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#8 CLAIM: The increasing use of better, but more expensive, prescription drugs is driving up costs


Americans are using more drugs than ever before. = TRUE

Does this mean Americans are taking too many drugs?

U.S. retail prescription sales – drug spending by patients at pharmacies – topped $192 billion in 2006, with California topping out at $15.8 billion and Wyoming in last at $0.3 billion. Spending on cancer drugs alone accounted for 13% of the nation’s drug spending in 2002 and is projected to almost double in 2007, to 22%.

Although prescription drug spending has been a relatively small proportion of national health care spending compared to spending on hospital and physician services (10% in 2004, compared to 30% and 21%, respectively), it has been one of the fastest growing components.

The government predicts overall spending on medications will continue to rise – to nearly $500 billion a year within a decade, up from an estimated $275 billion in 2007.

Increased spending on drugs:
A Kaiser Foundation study found that increased spending on drugs is due to 3 things:

Go here for charts on U.S. drug spending.

Increased use of drugs:

  • From 1994 to 2005, the number of prescriptions purchased increased 71% (from 2.1 billion prescriptions to 3.6 billion), compared to a U.S. population growth of around 13%.
  • In 2006, the number of prescriptions per person (both new and refills) bought in retail pharmacies, ranged from 6.5 prescriptions in Alaska to 17.2 prescriptions in West Virginia, with a U.S. national average of 11.1, approximately one prescription per month per American.

Is this too much? Let’s put it this way: people are living longer than at any point in history despite serious health problems, in part thanks to prescription drugs – and many of the drugs are produced in this country.

That said, I don’t know anyone who pays to take these drugs and endure the costs and possible side effects just for the fun of it, do you? And if blood pressure pills can keep someone like a 75-year old grandmother from having a stroke and all the expense that entails, who wouldn’t support it?

But maybe we are taking drugs we don’t really need.

We are increasingly exposed to drug advertising claims through television, radio, magazines, the internet, and newspapers. In 2006, drug-makers spent almost $5 billion on direct-to-consumer advertising.

Maybe it is that clever ad for the little purple pill or the new allergy medication that makes consumers run to their doctor’s office and demand them. Certainly if we have health insurance and an ailment, and we think there is an easy fix then we’re happy to try a drug that might fix it.

Put the big marketing money where the prescription pad is:
An estimated $19 billion is spent annually by the world’s pharmaceutical companies promoting their drugs directly to doctors. The pharmaceutical companies ultimately get back the costs of this spending when you fill the prescription.

So what’s driving the increase in drug spending?

Is it that Americans are using too many drugs or that the drugs are costing us too much?

New drugs on the market are better than those in existence; climbing prices reflects their quality. = FALSE

Newer, higher cost drugs replacing older, less expensive drugs:
Only 35% of the 1,035 new drug applications introduced between 1989 and 2000 represented real medical improvements. The rest were me-too drugs: no safer or more effective than drugs already available. In fact, the FDA currently allows new drugs to be less effective than current drugs as long as they’re more effective than a placebo.

Why bother developing these drugs? Because Americans are used to buying (and paying more for) “new” “improved” products. Of the direct-to-consumer drug ads studied in 2007, 58% portrayed the new drug as a medical breakthrough.

Orphan Drugs: Some of the most expensive prescriptions are for medical breakthroughs, but they don’t get widely advertised. So-called Orphan Drugs treat rare disorders affecting fewer than 200,000 people. Orphan drugs are now “one of the fastest-growing areas in pharmaceuticals.” Drug industry lobbying in 1983 succeeded in getting passed a federal law that secured tax breaks and patent exclusivity for such products. Orphan drugs are necessary for those with the disorders, but what is the reason to charge so much for them? The research is already completed and expensed.

Manufacturer price inflation for existing drugs:
What’s the actual cost of drugs?
The Tufts University Center for the Study of Drug Development, which is mostly funded by the drug industry, and whose findings are used by the Pharmaceutical Research and Manufacturers of America (PhRMA), has asserted that the actual cost of developing a drug is $800 million from beginning to end (human trials), though watchdog groups disagree and put the figure lower by 75% at $200 million.

What is certain is that only 1 in 10 of the experimental drugs in clinical trials earn FDA approval. Therefore, industry profitability relies on the few drugs that do make it to market to recover the costs of the other 90% that fail in testing – not to mention all the others that didn’t even get that far.

What’s the role of generics?
One key to recovering cost is to control how patents work and prevent brand-name drugs from going generic, which usually brings drug prices down an average of more than 50% after six months, to a total of 20% of the brand-name price within three years. In 2006, the average brand-name prescription cost more than 3 times the average generic: $111, compared with $32.

The U.S. Food and Drug Administration and the Patent Trademark Office have set a 20-year limit on drug patents. On average, however, the exclusivity period of brand-name products — the time between actual market launch and the patent’s expiration— is about 12 years. But there are ways around this.

Why are drug companies so threatened by generics?
The Wall St. Journal predicts that some of the top-selling drugs of all time “will become history as patent protections expire,” with generic competition “expected to wipe $67 billion from top companies’ annual U.S. sales between 2007 and 2012.” This loss in prescription profits due to the increased use of comparable generics will amount to “roughly half of the companies’ combined 2007 U.S. sales.”

Part of the problem is that the drug pipeline has dried up. The “century-old approach of finding chemicals to treat diseases is producing fewer and fewer drugs.” the Journal reports. Datamonitor estimates that annual revenue for the pharmaceutical industry between 2011 and 2012 will decrease for the first time in at least four decades.

That said, recent findings have shown that annual drug price inflation is at its lowest in 30 years: 1% in 2006 as compared with 4.4% in 2005. Economists say this is due to the increased use and availability of lower-cost generics (63% of filled prescriptions in 2006 up from 50% in 2005), possibly thanks in part to the increased number of huge retailers like Wal-Mart, Target, and Public offering cheaper generic drugs.

Why can’t we get prices lowered?

This relates to the issue of who’s paying and how.

Medicare Prescription Drug, Improvement, and Modernization Act of 2003: passed by both houses of Congress, signed by President Bush into law. The bill banned the federal government from negotiating with manufacturers for the drug prices for those enrolled.

  • As a result, drug prices are higher not just for those on Medicare but for the entire nation because insurance companies use Medicare pricing as benchmarks.
  • AARP recently found that in 2006, for the seventh year in a row, the average price for the 193 brand-name drugs most used by Americans over 50 increased faster than inflation – 6.2% versus 3.2%.
  • But the law was passed in 2003 and prices have been rising at high rates since at least 2000: this law itself isn’t entirely to blame.

In 1994, consumers made up the largest share of spending on drugs (43.1%), followed by private insurance (35.5%), and government programs (21.5%). Since 1995, private insurers has paid the largest proportion through spending on prescription benefits. This has increased the cost of private insurance, driving employers to shift these health insurance costs to employees or cancel these benefits altogether.


Drug profits are booming….
The pharmaceutical manufacturing was the most profitable American industry from 1995 through 2002. While its profitability has since declined, in 2004 drug companies were still the third most profitable industry (ranking only beneath mining and crude-oil production) and three times more profitable than the median for all Fortune 500 companies.

….sometimes through outright fraud

….sometimes even doctors are pulled into the kickback schemes.

Whatever the reason or method, drug profits boom at our expense.