The University Record, October 2, 2000

New Rx drugs drive prices up

Editor’s Note: In response to increasing prescription drug costs, the University is raising the co-pays for prescription drug benefits to $7 for generic drugs and $14 for brand-name drugs in most health plans, effective Jan. 1, 2001. The Benefits Office offers a series of five articles (this is the fourth) to provide background on the reasons behind the co-pay increases and information to help faculty and staff make the most of their prescription drug benefits.


By Kate Kellogg
Human Resources/Affirmative Action

When faced with an illness, whether it’s a bout of sniffles or a life-threatening disease, everyone wants the newest and the best medications at any cost.

In recent years, the pharmaceutical industry has been churning out record numbers of new drugs to treat conditions ranging from migraine to obesity to Alzheimer’s. The average number of new drugs approved per year has doubled since the early 1980s from 19 to 38 per year, according to a new report on prescription drug trends by the Kaiser Foundation.

James Stevenson, pharmacy director for the U-M Hospitals (UMH), believes that the abundance of new drugs is a natural result of work in new technologies. “In the last 10 years, the focus has been on biotechnology and molecular biology, which has led to a number of new and innovative ways of looking at disease and potential treatment,” he says. “The fruit of that research is starting to reach the marketplace.”

Top pharmaceutical firms in 1998 spent about $21 billion—more than 20 percent of their net profits—on research and development. In this high-risk industry, only five investigational compounds make it to market for every 1,000 evaluated, notes Edward F.X. Hughes, professor at Northwestern University at Evanston.

Another reason for the increased number of new drugs on the market is faster Food and Drug Administration (FDA) approval times. The average approval time for new drug applications is now 12 months, compared with 30 months in 1992. The FDA shortened approval times to speed up the availability of priority products such as HIV treatments, but the agency also has approved drugs for asthma, diabetes, osteoporosis and other conditions within six months.

The Kaiser Foundation study notes that pharmaceutical manufacturers face considerable economic pressure to develop new products since markets for existing products shrink when their patents expire. Once a patent expires, other manufacturers can produce lower-priced generic versions of that drug product.

Case in point: Zantac, the top selling anti-ulcer drug in 1995, slipped from fourth place in the ranks of the 200 top-selling drugs to 127 in 1998, a year after its generic version, ranitidine, hit the market. The much cheaper ranitidine already had topped Zantac in sales by 1998.

As a rule, the newer the drug, the more expensive. A look at trends in drug prices reveals that the flood of new brand-name drugs on the market is one of the main factors driving up prices of prescription drugs. New drugs introduced since 1992 accounted for almost 36 percent of the 1998 pharmacy benefit cost, Ad Med News reported last year.

Hard Choices

HMO formulary committees must carefully weigh the benefits of these new drugs against their high costs in deciding what to recommend for insurance coverage.

For example, Prilosec, the top-ranked drug by dollar sales in the country, costs a pharmacy almost 15 percent more than one of its popular predecessors, Tagamet. Prilosec was introduced in 1989 as the first proton pump inhibitor for ulcers.

“It’s very good,” says Stephen Lash, chief pharmacy officer for Care Choices, “and very expensive, costing over $100 per month. But Care Choices covers it because it is often the most effective therapy for severe cases of ulcer disease.”

On the other hand, Care Choices does not cover the ulcer drug Pepcid without a letter of “medical necessity” from the physician. Pepcid, an H2 blocker that blocks stomach acid, has no generic equivalent and costs more than $85 per month. Many physicians consider the generic drug ranitidine (brand name Zantac) an equally effective H2 blocker for peptic ulcers. Care Choices does cover ranitidine, which costs $17.93 a month.

“We think the best philosophy is for the doctor to start with a lower priced drug that has been proven effective and work upward, according to the patient’s needs,” Lash says.

In the antidepressant category, Prozac costs a minimum of $65.65 per month, compared to the older drug Elavil, which costs $11.54 per month. Elavil’s generic equivalent, amitriptyline, is even cheaper at $6.93 per month, according to Care Choices’ price list. In fact, Elavil is amitriptyline—generic drugs are often named for their active ingredients.

Nevertheless, Prozac is the second-biggest-selling drug in the country, after Prilosec. Doctors widely prescribe this more expensive antidepressant—a selective serotonin reuptake inhibitor—which has proven more effective and less likely than other antidepressants to induce side effects.

Health care organizations are torn between approving potentially beneficial new products and exercising caution about new drugs that have limited clinical and safety experience. For example, Care Choices did not cover some new “blockbuster” drugs such as Redux, for weight loss, due to potential safety problems; Redux has since been removed from the market.

The costs of some of the new lifesaving biotech drugs are staggering. Remicade is a new advance in the treatment of Crohn’s Disease and rheumatoid arthritis. The treatment costs more than $5,000 per year in many cases, Stevenson says.

“For some patients, there is no less expensive alternative to those very effective drugs with high price tags. That is why we must be diligent about identifying opportunities to save on pharmaceuticals in other areas,” he says. “We want to make sure the newer products will be available for the most appropriate patients.”

Achieving a Balance

A member of the UMH Ambulatory Formulary Committee, Stevenson is working with physicians on a “first choice” list of drugs in key categories. They will recommend drug choices that both meet the U-M Health System’s treatment guidelines and offer cost advantages.

“Some physicians are not fully aware of the relative costs within key therapeutic categories. Previously, no one had really recommended drugs for cost effectiveness,” he says. “We are now taking that active step, by looking first at effectiveness and safety, and then for savings possibilities. We’re especially concerned with the high-cost area of life-enhancing drugs, such as blood-pressure lowering agents, cardiovascular drugs and antidepressants.”

A common strategy among health plans is to put physicians “at risk” for pharmacy costs if they are not taking opportunities to prescribe equally effective, lower-cost alternatives. A number of health plans have begun to reduce doctors’ salaries or bonuses if they prescribe drugs indiscriminately. Naturally, some HMO members fear such policies may place their health, as well as doctors’ earnings, at risk.

“All policies hold potential dangers if carried too far,” Stevenson says. “We don’t want to see doctors basing decisions on economic factors at the expense of patients’ health. The key is to find the right balance.”

The last article in this series will examine the consumer’s role in lowering prescription drug costs, and steps individuals can take to ensure they are using their prescriptions safely and effectively.


About generic drugs

Generic or non-brand drugs comprise 45 percent of the prescription drug market. They have the same active ingredients as their name brand equivalents and cost 40 to 60 percent less.

Generics are generally known by their active ingredients rather than trademarked names. For example, ibuprofen, the active ingredient in Motrin, is now the name of Motrin’s generic equivalent. The original Motrin still exists—and costs more than $18 for a month’s supply of 400 mg pills. Generic ibuprofen costs $2.52 a month for the same.

How did the generic ibuprofen spin off of Motrin and why is it so much cheaper?

As long as a product is protected by patent, no other manufacturer can produce the same drug under another name. When the patent expires, after 17–20 years, any manufacturer is free to copy the formula and sell the drug under a generic name. Since no one company has a monopoly on a generic drug, market competition keeps prices low. Frequently, generic products are made by the same company, or a subsidiary of the same company, that makes brand-name products.

Another reason for their low price tags is that generics incur little or no research and development costs. The brand-name manufacturer already conducted the R&D prior to patenting the original drug. So the generic manufacturer does not have to recover those costs and can sell the drug at a much lower price than the original brand-name price.

The average retail price for all prescription drugs increased by almost 60 percent (from $23.68 to $37.38) between 1991 and 1998. According to the Kaiser Foundation, the average price for brand-name drugs increased 80 percent for that period, while generic drug prices increased by only 55 percent.

Generic drugs are comprised of the same active ingredients as their brand-name counterparts and are available in the same dosages. To receive FDA approval, they must show that their ingredients are absorbed in the body at the same rate as with their brand-name counterparts and with no more side effects.

Pharmacists can legally suggest a generic substitution for an equivalent brand-name drug as long as the customer’s doctor has not written DAW (dispense as written) on the prescription.

The American Medical Association supports the use of generic drugs and most hospitals routinely use them. Naturally, insurers promote them, since wider use of generics could significantly lower prescription drug benefit costs. Many employee health plans offer members low co-pay amounts for generic drugs.

And for obvious reasons, formulary committees are keeping their eyes on expensive brand-name drugs whose patents will soon expire.