[Ip-health] New York Times: Drug Companies Increase Prices in Face of Change

[Thiru Balasubramaniam]

http://www.nytimes.com/2009/11/16/business/16drugprices.html?ref=3Dus

November 16, 2009
Drug Companies Increase Prices in Face of Change
By DUFF WILSON

Even as drug makers promise to support Washington=92s health care
overhaul by shaving $8 billion a year off the nation=92s drug costs
after the legislation takes effect, the industry has been raising its
prices at the fastest rate in years.

In the last year, the industry has raised the wholesale prices of
brand-name prescription drugs by about 9 percent, according to
industry analysts. That will add more than $10 billion to the nation=92s
drug bill, which is on track to exceed $300 billion this year. By at
least one analysis, it is the highest annual rate of inflation for
drug prices since 1992.

The drug trend is distinctly at odds with the direction of the
Consumer Price Index, which has fallen by 1.3 percent in the last year.

Drug makers say they have valid business reasons for the price
increases. Critics say the industry is trying to establish a higher
price base before Congress passes legislation that tries to curb drug
spending in coming years.

=93When we have major legislation anticipated, we see a run-up in price
increases,=94 says Stephen W. Schondelmeyer, a professor of
pharmaceutical economics at the University of Minnesota. He has
analyzed drug pricing for AARP, the advocacy group for seniors that
supports the House health care legislation that the drug industry
opposes.

A Harvard health economist, Joseph P. Newhouse, said he found a
similar pattern of unusual price increases after Congress added drug
benefits to Medicare a few years ago, giving tens of millions of older
Americans federally subsidized drug insurance. Just as the program was
taking effect in 2006, the drug industry raised prices by the widest
margin in a half-dozen years.

=93They try to maximize their profits,=94 Mr. Newhouse said.

But drug companies say they are having to raise prices to maintain the
profits necessary to invest in research and development of new drugs
as the patents on many of their most popular drugs are set to expire
over the next few years.

=93Price adjustments for our products have no connection to health care
reform,=94 said Ron Rogers, a spokesman for Merck, which raised its
prices about 8.9 percent in the last year, according to a stock
analyst=92s report.

This year=92s increases mean the average annual cost for a brand-name
prescription drug that is taken daily would be more than $2,000 =97 $200
higher than last year, Professor Schondelmeyer said.

And this means that the cost of many popular drugs has risen even
faster. Merck, for example, now sells daily 10-milligram pills of
Singulair, the blockbuster asthma drug, at a wholesale price of $1,330
a year =97 $147 more than last year. Singulair is now selling at retail,
on drugstore.com, for nearly $1,478 a year.

The drug companies =93can charge what they want =97 it=92s not fair,=94 Eri=
c
White, the 42-year-old owner of a small jewelry store in Queens, said
as he left a pharmacy recently.

Despite having drug insurance, Mr. White says he now pays $110 a month
out of pocket for two brand-name allergy medicines, even as he has cut
prices in his jewelry store by at least 40 percent to keep customers
coming through the door.

He shook his head. =93What can I do?=94 he said. =93I need my medicines.=94

The drug industry has actively opposed some of the cost-cutting
provisions in the House legislation, which passed Nov. 7 and aims to
cut drug spending by about $14 billion a year over a decade.

But the drug makers have been proudly citing the agreement they
reached with the White House and the Senate Finance Committee chairman
to trim $8 billion a year =97 $80 billion over 10 years =97 from the
nation=92s drug bill by giving rebates to older Americans and the
government. That provision is likely to be part of the legislation
that will reach the Senate floor in coming weeks.

But this year=92s price increases would effectively cancel out the
savings from at least the first year of the Senate Finance agreement.
And some critics say the surge in drug prices could change the
dynamics of the entire 10-year deal.

=93It makes it much easier for the drug companies to pony up the $80
billion because they=92ll be making more money,=94 said Steven D. Findlay,
senior health care analyst with the advocacy group Consumers Union.

Name-brand prices have risen even as prices of widely used generic
drugs have fallen by about 9 percent in the last year, Professor
Schondelmeyer said. But name brands account for 78 percent of total
prescription drug spending in this country. And as long as a name-
brand drug still has patent protection it faces no price competition
from generics.

Ken Johnson, senior vice president of the industry association =97 the
Pharmaceutical Research and Manufacturers of America =97 criticized the
analysis Professor Schondelmeyer had conducted for AARP, saying it was
politically motivated.

=93In AARP=92s skewed view of the world, medicines are always looked at as
a cost and never seen as a savings =97 even though medicines often
reduce unnecessary hospitalization, help avoid costly medical
procedures and increase productivity through better prevention and
management of chronic diseases,=94 he said.

But Professor Schondelmeyer=92s analysis =97 which found prices for the
name-brand drugs most widely used by the Medicare population rising by
9.3 percent in the last year, the fastest rate since 1992 =97 is in line
with the findings of a leading Wall Street analyst, too.

Catherine J. Arnold, a drug industry analyst at Credit Suisse, said
her latest study of the nation=92s eight biggest pharmaceutical
companies showed markedly similar results: list prices rising an
average of 8.7 percent in the 12 months ending Sept. 30 =97 the highest
rate of growth since at least 2004.

As does Professor Schondelmeyer, Ms. Arnold based her price
calculations on reported wholesale prices and a formula that puts more
emphasis on each company=92s best-selling drugs.

Ms. Arnold said the prospect of cost containment under health care
reform, as well as the tougher business environment, entered into the
decisions of manufacturers to raise prices this year.

The industry stands to gain about 30 million customers with drug
insurance from the legislation pending in Congress. But the industry
also faces the prospect of tougher negotiations from both public and
private buyers as the government tries to squeeze savings out of the
health system.

=93If you=92re going to take price increases,=94 Ms. Arnold said, =93here a=
nd
now might be the place to do that, because the next year and the year
after that might be tough.=94

Mr. Johnson did not dispute the Credit Suisse study or deny Ms.
Arnold=92s finding that American drug makers have raised prices at the
fastest rate in five years.

He said both studies were incomplete by failing to include rebates
that drug makers give distributors. But Ms. Arnold, Professor
Schondelmeyer and a 2007 Congressional study of Medicare said the
rebates often accrue to the middlemen, not consumers, and higher
manufacturer prices lead to higher retail prices.

And the drug industry=92s own major consulting firm, IMS Health, has
also reported a significant run-up in prices. Back in April, IMS
predicted that United States drug sales might actually decline this
year.

Billy Tauzin, president of the industry=92s trade association,
highlighted the gloomy prediction in a June 1 letter to President
Obama shortly before striking the deal to cut drug costs by $80
billion. In negotiating the deal, the drug makers argued that they
could not afford to give up more than that.

But in October, IMS made an unusual change in the middle of its
forecasting cycle, saying it now believed United States sales would
grow at least 4.5 percent in 2009 =97 or $21 billion more than expected
six months earlier.

A major reason, IMS said, was higher-than-expected price increases for
drugs in the United States.


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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


Tel: +41 22 791 6727
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