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High drug prices, the U.S. elderly, and drug expenditure control policies

High drug prices, the U.S. elderly, and drug expenditure control policies.

by Albert Okunade

Introduction

The U.S. now spends approximately 15.0 percent of its GDP on health care, the highest rate among OECD countries. However, since 1960, it has consistently fared worse than the median in terms of "disability-adjusted life expectancy at birth" and as measured by other major indices of health status or outcomes. The quests for improved efficiency have intensified the managed care revolution, an evolution that continues, including the containment of drug costs. Potential cost savings from managed drug benefits include: 10.0-15.0 percent in retailer discounts and more efficient claims processing and automated claims adjudication, 8.0-12.0 percent from generic substitution, 5.0-15.0 percent from therapeutic interchange, and 5.0-10.0 percent from mail orders.

Drug therapy is central to the rational, coordinated management of many diseases by doctors, nurses, pharmacists, patients, and caretakers. Americans spent over $70 billion on prescription drugs in 1993. The U.S. prescription cost share of drugs has been growing rapidly and is projected to grow further, with consumers paying over 50.0 percent in out-of-pocket costs. However, prescription spending has been difficult to control since 1995, despite aggressive cost controls. Drug costs now rival the 20.0 percent physician share in managed care, despite lower managed care cost relative to the standard fee-for-service care, and drug spending is projected to rise by 14.6 percent annually from 2000 to 2004. The Wholesale Price Index (WPI) for ethical drugs in recent decades has exceeded the Medical Care Price Index and the Urban Wholesale Price Index. According to a 2002 report by the National Center for Health Statistics, prescription drug spending rose 17.0 percent and posted a 4.4 percent rate of price increase in the Consumer Price Index (CPI). Moreover, 32.0 percent of all prescription spending was paid out-of-pocket.

The U.S. elderly are the largest per capita users of prescription medicines. On average, people aged 50 in the U.S. taking 6 prescriptions a year will take 11 a year at age 60 and 15 a year at age 70. Prescription drugs also comprise the largest "out-of-pocket" expenses in elderly health care. Medicare, the national health insurance coverage for people aged 65 years and over, includes people entitled to Social Security disability payments for two years or longer and people with end-stage renal disease, regardless of income. The Medicare program, enacted July 30, 1965, under Title XVIII, took effect on July 1, 1966. Traditional Medicare coverage excludes prescription costs, except if incidental to physician office visits. (Medicaid health insurance program for the poor covers outpatient drugs of eligible Medicare-aged patients, however.) Depending on the plan, managed Medicare with prescription coverage and other expanded benefits, therefore, gained in popularity among the elderly population. However, as the e lderly population grows, drug costs continue to soar unabated with the introduction and use of new and expensive prescriptions for treating geriatric diseases. Therefore, rising drug costs are a major concern for Medicare and the for-profit and non-profit managed care plans (e.g., Medicare+ Choice) enrolling Medicare-aged patients.

Medicare drug cost containment policies are also important due to the growing use and rising prices of in-hospital, high-technology, and geriatric drugs. In 1998, 15.0 percent of the $6,300 average medical bill of elderly persons was paid out-of-pocket, and the average annual out-of-pocket expense for prescribed drugs was $531. Medicare paid only 2.0 percent of the prescription expenses of the elderly in 2000. The persistent use of prescriptions by the US elderly is also of policy interest to other OECD countries, especially in regard to strategies on access to drug insurance, extent of benefit coverage, and cost. Thus, it is timely and important to understand and evaluate the major cost control policies aimed at cutting elderly prescription cost growth.

Major Causes of Rising Drug Expenditures in the U.S.

The rational understanding and evaluation of policies for reducing drug expenditures can only proceed from a knowledge of the major factors that drive the increased spending. The medical health care economics literature identified these factors to include rising persistence among users, non-compliance, serious medical errors (e.g., mismedication) or adverse drug events, shortages of vital drugs, increased demand financed by third-party payers resulting in overuse or the "moral hazard" problem, recent enrollment growth of Medicaid beneficiaries under the federally-mandated State Children's Health Insurance Program (SCHIP), the higher per capita use of ethical drugs in the growing geriatric or Medicare-aged population segment, and increased utilization in the effective treatment of chronic illnesses, e.g., selective serotonin reuptake inhibitors, SSRIs, in depression. Clinical depression and other mental illnesses are among the most disabling disorders worldwide. Roughly, 30.0 percent of the U.S. population has some diagnosable mental disorder in a 12-month period. Drug treatments, although expensive, are most effective for treating mental disorders.

Since pharmaceuticals are a major culprit in rising U.S. health care costs, many drug cost-control policies intertwine strongly with larger health care reform politics and policies in the private and public sectors. The regulatory tools for curbing rising U.S. drug costs, as in Europe, include product regulation (e.g., prescription-to-OTC switches) and price- and profit-based supply-side policies. Demand-side instruments focus on physicians (e.g., positive and negative prescribing lists, fixed budgets); pharmacists (e.g., generic substitution); and patients (e.g., co-payments, non-reimbursement).

Managed care pharmacy is an integral aspect of the broader managed care design. Pharmacy cost growth differs across health plans, however. Coverage in managed care grew from 19.0 percent in 1992 to 30.0 percent in 1997 in Health Maintenance Organizations (HMOs), 27.0 percent to 35.0 percent in Preferred Provider Organizations (PPOs), and 7.0 percent to 20.0 percent in Point of Service (POS) plans. HMOs integrate the financing and delivery of health care services to enrollees. Private sector HMOs became important prototypes for public sector (Medicaid, Medicare) managed care. Medicaid managed care enrollment rose from 12.0 percent to 54.0 percent from 1992 to 1998, for example. Rising HMO monthly premiums for 2001 were attributed to a doubling of pharmacy benefits from 1994 to 1996, doubling again from 1996 to 1999; an approximate 9.0 percent rise in annual plan costs; and high outpatient costs due to increased utilization.

The exhaustion of managed care cost advantages, particularly in relation to rising drug costs, strengthens the imperatives of "evidence-based medical practice" and "data-driven decision making" in medical professions, insurance contracts, and government policy making. For example, a recent comparison of cost effectiveness and clinical efficacy of once-daily bupropion SR and nicotine replacement therapy (NRT) for smoking cessation in a smoking population at the U.S. Veteran Affairs Administration found the six-month quit rates were similar in both treatments. Pharmacoeconomic studies showed the overall therapy cost was $158 per patient getting NRT compared with $67 for bupropion SR. NRT and bupropion SR were equally efficacious; bupropion SR was more cost effective.

Quite important is technological progress, a factor accounting for at least 67.0 percent of the long-term rise in U.S. health care spending. Technological innovation is of great significance, particularly in medical care, and the pace of technological change in medicine is higher than elsewhere. Therefore, some theories have linked technology acquisition and utilization, insurance coverage, and rising medical care costs. This makes increasing discovery and aggressive marketing by drug firms and growing utilization of highly expensive biotechnology drugs and procedures for treating life-threatening illnesses and geriatric diseases raise drug costs. The major driver of prescription spending metamorphosed from rising drug prices to non-price factors, such as utilization. Thus, specific cost-containment efforts (e.g., Drug Utilization Reviews, or DUR) and legislation since 1993 have mostly targeted the non-price utilization causal factor.

Current Strategies for Containing U.S. Drug Costs

Pharmacy benefits were available to 71.4 percent of Medicaid enrollees in 1995, and from 1997 to 1998, the percentage reduction in Medicaid pharmaceutical spending was the smallest among major expenditures in the state-level Medicaid portfolio of services. Interestingly, the mean prescription cost of $24.84 at HMOs in 1995 reached $27.10 in 1997. Consequently, rising drug costs and reduced access to clinically necessary pharmaceutical products are forcing large hospitals, their purchasing groups, and federal and state governments to require drug companies to grant price concessions of at least 15.0 percent off the average wholesale price (AWP) of Medicaid prescriptions. Drug firms also negotiate rebates with retail drug stores on a "one-on-one" basis, in addition to rebates granted directly to consumers. These access-expanding, multiple modes of administering rebate plans is one strategy for minimizing program prescription cost per covered life.

Other government cost control policies for outpatient prescription benefits include consumer cost sharing as a percentage of cost or a flat rate, generic substitution, drug utilization review, limited formulary, and cost control information programs for the prescribers. Co-payments and quantity limits are major instruments of Medicaid prescription drug cost controls. The policy imposing monthly prescription limits of three to six drugs per beneficiary, which significantly reduced Medicaid drug bills in 1993, echoed this finding and further claimed that prescription limits raised total costs and nursing home admissions significantly among the elderly with chronic illnesses. Patient cost sharing in the form of co-payments, as low as $1.00 per filled prescription, also reduced Medicaid drug utilization by 7.5 percent.

Since the $200 billion Medicare program grew at double federal tax collections from 1985 to 1995, the debates at HCFA to control costs by mandating rebates similar to those of Medicaid suggest that the Medicaid rebates policy could be used as an example for Medicare rebate policy proposals. However, HCFAs ongoing debates on broadening the reach of PL 101-508 (1990) to the Medicare insurance program should anticipate the prescription access implications and the strategic responses (e.g., through well-financed lobbying) of the drug firms before implementing the policy. This could improve possibilities for containing drug costs and realizing the policy goal of broadened access to clinically useful care. Caution should be used, however, because analyzing the politics and economics of Medicare drug coverage is a tricky business that is not getting any easier in these budget-cutting times.

The Proposed Medicare Outpatient Prescription Discount Cards Policy

More than one-third of U.S. citizens aged 65 and over lack insurance coverage for outpatient prescriptions. The U.S. is the only advanced country lacking a universal policy granting access to the elderly for medically necessary hospital care, doctor services, and prescription drugs. Consequently, Medicare reform proposals have always been on the political agenda, especially during U.S. presidential elections. President Bush received more votes from the elderly aged 65 years and over during the 2000 presidential campaign by promising to sponsor legislation that favors significant reductions in out-of-pocket expenses for prescription drugs and other beneficial Medicare reforms. His proposed reforms of Medicare include improved coverage for preventive health care, new treatments, and serious illnesses.

Medicare does not cover outpatient prescriptions, except if incidental to a doctor's office visit. Program payments for drugs in 1994 were $1.4 million, mostly to doctors and largely for chemotherapy agents, pain management, and medications used with durable medical equipment, such as injectables and inhalation drugs used with a nebulizer. The indigent elderly frequently makes the difficult choice between buying groceries or purchasing therapeutically necessary drugs; so, roughly 12.0 percent of Medicare enrollees are also Medicaid-eligible for prescription benefits. Managing drug costs of elderly Medicaid patients thus poses further challenges to Medicare, veterans' benefit programs, and other tax-funded (state, local) initiatives. Currently, several managed Medicare plans (Medicare + Choice), private sector supplemental Medigap insurance, and other private initiatives (e.g., "compassionate use" of late-breaking experimental drugs for advanced geriatric diseases, e.g., Alzheimer's) afford low premium outpat ient drug benefits.

President George Bush on July 12, 2001, therefore, unveiled a new proposal for a voluntary private program to assist Medicare beneficiaries in getting large discounts on prescription drugs. The goal, an integral aspect of major legislation to revamp Medicare, is to further ease the out-of-pocket, drug-spending pressure on elderly family budgets by expanding access to geriatric pharmacy benefits. The program would consist of having drug discount cards issued by "buyer clubs" organized by private groups that meet specific federal guidelines to negotiate heavy discounts with drug makers and community pharmacies. President Bush currently seeks support of his plan from Congress, consumer groups, pharmacies, and other health care providers. The proposed discount prescription cards require no congressional action. Due to the national emergency on antiterrorism and pending lawsuits against the President's prescription proposal, the prescription policy appears slowed. Nonetheless, given the potential for eventual pas sage, some implications of the proposed prescription discount policy are discussed below.

The proposed drug discount card may have some merit; it could stimulate price and quality competition among large, private buying clubs or sponsoring organizations and community drug stores and pharmacists that already compete against lower cost mail-order pharmacies. Community pharmacies are likely to reap lower profit margins as they compete against the larger-scale, newly-created, and government-approved drug buying clubs. Drug costs, explicitly measured, are likely to fall for the average program participant, as one pays less for branded and bio-equivalent generics. The plan is also likely to achieve its goal of increased access to drug treatment, but this must be balanced against potential care quality attrition and the broadly defined costs of mismedication, non-compliance, and uncoordinated sources of obtaining multiple prescriptions for treating a set of chronic conditions.

Expanded access to outpatient prescriptions for Medicare-aged patients would raise overall drug spending due to greater utilization among current and new users, although unit drug cost per beneficiary may fall in the short run. Expenditures are expected to rise as out-of-pocket costs near zero to strengthen the "moral hazard" behavior for a sub-population that is already the highest prescription user. Among the Medicare-aged population in Pennsylvania in 1990, adding drug coverage in the PACE (Pharmaceutical Assistance Contract for the Elderly) program significantly raised the number of scripts filled in a two-week period. Specifically, it was found that, relative to those with no supplemental Medicare coverage for drugs or doctor visits: (1) seniors with supplemental physician coverage without prescription coverage filled 0.56 more prescriptions, (2) those with both doctor and prescription coverage filled 0.94 more scripts, (3) those with PACE alone filled 1.05 more prescriptions, and (4) those with both PA CE and a supplement for doctor visits filled 1.42 extra scripts. The "prescription discount card," as currently drafted, is quite generous and is most likely to generate significant increases in consumption for Medicare-eligible persons already participating in public- and private-sector insurance programs with outpatient drug benefits, as in managed Medicare (Medicare+Choice), Medicaid, Medigap and other state and municipal assistance programs with prescription coverage.

Medicaid and Medicare programs are expanding access to prescription care. The newly proposed outpatient "prescription cards" policy for U.S. Medicare-aged citizens relies on a private-sector framework to achieve something approaching universal access in European countries, e.g., Germany and U.K., where governments are the providers rather than the facilitators of access and payments for covered drugs.

Finally, the proposed prescription discount card policy must weigh more carefully the extra explicit and implicit costs of wider access (e.g., $25 annual fee, increased complexity of drug interactions, adverse drug events, non-adherence or the mismanagement of medication regimens, re-hospitalization, other risks for hazardous polypharmacy) against extra implicit and explicit benefits (e.g., improved health status, cheaper prescriptions, reduced unit prices, generic substitution).

Proposed Patent Length Reduction for Prescription Brands to Raise Generic Competition

The 1994 Drug Price Competition Act permits brand prescription makers to apply for an FDA extension of patents for up to five years and reduces obstacles to approval of bio-equivalent generics. Despite this and the 1992 streamlining of FDA's approval process encompassing "accelerated approval," "parallel tracks ," "safety testing and harmonization," and "outside expert reviews' brand prescription price growth remains high. Therefore, the general public and government regulators question high drug prices, especially since some of the initial R&D investments on New Chemical Entities at the National Institutes of Health (NIH) are heavily subsidized by federal tax dollars (e.g., Taxol[TM], an anti-cancer agent, later developed and marketed by the for-profit drug firm Bristol-Myers-Squibb[R]).

Drugs comprise 9.0 percent of the average health care dollar, but the almost 19.0 percent profitability of U.S. drug firms--which is four times that of Fortune 500 companies--is viewed politically as excessive and emanates from high drug prices relative to "low cost of goods sold" or marginal costs. Drug makers also spent 30.0 percent of their revenues on administration and marketing as compared to 12.0 percent on R&D. This conduct is attributed to the basic economic forces in the U.S. prescription market (e.g., patented brand-name drugs command market power) where the "law of one price" does not hold across classes of buyers, locations, and organizational arrangements for administering pharmacy benefits.

On October 21, 2002, President Bush announced a proposal to raise the speed of market entry of low-cost generic substitutes of brand name prescriptions. He claimed that the brands, through improper manipulation of drug and patent laws, have artificially prevented the competitive market entry of generics. The FDA is expected to implement the proposal in 2003. The goal is to reduce the cost of prescriptions by billions of dollars and reduce the out-of-pocket financial costs of drugs to the elderly. The American Association of Retired Persons (AARP), generic manufacturers, and sponsors of the Senate Bill that passed in July 2002 applaud this recent proposal. When implemented, the proposal would reverse the benefits currently reaped by brand name prescription companies that would otherwise have applied for patent extension.

Conclusion: Drug Cost Control Policies-Short-run Success or Long-term Failure?

Drug spending growth in the U.S. has been more rapid, persistent, and increasingly difficult to control since 1995, despite many managed-care cost control policies on both the supply and demand sides of spending. These policies, on balance, appear to be piecemeal, fragmented, and sub-optimally linked to the incentives that guide the behaviors of drug makers, prescribers, pharmacists, and patients. The scope and breath of the optimal cost controls are difficult, challenging, and complex, partly because of the "gaming tendencies" of the many economic and political actors in the prescription market. One recent study found a strong association between the generosity of insurance types and the costs of dispensed drugs--high-cost, branded drugs were more likely to be dispensed to private third-party and indemnity patients than to the uninsured. These findings echo an earlier result across OECD countries that the number of prescriptions per capita filled varies inversely with the net price patients paid. Therefore, effective and sustainable prescription cost controls and insurance coverage policy designs must anticipate the strategic responses of health care market actors to built-in incentives.

Public- and private-sector policies controlling drug spending through instruments such as out-of-pocket cost-sharing (notably, co-pays per prescription filled), monthly prescription limits, generic substitution, positive and negative drug lists (formularies), drug rebates and discounts to governments and large private buying groups, and prescription-to-OTC switches have largely succeeded in the short run. However, overall medical costs for 2001 were predicted to rise about 12.0 percent, after rising around 9.0 percent in 2000. Drugs have fueled 23.0 percent of the expected increase in health care premium costs, the highest from 2000 to 2001. Therefore, while managed care succeeded initially, costs are rising at similar rates regardless of the type of health care delivery. The effective management of health care cost and quality is a persistent nuisance.

The sustainable potency of managed care drug cost control policies is doubtful because, in the past five to ten years, newly introduced drugs have also been more expensive, aggressively marketed, and generally preferred by consumers. Rising incomes have the general tendency to increase the demand for normal goods, goods that individuals buy more of as personal incomes rise. Prescription drugs and other improved treatment technologies are normal or superior goods; the demands rise more than proportionate increases in income, all else equal. The portion of rising drug prices that is quality-driven raises the imperative of comparing the added benefits (e.g., lower mortality, reduced morbidity, fewer adverse side effects, improved compliance) of new and more expensive drugs with the added costs of the replacement drugs. One implication is that rising drug spending may not necessarily be bad if the extra spending is outcome-justified. Policies focusing unilaterally on cutting explicit costs may be sub-optimal, un less there is proper accounting showing a shortfall in full benefits relative to full costs.

In conclusion, one cannot look merely at the costs and benefits of drug treatment. The benefits and costs of a contemplated cost-containment policy, including reimbursements for prescriptions, other medical technologies, procedures, and health services, should be assessed more broadly beyond both ethical drugs and the health care sector.

A listing of references for this article is available upon request from the author, aokunade@memphis.edu.

Dr. Albert Okunade

Albert Okunade is Professor of Economics in the Fogelman College of Business & Economics at The University of Memphis. The first recipient of the "2001-02 Suzanne Downs Palmer University Professorship Award for Research," he also received the University's "2001-02 Alumni Association Award for Distinguished Research in Social Sciences & Business Administration? At The University of Memphis, he received the "2000 University Honors Teaching Fellowship" and the "1999 University College Advising Award." Dr. Okunade has authored over 70 research publications and recently co-authored an. interdisciplinary textbook on health risk and safety communication in journalism. During 2000-01, Dr. Okunade served a faculty research sabbatical in health care economics and policy at Harvard University, Boston, MA. His research focuses on health economics, medical care technology, pharmaceutical care, labor economics, and non-profit finance. He has also served on the Tennessee Commission on Pharmaceutical Care. Dr. Okunade, who teaches in the undergraduate and graduate programs in Business and Economics, earned a Ph.D. Economics degree from The University of Arkansas in 1986.

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