After years of double-digit increases in prescription drug costs, employers and state governments that pick up a lot of the tab have reached the breaking point. Now, a battle is erupting in courtrooms, state capitols, the insurance marketplace, and the halls of Congress over the high cost of prescription drugs. At stake are hundreds of billions of dollars in drug sales.
Brand-name drugmakers--among the nation's most politically well-connected--are suddenly on the defensive. In recent months, an unusual alliance of states, insurers, consumer groups, and large companies has lashed out at the punishing increases in pharmaceutical costs. Democrats, who hope to portray themselves as the party of lower drug prices, are cheering from the sidelines. One strategy: Force down prices by boosting the use of generics.
As everyone piles on, powerful brand-name-drug companies from Merck & Co. (MRK) to Eli Lilly & Co. (LLY) may face lower margins in the wake of pressure to cut prices. Generic drugmakers, meanwhile, such as Barr Laboratories (BRL) and Mylan Pharmaceuticals Inc., hope to tap the mounting anger to gain market share. Employers and states that foot the bill for many drugs don't care much who profits--they just want to slash costs. Says Paul B. Ginsburg, president of the Center for Studying Health System Change in Washington: "Payers are getting more and more desperate."
It's not difficult to see why. Last year, Americans spent a staggering $172 billion on medicines, 17% more than in 2000. Of that, $32 billion went for just 10 brand-name drugs, such as the cholesterol reducer Lipitor or the stomach drug Prilosec. Meanwhile, on average, a generic prescription runs $46 less than a brand name (chart). South Dakota, which like other states shoulders the prescription costs for its employees and Medicaid recipients, shelled out $1.4 million in 2001 on Prilosec alone. "Medicaid's breaking us," groans Governor Bill Janklow.
Such pressures are galvanizing the opposition. In Washington, General Motors Corp. (GM) and other major employers have joined Blue Cross, the AFL-CIO, consumer groups, and governors of at least 11 states. Their goal: Push Congress to speed generic drugs to market. The measure would make it tougher for a brand-name drugmaker to block a competitor from bringing a drug to market just as its patent expires. Brand-name companies say they need such protection to earn the returns required to support costly drug research.
At the same time, the Bush Administration is taking aim at some of the tactics the drug industry uses to prop up brand-name medicines. The Federal Trade Commission has brought cases against companies that effectively paid generic competitors to keep low-cost substitutes off the market for months after patents expired. This summer, the agency will release a study outlining the widespread use of such arrangements. State attorneys general and consumer groups have brought class actions against makers of at least 14 drugs for similar activities. One, involving the anxiety drug Atavan, was partially settled in February.
Consumer groups are pushing generics with campaigns aimed at convincing patients to request Brand X from their doctor or pharmacy. In mid-April, AARP rolled out a $10 million advertising blitz with the message: Don't believe everything you see in those drug-company ads. The campaign is part of a larger attempt by the powerful seniors' group to take more activist stances on a wide range of political topics.
Some of the biggest battles are brewing over Medicare, which provides health care for 40 million seniors, and Medicaid, which does the same for 36 million poor and disabled Americans. States pay about half the cost of Medicaid--Washington covers the rest. The tab jumped 14% last year, largely as a result of higher drug costs. In response, about a dozen states are forming buying groups in an effort to get volume discounts for the massive amounts of drugs they purchase for both the poor and their own employees.
The drugmakers have struck back. Their lobbying arm--the Pharmaceutical Research & Manufacturers of America (PhRMA)--has sued, claiming that states are illegally fixing prices. One case, involving an aggressive move by Maine to force lower prices, is now pending before the U.S. Supreme Court.
The brand-name-vs.-generic brawl is also roiling Washington's efforts to devise a Medicare drug benefit. Both political parties say they want to help seniors allay soaring prescription costs. But there's deep disagreement over how to do so. Many Democrats want the government to negotiate directly with drug companies, just as it now sets Medicare fees for doctors and hospitals. But the drug industry, backed by many congressional Republicans, wants a market-oriented approach that allows seniors to buy drugs through private insurers or drug middlemen called pharmacy-benefit managers. Either way, seniors will pay much less for drugs, and cheaper generics are likely to benefit.
Big Pharma says all the ire directed at drug costs is misplaced. True, prices are higher. But better medications reduce other health-care costs. "They make a mistake when they focus just on the drug budget," insists Alan F. Holmer, president of PhRMA. Still, as the cries from critics grow louder, drugmakers may soon face lower prices as they struggle to fend off generic competitors and their newfound corporate and government allies. By Howard Gleckman in Washington