
this bill is not implemented. We think this is very serious
money, we think that it's important that we have access to
Canadian pharmaceuticals, FDA-approved, safe pharmaceuticals,
through existing distribution channels, and we can accommodate
that, as I say, in a heart beat through existing distribution
channels.
Mr. Chairman, I thank you for the opportunity to present
today, and I look forward to helping you in any way possible to
get this legislation enacted and implemented.
[The prepared statement of Mr. Giroux follows:]
Prepared Statement of Stephen L. Giroux, Community Pharmacist,
Middleport Family Health Center, and Member of the National Community
Pharmacists Association, Accompanied by John M. Rector, Senior Vice
President for Government Affairs and General Counsel to NCPA
Mr. Chairman, Members of the Committee
I am Stephen L. Giroux. I am owner of 3 retail community
pharmacies, a home medical equipment business and a Hallmark card/gift
and old-fashioned soda fountain shop. Our company has about ten million
dollars of annual revenue. We are located in upstate Western New York.
Middleport Family Health Center, Transit Hill Pharmacy, Rosenkrans
Pharmacy, Lockport Home Medical and Thee Barker Store. I am a past
president and current member of the board of directors of the Rochester
Drug Co-Op, a regional drug wholesaler with about 300 million dollars
of annual revenue doing business in New York and Pennsylvania. I am a
past president of and board member of the Medina Memorial Health System
(hospital) and serve on the executive committee of the National
Community Pharmacists Association (NCPA), formerly the National
Association of Retail Druggists. [See Exhibit A].* I am accompanied
today by John M. Rector, Sr. Vice President Government Affairs and
General Counsel for NCPA.
---------------------------------------------------------------------------
* The information referred to has been retained in the Subcommittee
files.
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I want to thank you for inviting us to testify on these critical
consumer and small business issues.
The National Community Pharmacists Association (NCPA) represents
more than 25,000 independent pharmacies, where over 75,000 pharmacists
dispense more than 50% of the nation's prescription drugs and related
services. Independent pharmacists serve 18 million persons daily. NCPA
has long been acknowledged as the sole advocate for this vital
component of the free enterprise system. For decades have been the only
national pharmacy association with universal state association
membership, including those of the Committee's members.
Our members function in the market in a variety of forms. They do
business as single stores ranging from apothecaries to full line high
volume pharmacies; as independent chains (e.g., 100 pharmacies) and as
franchisees such as NCPA members involved with the Medicine Shoppes
franchise. Whatever the form of business entity, however, independent
pharmacists are the decision makers for this wide variety of NCPA
member companies.
As owners, managers and employees of independent pharmacies, our
members committed to legislative and regulatory initiatives designed to
protect the public and provide to them a level playing field and a fair
chance to compete. We appreciate the opportunity to assist the
Committee in assessing the differences between American and Canadian
pharmaceutical prices, how these prices effect the American consumer
and means to bring American prices in line with Canadian prices.
In May of 1999, we endorsed the bipartisan International
Prescription Drug Parity Act, H.R. 1885 by Representatives Marion
Berry, Bernard Sanders, and Jo Ann Emerson and S. 1191 by Senators
Byron Dorgan, Paul Wellstone, Olympia Snowe, and Tim Johnson. [Exhibit
B].*
---------------------------------------------------------------------------
* The information referred to has been retained in the Subcommittee
files.
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We worked closely with Senators Dorgan and Jeffords and their House
and Senate allies in support of P.L. 106-387, which with the exception
of the sunset provision was nearly identical to the language
overwhelmingly approved by the U.S. Senate. [Exhibit C].*
Our businesses are located about 40 miles from the Canadian border.
Never a day goes by that in the course of my practice of pharmacy that
I don't have a conversation with a patient or a patients' family member
that is concerned with the astronomically high cost of prescription
drugs.
At the outset, I must say that we need a Medicare prescription drug
benefit for our nations elderly. Not some scam like the Bush cash
discount card that gives absolutely no benefit to our seniors by
picking PBMs as market favorites creating anti-competitive environment
that will severely harm the small businesses that we represent [Exhibit
D].* In any case, we need to get some relief from the high cost of
prescription drugs for the elderly and the uninsured.
The drug importation/re-importation law P.L. 106-387 provides an
excellent free market, safe approach to allow our patients access to
safe and lower priced, FDA-approved prescription drugs without
bypassing established distribution channels or the professional
services of the pharmacist. After all, it's the pharmacist who has a
well-established trust relationship with patients. As NCPA's president
John Carson observed last May, ``We are deeply disappointed that
President Bush reconsidered his announced support for the new law and
resulting in HHS Secretary Thompson's failure to implement it.''
[Exhibit E].*
The NCPA House of Delegates unanimously approved a resolution on
October 18, 2000, calling for the expeditous implementation of the new
law. Today, we reiterate our views.
The nations retail pharmacies operate in an extremely competitive
marketplace on razor thin margins averaging less than 3%. My drug
wholesaler mark-ups are even slimmer. My wholesaler will use alternate
vendor suppliers for as little as a 1-2% savings. If we are afforded
through the implementation of P.L. 106-387 the opportunity to import/
reimport safe FDA-approved drugs for a 40-60% savings, we will do it in
a heartbeat. Those savings will be shared with our buying group members
who will pass along any savings to the patients they serve.
Importation can be achieved safely and cost effectively by our
small regional wholesalers and buying groups through existing
distribution channels. The large wholesalers and large chains are
opposing the implementation of the new law which would provide--not
require--any authorized purchaser the opportunity to import FDA-
approved Rx drugs. Perhaps many of these companies already operate in
an international marketplace and do not want to give up their
competitive advantage. Obviously the pharmaceutical manufacturers are
opposed to any scenario that could alter their present monopolistic
opportunity for profits.
We don't bemoan their financial success. As the most profitable
industry in the world, we do need them to continue to bring innovative
technologies and life improving and even life saving drug products to
market--just not at the highest prices in the industrialized world. We
are also concerned about encouraging patients to obtain their
medications directly through mail order or by personal trips across the
border generally neither are legal under current law and importantly
bypass the valuable counsel, and services of their trusted pharmacist.
The brand drug manufacturers are creative marketers. For example,
the brand name manufacturers have disparaged generic drugs for several
years and yet have purchased generic companies, formed generic
divisions, and attempted to control that sector. When one brand name
drug company executive was asked why they didn't pursue the generic
market by lowering prices of a branded product once all of the patents
had been exhausted, he said that they would not be able to make
sufficient money. The brand name drug industry is unique in that it
frequently raises prices when patents expire and their market share is
reduced.
In a similar vein the brand drug manufacturers have creatively
claimed that imported or reimported prescription drugs that they or
their parent companies have made threatened the safety of the American
consumers. For many years consumers, through mail order, border
crossings, and more recently the Internet, have been obtaining FDA-
approved prescription drugs from other countries, however, it was only
when the U.S. House of Representatives and the U.S. Senate (74 to 21)
[Exhibit F] * authorized imports by wholesalers and pharmacists that
drug makers belatedly expressed serious concerns about the safety of
imports. [Exhibit G].*
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* The information referred to has been retained in the Subcommittee
files.
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Interestingly, the drug manufacturers have been importing
prescription drugs at record levels [Exhibit H].* The drug makers are
not sharing the benefits of lower global pricing with American
Consumers. They are even authorized to import non FDA-approved bulk
products and export them as finished unapproved prescription drugs. By
not implementing P.L. 106-387 the Bush Administration is denying
American consumers especially the elderly and the un-insured equal
access to the benefit of global prescription drug pricing.
It's important to recall that all of the drug makers' customers are
not charged the high prices that even the largest retail pharmacies
must pay. The drug makers have denied retail pharmacies equal access to
economies of scale. The discriminatory pricing practices of the drug
makers have been the subject of the extensive litigation and federal
and state legislation. Implementation of P.L. 106-387 would provide
long overdue relief for pharmacists and consumers in a free market and
non-bureaucratic way. For the Committee's review, I have with me today
several examples of Canadian prescription drugs obtained from a
Canadian pharmacist to show the similarity in quality and price
differences for these basically FDA-approved pharmaceuticals. [See
Exhibit I.]
Exhibit I
----------------------------------------------------------------------------------------------------------------
Savings
percentage
calculated
before Canadian
Manufacturer Drug Package Size Net US Price Canadian Price Exchange rate
Net Wholesale of 42% on US
dollar
expanding the
savings
----------------------------------------------------------------------------------------------------------------
TAP Prevacid 100's $358.21/100 $200.00/100 44%
30 mg
----------------------------------------------------------------------------------------------------------------
Glaxo Smith Kline Paxil 30's $65.59/30 $46.04/30 30%
10 mg
----------------------------------------------------------------------------------------------------------------
Searle Pfizer Celebrex 500's $1109.40/500 $625.00/500 44%
200 mg
----------------------------------------------------------------------------------------------------------------
Glaxo Smith Kline Lamictal 100's $211.48/100 $33.15/100 84%
25 mg
----------------------------------------------------------------------------------------------------------------
Pfizer Zoloft 100/250 * $202.67/100 $160.00/100 21%
50 mg $400.00/250
----------------------------------------------------------------------------------------------------------------
Wyeth Premarin 100/500 * $73.20/100 $10.58/100 86%
0.3 mg $52.90/500
----------------------------------------------------------------------------------------------------------------
Astra Zeneca Nexium 30/28 * $100.42/30 $58.80/28 37%
40 mg
----------------------------------------------------------------------------------------------------------------
Pfizer Lipitor 90's $167.11/90 $144.00/90 14%
10 mg
----------------------------------------------------------------------------------------------------------------
Merck Vioxx 100's $220.19/100 $125.00/100 43%
25 mg
----------------------------------------------------------------------------------------------------------------
Merck Zocor 60/500 * $181.96/60 $890.00/500 41%
10 mg
----------------------------------------------------------------------------------------------------------------
Please note:
* Different dosage forms (i.e. tablets vs. caplets) or different package sizes (as noted).
On behalf of the members of the National Community Pharmacists
Association, we thank the Committee for the opportunity to participate
in the ongoing assessment of the need to provide pharmacists and their
consumers equal access to global pricing of safe prescription drugs.
Senator Dorgan. Mr. Giroux, thank you very much.
Finally, we will hear from Dr. Alan Sager, Professor of
Health Services and Co-Director of the Health Reform Program at
Boston University. Welcome, Dr. Sager.
STATEMENT OF ALAN SAGER, Ph.D., PROFESSOR OF HEALTH SERVICES
AND CO-DIRECTOR, HEALTH REFORM PROGRAM, BOSTON UNIVERSITY
SCHOOL OF PUBLIC HEALTH
Dr. Sager. Mr. Chairman, thank you, and good morning. My
name is Alan Sager, I am a professor of Health Services at the
Boston University School of Public Health, and I am honored to
have the chance to appear before you today.
The average American will spend $575 this year for
prescription drugs. Not seniors alone, that's the average for
all Americans. This is the highest spending in the world. Yet
70 million of us have no insurance for prescription drugs and
dozens of millions of others have insurance that is sadly
lacking. As a result, we have to choose among greater
suffering, paying more for medications or changing the way we
do business.
If Americans paid average Canadian prices for brand name
drugs, savings would total $38.4 billion this year alone.
Savings would range from $56 million in Alaska to over one-half
billion dollars in median states like Arizona and South
Carolina. Eleven states could save over a billion dollars, and
California would save over $3.2 billion. But the average state
like South Carolina or Arizona would save between 500 and $600
million yearly.
All Americans could enjoy the benefits of Canadian prices.
Today, as we've heard, individual citizens are able to import
drugs from Canada and enjoy the price differences. The
legislation that you have been advocating today is overall a
good idea, but I fear that even if it were to pass, it wouldn't
have the practical effect that many of us would hope. That's
because I think the manufacturers would produce fewer
medications in Canada or export fewer medications to Canada,
drying up supplies in Canadian warehouses and simply making
fewer pills available for importation back into the United
States. In other words, they would dry up the reservoir.
There have also been concerns that other techniques might
be employed by manufacturers.
Still, I think that the aim of the legislation is exactly
what we are trying to achieve, should try to achieve. Americans
could win the Canadian low prices by importing the regulatory
techniques that Canadians employ, not the lower priced drugs
themselves. We don't need to wash our medications through a
Canadian laundry.
If U.S. drug prices stay high, insurers and employers will
work ever harder to suppress drug use through higher copayments
and formularies and other methods, but suppressing drugs just
flies in the face of economic and medical realities.
Economically, the marginal cost of making more drugs is
typically very low once you do the research and build the
plant. Medically, restricting use denies many patients the
medications they need, as we have heard, and the nation would
directly gravitate toward a Rolls Royce drug market.
Lowering drug prices requires bringing all stakeholders to
the table, including drug makers, which requires getting past
drug makers' bluster about supposed free markets that
supposedly legitimate the world's highest prices. And also
getting past drug makers' threats that lower U.S. prices would
destroy research.
Careful public action is much less likely to damage
research than is the industry's commitment to run their
business as usual. High drug prices frighten many Americans and
that can translate into precipitous political action two or 4
years from now, and that would gut prices, and that will harm
research. So I think if we care about research, we can't let
the industry control prices.
That's like what Clemenceau said about the French generals.
He couldn't trust them to control the war, because that led to
4 years of blood, machine guns, barbed wire and trench warfare.
That's what we face with prescription drugs.
Our nation generates so great a share of drug makers'
incomes that we have to cut prices carefully. Here are four
elements of a package deal that might be called a prescription
drug peace treaty.
First, the federal government enacts a law to lower brand
name drug prices to Canadian levels. This alone cuts drug
makers' revenues by $38 billion yearly.
Second, drug makers would replace most of the lost $38
billion through higher volume in the private market. They would
be filling more prescriptions owing to lower prices.
Third, the federal government would guarantee the drug
maker could recoup any amount of the $38 billion that they
didn't make up in the private market, through publicly-
subsidized purchase of medications for people who couldn't
afford even the discounted prices. So you take away $38 billion
but you give it back to drug makers as they fill more
prescriptions. It's simple recycling. All dollars saved are
recycled to buy more drugs.
The fourth element of the peace treaty makes drug makers
financially whole. They would have to be paid the extra
manufacturing costs of the additional pills. Retailers would
have to be paid the extra dispensing costs.
As a result, all Americans of all ages can afford the drugs
their doctors prescribe, drug makers' profits and capacity to
finance research are unimpaired, but we avoid windfall profits
to drug makers through the Medicare prescription drug benefit
if the prices weren't contained.
If this were to happen, I estimate that up to 977 million
additional prescriptions for brand name drugs might be filled
if Americans could afford them. That's a high-side estimate.
The added cost of manufacturing and dispensing almost one
billion more prescriptions, which is a one-third increase above
current levels, would be in the range of $6.4 to $11.8 billion,
depending on dispensing fees and added costs of manufacture, to
protect all Americans against the cost of medications.
That may seem like a low estimate, but I think it's
warranted by the likely dispensing costs of these drugs and by
the likely actual manufacturing costs.
To make this work for the long haul, though, we have to
continue to promote breakthrough research, and that means
rewarding breakthrough research very generously, but not
rewarding copy cat research, on which up to 40 percent of
research dollars today, in my opinion, are largely wasted.
The final job is to keep costs low and affordable so we can
get medications to all Americans for the next 5, 10 or 20
years. No one tool will suffice, but there some obvious
candidates.
First, cut marketing waste. Drug makers' marketing costs
appear to be substantially greater than estimates from
industry-related sources suggest. The second chart from the
supplemental package shows how drug makers actually spend their
money according to their own financial reports, and we see that
in that pie chart, that 31 percent of drug maker revenue goes
to marketing and administration, versus only 11 percent to R&D,
and the lion's share of the marketing and administration, we
believe, does go to marketing.
The next chart shows the increase in employment in
marketing, employment in marketing and employment in research
between 1990 and 2000. The blue chart trends up slightly for
research, up about 10 percent. Marketing employment is up about
50 percent. That's money that we pay for when we buy our pills.
A couple of other approaches. Measure each drug's efficacy,
and compare with the costs, and disseminate the real evidence
on which drugs work for which patients, perhaps through NIH or
FDA, or perhaps an independent agency that would have no
financial stake.
The final step is to think harder about profits. For
example, in 1999, Merck reported consolidated before-tax return
on revenue of 26 percent, but Merck apparently garnered an
actual 37 percent before-tax return on revenue, more than 40
percent greater after factoring out its MEDCO PBM-related
costs.
In conclusion, we can learn a great deal from the evolution
of state efforts to wrestle in the trenches with prescription
drugs. Their first phase was throwing money at the problem by
buying medications; that was vital to do.
Their second phase now is holding down prices. The federal
government should marry these two approaches from the start,
lower prices and higher volume. Winning affordable medications
for all Americans is the easiest problem to solve in the United
States of America.
Thank you very much, Mr. Chairman.
[The prepared statement of Dr. Sager follows:]
Prepared Statement of Alan Sager, PhD., Professor of Health Services
and Co-Director, Health Reform Program, Boston University School of
Public Health
americans would save $38 billion in 2001 if we paid canadian prices for
brand name prescription drugs
How to Win Those Savings and Use Them to Protect All Americans against
High Drug Costs without Hurting Drug Makers or Drug Research
With State-by-State Savings Estimates
Disclaimer: As always, I write and speak only for myself, not on behalf
of Boston University or any of its components.
Acknowledgment: This testimony rests heavily on analyses conducted with
my colleague, Deborah Socolar.
2Earlier reports and testimony on prescription drug costs and
reform methods are posted on our web site, http://dcc2.bumc.bu.edu/hs/
ushealthreform.htm
Mr. Chairman and members of the Committee--Good morning. My name is
Alan Sager and I am a professor at the Boston University School of
Public Health. I am honored by your invitation to testify today.
I. Introduction
Together, we face two challenges:
making all needed medications available to all Americans at
affordable prices, while
building a durable financial foundation under drug research
and delivery in the U.S.
I am convinced we can do both of these. One reason is that we
already spend enough money to do so. But not if we continue business as
usual.
II. What is the Nature of the Problem?
Many Americans can't afford needed prescription drugs because they
lack insurance, suffer low incomes, and face excessive U.S. prices.
Today, 70 million Americans of all ages have no insurance for
prescription drugs. Additional dozens of millions have skimpy coverage.
Yet American prescription drug spending per person this year is the
world's highest. Total prescription drug spending will be about $165
billion this year,\1\ or roughly 11.6 percent of overall U.S. health
spending.\2\ That is some $575 for the average American.\3\
The drug cost problem will probably worsen. Drug spending in the
U.S. is doubling every five years and is rising about three times as
fast as overall health care spending. Between 1994 and 2000, estimated
retail prescription spending rose by 116.4 percent while total health
spending rose by only 34.2 percent.
If we fail to make vital drugs available to all who need them,
public fear and anger will grow. But reasonable action today will
prevent reckless over-reaction tomorrow.
Our nation must choose among:
Suffering: Many of us could suffer and die for lack of
needed medications, but that is intolerable.
Paying: We could spend much more public or private money--or
both--to buy needed drugs, but that is both unaffordable and
unnecessary.
Changing: We could secure more drugs from manufacturers for
the amount we already spend, plus small extra sums to cover
drug makers' actual incremental costs.
Change is the only realistic choice. Buying drugs at lower price
levels, such as those already prevailing in Canada--as a result of
government action \4\--is an important first element of that change.
Today's high U.S. prices make medications unaffordable for many
patients. They induce private efforts to cut drug use, resulting in
denial of needed drugs. And they handicap public actions to expand drug
coverage for more citizens.
III. U.S. Payments for Brand Name Drugs at Canadian Prices
If Americans paid average Canadian prices for brand name drugs this
year, savings across the United States would total $38.4 billion, I
estimate.
Exhibit Calculating U.S. Savings on Brand Name Drugs If We Paid Canadian Prices in 2001
($ billions)
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
1. 2001 brand name drug sales, USA, net of discounts and rebates $113.7
----------------------------------------------------------------------------------------------------------------
2. Assume undisclosed discounts and PhRMA generics of 10% - $11.4
----------------------------------------------------------------------------------------------------------------
3. Conservative estimate of sales, USA, brand name prescription drugs = $102.3
----------------------------------------------------------------------------------------------------------------
4. If U.S. paid Canadian prices, which averaged 62.5 % as high in 2000 - $63.9
----------------------------------------------------------------------------------------------------------------
5. Savings if paid Canadian prices in 2001 = $38.4
----------------------------------------------------------------------------------------------------------------
Note: All dollars are those actually paid to brand name prescription drug manufacturers, net of discounts and
rebates.
A. How the Savings Were Calculated
1. To calculate the $113.7 billion starting point, we began with
PhRMA's figure on total projected 2001 U.S. sales net of discounts and
rebates. We then factored out veterinary sales in line with their
actual share of PhRMA's 1999 total. The result: $113.7 billion.
2. We then assumed undisclosed discounts and rebates plus generic
sales by PhRMA members equal to 10 percent of PhRMA's reported sales.
(The 10 percent figure may be generous, but we wish to be conservative
in our estimate of U.S. spending and therefore in the estimate of
savings gained by paying Canadian prices.) The aim is to address
PhRMA's stated concern that some U.S. discounts and rebates are not
publicly disclosed and are therefore not considered by the Canadian
Patented Medicines Price Review Board in its international price
comparisons.
3. This yields a conservative projection of human sales of brand
name prescription drugs by manufacturers in the U.S. in 2001 of $102.3
billion.
4. The Canadian government's Patented Medicine Prices Review Board
calculated that Canadian brand name drugs' factory prices averaged just
62.5 percent of those in the U.S.A. in 2000. We applied this to
calculate how much would be spent in the U.S. in 2001 if we paid
Canadian prices.\5\
5. The result: cutting U.S. payments to manufacturers by $38.4
billion this year.\6\
B. State-by-State Savings
We apportioned this year's $38.4 billion in estimated U.S. savings
from paying Canadian prices among the states.\7\ The results are shown
in the next exhibit. Savings ranged from $3.2 billion this year in
California to $56 million in Alaska.
Exhibit State-by-State Projected Spending on Brand Name Drugs in 2001,
and Savings if the U.S. Paid Canadian Prices
($ millions)
----------------------------------------------------------------------------------------------------------------
Brand Name Brand Name
Drug Spending Savings if Drug Spending Savings if
in 2001 at Paid Canadian in 2001 at Paid Canadian
Factory Prices Prices Factory Prices Prices
----------------------------------------------------------------------------------------------------------------
Alabama $1,751 $657 Montana $264 $99
----------------------------------------------------------------------------------------------------------------
Alaska $150 $56 Nebraska $706 $265
----------------------------------------------------------------------------------------------------------------
Arizona $1,577 $592 Nevada $539 $202
----------------------------------------------------------------------------------------------------------------
Arkansas $1,019 $383 New Hampshire $441 $166
----------------------------------------------------------------------------------------------------------------
California $8,506 $3,193 New Jersey $4,001 $1,502
----------------------------------------------------------------------------------------------------------------
Colorado $1,095 $411 New Mexico $454 $170
----------------------------------------------------------------------------------------------------------------
Connecticut $1,528 $574 New York $8,037 $3,017
----------------------------------------------------------------------------------------------------------------
Delaware $339 $127 North Carolina $2,896 $1,087
----------------------------------------------------------------------------------------------------------------
D.C. $203 $76 North Dakota $217 $81
----------------------------------------------------------------------------------------------------------------
Florida $7,001 $2,628 Ohio $4,399 $1,651
----------------------------------------------------------------------------------------------------------------
Georgia $2,776 $1,042 Oklahoma $1,192 $447
----------------------------------------------------------------------------------------------------------------
Hawaii $351 $132 Oregon $1,036 $389
----------------------------------------------------------------------------------------------------------------
Idaho $377 $141 Pennsylvania $5,682 $2,133
----------------------------------------------------------------------------------------------------------------
Illinois $4,474 $1,679 Rhode Island $451 $169
----------------------------------------------------------------------------------------------------------------
Indiana $2,323 $872 South Carolina $1,484 $557
----------------------------------------------------------------------------------------------------------------
Iowa $1,066 $400 South Dakota $227 $85
----------------------------------------------------------------------------------------------------------------
Kansas $964 $362 Tennessee $2,403 $902
----------------------------------------------------------------------------------------------------------------
Kentucky $1,765 $663 Texas $6,797 $2,551
----------------------------------------------------------------------------------------------------------------
Louisiana $1,701 $638 Utah $636 $239
----------------------------------------------------------------------------------------------------------------
Maine $515 $193 Vermont $207 $78
----------------------------------------------------------------------------------------------------------------
Maryland $1,894 $711 Virginia $2,404 $902
----------------------------------------------------------------------------------------------------------------
Massachusetts $2,451 $920 Washington $1,809 $679
----------------------------------------------------------------------------------------------------------------
Michigan $4,384 $1,646 West Virginia $876 $329
----------------------------------------------------------------------------------------------------------------
Minnesota $1,683 $632 Wisconsin $1,969 $739
----------------------------------------------------------------------------------------------------------------
Mississippi $1,086 $408 Wyoming $150 $56
----------------------------------------------------------------------------------------------------------------
Missouri $2,047 $768 USA $102,300 $38,400
----------------------------------------------------------------------------------------------------------------
IV. Americans Can Enjoy the Benefits of Canadian Prices
Importing drugs from Canada has the potential to provide a measure
of relief from high prices to some or even many individuals, so it
should be tried until more effective price relief can be obtained. I
expect that individual citizens will be able to continue to pursue
retail importing solutions that lower their costs, but drug makers will
continue to block effective wholesale importing solutions. If, indeed,
importing drugs probably cannot do enough to make all needed
medications affordable, then more direct techniques will be necessary
to give Americans the benefits of low brand name drug prices that
Canadians now enjoy.
Americans could try to obtain Canadian prices in three ways. First,
we could travel to Canada, as growing numbers of Americans are now
doing. Several problems arise. They include inconvenience of obtaining
a valid prescription and the loss of a single, local pharmacy and
pharmacist coordinating all of the patient's medications. Worse, it
becomes necessary to transport something relatively heavy, a person,
instead of something relatively light, a pill. This defies all we know
about transportation economics.
Second, Americans could import drugs from Canada, either
individually or collectively.
Some pursue this approach idealistically because they reside in
border states and are frustrated by visibly lower prices nearby. They
justly bemoan the burden borne by older or chronically ill patients who
are today forced to travel across the border to buy drugs at more
affordable prices. The numbers of people who buy medications from
Canada is impossible to quantify but appears substantial. One
Massachusetts senior has received over 700 inquiries in the middle few
months of 2001 regarding methods of ordering medications from Canada by
fax through family physicians.\8\
One objection to this approach is that it creates new and
duplicative channels of drug distribution, some legal and some possibly
illegal. Some have raised questions about the safety of the imported
medications themselves.
The other objection is that, were the law changed to allow
wholesale importation of medications at foreign prices, and if the
volume of imports were to swell, the drug makers would predictably
adapt, as they have adapted to other types of reform in recent years.
They probably would:
export lower volumes of medications from U.S. factories to
other nations in the first place, thereby drying up one source
of lower-priced prescription drugs;
hold down the volume of drugs produced at the foreign
factories subject to FDA inspection, thereby drying up the
other source of lower-priced drugs; and
try to threaten foreign nations with higher prices if they
allow medications to be exported to the U.S.\9\ or simply
negotiate or set terms of their sales to other nations that
prohibit re-sale of drugs abroad.
Therefore, I do not expect importing to do enough to make
medications affordable for all Americans.
Allowing easier importation of medications is an attractive idea.
But it resembles other attractive ideas of recent years--many of them
implemented through changes in legislation or medical practice--that
have failed to make medications affordable to all Americans. These
ideas include patenting of copy-cat drugs, developing formularies,
promoting generic substitution, relying on PBMs, and relying on managed
care generally. All of these have attempted either to boost competition
or to reduce spending through care management or price negotiations by
fragmented buyers.
All of these ideas for winning lower prices indirectly seemed
appealing. None--individually or together--has apparently slowed the
rate of increase in U.S. drug spending. Consider, for example, that
generic drugs now account for about two-fifths of all U.S.
prescriptions but less than one-tenth of drug makers' revenues \10\--
indicating that today's soaring spending is driven by soaring payments
for brand name drugs.
Third, Americans could act more directly to win Canadian
prescription drug prices by importing the general methods that
Canadians employ, not the lower-priced drugs themselves. Adopting
Canadian methods in the United States does not require moving people to
pills or laundering pills through the Canadian pricing structure. It
does not hitchhike on foreign regulation. Rather, it would mean
forthrightly regulating drug prices.
Simply legislating lower prices for brand name drugs in the U.S.
could work but passing such a law is obviously difficult politically.
As you know, the law that actually passed in October of 2000 provided
for re-importing drugs, but it is unlikely that this law would actually
lower prices even if it were ever implemented, for the reasons just
mentioned. We again seem to face the dilemma of ``what can work won't
pass and what can pass won't work.'' This is demoralizing. It breeds
cynicism. We can do better.
V. Reassuring the Drug Makers by Negotiating a Peace Treaty
By themselves, price cuts will hurt drug makers. On the other hand,
price cuts alone will clearly aid three groups: a) many people who are
now able to afford their medications; b) the private insurors/HMOs and
public programs that help to finance medications for most of those
people; and c) some people who will be able to afford medications (or
more of their medications) after the price cuts take effect. But price
cuts will not help those Americans unable to afford even the newly
reduced prices.
Happily, price cuts can be combined with other approaches to
protect both patients and drug makers. If prices are to be lowered to
Canadian levels, we should at the same time devise methods of
addressing all stakeholders' legitimate interests, including those of
drug makers. And including those of all Americans who cannot afford
prescribed medications today.
Doing this requires bringing all stakeholders, including drug
makers, to the table to conduct serious negotiations. And that requires
filtering out manufacturers' bluster about free markets and
manufacturers' threats that government interventions to lower U.S. drug
prices will destroy research.
No free market sets drug makers' prices. Free markets require many
small buyers and sellers, so every actor is a price taker, not a price
maker. Free markets require an absence of artificial restrictions on
supply, demand, and price. Free markets require easy entry. And free
markets require that all parties have good evidence about price and
quality.
In the prescription drug market, patents, mergers among drug
makers, entry barriers associated with high research and marketing
costs, allegations of anti-competitive practices, patients' (and,
often, physicians') lack of good information about price and quality,
and patients' inability to act as sovereign consumers combine to mean
that nothing close to a free market acts to set drug prices.\11\
Nor do drug makers set prices to cover costs of research (whatever
those costs really are). Drug makers today are obligated to their
stockholders to set prices to maximize profits.
If government acts to win lower prices, ``The lights go out in the
labs, and there is no R&D,'' according to Tracy Baroni, senior director
of policy for PhRMA.\12\ This is an example of what my colleague and I
call PhRMA's fog of fear.
Reasonably careful, well-tested, and--if possible--negotiated
government intervention is much less likely to damage research than is
the drug industry's own insistence on more money for business as usual.
The drug industry is on a collision course with financial and
political realities. The industry's insistence on high prices is
frightening and angering many Americans. A few years from now, that
anger could translate into precipitous political action to gut drug
prices. And that would gravely threaten research (and profits). Worries
that this might happen could make today's drug makers the most nervous
very-well-dressed people in America.
Fortunately, government intervention to lower prices to Canadian
levels can--in combination with other reasonable steps--be designed to
protect and promote research, and even to protect drug makers' profits.
Careful U.S. action is vital to protecting and promoting research.
Unlike other nations, and unlike some U.S. states, the United States
government cannot simply cut drug prices without regard for the cuts'
effects on research. Because we buy so great a share (and an increasing
share) of the world's brand name drugs, the world's drug makers rely on
the U.S. market for a disproportionate share of their profits and the
dollars they require to finance research.
Four Elements of a Prescription Drug Peace Treaty
The challenge is to put together the right package of policies.
Here is an inter-locking four-part method.
First, the federal government could enact a law to lower brand name
drug prices to Canadian levels. If nothing else changed, the price cuts
would deprive drug makers of $38.4 billion in revenues from the U.S.
market, as calculated earlier.
But second, drug makers would replace much or most of this $38.4
billion in lost revenue through the natural rise in the volume of
prescriptions filled in the private market. Lower prices allow patients
to fill more of their prescriptions and do so more often. The relation
between price and volume for prescription drugs appears to be elastic,
meaning that the volume of drugs bought by patients in a private market
grows substantially when prices are cut.\13\
Third, the federal government could guarantee drug makers that they
would recoup every penny of lost revenue that was not replaced through
higher private market volume. The best vehicle for replacing that
revenue would probably be public subsidies to assist drug purchases by
patients of all ages who are unable to afford even the newly discounted
prices. The subsidies would be set to ensure replacement of all the
revenue lost by drug makers that was not recaptured through higher
private market volume. This public spending would not result in an
increase in total spending on prescription drugs. Rather, it replaces
some of the drug maker revenue lost from the price cut.
Fourth, the public subsidies would also include dollars needed to
cover the actual incremental costs of manufacturing the higher volumes
of drugs. These are relatively low, compared with current total
costs.\14\ Public subsidies would also cover the added cost of
dispensing the additional volumes of drugs in pharmacies and elsewhere.
These two items would result in increased total spending on
prescription drugs, but these are all that would be required to extend
pharmaceutical security to all Americans. No additional costs would be
incurred to pay higher profits to drug makers, because drug makers'
profits as a percentage of equity would already be preserved and
protected at the high levels antedating the peace treaty's provisions
for price cuts, higher private volume, and higher public volume.
Such a peace treaty achieves three things:
1. All Americans--not Medicare beneficiaries alone--can now
afford to obtain the prescription drugs they require.
2. Drug makers are kept financially whole. All lost revenue
is replaced, and the added cost of producing more pills is
covered. Drug makers' profits and capacity to finance research
remain intact at today's levels. This guarantee could be
maintained for perhaps five years. (It will be useful to
consider whether profits should be assured as a percentage of
equity or of revenue.)
3. The actual incremental costs of protecting all Americans
are relatively low (as estimated in section VI), making the
proposal affordable. Cutting prices to Canadian levels makes it
much easier to expand coverage. Manufacturers make up for lower
prices with higher volume. In other words, the $38.4 billion
squeezed out of the drug makers (by cutting their prices) is
returned to them (because many more prescriptions are filled)--
when they serve patients who previously could not afford needed
medications. Manufacturers do forego windfall profits that they
would have garnered from higher volume in the absence of the
price cuts.
This straightforward approach works most simply for the short run.
It makes today's drugs affordable for all. The arrangement could be
designed to run for perhaps five years. The main remaining questions
concern how to reward drug makers that develop new medications and how
to constrain the projected explosive growth in the cost of
pharmaceuticals. These matters are taken up in section VII.
High drug prices constitute the main logjam blocking the flow of
government reforms to win prescription drug security for all Americans.
Once prices are lowered, it becomes possible to buy medications for all
people who need them at a price that people and payors can afford.
VI. Estimating Short-Run Costs
Those who have sought to design a prescription drug benefit for
Medicare have experienced great frustration during the past two years.
Estimates of the cost of federal government subsidies rose from $118
billion for ten years in the first Clinton plan of June 1999 to $318
billion for ten years in the Senate Democrats' plan of June 2001.\15\
Some of this is attributable to changes in benefits and some to
rising estimates of underlying drug spending and other factors. CBO
projects that drug spending by or for Medicare beneficiaries during the
decade from 2001 to 2010 will be $1.3 trillion under current law--
without a prescription drug benefit. These projections have themselves
been rising rapidly.\16\
Sadly, even at the $318 billion level, only about one-quarter of
beneficiaries' expected baseline drug costs of the $1.3 trillion (that
is, costs before the Medicare coverage is introduced--costs that would
surely rise in the wake of new insurance protection) would be covered,
requiring very substantial monthly Medicare premiums and out-of-pocket
payments.\17\ A plan with low premiums and low out-of-pocket payments
could cost as much as $1 trillion over a decade.\18\
Some of this is attributable to most proposed legislation's
inability to limit drug prices meaningfully, resulting in huge windfall
profits for drug makers. Under most Medicare prescription drug plans,
drug makers would sell substantially higher volumes of medications at
only slightly lower prices. Even with 25 percent or 40 percent
discounts, drug makers' incremental revenue would far exceed their
incremental cost, generating the windfall profits.
Much of this is also attributable to drug spending projections that
take as givens continued unrestricted growth in drug marketing,
continued unrestricted introduction of expensive new drugs without
careful evaluation of their incremental benefits to patients, and other
costs, year after year.
Clearly, unrestricted increases in drug spending are unaffordable.
Drug makers would like to imagine that they can marry today's high
prices in combination with tomorrow's Medicare prescription drug
benefit that boosts volume at those high prices. But that is a fantasy.
Even without a Medicare drug benefit, restraint is inevitable--through
either private or public action. In response to high drug prices,
employers are establishing higher co-payments to try to suppress the
volume of drug use. More can be expected in the future if high prices
persist.
But that flies in the face of economic and medical realities.
Economically, the marginal costs of making more medications are
typically very low, once the research is performed and the factories
are built. Medically, high prices lead to restrictions on use that can
deny many patients the medications they need. The nation would
gravitate toward a Rolls-Royce drug economy when it needs Fords and
Chevy's.
To make all of today's medications available to the patients who
need them at an affordable cost, and to promote research to develop new
medications, The nation needs two coordinated approaches, one short-run
(for perhaps the next five years) and the other longer-run.
Short-run Cost Estimates
Cutting drug prices to Canadian levels yields markedly lower
estimates of the actual short-run incremental cost of financing full
prescription drug coverage for all Americans--not only Medicare
beneficiaries.
This added cost has two components, retail dispensing costs and
actual incremental manufacturing costs.
I estimate that as many as 977 million additional prescriptions for
brand name drugs would be filled if all Americans could afford the
medications their physicians prescribed. This is a deliberately
conservative (high-side) estimate.\19\ It amounts to a one-third
increase over the total number of retail prescriptions filled in
2001.\20\ This estimate requires considerable refinement, but it will
serve for now to permit a rough calculation of the short-run costs of
pharmaceutical security for all.
I estimate that the added costs of manufacturing and dispensing
these 977 million prescriptions would be in the range of $6.4 to $11.8
billion annually.
The lower of the two estimates assumes
a dispensing fee per prescription of $3.00 and
an average incremental manufacturing cost of $3.51 per
prescription, or five percent of the projected average retail
price for brand name drugs in 2001.\21\
The sum of the two costs is $6.51 per prescription. Multiplying
that by 977 million additional brand name prescriptions yields an added
total cost of $6.4 billion annually.
The higher of the two estimates assumes
a dispensing fee per prescription of $5.00 and
an average incremental manufacturing cost of $7.03 per
prescription, or ten percent of the average retail price for
brand name drugs in 2001.
The sum of these two costs is $12.03. Multiplying that by 977
million additional brand name prescriptions yields an added cost of
$11.8 billion annually.
This $6.4-$11.8 billion range estimates the full, total incremental
cost of filling almost one billion additional prescriptions, enough to
protect all Americans in 2001. Some seven aspects of these estimates
are worth noting:
1. These are total incremental costs above estimated 2001
spending on brand name prescription drugs. If they are paid
publicly, no additional sums for co-payments or premiums are
needed.
2. These incremental costs are a small fraction (3.9 percent-
7.2 percent) of the $165 billion projected to be spent on
prescription drugs in the United States in 2001. That is less
than six months' increase in total prescription drug spending--
increases that have been running around 15 percent annually.
3. These incremental costs are a fraction of those estimated
to be required to cover Medicare beneficiaries alone. Consider
the $318 billion Medicare-only estimate for ten years that
still leaves very substantial premium and out-of-pocket costs,
or the $1 trillion Medicare-only estimate for ten years that
eliminates premium and out-of-pocket costs that were mentioned
earlier.
4. Because these are incremental prescription drug costs,
they do not include the recycling of the $38.4 billion squeezed
out of the drug makers by applying Canadian prices for brand
name drugs to the U.S. market in 2001. That is because all of
this money is returned to the drug makers through higher
private market purchases and higher publicly subsidized
purchases of medication in response to the lower prices.
5. As the $38.4 billion is recycled, the private share of
payments for prescription drugs will fall somewhat and the
public share will rise somewhat. That is because individuals,
employers, and insurors/HMOs will enjoy most of the benefits of
the $34.8 billion in price reductions, but these private
parties will probably pay a smaller share of the costs of
replacing the lost revenue. (I have not yet estimated the size
of these offsetting changes.)
6. Additional costs of higher volumes of generic drugs are
excluded from these calculations. That is because pricing
methods for generics are different from those for brand name
drugs. And discounts are substantially lower. International
comparisons of prices typically employ brand name drugs only.
As noted, generics today amount to only about 8.6 percent of
total U.S. prescription drug spending, even though they are
over forty percent of prescriptions. So higher spending on
generics should not be substantial under this approach. Also,
lower prices for brand name drugs would reduce the price
differentials between generics and brand name drugs, probably
reducing generics' share of total prescriptions over time.
7. The estimates do not reflect one-time costs of building
pharmacies' capacity to substantially increase the number of
prescriptions dispensed annually.
VII. Promoting Development of Breakthrough Drugs, and Containing Long-
Term Costs So That All Medications Remain Affordable for All
Patients
In the short run, the prescription drug peace treaty described in
Section V of this testimony would make all of today's needed
medications available to all Americans at a surprisingly low
incremental cost.
Looking forward, a number of strategic interventions must be
undertaken to keep medications affordable for all Americans and for all
payors, to promote the development of new breakthrough drugs, and to
generously reward drug makers that develop those drugs.
Clearly, today's pace of drug spending increases cannot continue;
spending that doubles every five years is unaffordable. But even
reversion to the rates of increase of earlier years could raise grave
financing problems: five percent or ten percent annual increases in
drug spending would be very costly because they build on 2001's $165
billion base.
A. Spurring Research to Develop Breakthrough Drugs
Several policy and financing approaches should be considered to
encourage breakthrough research. The first is to reward breakthrough
research generously. The reward for a new drug should be keyed to the
magnitude of its clinical benefit (years of life gained, disability
reduced, and pain and suffering for patient and family relieved) for
the typical patient who uses it, the number of patients who use it, the
actual risks and actual costs of research borne by the company that
develops the drug, the drug's effects on other medical and non-medical
costs (costs of physician and hospital services, costs of long-term
care, and the like), and possibly other factors.
It should be recognized that drugs cannot be cleanly divided
between breakthrough or non-breakthrough drugs. Rather, they should be
arrayed on a continuum, with profits set in proportion to the benefits
and costs just listed.
This activity is essential because nothing close to a genuine free
market exists to reward research.
One clear step should be to cease to reward copy-cat research.
According to DiMasi, some 40 percent of pharmaceutical research today
is imitative.\22\ PhRMA claims that its members will conduct $23.6
billion worth of research in 2001.\23\ If that claim is accurate and if
40 percent goes to copy-cat research, some $9.4 billion is probably
being spent sub-optimally from the perspective of society.
Some would claim that copy-cat research is essential to generating
competition, and that that is essential to holding down prices. Perhaps
that is true in today's world (conceptually though not practically,
since prices have not been held down very effectively). But holding
down prices by regulation is much simpler. And $9.4 billion is
accordingly made available to finance breakthrough research this year
alone.
Others would claim that some copy-cat drugs could have superior
efficacy or fewer side-effects. In these cases, their developers should
profit in proportion to the additional value provided by the copy-cat
medication.
In sum, one good way to promote breakthrough research is to pay for
it generously, and to refrain from generously rewarding copy-cat
research.
Another good way to promote breakthrough research is to subsidize
it publicly through the National Institutes of Health. Such subsidies
have long been very important to new drug development, and NIH funding
has been rising rapidly in recent years. Public dollars often finance
the riskiest share of the research. Drug makers should not profit from
costs and risks borne publicly, but rather from their own efforts. In
that way, effort and results are rewarded, not ability to capitalize on
the accomplishments of publicly-financed research.
B. Containing Costs in Order to Keep Medications Affordable for All
The peace treaty described in Section V will make today's
medications affordable for all. The research promotion just described
will continue to spur the development of new breakthrough medications.
The remaining challenge is to make tomorrow's medications affordable
for all.
This is probably the knottiest job. No one tool will suffice.
Although other approaches will probably be necessary as well, I suggest
starting with these three tools:
1. Cut marketing waste
PhRMA does not, apparently, estimate or report its members'
marketing costs. Instead, the drug makers cite an estimate from IMS
Health that drug makers' marketing costs were only $13.9 billion in
1999. (This estimate is unnaturally low, since about one-half of it is
the retail value of samples, which grossly exceeds their cost to drug
makers.) The drug makers did report that their own research spending
that year was $20.4 billion.
A more skeptical estimate puts marketing spending at $24 billion
and research at $10 billion. This rests on an analysis of the
allocations of drug makers' revenue published in manufacturers'
financial reports. As shown in the following exhibit, 31 percent of
drug makers' revenue went to marketing and administration, while only
11 percent went to research and development.\24\
Exhibit How Six Drug Makers Spent Their Money, 1999
------------------------------------------------------------------------
------------------------------------------------------------------------
Marketing and administration 31%
------------------------------------------------------------------------
Research and development 11
------------------------------------------------------------------------
Production 32
------------------------------------------------------------------------
Taxes 6
------------------------------------------------------------------------
Other 4
------------------------------------------------------------------------
Profit 16
------------------------------------------------------------------------
The truth may well be somewhere between the two sets of estimates.
Clearly, more accurate information and analysis is required to resolve
conflicts and inadequacies plaguing some of the currently available
data.
But one piece of evidence is clear--the drug makers' marketing
employment soared by 57 percent between 1990 and 2000, while its
research employment rose by only 10 percent, as shown in the following
exhibit.
Exhibit PhRMA Members' Marketing and Research/Development Employment, 1990 and 2000
----------------------------------------------------------------------------------------------------------------
Type of employment 1990 2000 % change
----------------------------------------------------------------------------------------------------------------
Marketing 56,014 87,810 +56.8%
----------------------------------------------------------------------------------------------------------------
Research and Development 43,952 48,527 +10.4%
----------------------------------------------------------------------------------------------------------------
In today's world, drug marketing aims to maximize company profits.
Drug makers rely on their current marketing techniques, despite their
high cost, because these techniques pay off in higher sales. But it is
far from clear that the nation's patients are getting their money's
worth. Often, new medications are being widely marketed, advertised,
and sold even though they are much costlier than older medications they
replace--and without adequate evidence that they are markedly more
effective.
This may be good for drug makers but it is not good or affordable
for patients. At some point, it will probably be necessary for the
federal government and the drug makers to negotiate simple and
enforceable limits on marketing and advertising expenditures.
2. Carefully evaluate the efficacy of each medication and compare
efficacy with cost, and disseminate the results to physicians
and patients.
If marketing becomes much less important, how will physicians and
patients learn about which drugs might be helpful, and whether they are
worth the money?
This function should probably be performed by a research office in
the National Institutes of Health or the Food and Drug Administration,
or possibly by a separate non-governmental non-profit research
corporation. Objective evidence on efficacy should be compiled, along
with the information needed to calculate a fair return on a drug
maker's investment in a new medication. The objective evidence should
be disseminated to all physicians, along with recommendations from
expert panels of physicians and scientists regarding which medications
are effective and efficient in treating various ailments.
We can marshal the huge sums now badly spent on marketing, and
recycle them to finance the job of collecting and disseminating this
objective evidence.
Any public agency charged with this work must be insulated
politically. It cannot be influenced by pressure from cost-cutters to
downgrade its assessment of the value of a new drug in order to reduce
public spending. That would undermine citizens' trust. We should not
substitute information from a public agency motivated to hold down
spending for information from drug makers motivated to increase
spending. This consideration might argue for relying on an independent
non-profit corporation.
3. Give more careful thought to what constitutes fair profits for drug
makers
As my colleague and I have noted,\25\ drug makers' reported profits
have been extraordinarily high since at least the 1970s. The data in
the following exhibit indicate that the prescription drug industry's
return on equity in 1999 of 35.6 percent was 2.21 times as great as the
41-industry median of 16.1 percent. And the prescription drug
industry's return on revenue of 18.6 percent was 3.58 times as great as
the 41-industry median of 5.2 percent.\26\
Exhibit Prescription Drug Industry Returns on
Equity and Revenue Compared with 41-Industry Median, 1999
------------------------------------------------------------------------
Rx/41-
prescription 41-industry industry
drugs median ratio
------------------------------------------------------------------------
return on equity 35.6% 16.1% 2.21
------------------------------------------------------------------------
return on revenue 18.6% 5.2% 3.58
------------------------------------------------------------------------
The profits that drug makers actually garner by manufacturing and
selling prescription drugs may be substantially higher than those they
report overall. It is important to be clear that, in making this
statement, I am not in any way suggesting that any drug maker has done
anything remotely improper. Corporations report corporation-wide
financial results.
For example, my colleague and I examined Merck's profits as a
percentage of revenue (the only measure that could be calculated) after
factoring out the relatively low returns on revenue of its Medco PBM
subsidiary.\27\
Merck reports a consolidated 1999 income before taxes of $8,619.5
million on revenue of $32,714.0 million, for a before-tax return on
revenue of 26.3 percent. This includes revenue and profit on Merck's
large Merck-Medco segment. But how much did Merck make on its
prescription drug business alone? \28\
The answer is that Merck garnered a 37.4 percent before-tax return
on revenue on its prescription drug business. A brief glance through
Merck's annual report did not reveal this number, though it may be
there, somewhere. The 37.4 percent return on revenue is more than two-
fifths greater (42.2 percent greater) a return on revenue than the
consolidated 26.3 percent of revenue that Merck reports overall. The
calculations are shown in the exhibit that follows.
Exhibit Merck Pharmaceutical Segment's Revenues and Profits, CY 1997-1999
($ millions)
----------------------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------------------------------------------------------------------------------------------
1. Segment revenue $12,122.20 $12,839.90 $14,418.70
----------------------------------------------------------------------------------------------------------------
2. Segment profit $7,396.20 $7,367.30 $8,495.40
----------------------------------------------------------------------------------------------------------------
3. Less all unallocated costs $3,162.90 $2,370.20 $3,109.10
----------------------------------------------------------------------------------------------------------------
4. Segment profit after unallocated costs $4,233.30 $4,997.10 $5,386.30
----------------------------------------------------------------------------------------------------------------
5. Segment profit as % of segment revenue 34.9% 38.9% 37.4%
----------------------------------------------------------------------------------------------------------------
Source, Merck & Co., Inc. 1999 Financial Report, p. 55.\29\
Drug makers say they need high profits to finance research. But
profits do not finance research. The profits that they report--and that
are so far above those of other industries--are the sums left over
after they pay for research, manufacturing, marketing, advertising,
administration, taxes, and other costs.
Finally, the drug makers are not willing to identify a ceiling on
their profits or revenues--the level of profit or revenue beyond which
no more money is needed to finance useful research. Similarly, the drug
makers are unwilling to identify any floor on their profits or
revenues--the level below which vital research would suffer. Their
position is simple: more money (for themselves) is better. That would
make sense only if the drug makers operated in a competitive free
market. They do not, as discussed earlier.
For all these reasons, it will be necessary to investigate, debate,
and negotiate the level of profit required to induce drug makers to
retain their motivation to innovate and produce breakthrough drugs.
VIII. LEARNING FROM THE EVOLUTION OF STATE PRESCRIPTION DRUG POLICY
Examining the evolution of states' prescription drug policy in
recent decades may enlighten future federal action. States' first phase
was paying for drugs. Their second phase is holding down prices.
All state governments began paying for prescription drugs on a
large scale through their Medicaid programs. Many others followed with
special pharmacy programs to subsidize drug purchases for citizens who
did not qualify for Medicaid, usually for seniors.
In the past few years, many states have realized that soaring drug
costs were raising the costs of both of these activities to troubling
levels.
States therefore moved from financing to price controls Maine
legislated an innovative price control law. Vermont sought to cover
more citizens under the umbrella of its Medicaid rebate. The drug
industry has challenged these efforts in the courts. If the drug
industry prevails, states will try other techniques, such as
establishing themselves as sole buyers or wholesalers of drugs within
their borders, thereby perhaps avoiding a possible Commerce Clause pre-
emption of state action.
Thus far, some states have been motivated, politically, to respond
to the crisis of high drug prices because state governments feel those
prices directly and because, it appears, ordinary citizens who suffer
from high drug prices have been able to make themselves heard by some
state governments.
States can act to cut drug prices without worrying about the
consequences for research. The federal government cannot do so.
The federal government has, in one way, already acted to protect
itself against high drug prices by legislating low prices for the
Veterans Administration and the military. Unlike other nations,
however, the federal government has thus far protected mainly itself--
not all citizens--against high drug costs.
High prescription drug prices are one of the main reasons many
Americans cannot afford needed medications. High prices have spurred a
number of complicated, sometimes well-intentioned, and usually
ineffective responses, ranging from PBMs to formularies to higher co-
payments to obtaining drugs from abroad.
High prices spur efforts to reduce use. But this can harm patients
who would benefit from those drugs, and it flies in the face of the low
incremental or marginal cost of those drugs.
Instead of cutting use in response to high prices, federal action
should cut prices to Canadian levels, in order to facilitate higher
use, as medically appropriate. This is best done as part of a
comprehensive prescription drug peace treaty that protects the
legitimate needs of patients, payors, and drug makers.
NOTES
1. PhRMA projects $121.7 billion in U.S. domestic sales in 2001 for
ethical prescription drugs. Sold in the U.S. by U.S. and foreign
members of PhRMA, these are overwhelmingly brand-name drugs for human
use. Based on 1999 breakdowns, we calculate that 93.4 percent of this
is for humans. Applying the 93.4 percent share to the $121.7 billion
yields $113.7 billion. See Pharmaceutical Research and Manufacturers of
America, Pharmaceutical Industry Profile, 2001, Appendix tables 11 and
12, http://www.phrma.org/publications/publications/profile01/
app__a2.phtml#
table__11. It is estimated that some 74 percent of the overall retail
dollar goes to manufacturers. (See National Association of Chain Drug
Stores, ``The Facts about Prescription Drug Pricing,'' Alexandria,
Virginia: NACDS, 1999 (unpublished draft), 3rd quarter 1998, chain drug
stores only.) Applying this 74 percent share to the $113.7 billion
yields $153.6 billion in retail sales of prescription drugs for humans.
We round up to $165 billion to account for generics manufactured by
non-PhRMA members. In 1998, spending on generics was 8.6 percent of the
U.S. total. That figure was reported by the Generic Pharmaceutical
Industry Association, ``Generic Share of U.S. Market,'' Facts and
Figures, www.gpia.org/edu__facts.html, but it appears that this site is
no longer in operation.
2. This rests on the Health Care Financing Administration/CMS
projection of 2001 total health spending of $1,424.2 billion. See
Health Care Financing Administration, National Health Projections,
Table 1, March 2001, http://www.hcfa.gov/stats/NHE-Proj/proj2000/
tables/t1.htm.
3. This reflects our projection of U.S. population for 1 July 2001.
The population estimate is built on the U.S. population reported in the
2000 Census and increases it by the average annual population rise from
1990 to 2000, and adds one-quarter of a year to move the estimate from
1 April to 1 July.
4. David J. Cantor, ``Prescription Drug Price Comparisons: The
United States, Canada, and Mexico,'' Washington: Congressional Research
Service, Library of Congress, 23 January 1998; see also U.S. General
Accounting Office, Prescription Drugs: Companies Typically Charge More
in the United States than in Canada, Washington: The Office, 1992 (GAO/
HRD-92-110).
5. Patented Medicine Prices Review Board, Annual Report 2000,
Ottawa: The Board, 11 June 2001, Figure 8. The report expressed U.S.
and other non-Canadian prices as percentages of Canadian prices; we
calculated Canadian prices as a percentage of U.S. prices.
6. The low Canadian prices for brand name drugs are no aberration.
Consider these nations' brand name drug prices as a percentage of U.S.
prices in the year 2000:
------------------------------------------------------------------------
------------------------------------------------------------------------
Italy 52.9 %
------------------------------------------------------------------------
France 55.2
------------------------------------------------------------------------
Canada 62.5
------------------------------------------------------------------------
Sweden 63.6
------------------------------------------------------------------------
Germany 65.3
------------------------------------------------------------------------
U.K. 68.6
------------------------------------------------------------------------
Switzerland 69.2
------------------------------------------------------------------------
Source: Patented Medicine Prices Review Board, Annual Report 2000,
Ottawa: The Board, 11 June 2001, Figure 8.
7. Actual savings in a given state would vary slightly from those
calculated here. That is because these calculations make three
simplifying assumptions:
a) That prescription drug spending in 2001 is distributed
among the states in the same proportions as reported by the
Health Care Financing Administration's Office of the Actuary
for 1998. (See United States Health Care Financing
Administration, 1980-1998 State Health Care Expenditures
Estimates, 29 September 2000, posted on-line at http://
www.hcfa.gov/stats/nhe-oact/stateestimates/.)
b) That private insurance, Medicaid, and self-pay shares of
the market are similar from state to state. These actually
varying somewhat from state to state.
c) That discounts and rebates are shared evenly among the
states; in reality, these also vary somewhat from state to
state.
8. Personal communication from Hilda BenEzra (regarding Isaac Ben
Ezra) to Deborah Socolar, 30 August 2001.
9. The last tactic would be useful only when drug prices are
negotiated rather than regulated. I am indebted to John McDonough for
mentioning this tactic, one that drug makers apparently employed when a
U.S. state was considering obtaining medications from a Canadian
province.
10. Generic Pharmaceutical Industry Association, Facts & Figures.
See www.gpia.org/edu.
11. The United States government emphatically rejects PhRMA's
claims that a free market legitimizes drug makers' prices, or that
cutting prices is dangerous, by taking a 42 percent (or so) price
discount for medications for the Veterans Administration and the
military, and by taking an 18 percent (or so) rebate for the Medicaid
program. This is the sort of thing foreign governments have long done
for all their citizens.
We point to these six specific indicators of the absence of a free
and competitive market:
1. Prevailing price disparities are themselves evidence of
the lack of a free market for prescription drugs. While
different payors today pay very different prices for the same
drug, prices would tend to converge if there were a free
market. In a free market, price competition would result in the
same price throughout the market.
2. The drug industry's high U.S. prices--prices many times
marginal cost of production--also suggest that nothing close to
a freely competitive market is at work here. In a free market,
prices tend to track marginal costs.
3. The industry's monopolistic (or oligopolistic) character
in many sectors gives drug manufacturers tremendous power to
set prices. Recent reports have documented that there is only
limited competition within many major categories of medication.
For example, in four important categories of drugs, the top-
selling three drugs accounted for 71-90 percent of 1998 U.S.
retail sales. (National Institute for Health Care Management,
Prescription Drugs and Intellectual Property Protection,
Washington: NICHM Research and Educational Foundation, 24 July
2000, p. 2, and p. 6, Figure 4, http://www.nihcm.org/
prescription.pdf. Similarly, see Henry J. Kaiser Family
Foundation, Prescription Drug Trends: A Chartbook, Menlo Park,
CA: The Foundation, July 2000, p. 65, and p. 69, Exhibit 4.4,
http://www.kff.org/content/2000/3019/PharmFinal.pdf.)
4. This power will grow as drug makers merge into fewer and
larger corporations. (``Mergers Could Kill Competition for
Drugs, Spur Price Hikes,'' Associated Press, 28 January 2000.)
5. Vertical integration--including Merck's control of a major
PBM--is also a concern.
6. And allegations of such anti-competitive practices as
suppression of generic competitors are further signs of
continued monopoly and oligopoly. (See, for example, U.S.
Federal Trade Commission, ``FTC Charges Drug Manufacturers with
Stifling Competition in Two Prescription Drug Markets,'' Press
Release, 16 March 2000, http://www.ftc.gov/opa/2000/03/
hoechst.htm; John Martin, ``Conspiracy to Fix Drug Prices: Drug
Makers Keep Generic Drugs Off the Market,'' 16 March 2000,
http://abcnews.go.com/onair/CloserLook/wnt__000315__CL
__genericdrugs__feature.html; Ronald Rosenberg, ``Drug Makers
Seeks Curb on Sale of Generic Cyclosporin,'' The Boston Globe,
7 April 2000; Michael F. Cannon, ``Suppressing Generic Drugs
Fleeces Consumers,'' Citizens for a Sound Economy Foundation
Issue Analysis, No. 86, 25 February 1999; ``The High Price of
Drugs,'' ABC News, 20/20, 23 July 1999, www.abcnews.go.com/
onair/2020/transcripts/2020__990723__drugs__trans.html; and
Sheryl Gay Stolberg and Jeff Gerth, ``How Companies Stall
Generics and Keep Themselves Healthy,'' The New York Times, 23
July 2000, http://www.nytimes.com/library/national/science/
health/072300hth-generic-drugs.html.)
12. Cited in Deborah Baker (Associated Press), ``Many in Southwest
Lack Drug Benefits,'' Albuquerque Journal, 7 September 2000. Ms. Baroni
was testifying before the New Mexico legislature's Health and Human
Services Committee.
13. First, some market responses to predictions of lower drug
prices suggest that high sales volumes would offset threatened price
discounts. Three British drug companies' stock prices rose 3.4 percent
(Glaxo), 2.3 percent (SmithKline Beecham), and 1.9 percent
(AstraZeneca) following President Clinton's January 2000 State of the
Union speech calling for a Medicare prescription drug program. ``
(Glaxo Leads UK Drugs up after Clinton Speech,'' Dow Jones Newswires,
28 January 2000.)
Second, we have seen earlier estimates of the price elasticity of
demand for prescription drugs ranging from -0.10 to -0.64. (A price
elasticity of demand of -0.10, for example, would mean that a 1 percent
price cut for drugs would result in an offsetting 0.1 percent rise in
volume of drugs purchased. The increase in volume, multiplied by the
prices of the drugs purchased, would equal the replacement revenues
garnered by the manufacturers in response to the lower prices.) Much of
the empirical work on price elasticity of demand for medications rests
on introduction of, or increases in, co-payments for prescription
drugs. It is not clear how easily these findings can be generalized to
price cuts, especially to substantial price cuts.
Third, a June 1999 Merrill Lynch analysis estimated that a 40
percent price cut for Medicare recipients lacking prescription drug
coverage would result in a 45 percent volume increase for these
individuals. (Merrill Lynch, ``Pharmaceuticals: A Medicare Drug
Benefit: May Not Be So Bad,'' Merrill Lynch, 23 June 1999.) That
translates into a price elasticity of demand of -1.125. (A similar
price elasticity of demand might also apply to the remainder of the 69
million or more Americans lacking prescription drug coverage.)
Merrill Lynch also estimated that the same 40 percent price cut
would net out to a 25 percent price cut for Medicare recipients who
have prescription drug coverage (because they already enjoy discounts
estimated to average 15 percent), and that the 25 percent price cut
would raise the volume of drugs purchased by 10 percent. We suggest
that is a very conservative estimate of the increase in volume for
Medicare recipients who have prescription drug coverage. Many
recipients have very shallow coverage, such as a benefit through an HMO
with a cap of $500 annually.
Even with that conservative estimate, the Merrill Lynch report
concluded that, taking increased sales volume into account, a 40
percent price cut for Medicare beneficiaries would yield only a 3.3
revenue loss--or even a slight revenue gain.
Fourteen months later, Merrill Lynch continues to strongly espouse
this general position. In August of 2000, Merrill Lynch's health care
manager, Jordan Schreiber, has asserted that ``Even with drug price
cuts I think there's a good chance the pharmaceutical group will
actually come out as a net beneficiary as the presently uninsured
become customers, albeit less profitable customers.'' (Ian McDonald,
``10 Questions With Merrill Lynch Healthcare Manager Jordan
Schreiber,'' TheStreet.com, Fund Watch I, 14 August 2000, http://
biz.yahoo.com/ts/000814/fund1__000814.
html.
See also Beth M. Mantz, ``Merrill's Tighe Sees $207.08B in `00
Global Drug Revs,'' Dow Jones Newswires, 25 September 2000.) Other Wall
Street observers have recently concurred. (See Derrick Jackson, ``Drug
price cuts won't kill industry,'' The Boston Globe, op-ed, 22 September
2000.)
14. Once research is conducted and factories are built, it should
not be very great. We estimate the marginal cost of additional volumes
of medications at 5 percent of the retail dollar, or about 6.8 percent
of the manufacturer's cost. (Taking the manufacturer's share of the
retail dollar at 74 percent.) How can this be so low?
First, because producing the medications consumes a relatively
small share of the average manufacturer's total revenues. In 1999, for
example, only 32 percent of six large drug makers' revenues, on
average, was devoted to acquiring raw materials and to manufacturing
drugs. As this is the average cost, which includes substantial fixed
costs for engineering, equipment, and workers, then the marginal cost
of producing additional volumes will be substantially lower. Costs of
raw materials are typically very low. One report noted that ``the cost
of the raw materials runs only a few cents in pills that often sell for
up to $15 apiece.'' (Elyse Tanouye, ``Drug Dependency: U.S. Has
Developed an Expensive Habit: Now, How to Pay for It?'' The Wall Street
Journal, 16 November 1998.) A revealing example was reported recently.
The vital ingredient for Xalatan, a successful medication to prevent
glaucoma, costs only about one percent of annual sales. (Jeff Gerth and
Sheryl Gay Stolberg, ``Medicine Merchants: Birth of a Blockbuster; Drug
Makers Reap Profits on Tax-backed Research,'' The New York Times, 23
April 2000.)
Second, private conversations with managers of drug factories have
supported the 5 percent figure.
Third, the prices set by manufacturers of generic drugs are very
much lower than those set by manufacturers of brand name drugs. A Mylan
executive has asserted that her company sells two-fifths of its 104
products at prices equal to 10 percent (or less) of the prices charged
by brand name manufacturers. (Patricia Sunseri, ``FTC Antitrust
Complaint vs. Mylan,'' 23 December 1998, www.genericaccess.com/
info.html.)
15. See, for example,
First Clinton Plan: Associated Press, ``Drug Stocks Soar in Light
of Medicare Proposal,'' The Boston Globe, 30 June 1999;
CBO's estimates of cost of first Clinton plan: Robert Pear,
``Budget Office Says Clinton Underestimated Cost of Drug Plan,'' The
New York Times, 23 July 1999. Underestimates were attributed by CBO to
faster growth in underlying drug costs, including drugs for nursing
home residents (which should be a transfer from Medicaid to Medicare,
thus result in no real increase in total federal plus state government
costs), more low-income people expected to apply for federal aid in
paying premiums and co-payments, and lower expected discounts won by
PBMs in a federal program than in a private program.
Senate Democrats' Plan: Robert Pear, ``Rival Medicare Drug Plans
Are Both Ruled Affordable,'' The New York Times, 9 June 2001.
16. In only eight months from March 2000 to January 2001, CBO's
projections for drug spending by or for Medicare beneficiaries during
the decade from 2001 to 2010 rose from $1.1 trillion to $1.3 trillion
under current law--without a prescription drug benefit. See Dan L.
Crippen, ``Laying the Groundwork for a Medicare Prescription Drug
Benefit,'' Statement before the Subcommittee on Health, Committee on
Ways and Means, U.S. House of Representatives, 27 March 2001, Table 2.
17. $318 billion divided by $1.3 trillion equals 24.5 percent.
18. Anjetta McQueen, ``More Money Needed for Prescriptions,''
Associated Press, 16 May 2001.
19. It assumes the following:
----------------------------------------------------------------------------------------------------------------
total
added brand increase in
Group of people number in name brand name
group prescriptions/ prescriptions
person annually
----------------------------------------------------------------------------------------------------------------
number of Non-Medicare uninsured 57,000,000 5 285,000,000
----------------------------------------------------------------------------------------------------------------
number of Non-Medicare underinsured 75,000,000 3 225,000,000
----------------------------------------------------------------------------------------------------------------
Non-Medicare subtotal 510,000,000
----------------------------------------------------------------------------------------------------------------
number of Medicare uninsured 13,843,148 15 207,647,225
----------------------------------------------------------------------------------------------------------------
number of Medicare underinsured 25,936,014 10 259,360,135
----------------------------------------------------------------------------------------------------------------
Medicare subtotal 467,007,360
----------------------------------------------------------------------------------------------------------------
Grand Total 977,007,360
----------------------------------------------------------------------------------------------------------------
20. Some 2.84 billion retail prescriptions were filled in 2000, a
five percent rise from 1999. Another five percent rise in 2001 would
mean 2.98 billion prescriptions in 2001. (National Association of Chain
Drug Stores, ``Facts at a Glance,'' www.nacds.org/wmspage provided 1999
and 2000 data.) And the 977 million increase divided by 2.98 billion
equals 33.4 percent.
21. The average price of a brand name retail drug in 2001 is
estimated at $70.27, making for an estimated incremental cost of $3.51,
with the increment estimated at five percent of retail. The $70.27
average price was calculated by applying the 1999 to 2000 rate of
increase in price to the average price in 2000. National Association of
Chain Drug Stores, ``Facts at a Glance,'' www.nacds.org/wmspage
provided 1999 and 2000 data.
22. Cited in Merrill Goozner, ``The Price Isn't Right,'' The
American Prospect, Vol. 11, No. 20, 11 September 2000, http://
www.americanprospect.com/archives/V11-20/goozner-m.html. Goozner also
reports that ``FDA statistics for the 1990s suggest that about half of
the industry research is aimed at developing me-too drugs.''
23. Pharmaceutical Research and Manufacturers of America,
Pharmaceutical Industry Profile, 2001, Appendix Table 1, http://
www.phrma.org/publications/publications/profile01/
app__a1.phtml#table__1.
24. The data were compiled from an opportunity sample of seven
large drug companies (now merged into six) whose financial reports were
readily on-hand. The drug makers are Merck, Pfizer plus Warner-Lambert
(which have merged), Bristol-Meyers-Squibb, American Home Products,
Lilly, and Schering-Plough. We are grateful to Robert DeNoble for his
careful work in compiling and reducing the financial data. The firms'
combined 1999 revenue was $114.8 billion. The firms are generally
representative of the industry.
25. Alan Sager and Deborah Socolar, A Prescription Drug Peace
Treaty: Cutting Prices to Make Prescription Drugs Affordable for All
and to Protect Research: Boston: Health Reform Program, Boston
University School of Public Health, 5 October 2000.
26. The prescription drug industry and other industries' data are
presented in http://www.fortune.com/fortune/fortune500/medians.html. We
calculated the 41-industry median at the mid-point between the 20th-
and 21st-ranked industries on each list of 41 industries.
27. Alan Sager and Deborah Socolar, ``Prescription Drug Spending Is
Already Enough to Buy All the Drugs All Americans Need,'' Session on
Cutting Drug Prices and Expanding Coverage--Federal and State Efforts,
Health Equity and Public Hospitals Caucus, American Public Health
Association, Monday 13 November 2000.
28. Merck & Co., Inc. 1999 Financial Report, p. 42.
29. Note: Unallocated costs are ``indirect production costs,
research and development expenses and general and administrative
expenses, all predominantly related to the Merck pharmaceutical
business, as well as the cost of financing these activities.''
We calculated these unallocated costs by starting with before-tax
profits reported for all segments (which do not reflect those costs not
allocated to any segment) from p. 55 of the Financial Report, and
subtracting before-tax profits reported on the consolidated income
statement (which reflect all costs). See Merck & Co., Inc. 1999
Financial Report, pp. 42 and 55.
Senator Dorgan. Dr. Sager, thank you very much.
I regret that we are running out of time due to other
commitments this morning, but I want to ask just a couple of
brief questions. First of all, I think the testimony of this
panel has been excellent and provides some interesting
perspective about this issue from a range of different points
on the compass.
Let me ask you, Ms. Powell, you have heard the testimony
that preceded yours by the FDA. The question that was left
hanging was, do the Canadians, and speaking specifically now
about Canada, do the Canadians have a regime of safety and
quality assurance and chain of custody that should make
consumers feel comfortable? So let me ask you that question
because your industry sells a substantial amount of products
into Canada and markets a substantial amount of prescription
drugs in Canada.
Do the Canadians, in your judgment, give us reasons to
worry about the safety of their prescription drug supply?
Ms. Powell. Senator Dorgan, I know that the equivalent of
FDA, the agency of that reviews and approves or denies
marketing for prescription drugs in Canada, uses fairly similar
processes for determining safety and effectiveness. I, however,
do not know what the distribution system is within Canada. I
would be happy to do some research and get back to you, but I
don't know how the Canadian system insures that the product
sold by the manufacturer in fact gets to the pharmacy through a
chain of custody, I don't know what their chain of custody
system is. I would be happy to get back to you on that.
Senator Dorgan. We will ask a number of groups to determine
that. Mr. Giroux, you run a pharmacy south of the border, so I
assume you know what is happening north of the border. Do
Canadians have reasons to worry about the safety of their drug
supply?
Mr. Giroux. In my judgment, clearly not. I think there is
no difference between the Canadian system and the U.S. system.
If you look at any one of these products, they are clearly
sealed from the manufacturing plant and in all likelihood the
bottles are identical, as you have already pointed out. They
are coming from the same plants, from the same machines, and
they are sealed in these packages with a slightly different
label for the Canadian identifier when shipped to Canada.
And as all pharmacists do with any product that comes into
our doors, when we open the package, it has to be sealed. If it
isn't, it goes back.
Senator Dorgan. Are there common distributors between, for
example, a Canadian drugstore north of the New York line and
your drugstores, are you buying from common distributors?
Mr. Giroux. There are several of the larger wholesalers who
do have facilities in Canada and as I mentioned, probably they
are already potentially taking advantage of this. I don't know.
Senator Dorgan. So is it likely the chain of custody is
probably almost identical from a manufacturing plant to the
same distributor to the drugstore in Canada as to your
drugstore? So it would be an identical chain of custody?
Mr. Giroux. Absolutely. And I think the example that the
gentleman from FDA used in terms of the counterfeit, which I
think is a somewhat unrelated issue, but he used an example of
a product that was actually adulterated in Long Island, New
York and shipped to Chicago. It had nothing to do with the
Canadian drug distribution system. That can happen in any chain
of distribution, not necessarily from Canada to the U.S. I
would be totally confident and comfortable buying these
products from a Canadian supplier. They are sealed, they are
intact, if they weren't, we wouldn't buy it, plain and simple.
Senator Dorgan. Dr. Sager, your testimony was interesting
because it mentioned some new and interesting approaches, some
of which may be unable to be dealt with by this Congress, but
several of you have talked about the need to put a prescription
drug package in Medicare. I certainly agree with that and feel
strongly that we should do it. However, if we do that, and we
are oblivious to the issue of cost, and we see cost increases
of 16, 18, 19 percent a year, which includes both utilization
and price inflation, we are just going to break the bank.
I think what we have to do is address both issues. We need
to put a prescription drug program in the Medicare program, but
we need to find ways to put dominant pressure on prices to the
extent that we can. That is the reason this reimportation issue
is important. Let me reemphasize that my end goal is not to ask
people to leave this country to go elsewhere to purchase
prescription drugs. My end goal is that if the distributors and
pharmacists can do that, the pharmaceutical manufacturers will
understand and will reprice their product in this country. That
is the end stage of this whole thing.
Mr. Marvin?
Mr. Marvin. Senator, our people in Maine clearly understand
that the U.S. Government is involved in the Medicare program
negotiating with the prices for hospitals, they're involved in
the Medicare program negotiating prices with doctors, they are
involved in the Medicare program negotiating with virtually
every aspect of medicine except prescription drugs. And our
people in Maine are wondering what's so sacrosanct about the
drug industry that it should be exempted from dealing with the
U.S. Government as a negotiator on behalf of citizens as
opposed to all the other aspects of the Medicare program.
Senator Dorgan. Ms. Powell, do you want to answer that?
Ms. Powell. We support a federal Medicare drug benefit.
However, we believe it can most effectively be administered
through the private sector and there are a variety of models
for that kind of program, where the federal government is not
the sole purchaser of the medicines, but the federal government
provides support for seniors having access to prescription
medicines.
For example, within the Federal Employee Health Benefit
program, the federal government pays for Federal employees'
drugs but it does not negotiate a price for drugs, it contracts
with healthcare providers and we think that Congress should
look at a variety of those kinds of approaches to providing the
drug benefit. But I certainly would echo that a Medicare drug
benefit is needed.
Ms. Wennar. A couple points I would like to make here.
First, the private side, let's not forget, they to are having
some difficulty with prescription drug supplies. Even the
largest of payers, Wellpoint in California, have told us that
it's breaking the bank, and they are fairly large in terms of
negotiating power, and so I think, don't be fooled into a false
sense of security that by going to the private sector that you
are going to see this problem resolved.
And I do agree that prescription drugs do need to be
covered under Medicare because they are critical, as I pointed
out, on the provider side, the technology is now here to stay
in the form of a pill and it is going to continue to grow that
way.
I think our concern is that you have to figure out how to
have access to affordable prescription drugs before you cover
it under Medicare because if you go out there and you cover it,
and you can't control the cost, you very well, as you pointed
out, might have a major issue.
The other thing is, I would like to just pose a question. I
mean, I have heard a lot discussed around quality. You know,
just consider it this way on this side. The FDA does not
monitor samples in physicians' offices last I checked. They
don't check the temperatures, they don't check the storage.
They don't take any consideration in terms of looking at
things. I don't know whether they have the authority to or not,
but a lot of medication is being dispensed in the form of
samples, and nobody monitors that.
Why would you be any more concerned about the prescription
drugs coming in the manufacturer's bottle from Canada than you
would be concerned about physicians giving samples out?
Ms. Powell. I'm going to disagree with you, because there
is legislation. FDA, because of the 1998 statute, has extensive
regulations that control the entire process of sample
distribution, so I think it's not correct to say that those are
not controlled. Let me point out----
Senator Dorgan. We were not talking about control, we are
talking about whether in practice and whether as a matter of
fact you have FDA inspectors going out and inspecting samples.
Ms. Powell. My understanding is that FDA is authorized to
monitor the process of samples throughout the distribution
system.
Senator Dorgan. But I am wondering if they do or not.
Ms. Powell. That I don't know, but I know that they are
authorized to.
And I would also like to point out that samples constitute
more than 50 percent of the administration and marketing costs
that Mr. Sager refers to, and samples are one of the mechanisms
that manufacturers have used, along with their voluntary
patient assistance programs, to address the problems of people
who do not have insurance for prescription drugs, and they are
one of the ways that I know doctors deal with seniors who do
not have access to insurance.
But we think a more efficient way is through a Medicare
drug benefit.
Senator Dorgan. Dr. Sager, from an academic standpoint--
first of all, I appreciate the work you have done, your
testimony is very interesting as is all the testimony here--
from an academic standpoint you heard me suggest that if we
cannot do it the way we want to do it, then we will legislate
the first step by dealing with Canada only. Does that make
sense to you?
Dr. Sager. Well, I think it addresses some of the issues
that people have been complaining about, yes, but I'm still
worried about what I think is the likely response of drug
manufacturers, which will be to limit the supply available to
Canada for reimportation.
Senator Dorgan. That was my next point. You assume, and I
assume, that pharmaceutical manufacturers are making a profit
with those drugs they sell in Canada, do you not agree?
Dr. Sager. Right.
Senator Dorgan. If they are making a profit and limiting
supply, it seems to me they would be shooting themselves in the
foot. But having said that, having observed that, can I ask
again from your standpoint, would you submit for the
Subcommittee your analysis of methods by which the industry
could thwart what we do?
Let us assume that we can pass a piece of legislation and
get past the point of having HHS and FDA decide they are going
to implement it. We have always understood that there are
devices by which the industry can try to undermine the law. We
have never gotten to that point because we have not been able
to get through HHS at this point, but I think we are going to,
and it would be helpful if you would, because you mentioned one
approach, if you would give us from your standpoint as an
academician, your thoughts about what approaches might be used
by the industry that could undermine or thwart the intent of
legislation like this.
Now having said that, I must adjourn this hearing because
of other obligations, but let me make one additional point. I
think this has been an interesting exchange of views. I think
the testimony that all of you have brought today has given us a
record that a number of us will use in various ways, and
perhaps those who oppose what I am trying to do will use it as
well.
I did not mention, and I should have, Senator Wellstone and
Senator Johnson of South Dakota have been very active here in
the Senate on this legislation, and I should have mentioned
them.
It has been bipartisan, Republicans and Democrats, who are
interested in doing something in this area.
Again, thank you for participating. I know some of you have
come long distances today, but this is a very important issue,
and we appreciate your attendance.
This hearing is adjourned.
[Whereupon, the hearing adjourned at 11:10 a.m.]