Policy Background

Spending in the United States for prescription drugs rose from $40.3 billion in 1990 to $188.5 billion in 2004. Prescription drug spending is one of the fastest growing components of overall health care costs, increasing over the past decade at double-digit rates compared to single-digit rates for hospital and physician services. In the first three months of 2006, prices charged by drug makers for brand-name pharmaceuticals jumped 3.9 percent, four times the general inflation rate, according to AARP. This is the largest quarterly price increase in six years, and the fourth consecutive year the average prices of dozens of brand-name drugs widely used by elderly Americans have risen more than twice the rate of inflation. Examples of price increases for some of the most popular brand-name drugs include the sleeping pill Ambien, up 13.3 percent and the best-selling cholesterol drug Lipitor up 4.7 to 6.5 percent, depending on dosage. Overall, higher prices mean that the cost of providing brand-name drugs to the typical older American, who takes four prescription medicines daily, rose by nearly $240 on average over the 12-month period that ended on March 31, 2006.

Cancer and specialty drugs are especially costly and utilization is increasing rapidly. Celgene Corp. has announced that it will sell the drug Revlimid, a treatment for multiple myeloma, a cancer of the bone marrow, at $6,195 a month or $74,000 annually. This drug is priced well beyond the cost of R&D, manufacture, and marketing, according to Wall Street analysts. Morgan Stanley estimates the manufacturer will make a 97% gross margin – the profit excluding marketing and corporate costs – on Revlimid, an oral medication that is relatively inexpensive to produce. Revlimid is by no means alone in being priced “aggressively;” the Wall St. Journal has reported on many drugs priced well beyond patients’ ability to pay. For example, the Elan Corp. and Biogen Idec Inc. have priced the multiple sclerosis drug Tysabri at $2,184.62 a vial or about $28,000 a year, a 20% premium over the price of the drug when it was first approved in 2004. Overall, spending on high cost specialty drugs soared 17.5 percent last year and is expected to more than double by 2009 to $90 billion. Spending on injectable drugs for inflammatory diseases such as rheumatoid arthritis and crohn's disease soared 35 percent, and spending on cancer drugs known as anti-neoplastics, which are administered outside a doctor's office, rose 19.2 percent.

Rising prescription drug costs contribute to Medicaid costs and drive benefit cuts, and are a roadblock to health care access. Double-digit annual increases in prescription drug prices over the past decade and increased utilization have been major contributors to significant increases in state Medicaid costs, pressuring states to reduce benefits and cut costs through a variety of benefit changes. For example, in June 2006 the State of Vermont removed the acid reflux-fighting drug Nexium from the state's preferred drug list for Medicaid patients in order to save money; prescription drug costs for the program were up 24 percent from the previous year -- three times more than the cost for Medicaid patients' inpatient hospitalizations. The Vermont policy is based on the ready availability of comparable alternative medications that are more affordable, but other benefit cuts are less benign. A cost-cutting policy that is both widely adopted and widely criticized is to place monthly or annual caps on the number of prescriptions that an enrollee of a state Medicaid or other state prescription drug plan may fill. Even though these policies have been repeatedly discredited in peer-reviewed studies as not only harmful to patients but also ineffective in reducing total medical costs, states continue to adopt them.

Rising drug costs are also a serious roadblock to health care access for the estimated 41 million Americans who are ineligible for Medicaid or Medicare and lack private health insurance; the uninsured pay the highest retail prices. Even many people with insurance cannot afford medications because of high co-pays or limited coverage. A 2005 study found that nearly one-quarter of Americans had problems paying medical bills in the previous year, and more than six in ten of these had health insurance. Among adults reporting problems paying medical bills, 56 percent reported that the bills were for prescription drugs. Forty three percent of working-age adults with bill or debt problems did not fill a prescription because of cost. These costs have also contributed to the increase in personal bankruptcies; a Harvard University study estimates that medical-caused bankruptcies affect about 2 million Americans each year, counting debtors and their dependents, including 700,000 children.

State approaches. States are taking several approaches to rein in drug costs and insure greater transparency in pricing. The District of Columbia has enacted legislation that provides a legal remedy when drugs are priced at unconscionable levels. This pathbreaking law is currently being challenged in federal court, where the trial court held that patent law prohibits the District’s law – a ruling that is very broad and if upheld could threaten a wide range of state laws already on the books. NLARx is an amicus in that case. A law to establish a system of reference pricing of drugs based on the Federal Supply Schedule and to allow the negotiated prices for state programs to also be used by commercial insurers and private individuals was enacted in West Virginia and is currently in rulemaking. Maine and Colorado have recently enacted laws regulating prices of prescription drugs during emergencies. Several states, including Michigan, New York and Florida, post retail pharmacy prices on a website. Maine has a law requiring disclosure of AWP prices to the Medicaid program; Maine like many other states has sued drug manufacturers, chain drug stores and others for pricing manipulation and violations of the “Best Price” requirement under Medicaid, and some states are adopting state False Claims Acts to better address this fraud issue and to increase their recoveries.

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