Healthy Skepticism Library item: 11518

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Publication type: news

Saul S.
Helped by Generics, Inflation of Drug Costs Slows
New York Times 2007 Sep 21
http://www.nytimes.com/2007/09/21/business/21generic.html?_r=1&oref=slogin

Full text:

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’s latest data, released Wednesday.

“The way the index is going, it looks like drug price increases are not going to be very painful this year,” 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 – Hillary Rodham Clinton, John Edwards and Barack Obama – 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’s 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’ promotions began, particularly in the South, where Wal-Mart started its program. His colleague, Mr. Ginsburg, called the drop in prices for generic drugs “dramatic.” 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’s 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.

“My guess is that the increasing market share of generics, driven largely by firms using two- and three-tier pricing – that’s what’s slowing us down over time,” 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.

“For specific drugs that are near the end of their patent life, the manufacturers are trying to think about how to hang on to sales,” Mr. Rother said. “The only way they can do that is to offer deeper rebates so there isn’t as much interest in generics.”

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

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’s 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’s 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’s plan had raised awareness of generics.

“I think it may be having a spillover effect psychologically,” Ms. Treat said. “Folks are seeing generics as more acceptable than they had.”