What’s Happening with Prescription Drugs

By Debra Gordon

Richard Evans takes so many prescription medications that he keeps them in a small bookcase in what he calls his “medication station.” The 57-year-old freelance indexer takes two different types of insulin and the oral medication Glucophage for diabetes, testosterone therapy for chronic fatigue, an anti-inflammatory and Questran for ulcerative colitis, two inhalers for his burgeoning asthma and a sleeping aid for his insomnia.

But wait! There’s more: Hyzaar for high blood pressure, Nexium for reflux, Synthroid because he had Grave’s disease. And that’s not counting the occasional antibiotic and decongestant if he gets acutely ill.

For all this, Evans is lucky. Retired from IBM, his former employer provides drug coverage through an HMO. Since he orders his prescriptions through a mail-order pharmacy and receives a 90-day supply at a time, his out-of-pocket expenses for prescription medications average about $210 a month.

But with many large employers dropping or severely limiting health coverage for retirees, increasing co-payments and tightening up on prescription drug coverage, Evans knows his luck could run out at any time.

And then he might be like the one in five Americans aged 18 to 64 who, the Center for Studying Health System Change found, leave at least one prescription unfilled because they can’t afford it. The numbers are even worse for Hispanics and African-Americans, with more than one in three blacks and one in four Hispanics reporting they couldn’t fill all their prescriptions because of cost.

Overall, an estimated 65 million Americans – one-third of them Medicare beneficiaries – have no prescription drug coverage. And, as anyone who has ever paid $120 for a month’s supply of the stomach drug Nexium knows, that hurts.

Right now, you might be lucky enough to have much of your prescription costs covered under an employer-provided health insurance plan. Don’t get too comfortable. As you have probably noticed over the past couple of years, you’re paying more in co-payments for those drugs. Today, if you want the brand name of a drug (for example, Prozac instead of its generic form, fluoxetine) you may have to pay twice as much out of pocket than if you bought the generic version. Plus, some brand-name medications may not even be covered on your plan, a tactic more employers are taking to cut skyrocketing health costs.

Why are drug prices so high? What can you do about it? Should you order your medications from Canada? And, the classic $64,000 question: What’s going to happen when you turn 65 and Medicare kicks in?

Hang on. We’re going to take you on a whirlwind tour of the world of prescription drugs in the United States.

Why Are Drugs So Expensive?

Lots of reasons. Here are some of the biggies:

Research and development – From start to finish, economists estimate that it takes between 10 and 15 years and costs about $802 million to get a new drug to market. Drug development is basically a numbers game: of every 5,000 compounds screened, just one winds up approved as a new medicine. Most drug companies are publicly held companies – they’re under pressure to show a profit every three months and to recoup that massive research investment.

• Short patent times – Once a drug is approved, the drug company usually only has about seven or eight years remaining on its exclusivity. Once the patent expires, copycat generic versions of the drug, which cost far less than the brand-name drug, hit the market. Since those generic companies don’t have to spend the time or money proving their products are safe and effective (remember, they’re just copying the existing drug), their overall development costs are lower and they can afford to charge less. So drug companies have a limited time to recoup their initial investment.

• Direct-to-consumer advertising – You can’t pick up a magazine or turn on the TV these days without seeing an ad for a prescription drug. It’s called “direct-to-consumer” (DTC) advertising, and since the U.S. Food and Drug Administration relaxed the rules on prescription drug advertising in 1997, its use has exploded.

Overall, one study found that annual spending on DTC pharmaceutical advertising increased from $791 million in 1996 to about $2.5 billion in 2000. Some critics blame this for increased drug costs. The reality, however, is that overall marketing budgets for drug companies – which include marketing to doctors and pharmacists – have not increased in five years, and no studies have found a direct link between DTC advertising and drug costs.

• Increasing use of medications and more medications available – The Pharmaceutical Manufacturers Association, a trade organization, notes that the use of new and improved medicines account for about 70 percent of total spending increases in recent years, compared to about 30 percent attributable to price increases. One reason we’re using more drugs is that the population is aging and there are simply more drugs available for common chronic conditions like high cholesterol and osteoporosis.

What Does This Mean for You?

Greater spending on prescription drugs affects you in numerous ways, even if you have drug coverage. For instance, remember the good old days when you paid about $5 out of pocket for every prescription drug – no matter what it was – and your insurance company picked up the rest? Those days are gone.

Today, 85 percent of people covered under employer-sponsored pharmacy benefit plans have a “tiered cost-sharing structure,” which means they pay more for certain drugs. More than half (63 percent) are under a three-tiered pharmacy plan, meaning they pay one price for generic drugs, one price for branded drugs that are on their plan’s “formulary,” and one price for branded drugs that are not on the formulary.

The formulary, by the way, is a list of medications the plan has agreed to cover at that lower rate. It’s a constantly changing and evolving list, so it’s nearly impossible to keep track of. Drugs make it on or off the list for a variety of reasons, including how well they work and how much they cost.

If you, or your doctor, insist on those “non-preferred” drugs, you’ll pay a lot more out of pocket for them. The average co-payment jumped from $17 in 2000 to $29 in 2003, according to a Kaiser Family Foundation survey of employer health benefits.

Why the big hikes? “Employers are trying to make employees more cost conscious,” says Kaiser Vice President Gary Claxton. That’s because employers keep getting hit with double-digit premium increases for health plans. In 2003, for instance, employer-sponsored health insurance premiums rose 13.9 percent, the third consecutive year of double-digit premium increases and the highest increase since 1990.

Buying Overseas

OK, you say, I’ll just log on to a Canadian pharmacy site and get my drugs that way. After all, an estimated 48 percent of Americans say they’d buy their drugs from another country to save money, according to a Wall Street Journal poll.

Well, hang on. Sure, you might save some money up front – the government controls drug prices in Canada, unlike in the United States, which is why drugs cost less. But you could be putting your life at stake for a few dollars.

Just consider that nearly 90 percent of imported drugs the U.S. Food and Drug Administration checked at the border in the summer of 2003 contained medications not approved for use in the United States. Some had been withdrawn from the U.S. market for safety reasons. Others came packed in baggies, tissue paper or envelopes, sometimes arriving crushed and broken. Most often, the drugs had inadequate labeling and instructions for proper, safe use, including proper dosing, weren’t included.

The bottom line: There are better, and safer, ways to get your drugs more affordably (see “Finding More Affordable Drugs”).

Medicare and Prescription Drugs

So now we come to the big kahuna: the Medicare program. Why, you’re wondering, should you worry about Medicare? After all, you’re not 65 yet. No, but you’re fast closing in on that magic age. Plus, many of you are probably caring for aging parents who have to cope with the intricacies of Medicare. So you need to know not only what’s out there now, but what’s coming in 2006, when some of you will be 65.

As you undoubtedly heard, new legislation signed into law in December 2003 finally puts some drug coverage into the Medicare program. Previously, Medicare only paid for prescription drugs if you were hospitalized or receiving certain cancer drugs. Starting June 1, however, Medicare beneficiaries could get a discount-drug card (provided by private companies at a cost of about $30) that would save you about 10 to 15 percent on total prescription drug costs. Low-income Medicare beneficiaries get drug credits.

The program is confusing, however, with certain cards (as of late May there were more than 70 available) covering certain drugs (which can change all the time) able to be used only at certain pharmacies.

No wonder Kaiser Family Foundation focus groups and surveys in early June found widespread confusion and dissatisfaction with the plan.

“Many seniors were skeptical about whether they’d actually see lower drug prices,” says Michelle Kitchman, a senior policy analyst with Kaiser.

The whole drug card thing becomes moot in 2006, however, when the first-ever Medicare drug prescription benefit comes into play. It adds a Part D to the Medicare benefit, which will cost about $35 a month to start. Then you’ll have a $250 deductible before the benefit itself kicks in. After you meet the deductible, the government will pay 75 percent of your total drug costs for the rest of the year until, that is, you rack up $2,250 in total drug costs.

That’s when the “doughnut hole” provision kicks in. This requires that you now pay 100 percent of the next $2,850 you spend on prescription drugs until your total drug costs for the year hit $5,100.

“After that,” Kitchman says, “you’ve gone into catastrophic mode and the government will pay 95 percent of your drug costs for the rest of the year.”

Every year, of course, those numbers change depending on overall costs, inflation and whether there’s a full moon.

Got that? If you didn’t, don’t feel bad. Even experts like Kitchman admit that the program is confusing.

“It will be a tremendous challenge to explain this to seniors,” she says. The agency charged with administering the Medicare program, the Center for Medicare and Medicaid Services, is issuing nearly daily press releases clarifying the new benefits, beefing up its 1-800 numbers and Web site, and spending a lot of time doing outreach with organizations that work with people 65 and older. 

Impact on Retiree Benefits

The new Medicare benefit may have an unexpected impact on retirees whose former employers currently cover their drug costs. Some employers may decide to cut the drug benefit. To discourage that, the law includes substantial subsidies for employers who decide to remain with their own drug benefit or develop a benefit that “wraps around” the Medicare benefit, covering costs Medicare doesn’t, Kitchman says.

In the meantime, retirees are already paying a lot more for their drug coverage. A 2004 Kaiser study found that 57 percent of large private employers increased drug co-payments last year and 32 percent imposed a three-tiered drug co-pay system. Looking to the future, the survey also revealed that 86 percent of large employers plan to increase retiree contributions to health coverage within the next three years.

One of those seeing the increase is Richard Evans. He got his first bill this year for his IBM-provided health insurance. It wasn’t much, but he knows the amount will increase. “I can foresee a time when the cost of my health care will eat up almost my entire IBM pension,” he says.

Still, he doesn’t begrudge the money he spends today and will spend in the future on prescription medications. “I would have been dead years and years ago without chemistry and modern medicine,” he says. “I frankly think that anything that keeps people alive and active and contributing to society is worth the price.”

Debra Gordon is an award-winning health writer and editor. Her most recent piece for Get Up & Go was Laser Eye Surgery: Is It Right for You?