Medicare and Prescription Drug Costs-Part I of a VII Part Article

(Editor's Note: This article along with the article "How to Select a Nursing Home" has been one of the most popular articles on this site for the last several months. Because of the importance of the topic we have continued to add on many paragraphs to the original article. This however, has made the article very long and difficult to read. We therefore have decided to hopefully make things easier for our viewers by having separate articles in the future which will deal with each of the sub-topics that the article covers. We felt it would create too great a difficulty for our viewers who have set the article as one of their" favorites" to just edit the article out of existence. Please let us know if you feel that this is creating too much difficulty for you, our viewers, and we will surely listen to what you have to say on the matter. We have already done this to some extent because the articles "State Legislation and Prescription Drug Costs" and also the article "Patents and Prescription Drugs" should be read in connection with this overall topic.)

(1/16/11)- The Public Health Service Act of 1992 required the secretary of health and human services to sign agreements with the pharmaceutical companies that set maximum prices for drugs sold to certain health care providers. Federal officials would calculate the price for the drug based on information supplied by the drug companies' average wholesale price.

The health care providers were therefore supposed to pay the lowest price for the drugs that they purchased, since the pharmaceutical companies promised to provide discounts to clinics and hospitals that serve large numbers of poor and uninsured patients.

Santa Clara County and Santa Cruz County in California, which includes the city of San Jose operates a public hospital and several health care clinics within their boundaries. The counties brought a lawsuit against the drug company AstraZeneca PLC and several other drug companies contending that they were overcharged for the drugs that they received from these companies.

Nationwide more than 15,000 clinics and hospitals participate in this drug discount program. They spend over $6 billion on the drugs for their patients.

In a surprising development the U.S. Justice Department sided with the drug companies when they raised the defense to the lawsuit, that only the federal government could bring a lawsuit under the act. In its friend-of-the-court brief, the Justice Department stated that private lawsuits would interfere with the federal government's ability to enforce the law.

The United States Court of Appeals for the Ninth Circuit in San Francisco ruled in favor of the clinics and hospitals in December 2009. The drug companies appealed that decision to the Supreme Court with the support of the U. S. Justice Department, hoping to have that decision reversed.

Oral arguments are scheduled to be heard before the U.S. Supreme Court on January 19 in the case, Astra USA v. Santa Clara County California.

(1/23/02)- AIDS is not a disease particularly associated with the elderly. Because of some of the interesting facts now in the news in connection with the pricing of some of the AIDS cocktail drugs by the pharmaceutical companies we thought it would be important to bring some of the facts to your attention.

Richard G.A. Feachem, executive director of the United Nations program, the Global Fund to Fight Aids, Tuberculoses and Malaria announced that the fund had received $2.1 billion in pledges, of which $200 million was pledged by President Bush. The fund had hoped to obtain about $7 billion to $10 billion in pledges. The fund on the other hand had received requests from poor countries of about $8 billion.

The fund will encourage the poor countries to buy generic drugs instead of brand name drugs and in the process may be in violation of patent laws. The decision will mean that makers of generic drugs in India, Brazil and other countries will be allowed to sell more of their drugs in the poorer third world countries.

The fund will require countries applying for grants to do three things:

Any drug that is on the WHO list of approved drugs and drugmakers qualifies automatically. Thus for example the companies in India such as Cipla, that make drugs in violation of Western country's patent laws will qualify, since patent law violations are allowed at this time in India until 2005.

Shannon Herzfeld, a spokeswoman for PhRMA, said the group supported the fund's decision. "We believe strongly that there is room for bona fide generics as long as they are of high quality."

The World Health Organization estimates that some 30 million Africans are infected with the human immunodeficiency virus, H.I.V., which causes AIDS. Of the estimated 30 million who are infected in Africa, 5 million are ready for antiretroviral therapy according to WHO. Presently only 30,000 are receiving the antiretroviral drugs that are needed to treat the disease. Even if some of the African countries did have the money to pay for the reduced cost drugs, many of them do not have the medical and administrative capacity needed to deal with the outbreak

Cipla Ltd., an Indian generic drug company asked the South African government for permission to sell inexpensive generic versions of 8 of the 15 anti-H.I.V cocktails used to treat the disease. Cipla said they would charge as little as $350 per patient per year for the triple-therapy cocktail d4T, or up to $600 per year per patient for some of the other AIDS cocktail drugs. It is offering d4T for as little as 5 cents a tablet, versus the $2.23 that Bristol-Myers charges per tablet. Americans normally pay from $10,000-$15,000 for the same cocktail of drugs.

Shortly thereafter Merck announced that it would offer the cocktails to a number of South African countries at sharply reduced prices, namely $600 per patient per year for the protease inhibitor Crixivan, and $500 per patient per year for Sustiva which is marketed overseas under the name of Stocrin.

As an interesting side light to the whole patent issue, drug costs and Brazil please see our article "Patents and Prescription Drugs" so that you may better understand this situation. In the article we discuss the principle of "compulsory licensing" in patent law. Under this principle a generic drug company can petition a government to allow it to produce and sell a generic version of a patented drug if a health threatening epidemic has broken out in a country. If the government of the country that has been petitioned finds that such an emergency does exist, it need not abide by the requirements of the patent protection laws.

Merck at the same time that it announced the pricing offer, issued a challenge to the governments of wealthy countries as to how to help the African countries pay for even the reduced costs of the drugs being offered to them.

One of the fears that the drug companies have is that the cheap priced drugs will be misappropriated and resold back to patients in the wealthier countries instead of being administered to the people in Africa for whom they were intended. Drug companies do the research and development work needed to discover the new drugs, and as a reward for this they have free rein to set the price of the drug as they see fit.

Of course it can be argued that they will now be selling millions more of the drug to people to whom they never would have sold the drug to and thus bring down the overall cost of manufacturing the drug through mass production. If you deprive the drug companies of their right to make a fair profit on their products, you may in fact hurt the research budgets that help them discover new and valuable other drugs.

Thus you can see this is a complex and many-sided issue involving the pricing structure of drugs. It will be interesting to follow this situation as it unfolds and we will keep you posted on this matter. In another example of the complexity of the issue, Novartis, the Swiss drug company has agreed to cut sharply the price of Riamet, its malaria fighting drug, used extensively in Africa.

According to the World Health Organization malaria kills more than a million people a year. About 3 million people die a year from complications from AIDS. Novartis will sell its drug to the W.H.O. for about $2 for a full treatment, rather than the $20 that the full treatment costs in the Western world markets.

The National Institute for Health Care Management, a nonprofit, nonpartisan group that conducts research on health care issues has just released the results of its study of the cost of prescription drugs for 2001. According to the study spending on prescription drugs rose 17% last year over the year 2000. Total prescription-drug spending in 2001 topped $154 billion, rising $22.5 billion from 2000. The average cost of a prescription at a pharmacy rose about 10% to $49.84. The most commonly purchased drugs were the anti-depressants.

Medicare beneficiaries are expected to spend about $80 billion to $85 billion for prescription drugs this year. The report, which is issued yearly surveys the prices and sales trends of 9,482 prescription drugs sold in pharmacies, food and discount stores and mass merchandisers. Mail-order prescription drug sales rose 27% to $20.7 billion last year.

The prior year's study entitled " Prescription Drug Expenditures in 2000: The Upward Trend Continues" showed that spending on prescription drugs increased 18.8% in 2000 from 1999 to $131.9 billion from $111.1 billion in 1999. Nineteen prescription drugs had retail sales exceeding $1 billion in 2000 compared to 15 such drugs in 1999. In other words the drug industry had more blockbuster drugs in 2000 than they did in 1999. 2.9 billion prescriptions were dispensed in the retail market in 2000, up from 2.7 billion in 1999.

Of the $20.8 billion increase in retail drug spending from 1999 to 2000 about 42% was attributable to the increase in the number of prescriptions written. About 36% of the increase were attributable to the shift from lower priced older drugs to higher-priced medications the majority of which were approved in the last 5 years. About 22% of the increase was caused by the one-year increase in the individual drug price increase. The average number of prescriptions per person in the U.S. population rose from 9.9 prescriptions per person in 1999 to 10.4 in 2000.

A coalition of consumer groups filed a complaint in the U.S. District Court in Boston accusing 28 drug companies of engaging in an "industry wide" scheme of overcharging elderly Medicare patients. The suit goes back to the issue involved in the "average wholesale price" system, which the complaint alleges were set too high.

We discuss this AWP issue later in this article. The lawsuit deals with the time frame since 1993, and alleges that the drug costs have been bloated by the artificially high AWP prices which has meant artificially inflated premiums have been set in connection with prescription drug coverage set under medical coverage for health plans. The coalition represents consumers in 11 states and alleges the overcharges last year was over $800 million. As has been documented the AWP is not an accurate indication of the true price of a drug.

The inspector general of the Health and Human Services Department has released a review of drug company pricing in connection with Medicaid reimbursements to the government. According to the law the government must receive the best possible price for a drug. The drug companies submit data to the government, which forms the basis for the book on pricing called the "average wholesale price".

A state bases the payments that it makes to a pharmacy for Medicaid recipients based on the AWP, minus a percentage that represents the discounts that the pharmacy normally gets from the drug company. If a Medicaid recipient pays too high a price for their prescription drug, the drug Company must reimburse the government for the difference between the AWP price with the discount and the price actually paid for the drug.

In studying the records of the pharmacies in connection with the 200 most common brand-name drugs that Medicaid covers, the inspector general found that whereas the pharmacies normally received about a 22% discount off the AWP, Medicaid received only about a 10% discount. According to the report Medicaid for all the states combined could have saved about $1 billion in 1999. Pharmacies oppose the increased discount to Medicaid, because they claim that the reimbursement does not adequately pay for the additional costs linked to the drugs, such as storage, dispensing and distribution.

Because of things like refunds and rebates large purchasers of drugs such as HMOs, repackagers and drug plan managers such as Merck/Medco pay a discounted price from the AWP. Yes, the drug companies have paid substantial amounts in fines for abuses of the system to Medicare and Medicaid but these abuses still go on.

The health insurance program for federal employees and retirees announced a 13.3 percent increase for its members for the year 2002. It is the largest employer-sponsored health plan in the United States. The average premium will jump to $5,880 in 2002 for the subscriber and the government combined. This will be 50 percent higher than the premiums paid just 4 years ago. The plan covers about an estimated 9 million federal workers, retirees and dependents. Thus the percentage rate increase for health care premiums is rising at an alarming steep amount. The announcement came from the federal Office of Personnel Management.

In the largest percentage increase since 1992, according to figures released by the Kaiser Family Foundation, an independent health-policy study group, the average cost of employer-sponsored health-care premiums jumped 11% from the spring of 2000 to the spring of 2001. Small businesses (those with 3 to 9 employees) saw the biggest increase, averaging 17%. Large businesses (those with more than 200 employees) saw a 10% jump in their premiums. The average employee now pays $30 a month for coverage, which was an increase of $2 from 2000.

It is estimated that the average premium increase for health care insurance next year will rise more than the 11% it rose in 2001. According to the Center for Studying Health System Change, a non-partisan policy-research firm in Washington, the average family premium for those with employer sponsored insurance is about $7,000. Therefore we must look at other innovative methodologies to hold down the cost of prescription drugs, while at the same time maintaining the quality of health care.

Total health care spending, when measured as a fraction of all goods and services produced in the U.S., did not rise from 1992 to 1999. Those numbers are going to change drastically in the next few years as the cost of health care rises swiftly and steeply. According to Hewlett Associates, a consulting firm, HMOs are proposing about a 17% increase in premiums to their larger corporate clients in 2002.

According to the New York based consulting firm of William M. Mercer, which helps large employers negotiate rates, health plans and employees will see an average increase of about 18% in their health care cost premiums next year. The increased expense to the employees won't be solely in their in the premium increases, it will also be reflected in the amount of money that an insured has to co-pay. According to its survey over 40% of the employers expect to pass along increases to their employees in both premium and co-pay amounts.

In an article in the July 30, 2001 edition of the Wall St Journal entitled "Stiff Premiums for HMO Plans Surprise Benefits Managers Braced for Increases", by Barbara Martinez, discusses the large premium increases that will be taking place in 2002. "Employers are facing another year of double-digit inflation in health care, but even more troubling is that they're looking at prospects of the trend continuing for the foreseeable future," warns Peter Lee. Mr. Lee is president and chief executive officer of the Pacific Business Group on Health, a coalition of 44 companies that annually spend more than $3 billion on health care for about 3 million workers, retirees and their families."

The health benefits committee of the California Public Employees' Retirement System is recommending that certain benefit-design changes be made that would mean an increase of about 6% in the premium paid by its 1.1 million state employees. Since Calpers is the largest health-care insurance purchaser in California it is a good indication of the increase the rest of us face next year for health benefits under private plans. The changes include increasing co-pays or out of pocket expenses to $10 from $5 for a doctor's office visit. A three-tier prescription-drug plan with co-pays ranging from $5 to $45 for various generic and brand name drugs would replace the current $5 co-pay for all prescriptions.

In looking at the whole area of high costs for prescription drugs that the consumer ends up paying for, it becomes obvious that one of the contentious areas for this situation is the complicated and often conflicting laws in this country. Mind you we are not saying that the drug companies aren't entitled to a fair profit for their drugs, but sometimes the laws are being used to the detriment of the consumer.

The House of Representatives had passed a bill, introduced by Representative Gil Gutknecht (Rep-Minn.), by a vote of 324 to 101, allowing individuals to purchase drugs overseas by mail order for their own personal use. The Senate bill did not contain such a provision. Passage had been unlikely since the president has indicated his opposition to the bill. House and Senate conferees have just approved an agriculture appropriations bill that did not include the provision that would have allowed individuals to import FDA-approved prescription drugs from Canada. Sen. Byron Dorgan (D-N.D.) had favored the provision but he was unable to convince his colleagues on the conference committee to go along with him

In light of our discussion about the abuses in connection with the AWP, we find it quite interesting when we look at the announced plan of GlaxoSmithKline, the world's second largest drug company, to create a national discount prescription drug plan for low-income people over the age of 65. For a complete discussion of prescription drug discount cards please see our article Proposed Prescription Drug Discount Plans

It certainly is a step in the right direction, but the plan leaves much to be desired before it can be called a fair one. Under its plan those eligible to receive an Orange Card must be senior citizens 65 or older, or the disabled who are enrolled in Medicare. To be eligible the annual income must be at or below 300% of the federal poverty level. This means incomes at or below $26,000 for single individuals and $35,000 for couples. According to Glaxo this would mean up to 11 million citizens could be eligible to join the plan. A further requirement for eligibility is a lack of either public or private insurance programs, such as Medicaid or Medigap policies covering prescription drugs.

Novartis, A.G. of Switzerland became the 2nd drug company to offer cards to elderly Americans to provide discounts of 25% or more on the company's brand name drugs. Under the Novartis plan, which begins in January of 2002, to be eligible you must be 65 or older and have an income of $26,000 or less if single, or $35,000 or less if married. According to IMS Health, which collects data about pharmaceutical sales, Novartis' products account for about 1/4 the sales of prescription drugs to people over the age of 65 in the last 12 months. Miacalcin Nasal Spray for osteoporosis was among the top 50 drugs used by the elderly in a Families USA survey last year.

According to the Glaxo press release:

Applications for the plan are being accepted immediately through health care providers or by calling a toll free number: 1-888-ORANGE6. A participant would present the card to any pharmacist to be eligible to receive a discount of anywhere from 25% to 40% off the AWP on any Glaxo drug. Glaxo's most popular drugs are: Avandia for diabetes (sales of $900 million in 2000); Flovent for diabetes (sales of $837 million in 2000); Seravent for allergy (sales of $564 million in 2000); and Lanoxin for the heart (sales of $125 million in 2000). Express Scripts, a drug plan manager will administer the Orange Card program. As we point out the problem is not so much with the plan itself but with the whole AWP system.

Abbott Laboratories recently announced price cuts for about 50 drugs and other medical products that it charges to state Medicaid programs. These are believed to be the first price cuts resulting from the government's investigation into how the drug companies charge government agencies for medicines. The state of Illinois Medicaid office estimated that it would result in a savings of about $2.5 million to the state's low-income medical-insurance program.

The investigation centers on the pricing in connection with the "average wholesale price" as reported by pharmaceutical companies that are used in determining payments for the drug's usage by Medicare and Medicaid. Medicare does not generally pay for most prescription drugs, but does pay for a handful of mostly oncology and intravenous products administered in the doctor's office. Federal investigators say that for certain drugs, manufacturers report artificially high wholesale prices, while selling the drugs to doctors at steep discounts.

By keeping the spread wide between what the doctor actually pays for the drug and what is reported as the "AWP" the doctor receives a financial benefit in using such a drug. In many cases the encouragement is so great that a doctor benefits more by recommending a brand name drug than if he/she recommends a generic drug. The question also arises as to whether or not reporting an artificially high "AWP" is a crime under the law as it is written.

According to the review a handful of drug companies sold some brand name drugs to HMOs without reporting some of the lower prices that they were sold at, as required by the law. The report estimated that the government overpaid by $108 million between 1998 and 1999. Repackagers are firms that take large quantities of drugs and repackage them into smaller doses or under their own names.

They are exempted from the best pricing law. HMOs are not exempt from the best price provision of the law. Seven unnamed drug companies sold drugs to 8 repackagers for prices below the AWP. Three of the 8 repackagers were HMOs and therefore subject to the law. An earlier report from the inspector- general found that 2 popular drugs were sold to HMOs classified as repackagers for 34.3% less than the reported AWP.

Schering-Plough revealed in its year 2000 annual report, and 10-K filing, that it is being investigated by the U.S. Attorney's Office in Massachusetts for setting an artificially high "average wholesale price" that is used in connection with Medicare and Medicaid billings. Prescription drug billings to Medicare and Medicaid are based on the average wholesale price, which is furnished to the government by the drug companies. If the government is reimbursing the dispensers of prescription drugs too high an amount it is the taxpayer that in effect is helping to pay for this fraud. In October 1999 the U.S. Attorney's Office for the Eastern District of Pennsylvania subpoenaed Schering re an investigation of illegal drug rebating practices.

There are several databases available to enable you to find out which programs offer discounts or free medication to individuals in need. To help you even further in finding information on prescription drug assistance programs, Medicare managed care plans, and Medigap plans that offer prescription drug coverage in your area, we recommend that you try the Medicare site

We appreciate a recent email that we received from Amy Hazelton pointing out the fact that the prior link that we had listed here was no longer available. She in turn recommended .This site links you to insurance companies from which you can get quotes for different types of insurance. We at therubins do not make product recommendations nor do we have any ads at all, but in appreciation for Ms. Hazelton's correction email to us, we wanted to show her our thanks.

We all have heard of the term generic drug, but we thought it might interest our viewers if we explained the process from start to finish for the approval of a generic drug. A generic drug must have the same active ingredients as the branded drug. It has to be in an identical strength and dosage form (tablet, liquid, etc.), and be administered in the same manner (oral, injection, etc.) as is the branded product. The generic also must supply the same amount of the active ingredient to the human body, at the same absorption rate as the branded drug.

This is called " bioequivalence" and all generics must prove (within a range of (20)%/+25%) as to the efficacy and safety of the chemical compound in question that was established by the original branded drug. The generic does not require the lengthy and expensive clinical trials, as do the branded drug trials. On average the development of a generic drug takes about 3 years versus the 6 years of expense and trial for the branded product. Once bioequivalence studies are complete, the generic company submits an Abbreviated New Drug Application (ANDA) to the FDA for approval to market the drug. The approval process for the ANDA at the FDA takes anywheres from 10-24 months. On average it takes the FDA about 12-months to review brand products, but one of the reasons this is true is because the brand drug companies have contributed financing to the FDA specifically for this purpose.

The generic drug company must also submit its proposed manufacturing process and quality control tests to the FDA. The FDA requires that the company's manufacturing process conforms to current good manufacturing practices (cGMP) as defined in the U.S. Code of Federal Regulations. The FDA will inspect and audit the manufacturing process for compliance before a drug is approved, as well as every two years following approval.

If the FDA believes a company is not in compliance, it can impose sanctions which include withholding new product approvals, disqualifying a company from supplying the product to federal agencies, prevent a company from exporting a product or in the most serious cases halt the manufacture or even order recalls of the product. The FDA announces it actions through warning letters sent to the manufacturer.

TAP Pharmaceutical Products, a joint marketing venture of which 50 % is owned by Abbott Laboratories and 50% is owned by Takeda Chemical Industries, pleaded criminally guilty to illegal marketing and health care fraud. Judge William Young of the Federal District Court in Boston set a hearing for December 17 in order to determine if the $290 million fine agreed to by the prosecutor's office and the company was a sufficient and proper an amount to settle the matter. The $290 million settlement would be the largest criminal fine ever in a health care fraud matter. TAP had previously agreed to pay $559 million to settle the civil portion of the case.

The case against TAP Pharmaceutical Products involves improper billing by physicians for free medical samples that they received from the drug company. TAP will pay a total of $875 million to settle the criminal and civil charges of fraud against the Medicare and Medicaid programs. The settlement agreement further requires that TAP accurately report its true "average wholesale price" to the government.

We do not know how this true price will be arrived at, but we hope it does in fact require an accurate and true system that the government can rely on. We will advise our viewers as to how this price is arrived at as soon as this information becomes available. Prosecutors also indicted six current and former employees of TAP who are charged with conspiracy to pay kickbacks to doctors for prescribing Lupron over Zoladex. Abbott Laboratories said that it was setting aside about $344 million to settle accusations raised by the Justice Department in this case.

The case involves both improper inducements and free samples of the drug Lupron that is a prostate-cancer drug. The Prescription Drug Act of 1987 makes it a felony for doctors to bill insurers for drugs they receive free, as well as for the manufacturers to conspire with the doctors in such a scheme. In several of the cases it is alleged that the physicians were given free doses of Lupron if they would prescribe Lupron for their patients instead of the rival drug Zoladex which is manufactured by AstraZeneca.

So far four urologists have been charged in connection with this matter. A urologist in Lewiston, Maine, who allegedly received 85 to 90 free samples of Lupron Depot, is charged with having given those free samples to his patients, but thereafter having billed their health insurers from whom he subsequently received payments for the free drugs. Three other urologists have pleaded guilty to health care fraud under similar circumstances. A House Commerce Committee investigation showed that TAP was selling a 7.5-milligram dose of Lupron for $412, while encouraging physicians to seek $515 a dose reimbursement from Medicare.

Illegal marketing practices by the drug companies eventually cost the consumer many millions of dollars. Bristol-Myers Squibb Co. has been subpoenaed in connection with its marketing of the anti-cancer drug Etopophos and its medical device "Cytoguards". Etopophos is an injectable medication used to treat testicular and lung cancer and non-Hodgkin's lymphomas. Cytoguards are devices that prevent spilling of intravenous-administered treatments.

This possible criminal investigation centers on the idea that the free samples and the medical devices were given to physicians to use the Bristol products. The physicians may in turn have improperly billed Medicare and Medicaid by charging items on the bill that in fact were given to them for free. This would result in a criminal violation under the terms of the Prescription Drug Act of 1987.

The activities of Bristol's generic subsidiary Apothecon Inc. are also thought to be under investigation because of the possibility that Apothecon gave pharmacies improper inducements to dispense Bristol's generics rather than the generics of some other company. One such Apothecon generic is atenolol, a blood-pressure treatment. Investigations of Bristol and other drug companies' sales practices are also being conducted by states Attorney Generals in Florida, Texas and California. The state prosecutors are particularly interested in the activities of Oncology Therapeutics Network, a San Francisco drug wholesaler that is a subsidiary of Bristol that gave doctors free samples of Cytoguards along with their monthly orders. The federal investigations are centered in Florida and Massachusetts. Civil charges are also possible in these matters.

We at therubins like to keep you updated about some of the little intricacies involved with medications so that you will be a more informed consumer. A situation just occurred to this writer that will illustrate this point. My doctor about a year ago put me on the cholesterol lowering medication Lipitor.

When I had the prescription filled by Merck-Medco,( the prescription drug benefits manager used by the company that I worked for) I received a bottle containing a 90-pills supply. Under my companies co-payment system I therefore had to co-pay $24, and that was the total charge to me. After 4 renewals of the prescription my doctor had to submit a new prescription to Medco in order for me to be able to receive this medication. I submitted the new prescription to Medco without noticing that the new prescription called for only a 30-pill supply. When I got the medication in the mail, the enclosed bill was for $24. I would say something is wrong with a system where the co-payment is not based on the number of prescription pills that the consumer uses, but rather is a constant based on the number of times the consumer puts in his order.

When I called to inquire from Medco why I had to co-pay $24 for a 30-pill supply, when I co-paid the same $24 for a 90-pill supply, I was told that the co-pay stays the same no matter how many pills are in the bottle. Thus every time I re-order my medication I have to make sure that the doctor has indicated on the prescription that it is for the 90-pill version.

The amount of money spent on outpatient retail prescriptions rose 18.8% in 2000, from $111.1 billion to $131.9 billion. The average number of prescriptions per person in the US rose from 7.3 in 1992 to 9.6 in 1998, according to a Kaiser Foundation study. A National Institute for Health Care Management (a nonprofit, nonpartisan group that conducts research on health care issues) study indicated a further increase to 9.9 prescriptions per person in 1999 and 10.4 in 2000 (from 2.7 billion prescriptions in 1999 to 2.9 billion prescriptions in 2000).

Interestingly, 8 categories of medicine accounted for just over half  (51.4%) of this increase. Those categories were treatment of high cholesterol, arthritis, chronic pain, depression, ulcers and other stomach ailments, high blood pressure, diabetes and a predisposition to seizures. Sales of the top fifty drugs, of an overall total of 9,911 drugs, were responsible for $58.2 billion (44%) of the total spent on drugs, a 29.7% rise in 2000. Generic drugs now account for 40% of all prescriptions, approximately the same percentage since 1995, while accounting for about 9% of total prescription drug sales, down from 12.2% in 1995.

One of the other issues involved in the Massachusetts investigation of Schering is the issue known as "repackaging". When a drug company sells a drug in bulk to an HMO, the HMO in turn has the bulk shipment repackaged into more convenient dosages for its doctors to distribute to their patients. A federal law passed in 1990 requires that the manufacturers report the "best prices" offered to its private-sector customers. By not reporting the low prices given for the bulk shipment the companies lower the amount that they have to remit to Medicaid and Medicare every quarter. One of the drugs being investigated is albuterol, a generic asthma product produced by Warrick Pharmaceuticals, which is a unit of Schering.

One of the more obvious answers to this problem would be greater emphasis on generic drugs when they are available and are just as effective as the brand name drug. In this vein we should look at what is happening with generic Prozac (fluoxetine). Eli Lilly & Co. had over $2.7 billion in sales in the U.S. from the drug Prozac, which is an anti-depressant in 2000. The generic version of the drug came onto the market in August of 2001.

Merck-Medco, the pharmaceutical benefits unit of Merck & Co. initiated a large campaign to convince doctors to the prescription for generic Prozac rather than the brand-name drug. Merck/Medco stated that it had contacted 25,000 doctors who were the biggest prescribers of Prozac to tell them of the availability of generic Prozac. So far the company reports that about 80% of the prescriptions written for the drug have changed over to the generic version. Merck-Medco, which provides drug benefits for more than 65 million Americans estimates that its members could save about $40 million in the next 6 months by using the generic version of Prozac.

When you go into the prescription department area of any Duane-Reade drug store you will see posters announcing the availability of the generic version of Prozac. Because of the long and costly litigation involving the patent protection for Prozac the generic manufacturers of fluoxetine have discounted the price by only about 30%. Once the 6-month exclusivity period expires, other generic drug companies will be coming with their products, so the cost should go down a great deal more after February 2002. Express Scripts Inc. another prescription drug-benefits manager with 47 million members has gotten about 75% of the doctors to switch to fluoxetine. AdvancePCS, an Irving, Texas drug-benefits manager with 75 million members, plans to remove Prazac from its "preferred brand" list on October 1.

Blue Cross Blue Shield of Michigan, which provides about 1/2 of the health insurance coverage for Michigan residents initiated a campaign called "Generic Drugs, the Unadvertised Brand" to try and boost the usage of generic drugs amongst its members. It also initiated a competition among the state's retail pharmacies to increase the percentage of prescriptions filled with generics instead of brand-name drugs. Blue Cross will initiate a large advertising campaign in the state in the spring featuring the names and addresses of those pharmacies that switched over to the generic version of Prozac. About 38% of prescriptions written in Michigan were for generics.

It is estimated that for every 1% increase in generic usage the consumers would save about $35 million. In the next few months several other blockbuster drugs will be coming off of patent protection. This includes AstraZeneca's ulcer drug Prilosec, and Schering-Plough's anti-allergy drug Claritin. The battle between the generic drug company Barr Labs and Eli Lilly, over the length of the patent life for Prozac is a classic example for us to take a look at, to see how the consumer pays in the end when a generic drug and the patent holding drug company have a legal tussle over the patent.

Lilly used every legal means available to it in order to extend the patent life of Prozac. Lilly could not be blamed for doing this since it took in over $2 billion in revenues last year from this drug. The legal battle was a long drawn out affair that was costly to both sides. Lilly is still appealing the case to the U.S. Supreme Court, but in the meanwhile, Barr came out with the 20-mg generic version of the drug on August 2, 2001.

Barr recently announced that it was taking a .04 cents a share charge to its earnings for the legal fees they incurred in the battle with Lilly. With its victory in the courts, Barr had a 6-month period of exclusivity to sell the 20 mg version (the dosage that is used in over 90 % of the prescriptions) of the drug. Thus no other generic drug company can come out with their 20-mg generic version of Prozac for 6 months. Normally a generic version of a drug will sell for a discount of between 60 to 80 % to the branded product. Because of the long and costly legal battle with Lilly, Barr announced that it would sell its generic version of Prozac for only a 30% discount.

Thus the consumers of the generic version of Prozac will be paying anywhere from 30% to 60% more than usual for this 6-month period. We realize that Barr should be rewarded for pursuing the long and costly battle, but wouldn't it be fairer to impose a monetary penalty on the company that lost the lawsuit rather than the consumer? That way Barr would be compensated for its legal expenses by Lilly plus the receipt of a monetary penalty assessed against Lilly for causing the delay.

Two economists, David Cutler of Harvard and Mark McClellan of Stanford in an essay published in the journal Health Affairs found that heart-attack victims in 1984 lived slightly less than 5 years, on average, after the attack. 14 years later heart attack victims lived, on average, 6 years after the attack. In today's dollars, Medicare spent about $4 billion for the treatment of heart attacks in 1984. In 1998, Medicare spent about $6 billion for treatment of heart attacks, even though there were about 10% less heart attack victims in 1998 than there were in 1984. According to their article, " better treatment of heart attacks have been sufficiently great that they alone are about equal to the entire cost increase for medical care over time".

According to their statistics not all diseases have the same cost results as heart attacks do. It costs $25, 000 more to treat a breast cancer patient in 1996 than it did in 1985. Again according to their statistics that bought the patient only an additional 4 months of life.

Representative Bernard Sanders (Ind-Vt) had introduced a bill into the agriculture appropriation bill now pending in the House similar to the drug import bill passed by Congress in 2000. The then Secretary of HHS Donna Shalala and the current Secretary Tommy Thompson opposed the measure because of safety concerns. His proposed bill was defeated by a vote of 267 to 159.

The legislation would have allowed pharmacies and wholesalers to import low-priced prescription drugs back into the U.S., if the imported drugs that had been approved by the Food and Drug Administration, and were made in FDA certified facilities. A provision was added that called for the expiration of the new law at the end of 5-years. The compromise version of the bill wouldn't permit imports from all countries, just from a restricted few of them.

The administration however faulted the compromise because it wouldn't require drug manufacturers to turn over FDA-approved labels to importers. Without such labels, dosage information might be missing from the pill receptacle. Former President Clinton vetoed this legislation. He especially opposed the provision ending the law after 5-years. Drug industry lobbyists also opposed the negotiated law saying that it infringes on their right to do business, and also it has long-term dangerous implications, in terms of safety. Sen. James M. Jeffords (Ind.-Vt.) had been the chief sponsor of the law.

The law contained an amendment that would require that the Food and Drug Administration to certify that the action would pose no risk to the public health and safety, and would significantly reduce the costs to consumers. Senator Thad Cochran (Rep.-Miss.) sponsored the amendment. The amendment could cause extensive delays in lifting the ban since the FDA was not given any guidelines in determining how it was to determine these factors.

The White House did not oppose the Jeffords amendment but it requested that funding be provided to the FDA so that it can assure the safety and purity of the re-imported drugs. The vetoed law covered prescription medications that have been produced here in the United States or in foreign pharmaceutical plants approved by the FDA. A Federal law, which was passed in 1988, does not allow for the re-importation of prescription drugs except by the manufacturer.

The Congressional Budget Office has released their independent estimates of the costs of the Democrat, Republican and President George W. Bush's prescription drug plans. Please keep in mind that $300 billion was allocated for it under the spending plan adapted by Congress in May.

The Senate Democrats' proposal would cost an estimated $318 billion over the next 10 years. The Republican proposal passed by the House would cost about $157 billion in the same 10 year period of time, which is about the same amount as President Bush's proposal ($153 billion) would cost. The proposed prescription drug plan announced by Senator John B. Breaux (Dem.-La.) and Representative Bill Frist (Rep-Ca.) was estimated to cost about $176 billion over 10 years by the CBO. Senate Republicans seem to favor this plan. The CBO further estimated that former President Bill Clinton's prescription drug plan would cost about $425 billion over 10 years.

Senate majority leader Tom Daschle has announced that he will do everything in his power to push for the passage of legislation that would include the cost of prescription drugs under Medicare. The CBO also estimated that the cost of the premiums under the various plans would be as follows: about $53 a month under the Senate Democrats and House Republicans plan in 2004, compared with $28 a month under President Clinton's plan. The premiums would rise in 2011 to $65.50 a month under President Clinton's plan. The premium would rise to $114.70 a month under the Senate Democrat's plan in 2011, and rise to $92.50 under the House Republican plan in 2011.

Under all the proposals, the government would spend roughly $100 billion over 10 years to help low-income beneficiaries pay premiums and other costs. Drug spending by or for Medicare beneficiaries would total about $1.3 trillion in the next 10-years, with the government paying about 1/3rd that cost even under the most generous proposals.

It is estimated that Bush's prescription drug plan would cost $153 billion over a 10-year period of time. Under Bush's plan coverage would be phased in over a period of time. Initially Bush would offer $48 billion to states to initiate or expand the various states run plans. Please see our article "State Laws the Help the Elderly with Prescription Drug Costs". Under Bush's plan the coverage for the Medicare beneficiaries would be done under private insurance plans rather than through Medicare. The government would pay the entire premium for certain low-income seniors. Under Bush's plan the government would pays all "catastrophic" drug costs once the out-of-pocket expense for the beneficiary exceeds $6,000.

His plan would build on the plans that already exist in 26 states. It would last until 2004 or until comprehensive Medicare restructuring was put into effect. As outlined by the White House the following information contains the key data for President Bush's prescription drug plan:


Senator Bob Graham (Dem.-Fl) and Sen. Kent Conrad (Dem.-ND) speaking for many of the Congressional Democrats announced that they would seek between $310 billion to $330 billion for Medicare drug benefits over the next 10-year period of time. Sen. Conrad is the senior Democrat on the Senate Budget Committee. Representative Pete Stark, Democrat from California, and the senior Democrat on the House Ways and Means subcommittee responsible for Medicare stated, " By all standards that we know, a decent drug benefit might cost $40 billion a year."

Democrats on the House Budget Committee have drafted an amendment providing for $350 billion over 10-years for prescription drug coverage under Medicare. Senate Democrats had hoped to trim about $160 million from President Bush's $1.6 trillion 10 year tax cut plan, with the money then going to help pay for prescription drug costs under Medicare. This sum would then be added to the $153 billion that President Bush has indicated he would set aside for the cost of the coverage. The attempt has failed so far to accomplish the cut in the tax plan.

In testifying before the Senate Budget Committee, Dan Crippen, Director of the Congressional Budget Office said the benefit could cost between $700 billion to $1.1 trillion over the next decade if Congress passed such legislation. He projected that the drug costs would be about $1.5 trillion from 2002 to 2011. Thus if the government were to pay half the cost under a prescription drug coverage plan, it would be faced with a $728 billion bill through 2011. If the bill were designed so that the government paid all costs above $1,000, it would be $1.1 trillion.

On our title page we state: " We hope that as a result of reading these articles, you will be able to make more informed decisions about the problems associated with the elderly". One of the major problems facing the elderly is the high cost of prescription drugs. The elderly are the largest consumers of prescription drugs as an age group so they are the group that is most affected by these high prices.

We are all familiar with car, bus and train trips organized to go to places like Canada and Mexico with the avowed purpose of purchasing prescription drugs at much cheaper prices than in the U.S. One of the methods that the elderly have employed to help reduce their drug costs is to order the prescription drugs from overseas suppliers. Even though it is illegal to have prescription drugs shipped to you from overseas the Customs Bureau has been overlooking the law if the package contains shipments intended for one individual only.

This is about to change if the FDA has its way. The FDA has asked Health and Human Services Secretary Tommy Thompson to approve the recommendation that U.S. Custom Service agents at mail-inspection sites be required to send back all small foreign drug shipments they find. The only exemption would be for "compassionate use", so that seriously ill patients could order drugs from overseas that are unavailable in the U.S. While tougher enforcement is not likely to occur shortly the FDA's recommendation is supported by the U.S.Customs Bureau.

The January 18th, 2001 of the Wall Street Journal contained an article by Laura Johannes entitled "Canadian Web Drugstores Offer Deep Discounts and Legal Quandaries". We will summarize the article for you but we suggest that you read it in full so that you will be better able to make a fully informed decision on this matter.

There are now over 50 Web sites that can be used to purchase prescription drugs at Canadian pharmacies that can save U.S. residents anywhere from 20% to 50%. Ms Johannes article went on to state that "Ordering drugs from Canada to save money is technically illegal in the U.S., though authorities so far have mostly looked the other way" as long as the purchase is being made for the individuals own use.

Tom McGinnis, director of pharmacy affairs at FDA headquarters in Rockville, Md. stated: "We haven't been going after individuals because we don't have the manpower". This policy as stated above may change if Congress allocates sufficient funds for the U.S. Customs Bureau to enforce the law.

The article also points out that U.S. residents can also get generic versions of some prescription drugs that are not available in this country. Each of the three Canadian websites stated that they operate within the Canadian law, which allows pharmacies to fill prescriptions only if signed by a Canadian licensed doctor. The three largest Canadian drug websites are:,, and Manitoba, Canada has seen over 27 sites arise in the province in the last 4 years. and are two of the sites that have arisen in that province which is just north of North Dakota and Minnessota. The Canadian government caps the prices for prescription drugs in that country.

CanadianDrugstore has a Canadian doctor review the U.S. patient's medical history before co-signing the prescription. It charges $50 for the review but the customer can still come out ahead if he is buying up to a 3 months supply of an expensive drug. CanadaRX mails the medications to the patient's U.S. doctor. It article points out that the savings from theCanadianDrugStore over the U.S. based was as much as 64% for Tamoxifen to as little as 26% for Lipitor or 30% for Prozac.

One of our viewers was kind enough to e-mail us with the web address and toll free number of another Canadian drug web site. The site is and their toll free number is 1 877 542 3330. We recommend that you compare the prices and costs on all four of these sites to see which one is best suited for your own needs.

A coalition of 17 consumer groups filed several lawsuits against Barr Laboratories, a generic drug manufacturer, and AstraZeneca, charging that the companies illegally kept a generic version of a breast cancer drug off the market. The coalition alleges that because of an agreement between the two companies agreed to in 1993 to keep the generic version off the market, the consumer has had to pay a much higher price for the drug. In 1992 Barr Labs won a court ruling that it could sell a low-priced version of tamoxifen, the most frequently prescribed medicine for breast cancer. Tamoxifen is sold under the brand name of Nolvadex.

Normally generic drugs sell at anywhere from a 30% to 90 % discount to the brand name drug. In this case however the generic version sold for only a 5% discount. The complaint alleges that Barr and Zeneca (the predecessor to AstraZeneca) entered into an illegal pact wherein Zeneca paid Barr $21 million so that Barr sold Zeneca's version of the drug rather than manufacture its generic version of the drug.

Bruce L. Downey, Barr's chief executive said he signed the agreement because he feared that Barr would lose the case on appeal. Downey further stated that under the agreement Barr could sell the drug 10-years earlier than otherwise since the drug is under patent protection until 2002. The name of the coalition bringing the lawsuit is the Prescription Access Litigation Project that includes groups such as Citizens Action of New York, the Vermont Public Interest Research Group, and the Congress of California Seniors. The groups were brought together by Community Catalyst, a Boston-based advocacy group.

The anti-allergy family of drugs generated $4.2 billion in sales in the U.S. last year, or about 2.5% of all drug spending in this country. Managed care companies do reimburse for usage of the anti-allergy drugs Claritin (Schering), Allegra (Aventos) and Zyrtec (Pfizer). Since these three are all second-generation antihistamines the managed care industry has claimed that they are safer than the first generation antihistamines and therefore should not need any prescriptions to be bought by the public. For the latest information on this matter please see Part II of this series of articles Medicare and Prescription Drug Coverage-Part II. In that article you will read about the fact that Schering is now proposing to voluntarily change Claritin over to a non-prescription medication.

In July 1998 Blue Cross of California/Well Point Health Networks filed a Citizens Petition with the FDA requesting that these aforementioned drugs be switched to over-the-counter status. An advisory panel to the FDA reviewed this petition on May 11, 2001. The advisory panel consisted of 23 members who are experts in the field of pharmacology. The manufacturers of these anti-allergy drugs opposed the change to over-the-counter status since this would sharply reduce the price that the drug is sold for in the U.S.

The advisory panel ruled that the 3 drugs are safe enough to be bought without a prescription. The advisory panel's decision is not binding on the FDA, and so the process now requires that the further collection of research data, hearings and then a ruling on the matter by the FDA itself. The second generation of antihistamines is considered safer than the first generation because among other things they are less drouse inducing. For those who are on Medicaid the changeover to OTC status for these drugs is a negative since Medicaid does not pay for OTC drugs while it does pay for prescription drugs.

The drug industry argued that in allowing the drugs to be bought without a prescription you are thereby eliminating the need to be seen by a competent medical professional. With the rise in asthma cases reaching epidemic proportions you are putting many people at risk that it is asthma which can be deadly rather than an allergy that is causing the problem.

If the FDA does allow the change in status it is expected that the drug companies will take the matter to the court system. Many legal experts feel that the FDA does not have the power to change a drug from prescription to otc status. Even if the FDA does have the power to change the status how can you deprive the drug companies of their legal right to the full life of their patents? This matter may be moot since Schering is now voluntarily asking that the FDA to allow Claritin to be sold over-the-counter without a prescription.

The only other time that a drug was switched from prescription to over-the-counter status was in October 1982 when Alupent for asthma was switched to OTC status. Shortly thereafter the FDA reversed this switch, and even today Alupent has remained a prescription medication.

Top Ten Prescriptions Drugs Written
in the U.S. in 2000


48.8 million


46.8 million


43.5 million


36.5 million


32.1 million


30.8 million


27.4 million


27.4 million


26.5 million


25.2 million

Source: IMS Health

Of the 50 best-selling drugs in 2000, four were generic drugs with combined sales of $2.7 billion, which represented 2% of all retail sales in 2000. Expenditures for prescription drugs accounted for about 9% of overall health care spending in 2000.

Medicaid costs will exceed budgeted amounts for the fiscal year in 25 states. Medicaid spending has tripled from 1990 through 1999 for prescription drugs. About 30% of Medicare beneficiaries lack any prescription drug coverage. According to the study "This group spent an average $546 out of their own pockets in 1998 compared with $325 for seniors with drug coverage from private sources or Medicaid. More to the point, about 21% of all Medicare beneficiaries (8 million) spent in excess of $1,000 on drugs in 1996. Premiums on Medigap policies covering prescription drugs rose an average of 37% between 1998 and 2000. About 3.7 million seniors have Medigap policies covering prescription drugs.

The average retail price of all prescription drugs rose 10.5% from 1999 to 2000, from $40.96 to $45.27. Generic drugs account for about 40% of all prescriptions written while accounting for only 9% of total prescription drug sales.

The number one prescription sales drug for the year 2000 was Prilosec, a treatment for ulcer conditions with over $4.1 billion in sales. Number two was Lipitor, a cholesterol lowering medication with about $3.7 billion in sales. The third in prescription drug sales was Prevacid for treatment of ulcers with sales of about $2.8 billion followed by Prozac the anti-depressant in fourth place with sales of about $2.56 billion. Rounding out the top five was Zocor a cholesterol reducer with sales of $2.2 billion. The next five prescription drugs in order of sales were Celebrex, the anti-arthritic drug with sales of $2.01 billion, Zoloft (depression -sales of $1.89 billion),), Paxil (depression and OCD-sales of $1.8 billion), Claritin (oral antihistamine-sales of $1.67 billion) and Glucophage (oral diabetes-sales of $1.6 billion).

In examining the question of drug costs to the consumer you can not just look at the cost of the raw materials that go into making any successful prescription drug. For every successful blockbuster drug that evolves from a drug company's research there are countless other drugs that never make it to the consumer's medicine cabinet. To show you just how complicated the whole question of drug pricing is all we need do is look at the Brazilian government's laboratory, Far-Manguinhos.

By importing the ingredients from Asia, Far is able to produce 8 of the 12 medications used in the treatment of AIDS at a much cheaper price than any other drug manufacturing company. According to Hilbert Ferreira, industrial director of Far-Manguinhos, the company produces what he calls "orphan drugs". The big multinational drug companies are not interested in producing these drugs "because they fight diseases of the Third World."

There is not enough profit in these drugs to make them worthwhile candidates for the major drug companies and their Research and Development budgets. Through recent expansions however, Far is able to produce these generic versions of some of these drugs in great enough amounts to be able to export them to other Third World countries. Included in this category of drugs are those used to fight malaria, leprosy and other illnesses that have largely disappeared in developed countries. It will be interesting to see what develops if Far decides to start producing some other prescription drugs for which the major drug companies have the patents.

The pharmaceutical industry has asserted that long delays in the drug approval process has been one of the important causes for the high cost of prescription drugs and medical devices. Let us look at the record for the year 2000 and see how the Food and Drug Administration has done in this area.

Last year, the FDA approved 160 new drugs, biological products, and medical devices. Three of FDA's centers--the Center for Drug Evaluation and Research (CDER), the Center for Biologics Evaluation and Research (CBER), and the Center for Devices and Radiological Health (CDRH)--give pre-market approval for new health-care products. They also prevent unsafe or ineffective products from going on the market, assure adequate labeling for approved products, and monitor the effects of marketed therapeutics.

FDA's Center for Drug Evaluation and Research (CDER) issued 98 approvals for original new drug applications in the total median time of 11.2 months. The Center for Biologics Evaluation and Research (CBER) issued 13 approvals for product license or biological license applications in the median time of 25.1 months. The Center for Devices and Radiological Health (CDRH) approved 49 product-marketing applications for original devices in the median time of 9.6 months. CDRH approved four additional products under FDA's Humanitarian Use Exemptions program (for devices with a patient population up to 4,000) in a median time of 3.5 months.

Along with approving 98 original new drugs, CDER issued 244 approvals for generic versions of drugs on which the patents had expired. FDA approved 20 products classified as priority drugs in a median time of six months. The FDA approved 27 new molecular entities (products with ingredients never before marketed in the United States) in the median time of 15.6 months. In addition to approving 53 original new medical devices, CDRH cleared for the market 3,457 so-called 510(k) devices. These are products similar to devices already in use. CBER issued 13 approvals for product license or biological license applications.

In all of the above cases the time periods involved represent a substantial reduction in total elapsed time for approval to be granted. Many question whether or not the speeding up of the time period has lessened the safeguards built into the system. It is clear however that the pharmaceutical industry has benefited from the decrease in time that is now involved in getting the necessary approval.

In March of 1998 Sanofi-Synthelabo SA and Bristol-Myers Squibb Co., co-marketed the anti-clotting drug Plavex (clopidogrel) for short-term use in patients who have undergone balloon angioplasty and stent procedures to open obstructed coronary arteries. The drug became a blockbuster racking up sales of $1.19 billion in 2000. According to a study directed by Salim Yusuf, director of cardiology at McMaster University, Hamilton, Ontario the drug when taken continuously also reduces the chances of a new heart attack, stroke or death by 20%. The study was conducted on over 12,500 patients in 28 countries.

The drug is targeted at the estimated 2 million Americans who report to hospitals each year with unremitting heart pain, which is usually a precursor of a heart attack. Plavex costs about $3 per pill and now may be prescribed for more of the elderly population. There was one significant negative side effect in connection with its usage, namely a 30% increase in major bleeding versus the trial group that took only aspirin. Thus Plavex has an increased cost over aspirin and a greater risk of increased bleeding than does aspirin. Remember also that aspirin in and of itself has an increased risk of causing bleeding.

Another unknown that has come into the headlines recently in the prescription drug cost area is what effect will the announced mergers of the nation's biggest drug distributors have in the price equation. AmeriSource Health Corp. and Bergen Brunswig Corp. have proposed a merger that will create a drug-distribution giant with nearly $35 billion in annual revenues. Cardinal Health Inc. recently completed the acquisition of Bindley Western Industries, Inc., to form the largest drug wholesaler with McKesson HBOC Inc. Will these mergers result in lower prices to the consumer, or since there will be less competition in the drug distribution industry, will that mean the consumer will have less choices and higher prices to pay for our prescription drugs?

The Congressional Budget Office, a nonpartisan arm of Congress, said that spending for prescription drugs averaged $1,525 for each Medicare beneficiary in 2000. It estimated that this amount would triple by the year 2011. There are presently about 40 million Medicare beneficiaries, of whom about one third have no prescription drug coverage once outside the hospital. This number is expected to grow to 47 million by the year 2011. Last year, when the House passed a bill offering drug coverage to Medicare beneficiaries, the 10-year cost was estimated to be $159 billion. In testimony that he gave recently to the House, Tommy G. Thompson, Secretary of Health and Human Services stated that the new official estimate of the cost had risen to $213 billion.

The CBO further estimated that spending for drugs for people on Medicare would grow to about $70.6 billion in 2001, which represents a 7% increase over the amount of their previous estimate made in May 2000. In light of these new numbers the cost for prescription drug coverage for the elderly becomes even more expensive then previous estimates. This in turn means that either the government will have to increase the amount being allocated for any Medicare prescription drug coverage plan, or increase the premiums being charged to beneficiaries who are to be covered under the plan.

Under President George W. Bush's proposed plan the government would pay all drug costs for the beneficiaries over $6,000. Under the new estimates many more beneficiaries would reach this threshold level, which in turn means higher costs to the plan. These recent figures on drug spending came from government surveys of Medicare beneficiaries, and from commercial sources including IMS Health of Westport, Conn. which collects data from pharmacies across the country.

The high costs for prescription drugs are now being reflected in the increased premiums being paid for Medigap policies. Because of the increased premiums many of the most vulnerable elderly and disabled people are dropping these policies since they can not afford to pay the higher premium. Empire Health-Choice, the largest Medigap insurer just announced a 31 % increase that will be effective March 1, 2001.

According to the latest figures available about 500,000 Americans have Medigap policies, and about 12 million are covered for prescription drugs through their employer's retiree plans. It is estimated that there are about 12 million Americans with no prescription drug coverage plan and about 4 million are covered by Medicaid. William M. Mercer a benefits consultant firm reported recently on the increased costs for prescription drug co-payments that are being born by employees. For the year 2000 co-payments by employees rose 14% to $16, on average for each brand-name drug and to $7 for each generic drug.

Due to the high utilization of medications by Medicare participants, many HMOs are setting additional premiums for Medicare drug plan beneficiaries. As of February 2000, the premium increases range from $30 for a maximum drug benefit of $2500 to $175.25 for an unlimited drug benefit. Please keep in mind that the HMO can pick and choose who they accept into their plan.

One of the reasons why there is no great public outcry against the high cost for prescription drugs in this country is the fact that most of us are covered by private insurance. Most of us only pay the $5 to $15 co-payment when we buy a drug so we don't see what the big problem is on this matter.

According to government figures 77 % of Americans under 65 have health insurance. From a low point of only 8% of the nation's total drug costs being covered by private insurance in 1970, that number has risen to over 56% by the 1990s. Another 21 % were paid with public money, meaning either through military coverage or those covered by Medicaid. Although the nation's per capita spending on prescription drugs has risen to more than $300 in 1999 from $26 in 1970, the rise has not kept pace with inflation in the economy over the same period of time. After a period of relatively benign health care cost increases from 1993 up until the middle of 1998, the pace of increases seems to be escalating once again.

In a report published in the journal Health Affairs researchers form the Center for Studying Health System Change report that prescription drugs accounted for 44% of the 6.6% increase in health costs in 1999. Doctor's services accounted for 32% of the increase. The remainder of the increase came form outpatient hospital care which accounted for 21% of the increase and inpatient hospital care accounted for the remaining 3% of the increase.

Change is on the horizon because employers will be passing along the higher premiums that will be charged in the coming year to their employees. With drug prices rising almost 15% this year something has to give. Many employee plans have escalating charges depending on the type of prescription drug plan the employee chooses.

Thus the employee will pay a lower premium if he/she is willing to choose a generic drug rather than a brand name drug. The amount of co-payments made by the employees is increasing also. Even though generic drugs filled 41% of all prescriptions sold, they accounted for a mere 9% of the total cost spent on prescription drugs in 1998.

Merck-Medco Managed Care, a subsidiary of Merck & Co.(that will shortly become a separate company from Merck) is now giving free samples of some generic drugs to doctors. This represents a novel approach for the generic drug industry, which normally has not been giving out free samples. IMS Health estimates that the drug companies gave medical professionals about $7.2 billion retail value of free drugs in 1999. GM Corp. has estimated that it would save $3 million a year for every one-percentage point increase in the use of generics.

The Wall Street Journal had an article in its November 10, 2000 edition written by Tom Hamburger and Laurie McGinley entitled "Drug Lobby Wins Big With Massive Spending against Medicare Plan". The sub-heading was "$80 Million in Ads, Donations Help Defeat Industry Foes....". The article deals with how effectively the drug industry was in deflecting the Medicare prescription drug issue, which originally had been such a major point for the Democrats. We quote from the article as follows: "

By the end of the election in 2000, the nation's drug makers had waged the biggest and costliest corporate campaign in U.S. political history, spending more than $80 million to keep the Democrats form regaining control of Congress in the year 2000. And they won". The gist of the article dealt with the fact that the issue of prescription drug coverage dropped from being a prime concern of the electorate to one of secondary importance.

Former Senator William V. Roth (Rep-Del), who was defeated in his bid for re-election, and who was chairman of the Senate Finance Committee released his Medicare prescription drug plan that had significant differences from the plan approved by the House in September 2000 by a 217-214 vote margin.

This new development in the battle to include prescription drug coverage under Medicare is considered significant since the Senate Finance Committee is the one that initiates any changes that are to be made in the Medicare program. Sen. Charles Grassley (Rep.-Iowa) replaced Sen. Roth as the new chairman of the committee. Sen. Grassley has previously chaired the Select Senate Committee on Aging where he was quite helpful in understanding the issues important to older Americans.

Several Democrats expressed interest in working with Senator Roth, a conservative Republican who was defeated when he ran for re-election. Under his proposed plan Medicare beneficiaries would have the choice of one of two options. They could stay in the original fee-for-service Medicare plan or they could enroll in a high option plan. Under the high option plan, prescription drug coverage would be included along with a charge for certain services like lab testing and home health care. His plan incorporates some of the proposals contained in Senator Bob Graham's (Dem.-Fl.) plan discussed below. The key elements of Senator Roth's plan are:

Under both the plan passed by the House and under former President Clinton's proposed plan the government would offer subsidies to employers to encourage them to continue providing drug benefits to retirees. Senator Roth's plan has no such subsidies provided under it. Senate Republican leaders have not indicated their positions on Senator Roth's proposals.

Through some adroit political maneuvering the Senate Democrats were able to bring their prescription drug bill up for a vote. Although the measure was defeated by a vote of 53 to 44 it was the first time that a prescription drug bill coverage under Medicare had been voted upon in the Senate. Two Republicans voted in favor of the measure while one Democrat voted against it.

The Democrats proposal was drawn up under the leadership of Sen. Bob Graham (Dem.-Fl), and it was supported by 5 of the 9 Democrats on the 20-member Senate Finance Committee. The Finance Committee is the panel responsible for origination of Medicare legislation in the Senate. Sen. Graham was joined by Sen. Max Baucus (Dem.-Mont.), Richard H. Bryan (Dem.-Nev.) Kent Conrad (Dem.-N.Dak.), Charles S. Robb (recently defeated Dem.-Va.) and the Republican non-member of the panel Lincoln Chafee of Rhode Island.

Under the Democratic proposal the beneficiary would have a $250 deductible that he/she would be responsible for. The government would pay 50% of the expenses from $250 to $3,500 and the beneficiary would pay the rest. The government would pay 75% of the expenses from $3,500 to $4,000 a year, and it would pay all expenses above $4,000. The beneficiary would pay a premium of between $35-$40 per month. The basic drug benefit plan and the catastrophic coverage also would begin in 2003. There would be no income differentials in connection with the amount of the premium that a beneficiary would pay.

The House Republicans have announced their Medicare drug plan. Under their plan they would set aside up to $4 billion over 5 years for the H.M.O. industry to help stem the tide of the exodus of H.M.O's from Medicare. It would create an agency in the Department of Health and Human Services to administer drug benefits and the H.M.O program for Medicare beneficiaries. It is estimated that the House Republican prescription drug plan would cost $39.7 billion over a 5 year period of time while it is estimated that former President Clinton's plan would cost $79 billion over that same 5 year period of time. The new agency would be known as the Medicare Oversight and Management Administration. Under their plan premiums would average between $30-40 per month depending on the type of plan the beneficiary opts to go with. The following are the key elements in their plan:

The numbers behind former President Clinton's prescription drug coverage plan have created a great deal of uncertainty among many individuals and organizations. We have seen a great deal of variety as to the numbers proposed in the plan so we would like to go over the exact numbers with you.

An initial premium for prescription drug coverage would be $24 a month starting in 2002. Medicare would pay half the cost for each prescription, and there would be no deductible. The premium would gradually rise to $48 per month by the year 2009. Starting in the year 2002 the maximum federal payment for prescription drugs for an individual would be $1,000 for a person with $2000 in prescription drug expenses in 2002. By the year 2009 the maximum payment would rise to $2,500 for a person with expenses of $5,000 or more.

Former Sen. Slade Gordon (R-Wash) introduced legislation in the last session of Congress that would help reduce the disparity for prescription drugs that causes American consumers to pay higher prices than do Canadians or Mexicans. He stated that the American consumers were being "ripped off" by the drug companies pricing practices. The Senator said that his proposed legislation would prohibit drug makers from charging higher wholesale prices in the U.S. than in Canada or Mexico.

He further was quoted as having said " I was astounded to learn that for the top 10 most commonly prescribed drugs average prices are 64 % lower in Canada than in Washington State. That is outrageous". Sen. Gorton said his bill would put pressure on Canada and Mexico to let drug manufacturers charge higher prices, so consumers there would eventually "pay their fair share of research and development costs for drugs". Democratic senators proposed legislation for a drug benefit under Medicare before Congress could enact any tax cuts. The legislation was defeated since the Democrats could not achieve the super majority of 60 votes needed for the passage of such a proposal.

Medicare falls within the jurisdiction of the Finance Committee of both the House and Senate. Some of the moderate Democrats on the Senate Finance Committee are drafting their own proposals for prescription drug coverage for Medicare beneficiaries. Led by Sen. Bob Graham (Dem-Fl) their proposal would resemble the type of coverage found in most employer-employee plans since it involves having a $250 deductible, before the government would have to pay anything.

Under former President Clinton's proposed plan the government would pay half the drug costs incurred by any Medicare beneficiary who signed up for coverage with no deductible. The maximum federal payment would start at $1,000 a year in 2002 and rise to $2,500 in 2009. Under Sen. Graham's proposal the government would pay all of a beneficiary's drug expenses beyond a certain amount.

Under Sen. Graham's proposal higher premiums would be charged to higher income earning beneficiaries. It is thought that the levels initially introduced would be $75,000 for single beneficiaries and $100,000 for a couple. It would seem to us that in connection with prescription drug coverage for Medicare beneficiaries some amount of deductible and some amount of co-payment should be required. Equitably we also do favor some type of graduated premium payment dependent on the income of the beneficiary.

Senators Olympia J.Snowe (Rep-Me.) and RonWyden, (Dem-Ore) who are members of the Senate Budget Committee, have introduced proposed legislation to cover the cost of prescription drugs for Medicare beneficiaries. The proposed legislation arises under the jurisdiction of the Budget Committee rather than the Finance Committee, which oversees Medicare since the proposed cost has huge budgetary implications.

The cost estimate for prescription drug coverage under former President Clinton's proposal has already risen in the intervening months since being announced from $118 billion to $160 billion over 10 years. Part of the increase in estimation is due to the fact that his proposals would include the cost to Medicare for beneficiaries in nursing homes.

Under the Snowe-Wyden proposal beneficiaries would be offered a wide range of private insurance prescription drug coverage plans to choose from. The government would pay at least 25% of the premium. Lower income beneficiaries would receive larger subsidies than would wealthier income beneficiaries. They have been able to get some bi-partisan approval to their proposals, including the approval of Sen. Daniel Patrick Moynihan, the ranking Democrat on the Senate Finance Committee. Their proposal would set up a drug benefits operation independent of the Health Care Finance Administration.

Recently the insurance industry has introduced their side into the issue of Medicare coverage for prescription drug coverage for Medicare beneficiaries. Many Republicans and the drug industry as a general rule seem to favor some form of subsidy to Medicare beneficiaries so that they can buy their own prescription drug coverage from private insurance companies. The insurance companies however fear that if this were the system that eventually was enacted, it would result in the government regulating the amount of premiums the insurance companies could charge for such coverage.

With drug costs rising very steeply the amount of premium that they could charge would not be enough to cover their expenses for such coverage. Thus the insurance industry is warning that this system could result in another government bureaucracy being established. Charles N. Kahn IIII. President of the Health Insurance Association of America stated " Private drug-insurance are doomed from the start. The idea sounds good, but it cannot succeed in the real world". Thus we now have 2 of the key industries involved in the prescription drug coverage for Medicare beneficiaries at odds with each other.

"I can't afford it". Or maybe the answer might be "But doctor, the medicine is so expensive, so I must skip the medicine every once and a while". These are but two of the answers that a doctor might get when asking a patient why he/she did not take the medicine. For many of the 40 million people who are on Medicare the cost of prescription drugs is one of their expenses costing a disproportionate amount of their income. As it stands now Medicare does not pay anything towards out patient drug expenses.

The drug industry has a trade group called Pharmaceutical Research and Manufacturers of America (PhRMA). A special sub-group set up within the organization proposed to approve the establishment of a change in their opposition to any drug assistance cost help under Medicare.

Under their proposal each Medicare beneficiary would be entitled to some Federal subsidy to be used to cover outpatient drug costs. This could be done through either purchasing insurance for prescription drug coverage or through the usage of prescription drug benefits managers. Thus Medicare would not be picking up the cost. Drug companies had opposed prescription drug coverage under Medicare claiming that the lost profits from such a plan would mean less research and development money available from the drug companies because of lower profits.

This shift by the drug industry is being caused by a confluence of recent events. In his State of the Union address, former President Clinton called for governmental drug coverage for the elderly. In the Legal Issues section of "" we discussed 2 items. Under Proposed Drug Cost Legislation we discussed Rep. Tom Allen of Maine's proposal which would cost the taxpayer absolutely nothing. Seniors could purchase drugs at the same low price as "favored customers" of the drug industry. See that article herein for further particulars.

In the article Proposed Revisions to Medicare we discussed the proposals of the Medicare Commission formed by the 1997 Balanced Budget Act. The Commission headed by Sen. John Breaux of Louisiana was unable to issue its report by March 1,1999. The Commission was split between Democrats and Republicans on the issue of Medicare coverage of prescription drugs under Medicare. Sen. Edward Kennedy and Rep."Pete" Stark have introduced legislation on this topic. Their proposed legislation would utilize a prescription benefits manager to centralize Medicare recipients drug purchases.

In the article Medicare Spending is Down-Who Should Benefit? we discuss the fact that Medicare spending has gone down substantially in the fiscal 1999 Federal year. Where should this additional money go? In the article Security and Social Security-Can They Co-Exist in a Balanced Budget we discuss the difficulty in balancing the budget, and at the same time spending more money for the military. Will the Social Security System suffer as a result of this conflict in priorities.

As a concerned citizen you should be interested to know that there is a site wherein you can ascertain donations made to all politicians and political parties, and where it came from. From the biggest to the smallest, the facts are there. The site is

Of further interest on this topic please see our articles " Understanding the "Harry and Louise" Campaign" and "Prescription Drugs and the Cost of Advertising Them"

Cost of 5 commonly prescribed drugs for the elderly

Name of Drug What it treats Cost for 1-year supply
Celebrex (200 mg) Arthritis $1,837
Zocor (20 mg) Cholesterol control $1,520
Prilosec (20 mg) Anti-ulcer $1,511
Prevacid Anti-ulcer $1,459
Plavix Anti-Platlet Agent $1,232

Source: Information contained in the report "Enough to Make You Sick: Prescription Drug Prices for the Elderly" from Families USA..

The following chart lists state telephone numbers to call for information about pharmaceutical assistance programs in that state:

California 800 434-0222
Connecticut 860 423-5026
Delaware 800 996-9969 x 17
Florida 888 419-3456
Illinois 800 642-2459
Indiana 866 267-4679
Maine 888 600-2466
Maryland 800 492-1974
Massachusetts 800 243-4636
Michigan 517 373-8230
Minnesota 800 333-2433
Nevada 800 243-3638
New Jersey 800 792-9745
New York 800 332-3742
Pennsylvania 800 225-7223
Rhode Island 401 222-2880
South Carolina 877 239-5277
Vermont 800 529-4060
West Virginia 877 987-4463
Wyoming 800 442-2766

The latest report from the Social Security and Medicare trustees showed an improved outlook for both funds because of an increase in the productivity of American workers in the coming decade. Overall productivity growth for the 75-year period measured will be 1.6% annually, compared with the 1.5% figure that was used last year.

The Medicare trustees are Treasury Secretary and Managing Trustee Paul O'Neill, Secretary of Health and Human Services Tommy G. Thompson, Labor Secretary Elaine Chao and Social Security Commissioner Jo Anne B. Barnhart. The two other members are the public trustees, who are appointed by the President with Senate confirmation. The public trustees are John Palmer and Thomas Saving. They serve four-year terms and represent the general public. Tom Scully, administrator of the Centers for Medicare & Medicaid Services, serves as secretary to the board of trustees.

The panel estimated that Medicare would become insolvent in 2030, an increase of one year over last year's assumption. The estimate for the solvency of Social Security was lengthened by 3 years to 2041. The Social Security program will begin to run into a cash deficit in 2017.

The report on Medicare said the hospital insurance trust spent $143.4 billion last year, while it took in $174.6 billion, so it had a net surplus of $31 billion last year. The hospital trust is expected to run into a deficit starting in 2016. Spending for the separate trust fund that pays doctors and labs rose last year by 12 % to $101.4 billion.

Editor's Notes: For an excellent article recapping the Medicare and prescription drug issue please see the New England Journal of Medicine's March 29, 2001 issue which contains the article "Medicare and Prescription Drugs" by J. K. Iglehart

Thinking of buying prescription or over-the-counter drugs online?
Is it safe? How can you tell if a website that sells medical products is legitimate? What should you do before you buy medical products online?

If you are looking for a database that consumers as well as physicians can use for information on government-sponsored clinical trials try

For the official federal Internet gateway to consumer health information which is also host to universities and nonprofit and public-health sites go to

For the database of the National Library of Medicine you would go to

To go to the section of that provides info on programs that offer discounts or free medications to individuals in need see:


Please See: Medicare and Prescription Drug Coverage-Part II
Medicare and the Cost of Prescription Drugs-Part IIa-Medicare and Medicaid Drug Spending
Medicare and the Cost of Prescription Drugs-Pharmacy Benefits Managers-Part III
Crossing the Border to Obtain Cheaper Prescription Drugs-Part IV
Prescription and Generic Drug Costs- Part V
Medicare and the Cost of Prescription Drugs- Part VII

By Allan Rubin and Harold Rubin, MS, ABD, CRC, Guest Lecturer
Updated January 16, 2011

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