The Prescription Drug Fairness for Seniors Act

What the Drug Companies Would Have You Believe

The pharmaceutical industry has launched an all-out effort to defeat the Prescription Drug Fairness for Seniors Act. As part of this campaign, the drug manufacturers have enlisted a number of organizations, such as the Healthcare Leadership Council, the Cancer Research Foundation, and others, to participate in their campaign and are distributing press packages containing statements from groups. While these organizations appear to have no connection to the pharmaceutical industry, they in fact receive extensive financial support from the pharmaceutical companies. I hope you will take a moment to review my letter to the editor, which discloses their conflict of interest and rebuts their allegations. In addition, the pharmaceutical industry is spreading disinformation -- asserting that the legislation extends price controls to the industry and will force the industry to dramatically slash its spending on research. Such claims, however, are inaccurate and rests on misrepresentation of the legislation. Listed below are the industry's major allegations against the legislation and the facts in response to each.

Industry Myths vs. Reality

Industry Allegation: The legislation extends price controls to the pharmaceutical industry. The Facts: The Prescription Drug Fairness for Seniors Act (H.R. 664) does not impose price controls on the pharmaceutical industry. Instead, the legislation ends price discrimination. Under the legislation, companies can set their best price at whatever level they want. The goal of the bill is to allow senior citizens access to prescription drugs at these same low prices. Since drug companies closely guard their drug prices as trade secrets, the best publicly available indicator of the industry's "best prices" are the prices that the industry charges the federal government. For this reason, the bill requires the drug companies to make their drugs available to pharmacies for resale to senior citizens at the lowest prices the drug companies charge the federal government. If a drug company refuses to extend its lowest federal prices to the senior citizen market, the only consequence to the drug company is that the federal government will no longer buy drugs from the company. In this way, the bill uses the buying power of the federal government to end price discrimination and help seniors gain access to the drug companies' lowest prices.

Industry Allegation: The lowest federal prices mandated by the bill are in effect price controls because the prices are set by statute and are lower than the prices that many private-sector buyers must pay. The Facts: The federal government buys its drugs under a multitude of programs. Some of these programs (such as the Federal Supply Schedule (FSS), the VA Formulary, and the VA "Blanket Price" Program) determine prices through voluntary negotiations between the federal government and each participating manufacturer. Other programs (such as section 340B of the Public Health Services Act) use statutory discounts. One government program (the Medicaid drug rebate program) explicitly ties the statutory discounts for drugs participating in the Medicaid program to the best private-sector prices, but is prohibited by statute from making this "best price" information publicly available. Although these programs use different mechanisms for acquiring drugs, their common goal is to obtain prices for the federal government that are as low as those offered to the most favored private-sector purchasers. It may be true, as the drug companies assert, that some private-sector buyers pay more for their drugs than the federal government. The crucial question, however, is what are the prices that the industry charges its most favored private-sector customers. The pharmaceutical industry has never asserted that these most favored customers must pay more than the federal government. Furthermore, GAO has confirmed that "federal supply schedule prices represent the best publicly available information on the prices that pharmaceutical companies charge their most favored customers."

Industry Allegation: The legislation will force the pharmaceutical industry to reduce research and development expenditures. The Facts: Historically, there is no evidence to support the industry's claim that preventing pharmaceutical companies from overcharging for their products reduces research. In 1984, Congress passed the Hatch-Waxman Act, which increased the availability of generic drugs and provided more competition for brand name drugs. This legislation did not reduce innovation in the pharmaceutical industry. Indeed, according to industry data, over the next five years pharmaceutical companies more than doubled their investment in research and development, from $4.1 billion to $8.4 billion. In 1990, Congress passed legislation that created the Medicaid drug rebate, requiring drug companies to reduce their prices for drugs sold to the Medicaid program. At the time, the Pharmaceutical Manufacturers Association opposed legislation to reduce Medicaid drug prices because "[i]ncentives for pharmaceutical research will be reduced." This legislation, however, did not reduce innovation in the pharmaceutical industry. Since 1990, pharmaceutical companies again more than doubled their spending on research and development, from $8.4 billion in 1990 to $18.9 billion in 1997. Industry spokesmen have themselves conceded that the research and development argument is a red herring. According to Jeffrey Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America, competition within the drug industry will keep the industry from reducing research and development: "Basically, companies are going to do whatever they need to do to be able to have the money necessary to spend on research and development, even if its $24 billion a year and still going up."

Industry Allegation: If the legislation is enacted, the pharmaceutical industry simply will not be able to afford to pay for high levels of research and development. The Facts: There is no support for the industry's assertion that it could not afford its research and development budget if the legislation were enacted. While the pharmaceutical industry current spends $17 billion annually on research and development, it spends $11 billion annually on advertising and marketing and reported $26.2 billion in profits in 1998. Its profit margin is 28.7% -- nearly three times higher than the profit margin of other manufacturers of branded consumer goods. Even if the legislation had the effect of reducing industry revenues, the industry could afford to maintain or even increase its spending on research and development. While the industry's research and development expenditures are relatively large as a percentage of revenue, they are not high as a percentage of profit when compared to other large U.S. companies. For example, Ford's expenditures on research and development in 1997 were equal to 90% of its profits, whereas Merck's expenditures on research and development were equal to only 37% of its profits.

Industry Allegation: The legislation does not guarantee lower prices because pharmacies, not drug companies, are responsible for the high retail markups paid by senior citizens. The Facts: At the retail level, the pharmacy market is highly competitive: if consumers are unhappy with the prices charged at one retail outlet, they can buy their prescription drugs at a different outlet. This competitiveness guarantees that pharmacies will pass on to senior citizens the benefits of any lower prices for prescription drugs.According to a leading academic expert, Professor Stephen W. Schondelmeyer, the head of the University of Minnesota's Department of Pharmaceutical Care and Health Systems: Once a patient is on a given prescription medication, the patient becomes a price competitive consumer. . . . Any discounts passed on to community pharmacies will be passed on to the consumer, or payor, of the prescription because of the competitive retail environment. "The analyses by the minority staff of the Committee on Government Reform demonstrate that the legislation will be effective: lowering prices that pharmacies pay for prescription drugs will lower retail prices for seniors. The study compared the retail markup due to pharmacies with the total markup paid by retail customers. It found that drug companies, not retail pharmacies, were responsible for the significant price differential between the prices paid by retail customers and the prices paid by the drug companies' most favored customers. The analysis found that while the average retail price differential is approximately 100%, pharmacy markups only account for 22% of the price paid by retail customers. This indicates that it is drug company pricing policies, not pharmacies, that are responsible for the high prescription drug prices paid by seniors.

Industry Allegation: The legislation does not address the problems with Medicare. It fails to provide seniors with what they really need: complete coverage for prescription medicines. The Facts: The ideal solution for seniors would be to enact a Medicare drug benefit -- a solution supported by many members of Congress. Questions have been raised about the price tag of this benefit, however. A comprehensive Medicare drug benefit has been estimated to cost $20 to $40 billion annually. The Prescription Drug Fairness for Seniors Act is an intermediate step that reduces drug prices for seniors without costing the federal government anything. It will measurably improve the quality of life for senior citizens by lowering the price of prescription drugs by approximately 40%. A senior citizen spending $150 a month on prescription drugs could save over $700 annually under the legislation. It is ironic that the pharmaceutical industry criticizes the legislation for failing to provide a comprehensive Medicare drug benefit. Although the drug companies now say that they support the inclusion of prescription drug benefits in private-sector Medicare HMOs, they continue to resist including prescription drug coverage as a universal Medicare benefit. As the New York Times recently reported, "drug companies are gearing up to fight any plan for the Government to provide prescription drugs as a basic benefit in the traditional Medicare program."