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Strengthen Medicare: End Drug Company Price Setting



May 28th, 2013

It’s no secret that, four years ago, President Obama cut a deal with the pharmaceutical industry. He promised that so long as the drug companies did not block health reform, federal law would continue to prohibit Medicare from negotiating drug prices. Instead, the pharmaceutical industry would get 30 million new customers and remain free to set drug prices for Americans.  This single policy will cost Medicare and U.S. tax payers hundreds of billions of dollars over the next ten years.

If Congress wants to contain long-term Medicare spending and keep health care affordable in America, lawmakers should start with the low-hanging fruit: the excessive prices Medicare and our citizens pay for drugs.

Medicare easily pays between 150 and 300 percent of the average cost of prescription drugs in the other wealthy nations. Recently released data from the International Federation of Health Plans make the point. A monthly supply of Lipitor (a common cholesterol medication) costs about $100 in the U.S.; the same drug costs about $6 in New Zealand and $48 in France.  Nasonex (commonly prescribed for nasal infections) costs Medicare about $108 for a monthly supply; the same drug costs France $17 and Canada $29.  At best, the United States subsidizes the prescription costs of all other wealthy nations; at worst, we are simply dupes.

Price Increases Are Continuing

Moreover, the prices of brand name and specialty drugs in the U.S. are increasing substantially every year. Generous patent protections, effective oligopoly power and the lack of price regulation in the drug market grant the drug industry the privilege of inflating drug prices without any legal or market constraints. A 2009 AARP study reports that the cost of brand-name drugs rose much faster than the Consumer Price Index between 2002 and 2009. A Credit Suisse study reveals that in the 12 months ending Sept. 30, 2009, list prices for the eight largest drug companies rose an average of 8.7 percent.

These huge annual drug price increases have not abated during or since the Great Recession. In 2010, Barclay’s reported an average 6.9 percent increase in the 130 top-selling drugs it studied. Prices of popular brand-name drugs increased 12.5 percent in 2012, more than seven times the overall rate of inflation for consumer goods (1.7 percent), according to data compiled by Express Scripts.

To maximize profits, drug companies have abused the nation’s trust, continually broken the rules, and set excessive prices for Medicare and Medicaid. Between 1991 and July 2012, 20-plus drug companies have settled 269 state and federal allegations of wrongdoing, half of which involved inflating drug charges to Medicare and Medicaid. All in, they have paid out almost $30 billion in penalties.

The sheer number of recent drug company settlements — 74 of them, with financial penalties totaling $10.2 billion, between November 2010 and July 2012 — reflects an industry that is ready, willing and able to bilk taxpayers at every turn and holds itself above the law. Financial penalties are no deterrent, a trivial price when compared to their soaring profits.

In the last 10 years, the largest 11 drug companies delivered $711 billion in profits, resulting in significant part from new business attributable to the advent of the Medicare drug benefit in 2006. Between 2005 and 2012, these companies have seen an almost 50 percent increase in profits, from $57.1 billion to $83.9 billion. Congress needs to step in.

Policy Changes Could Bring Big Savings For Taxpayers

If Congress permitted the federal government to negotiate drug prices as every other wealthy nation does, U.S. taxpayers could save hundreds of billions of dollars. In every other wealthy nation, the government limits drug company prices to between 35 and 70 percent of U.S. prices. Reining in brand-name and specialty drug prices in Medicare alone would strengthen the program while protecting older and disabled Americans. If those prices were negotiated down to those paid in Denmark, for example, Medicare would save $541.3 billion over 10 years, according to Dean Baker, co-director of the Center on Economic and Policy Research

Archer-Exhibit

Source: Dean Baker, Center on Economic and Policy Research

In a recent report on Medicare spending, the Kaiser Family Foundation looked at ways Congress could generate substantial savings by reducing the amount Medicare pays for drugs. These solutions warrant strong congressional support. Simply restoring an established drug-discount program that Congress ended when it enacted the Medicare drug benefit would generate about $123 billion in savings over 10 years. These discounts are drug rebates for people enrolled in Medicare and Medicaid, also known as “dual-eligibles,” and were supported by President Obama in his State of the Union message and his proposed 2014 budget.

With Congress committed to curbing wasteful spending, our representatives should be focused on ending drug-company price setting in America. Like every other wealthy nation, the United States can negotiate prices for its citizenry without hampering vital drug research or impeding new drugs from going to market. Drug research and marketing costs do not require Americans to pay grossly inflated prices, as the pharmaceutical industry often argues. There is no data to back up their claims that patients would suffer without high prices; to the contrary, there is every reason to believe drug makers are crying wolf on this issue. At any rate, even cutting-edge pharmaceutical research is of little value to us if brand-name and specialty drugs are increasingly unaffordable to vast numbers of Americans who need them.

Americans can no longer live by drug company rules. Our nation cannot afford what amounts to hundreds of billions of dollars in corporate welfare to Big Pharma in the form of unfettered pricing power guaranteed by law to produce super-sized profits. The rate of growth in health care spending is already unsustainable and untethered from the rules that would support a healthy marketplace that serves buyers, sellers and the public interest. Negotiated drug prices are a common-sense way to protect our economy, along with the lives of countless Americans for whom vital drugs and good health are simply unaffordable.

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9 Responses to “Strengthen Medicare: End Drug Company Price Setting”

  1. Jk Says:

    Also, expenditure on drugs is only 10-12% of overall healthcare costs in the US. If you support reducing drug prices,also support reducing wages, reducing costs of electricity, water supply etc. all of these factors contribute to high costs associated with inpatient hospitalization.

  2. Jk Says:

    Price controls will halt innovation. Whoever is against high pharmaceutical prices, I simply ask to conduct an analysis that includes no. of innovative drugs launched by US vs. ex-US companies in last 10 years. Even ex-US companies support research through revenues generated from the US. Price controls in the US will mean reduce spending on R&D. Someone should be willing to pay for new innovative medicines.

  3. Daoud Says:

    Walmart Pharmacy negotiated a deal with Nordisk for their Novolin 70/30 insulin, Walmart price $24.98 a vial
    All other pharmacies sell Novolin 70/30 between $89-$105
    If Walmart can do this imagine what Medicare can do if they were allowed by Congress and the white house to negotiate drug prices.
    But SilverScript Medicare-D plan will not cover the lower priced Novolin 70/30, they will only cover the higher priced one. This issue is now in the hands of the Medicare Council judges in Washington DC.

    You can contact me for more information if you are interested.

    Daoud

  4. hmelnick Says:

    Ms Archer’s commentary pretends to be a scholarly study but is instead an inflamatory polemic. Phrases like “Generous patent protections, effective oligopoly power”, “corporate welfare to Big Pharma”, “super-sized profits”, “an industry that is ready, willing and able to bilk taxpayers at every turn and holds itself above the law” make clear that hers is not an objective viewpoint.

    Let’s look at her first statistic, Lipitor. Yes, a month’s supply of Lipitor costs about $100/mo. in the U.S., often more. But does the study include only the brand-name Lipitor in every country, not the generic Atorvastin? A month’s supply of Atorvastin costs as little as $15 in the U.S., and I think it’s safe to assume that most seniors on Part D will chose the generic. Now here’s what’s interesting: 90 Lipitor 20 mg tablets cost $576 at Costco Pharmacy; at Advair Pharmacy in Canada, they cost $284, quite a savings for Canadians. But 90 Atorvastin 20 mg tablets cost $36 at Costco while they cost $69 at Adv Care. Canada controls prices for generic drugs, too; the U.S. doesn’t. Canadians, come to the U.S. for generic drugs and save.

    Then let’s look at another statisitc, Ratio of Per Capita Prescription Drug Spending to U.S. Spending. If this is, as the label suggests, simply taking total prescription drug spending and dividng by population, it omits an important factor: usage of prescription drugs per capita. How about adding to that chart the per capita ratio of overweight and obese people. I think you’ll find a correlation. With one of the world’s highest proportion of overweight and obese people, the U.S. is understandably one of world’s the largest per capita consumers of medications. In addtion, other countries’ health care systems often will not pay for very expensive medications that have limited benefit, while Medicare will. (“Death panels”, anyone?)

    Patent laws exist for a reason, to assure inventors that they will have a chance to profit from their invention. Take away that protection and kiss innovation goodbye. Drug companies do somtimes lose money; limiting their profits without limiting their losses will discourage innovation. Of course, we could simply natioanalize all drug companies and let the government take over research; It worked well in the Soviet Union.

    This is not to say that we don’t need to look at the costs of drugs and controlling pricing. U.S. consumers do pay higher prices for brand name drugs than consumers in other countries. Perhaps prices need to go down here and up elsewhere. But to deride the companies that create these miracle medications for wanting to profit from them is not constructive.

  5. RxRightsAdvocate Says:

    Thank you for highlighting the excessive drug prices in the U.S. and for supporting the negotiation of Medicare drug prices as a common sense, first step.

    As Gabriel Levitt suggests, another common sense step that President Obama has endorsed in the past is prescription drug importation.

    A study released by the National Bureau of Economic Research confirms that personal drug importation through legitimate Canadian and other international online pharmacies can be a safe, money-saving option for Americans. According to this study, among the verified websites tested, U.S.-based pharmacies charged an average of 52.5 percent more than international pharmacies for four top-selling brand-name medications. In addition, all 211 drugs sampled from 23 certified pharmacies passed quality-control tests. Study link: http://www.nber.org/papers/w17955

    RxRights is a national coalition of individuals and organizations dedicated to promoting and protecting American consumer access to sources of safe, affordable prescription drugs. We are currently collecting testimonials from Americans who can’t afford their medication. Their stories are highlighted on our website: http://www.rxrights.org/testimonials

  6. byrondennis Says:

    Gabriel Levitt

    The savings that would be reaped by Medicare negotiating drug prices are not “obvious” to anyone that does the math. The incremental cost of Part D above what governments were previously paying for low-income seniors drugs (via negotiation in an inferior two-tier welfare system like the VA and Medicaid still have today) is in the range of $15 billion annually. So how could the government save hundreds of billions of dollars? Do you want to cut assistance to low income seniors? How would you claw back the $100 billion in discounts given seniors in the donut hole (part of the 2009/2010 “secret” agreement, which — by the way — apparently wasn’t much of a secret)?

  7. byrondennis Says:

    This opinion piece is such a wandering collection of factoid and hate concerning the worldwide drug industry and U.S. drug marketing that a total response is not possible in a comment. The author’s statement is a parade of half-truths, references to propaganda masquerading as research, and totally strained analysis. I comment only because it is typical of far-left-wing opinion that threatens my healthcare-insurance as a retired senior citizen on a fixed income.

    Just sticking to Medicare Part D, consider the author’s errors and misleading statements. You can draw your own conclusions as to the validity of the rest of the diatribe.

    1. The reference to Obama’s secret 2009/2010 deal with PhRMA fails to mention that the drug manufacturers discounted seniors’ brand-name drug costs by over $100 billion over 10 years. Does the author want to claw back those savings from the million or so seniors that received the discounts? (Admittedly that’s only a small fraction of all of us seniors but the 1,000,000 or so are the senior citizens paying the most for drugs in states where there is no full-strength state pharmaceutical assistance programs. In states with full-strength SPAPs, the state’s taxpayers got most of the discount.)

    2. To claim that the Medicare Part D portion of the 2003 law that says pharmaceutical prices will be set by negotiation between manufactures and distributors rather than being fixed by the IRS or some such similar U.S. government bureaucracy “cost(s) Medicare and U.S. tax payers hundreds of billions of dollars” is simply not true. Forgetting the $100 billion in discounts already noted in number 1 above, to believe the author’s claim would require one to assume both that there are no savings in the current negotiation process and that the incremental cost of the 2003 law could be cut by more than 80%.

    3. The claims about brand-name drug prices simply neglect that fact that the vast majority of drugs used by seniors and paid for by Medicare Part D are generics. (It is interesting that the author never mentions Part D. Apparently there is fear that when seniors find out that the author and his or her far-left-wing “senior advocates” wants to gut the most popular Medicare program ever implemented, the poor people that fund the author will riot in the streets… and stop sending the author money.)

    4. There is also a convoluted argument in the article that claims that dual eligibles should be moved back to the inferior second-rate VA-like welfare program for drugs that they were in (at taxpayer expense) before the 2003 law while simultaneously claiming that PhRMA rips off the Medicaid welfare bureaucracy that would administer the inferior two tier system. My recollection is that the inferior second-rate VA-like welfare program for drugs for low-income seniors was eliminated because of advocacy by groups the author claims to represent.

    Overall it is unclear whether the author wants the U.S. government to simply fix pharmaceutical prices or to go so far as to nationalize the drug industry. There are references to trillions of dollars in fraud and waste so the author cannot be talking just about Medicare because the incremental cost of the 2003 Medicare drug benefit is “only” a few hundred billion over 10 years (and all of it is not wasted even if some of it is). Presumably the author wants to take the hundreds of billions out of the entire drug supply chain and not just the relatively small part of if that the taxpayer pays for via Medicare Part D.

    Whatever, this author threatens Medicare with his or her ideas in a way much more serious than few previous left wing proposals have ever done.

  8. Rachel Says:

    Excellent post. I don’t understand why this issue doesn’t get more attention in the press. It isn’t hard to understand. For a while there was press about patients going to Canada to get their drugs, and somehow it is no longer in the news.

  9. Gabriel Levitt Says:

    Ms. Archer’s advocacy of negotiating drug prices for Medicare would obviously achieve enormous savings. I’m glad to see Health Affairs focusing on drug prices, which should really be regarded as a public health crisis. The problem is not only for our nation’s seniors. The Commonwealth Fund recently announced that 50 million Americans between the ages 19-64 did not fill a prescription in 2012, due to cost: http://pharmacycheckerblog.com/50-million-americans-ages-19-64-forgo-meds-in-2012-due-to-cost.

    It’s important to remind readers that the Obama administration also agreed to end is support for easing prescription drug importation laws as part the “deal” with the pharmaceutical industry: http://www.nytimes.com/2012/06/09/us/politics/e-mails-reveal-extent-of-obamas-deal-with-industry-on-health-care.html?pagewanted=all. Facilitating personal drug importation from lower cost pharmacies in Canada and other safe international pharmacies would ease the out-of-pocket drug price burden that tens of millions of Americans face each year.

    Gabriel Levitt
    Vice President
    PharmacyChecker.com

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