Prescription Drug Pricing Attacked, Defended

Published March 1, 2005

At a January meeting of the National Association of Attorneys General (NAAG) in Chicago, critics of the prescription drug industry unleashed a barrage of attacks on the way the industry prices its product. Most of the criticism was off the mark.

At the meeting, invited speakers Marcia Angell, author of The Truth About the Drug Companies (2004), and Merrill Goozner, a former journalist who works for the Center for Science in the Public Interest, alleged drug prices in the United States are far higher than they are in other countries and higher than they need to be.

They and other speakers also accused the industry of charging their highest prices to the uninsured and violating laws that require drug companies to sell their products to government agencies at their lowest prices.

Speakers Omitted Facts

Unmentioned by these speakers was the fact that drug prices in the United States are not rising particularly fast–only about 3 percent last year, by most estimates–and less rapidly than spending on other aspects of health care.

And while brand-name drugs are more expensive in the United States than in other countries, generic drugs are much less expensive here. Since generic drugs account for approximately half of the pills sold in the United States (a much higher percentage than in other countries), a typical U.S. citizen spends about the same for prescription drugs as he or she would pay for the same combination of drugs in Europe.

John Calfee, a resident scholar at the American Enterprise Institute, pointed out at the NAAG meeting that drug prices are expected to rise more slowly or even fall in coming years, as generic substitutes for five of the top 10 best-selling prescription drugs come onto the market.

Calfee also pointed out that estimates of price increases are often exaggerated because the analysts drop from the comparisons drugs that have gone generic or over-the-counter.

Solutions Already in Place

The problem of the uninsured having to pay prices higher than those under various benefit plans has been at least partly solved already. Depending on their income, the uninsured qualify for substantial discounts, or even free drugs, under discount plans sponsored by drug companies.

Through Pfizer Pfriends, for example, families earning $45,000 or less per year save an average of 37 percent off retail prices on Pfizer medicines.

In addition, Pfizer’s Connection to Care and Sharing the Care programs provide free drugs to families earning $31,000 or less. Uninsured seniors qualify for discounts under a different industry-sponsored program, called Together Rx, if they have annual incomes less than $28,000 for singles ($38,000 for couples).

The new prescription drug benefit created by the Medicare Modernization Act will give all seniors access to prescription drug insurance. Although the act prohibits the government from negotiating directly with drug companies, it does authorize prescription benefit managers to negotiate volume discounts on behalf of seniors.

Using More Drugs

Although drug prices are not rising very fast, total spending on prescription drugs is. That is because we are using more drugs and newer ones. Frank Lichtenberg, an economist at Columbia University Graduate School of Business, pointed out at the NAAG meeting that this is a good thing, since a dollar spent on a new drug reduces hospitalization expenses by much more than a dollar.

Comparing spending on drugs to spending on hospital care, then, can be paradoxical: the more we spend on drugs, the less we should need to spend on hospitals.

Price Laws Too Complex

Finally, what about allegations that drug companies charge government programs, such as Medicaid, illegally high prices? Different federal and state programs impose different pricing requirements, and those requirements frequently change, sometimes with new rules that apply retroactively and sometimes not.

Meanwhile, drug companies are selling to hospitals, wholesalers, pharmacies, and direct-to-consumer at prices that vary widely and over time, sometimes leading to violations of the lowest-price rule.

What the presentations at the NAAG meeting made clear was not that industry deliberately inflates or manipulates prices to circumvent the law, but that both the law and the marketplace for drugs are so complex that drug companies find it difficult to comply with the law, and government officials often do not know until after the fact if they paid too high a price.

The whole system seems ripe for reform, but no one at the meeting explained how litigation would lead to that outcome.

Joseph L. Bast ([email protected]) is president of The Heartland Institute, co-author of two books on health care reform, and publisher of Health Care News.