[Ip-health] NYT: Helped by Generics, Inflation of Drug Costs Slows

[Sarah Rimmington]

The New York Times

September 21, 2007
Helped by Generics, Inflation of Drug Costs Slows
By STEPHANIE SAUL

As overall health care costs continue to rise sharply, prescription
drugs have emerged as a surprising exception.

Annual inflation in drug costs is at the lowest rate in the three
decades since the Labor Department began using its current method of
tracking prescription prices. The rate over the last 12 months is 1
percent, according to the government=92s latest data, released Wednesday.

=93The way the index is going, it looks like drug price increases are not
going to be very painful this year,=94 said Daniel H. Ginsburg, a
supervisory economist at the Bureau of Labor Statistics, where he is
involved in compiling the Consumer Price Index.

As recently as 2005, inflation in drug prices was running at an annual
rate of 4.4 percent.

Economists say the slowdown has come about because more people are
turning to generics and because generic versions of some of the most
common drugs have recently come on the market.

In the past year and a half alone, generic equivalents have become
available for the cholesterol treatment Zocor, the sleeping pill Ambien
and the blood pressure drug Norvasc.

Another factor could be the so-called Wal-Mart effect. Last fall,
Wal-Mart began offering many generic prescriptions at $4 a month. Target
quickly announced a similar plan, and Kmart expanded its program, which
offers a 90-day supply of generic drugs for $15. Other retailers have
followed with their variations. Publix, a grocery store chain with 684
pharmacies in five states in the Southeast, announced last month that it
would not charge for prescriptions for seven commonly used antibiotics.

To be sure, the government still expects spending on medications to
rise, to nearly $500 billion a year within a decade, up from an
estimated $275 billion this year. That will happen as more people take
more drugs and as new drugs are introduced. Also, costs are likely to
soar in some specialized categories like cancer treatments and
biotechnology drugs.

And yet for the average household, the drug index is perhaps a better
reflection of the actual day-to-day impact of prices for their most
commonly used drugs, like antibiotics, blood pressure pills and
cholesterol medicines. According to the nonprofit Kaiser Family
Foundation, in 2006 the average brand-name prescription cost more than
three times the average generic: $111, compared with $32.

But now, tamer drug inflation could add credibility to the platforms of
presidential candidates who have embraced generics as part of a solution
to rising health care costs, according to Dr. Robert Berenson, an M.D.
who is a senior fellow at the Brookings Institution. Three Democratic
candidates =97 Hillary Rodham Clinton, John Edwards and Barack Obama =97
have included generics in their health care proposals.

Generics made up 63 percent of prescriptions dispensed in the United
States in 2006, up 13 percent from 2005. And these days, the country=92s
biggest supplier of prescription drugs, as measured by prescriptions
filled, is not a high-profile American company like Pfizer or Merck. It
is Teva Pharmaceutical, a generic manufacturer based in Israel,
according to data from IMS Health, a firm that tracks the market.

A Labor Department economist, Francisco Velez, said his office noted a
drop in generic drug prices shortly after the large stores=92 promotions
began, particularly in the South, where Wal-Mart started its program.
His colleague, Mr. Ginsburg, called the drop in prices for generic drugs
=93dramatic.=94 Wal-Mart and other large chain stores make up 15 to 20
percent of the pharmacies that the government surveys for the index.

The fourth quarter of 2006 was the first time in several decades that
the index registered three consecutive months in which prices declined.
Mr. Ginsburg said that the effect of the promotions by large retailers
could be a one-time phenomenon, unless the companies decide to expand
the number of drugs they discount.

Wal-Mart=92s list of discounted generics includes fewer than 350 drugs. On
Tuesday, Wal-Mart announced that, beginning next year, 2,400 generics
would be available to its employees at $4 a month. The company has also
indicated that later this month it may make an announcement regarding
its generic drug program for consumers.

The use of generics has been promoted by Medicare, private employers and
the pharmacy benefit managers that administer employee drug plans. Len
Nichols, director of health policy for the New America Foundation, a
Washington policy group, noted that many pharmacy benefit managers have
encouraged the trend with tiered co-payments, allowing consumers to pay
less if they choose the cheapest generic drugs and more for the most
expensive name brands.

=93My guess is that the increasing market share of generics, driven
largely by firms using two- and three-tier pricing =97 that=92s what=92s
slowing us down over time,=94 Mr. Nichols said.

Although the Consumer Price Index is only one measure of prescription
drug inflation, Medicare has also reported slower increases in spending
on prescriptions, beginning in 2003 and continuing through 2005. The
2006 numbers are not yet available.

Despite the slowed inflation recorded by the index, overall spending for
pharmaceuticals is still on the rise, up 8.3 percent in 2006, according
to IMS. And that is unlikely to diminish anytime soon, as an aging
population faces increasing health problems. According to Medicare,
there have been great increases in the use of drugs for the
cardiovascular and central nervous systems and for Type 2 diabetes.

High prices for new cancer drugs are also driving up spending, and
pharmaceutical companies are collecting healthy profits. But John C.
Rother, the policy director for AARP, said there were signs that even as
brand-name manufacturers have posted higher prices for their top drugs,
they have offered bigger rebates to major customers like pharmacy
benefit managers. Because those rebates are negotiated individually and
privately, they are difficult to measure.

=93For specific drugs that are near the end of their patent life, the
manufacturers are trying to think about how to hang on to sales,=94 Mr.
Rother said. =93The only way they can do that is to offer deeper rebates
so there isn=92t as much interest in generics.=94

Though the role of the so-called Wal-Mart effect in the slowing of drug
cost inflation is debated, a similar phenomenon has been documented on
retail prices for other items. In a recent paper, two economists, Emek
Basker of the University of Missouri and Michael D. Noel of the
University of California, San Diego, described how the arrival of a
Wal-Mart Supercenter results in a drop in grocery prices of 1 to 1.2
percent throughout the community.

Wal-Mart constitutes 5 to 6 percent of annual retail spending on
pharmaceuticals, according to Adam J. Fein, president of Pembroke
Consulting, which focuses on the drug supply chain.

Mr. Fein said Wal-Mart=92s promotion had been beneficial not only to
people without insurance but also to Wal-Mart itself, increasing traffic
in the retailer=92s pharmacies, which he said had been underused. =93In the
first two months of this program, the average Wal-Mart pharmacy=92s daily
volume increased by about 22 percent,=94 he said. =93That translated to
about 30 prescriptions a day.=94

One customer who was drawn to Wal-Mart by the generic promotion is
Bernadine Peterson, a nurse who lives in Westbury, N.Y. Ms. Peterson
said she started using the Wal-Mart pharmacy four or five months ago
because of the $4 generics. As a result, she said, she was saving $100 a
month, reducing her monthly prescription bill to $200.

But the number of factors limiting inflation for prescriptions makes it
unclear what effect Wal-Mart=92s prices have. Several health care
economists and financial analysts said they doubted the direct influence
of drug plans at stores like Wal-Mart in slowing the inflationary trend.
They noted that because the generics offered under the plans were
typically the most established, and cheapest, ones, a price of $4 a
month did not represent a large discount.

But Wal-Mart=92s initiative could be having a less direct effect,
according to Sharon Treat, the executive director of the National
Legislative Association on Prescription Drug Prices, a coalition of
state and local policy makers. Ms. Treat said that publicity about
Wal-Mart=92s plan had raised awareness of generics.

=93I think it may be having a spillover effect psychologically,=94 Ms. Trea=
t
said. =93Folks are seeing generics as more acceptable than they had.=94




--
Sarah Rimmington
Attorney
Essential Action, Access to Medicines Project
Washington, DC
Tel: (202) 387-8030
Cell: (202) 422-2687
www.essentialaction.org/access/