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Why drugs cost so much
The answers to seven pressing questions about the fortune we spend on prescription drugs.
October 13, 2003: 9:45 AM EDT
By Lisa Gibbs, Money Magazine

NEW YORK (Money Magazine) - Should drugmakers be judged differently than other profitable companies because the product is health? Should they be able to charge whatever the market will bear, like other industries, or should they be subject to government price controls?

We address some of these questions.

Why are drugs cheaper overseas?

This one is simple: Other countries regulate drug prices.

In Canada, the destination for busloads of American seniors seeking cheaper drugs, a government review board sets the prices of new drugs and limits the increases on existing ones to no more than inflation.

Today the U.S. dollar's strength relative to the Canadian dollar gives us an automatic 26 percent discount. A three-month supply of 10mg Lipitor costs $183.97 at drugstore.com. In Canada, the same Lipitor costs $206.22 Canadian. At the current exchange rate, we can buy that Canadian Lipitor for $153.20.

For further proof that government controls and patent protections are what account for big price gaps, consider generic drugs, whose prices are unregulated in Canada. Generics tend to cost as much as 50 percent more in Canada. One little-discussed fact in the U.S.-Canadian drug debates is that the border is being crossed both ways: Canadians often buy generics from mail-order pharmacies in the U.S.

Are high prices the reason drug spending is rising so fast?

Not entirely. The biggest reason for the rapid growth in drug spending is simply that we're popping more pills than we used to. Last year Americans filled 3.3 billion prescriptions, nearly twice as many as a decade ago. In 1999, doctors prescribed 146 drugs for every 100 office visits, up from 109 drugs in 1985.

Why are we taking so many more pills?

For starters, we now have effective medications for a host of conditions that once couldn't be treated with drugs, or at least not well. Those include cholesterol-lowering drugs such as Lipitor and antidepressants like Prozac.

Also, when new drugs are more effective than older ones or have fewer side effects, consumers who once avoided drug treatment rather than bear the side effects rush to sign up. And most of these new drugs are more expensive than the ones they replaced.

The aging of the population is contributing too. Consumers over the age of 60 use twice as many drugs as 40-year-olds do. Prescription usage starts to spike at age 55 -- a milestone the first baby boomers hit in 2001.

What about the criticism that marketing is to blame for higher usage?

It certainly plays a part. A 2001 Kaiser Family Foundation survey found that 30 percent of consumers discuss with their doctor a drug they saw advertised -- and almost half of that group leave the office with a prescription in hand. A Kaiser study of drug ads that ran from 1996 to 2000 concluded that every $1 spent on advertising produced $4.20 in additional sales of the 25 largest classes of drugs in 2000, accounting for 12 percent of the growth in drug spending that year.

What may be even more powerful are promotions to physicians -- which cost $9.4 billion in 2001 (vs. $2.8 billion for ads). Some 81,500 polished sales representatives hit the streets every day, doling out free samples (worth $10.5 billion in 2001) and perks -- 61 percent of 2,608 physicians surveyed two years ago said they had received free meals, tickets or travel from a drug rep. Many doctors, including American Medical Association president-elect John Nelson, worry that this leads to excessive and inappropriate prescribing.

Do we get our money's worth from drugs?

Heavy marketing may push up drug spending for no good reason. An FDA analysis of drugs approved between 1989 and 2000 found that 76 percent of them were no more than moderate improvements over existing treatments. Too often, says Robert Seidman, chief pharmacy officer at health insurer WellPoint, we're choosing the newer, pricier drug without considering whether older drugs would get the job done just as well.

Take cholesterol killers. Top sellers in the category -- Lipitor, Zocor and Pravachol -- are also the most expensive. A much cheaper generic version of Mevacor, the first-ever cholesterol reducer, became available in 2001. "It works really great but nobody uses it," says Seidman.

Lost in the outrage over high drug prices, however, is the fact that an effective medication can cut overall health-care costs (not to mention help us live healthier and longer lives). Cholesterol drugs can prevent heart attacks; antidepressants can improve workplace productivity.

A study published in Health Affairs in 2000 looked at asthma patients in managed-care programs in 20 states and found that between 1995 and 1998 drug costs rose by 94 percent, primarily because of increased use of a new type of inhaler. During the same period, though, hospitalization of asthmatics (average cost per stay: $11,000) declined 27 percent and emergency-room visits fell by 8 percent.

A 1996 study by researchers at Columbia University found that every additional $1 spent on pharmaceuticals results in a $3.65 reduction in hospital costs.

So what's the problem?

In 1988, consumers footed nearly 60 percent of the nation's drug bill, according to the Centers for Medicare and Medicaid Services. In 2001 only 31 percent came out of our pockets, mainly because the rise of managed care meant our insurance company was more likely to pick up the tab.

But that doesn't mean you're shielded from the effects of higher drug costs. As insurers feel the pinch, they raise premiums. A study by PricewaterhouseCoopers found that drugs and medical devices accounted for 22 percent of average premium increases from 2001 to 2002. In a recent Kaiser Family Foundation survey, 61 percent of employers said that higher spending for drugs contributed "a lot" to premium hikes.

Plus, out-of-pocket costs are rising. Over two-thirds of large employers have increased drug co-payments in the last two years, and a recent Kaiser Employee Health Benefits survey found that 56 percent of large employers and 38 percent of small ones said they will probably increase employees' share of drug costs next year.

Those of us with insurance have become used to a fairly simple two- or three-tiered co-payment system, where we pay, say, $10 for a generic drug and $20 for a brand-name medicine. Now insurers are coming up with benefit plans designed to recoup more drug costs and, more important, to encourage the use of cheaper drugs.

The boldest experiment comes from Humana, which is testing a plan called RxAllowance that turns the traditional co-payment system upside down. With RxAllowance, employees receive an allowance for every prescription and are on the hook for costs above that. In exchange, insurance premiums are lower. The company will start offering RxAllowance to employers next year.

Here's how the system works. Drugs are grouped into four categories based on their ability to prevent a more serious medical condition and to improve worker productivity. The allowance for drugs in category A, which includes antibiotics and drugs for migraines, is $30. If the drug costs no more than that, the employee pays nothing.

For category B drugs, which include cholesterol drugs, the allowance is $20, so a $63 Lipitor prescription would cost $43. For the lifestyle drugs like Viagra in category D, the allowance is just $5. "The idea is to get you engaged with your prescription at the point of care, so you say to your doctor, 'Here's what I've got to spend, can you help me?'" says Humana's vice president of pharmacy, William Fleming. "You also might think about where you'll pick up your prescription, at Wal-Mart for $40 or Walgreens for $45."

What can be done for seniors?

A full 24 percent of Medicare beneficiaries -- about 10 million people -- have no drug coverage at all and more than half of the rest have limited coverage. Yet seniors take more drugs than anyone else.

And while insurers negotiate volume discounts for drugs, the uninsured pay retail. The result is that many seniors are stretching to afford prescriptions or doing without necessary medications. Medicare recipients without drug coverage average nearly seven fewer prescriptions a year than those with coverage. Nearly one in four seniors report that they skip doses or don't fill prescriptions because of costs.

In Congress, lawmakers are debating whether to legalize "re-importation" from Canada and other countries, a measure strongly opposed by the FDA, the AMA and drugmakers. Any solution for seniors, though, will have to go beyond buying drugs overseas. Adding a prescription-drug benefit to Medicare would offer some relief. However, the costs to the federal budget would be enormous, and political observers say the odds are against any legislation passing this year.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.