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**Testimony of Gail Shearer**

**Director, Health Policy Analysis**

**Washington Office**

**CONSUMERS UNION**

**Before the**

**Subcommittee on Human Rights and Wellness**

**House Committee on Government Reform**

**On**

**Medicare Prescription Drug Benefit:**

**Importance of Curbing Growth of Prescription Drug Expenditures**

**July 17, 2003**

### Summary: Consumers Union Testimony on 

**Medicare Prescription Drug Benefit**

Whether your preferred method of providing Medicare prescription drug
coverage is to expand the role of the private marketplace or to rely on
an expanded governmental role, lower growth of expenditures make it is
far easier to design a decent benefit. The rapid growth in prescription
drug expenditures, combined with a modest Medicare prescription drug
benefit, create a troubling reality for Medicare beneficiaries: If
prescription drug expenditures continue to increase at the same rate as
the past five years, many Medicare beneficiaries would find that their
out-of-pocket costs in 2007 are actually *higher* than they are today,
even with coverage as provided in H.R. 1. We do not believe that the
average Medicare beneficiary will view this legislation as providing
meaningful relief from the financial burden of prescription drug
expenditures. Specifically:

-   the average Medicare beneficiary (without prescription drug
    coverage) spending \$2,318 in 2003 would find that his or her
    out-of-pocket costs for prescription drugs (including the premium,
    deductible, co-payments, and "doughnut") are higher in 2007, despite
    the new prescription drug benefit, and would total \$2,954 (in real
    2003 dollars).

-   A person in the top third of prescription drug spending, with annual
    costs of \$3,000 in 2003, would find that his her out-of-pocket
    costs reach \$4,112 in 2007 (real 2003 dollars).

> Drug costs are increasing at an unacceptably high annual rate, forcing
> U.S. consumers to pay higher prices than consumers in Europe and
> Canada.

Congress should take aggressive steps to rein in the growth of
prescription drug expenditures, including:

-   Enact a Medicare prescription drug benefit that puts the full
    purchasing power of the federal government to work negotiating on
    behalf of consumers and taxpayers.

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-   Encourage the purchase of medicines that are the most
    cost-effective.

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-   Consider adopting strategies that have been successful in other
    countries and states to curb prescription drug expenditures without
    sacrificing quality.

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-   Speed generics to the marketplace.

If Congress were to enact a Medicare benefit that combines a modest
prescription drug benefit without aggressive cost containment, the end
result will be skyrocketing prescription drug expenditures, larger
federal budget deficits, and continued high profitability for the
pharmaceutical industry. The U.S. should establish the goal of achieving
greater value per prescription drug dollar as a top priority.
Restraining growth of prescription drug expenditures provides a win/win
situation for consumers and taxpayers.

### Consumers Union Testimony on 

**Medicare Prescription Drug Benefit**

Thank you for inviting Consumers Union[^1] to testify on the need to
curb the growth of prescription drug expenditures in the context of a
new Medicare benefit. As the Medicare prescription drug bills passed by
the House and the Senate are considered in the conference committee, a
central issue to the success or failure of the bill's ability to rein in
the spiraling expenditures of prescription drugs. This issue is
important for Medicare beneficiaries who seek relief from high
out-of-pocket costs for their medicines (including premium deductible,
cost-sharing, and uncovered costs).[^2] It is also crucial to taxpayers
who will pay a large share of the cost for this benefit.

**Whether your preferred method of providing coverage is to expand the
role of the private marketplace or to rely on an expanded governmental
role, lower growth of expenditures will make it far easier to design a
decent benefit.** Lower growth in prescription drug expenditures can
mean a lower burden on taxpayers, more restrained growth of federal
deficits, lower premiums for beneficiaries, and a more generous benefit
design. Clearly, restraining growth of prescription drug expenditures
provides a win/win situation for consumers and taxpayers.

**The benefit design of H.R.1,**

**combined with rapidly increasing prescription drug expenditures,**

**will leave consumers with high out-of-pocket costs**

The rapid growth in prescription drug expenditures, combined with a
modest Medicare prescription drug benefit in H.R. 1, create a troubling
reality for Medicare beneficiaries: If prescription drug expenditures
continue to increase at the same rate as during the past five years,
many Medicare beneficiaries will find that their out-of-pocket costs in
2007 will actually be *higher* than they are today, even with coverage
as provided in H.R. 1.

As the Medicare prescription drug bills moved through the House and the
Senate, we analyzed the anticipated out-of-pocket costs for consumers
with different prescription drug expenditure levels once the bills are
fully implemented in the year 2007. Out-of-pocket costs (including
premiums, deductibles, cost-sharing, and coverage gaps) are a key
measure of the financial burden\--or relief from financial hardship\--
that consumers will experience when a new benefit is available. For
purposes of our analysis, we assumed that the private marketplace would
respond as Congress intends it to: there will be coverage available at
the estimated average premium assumed in the legislation. We question
whether this will indeed be the case, but these issues are put aside for
the purpose of our report and this testimony. While out-of-pocket costs
are the key measure of burden for *consumers*, they tell only part of
the story, and it is important for Congress to also consider the actual
benefit paid, since this determines the ultimate cost to the federal
budget. The rate of growth of prescription drug prices is a key
determinant of both the projected out-of-pocket costs *and* the
projected level of benefits for Medicare beneficiaries.

In Consumers Union's report *Skimpy Benefits and Unchecked Expenditures:
Medicare Prescription Drug Bills Fail to Offer Adequate Protection for
Seniors and People with Disabilities,*[^3] we considered individuals who
have no prescription drug coverage in 2003. We focused on individuals at
the average level of drug expenditures, in the bottom, middle, and top
third of the distribution of health expenditures, and with catastrophic
expenditures. We took the total amount they would spend on medicines in
the year 2003, and then estimated what their total expenditures would by
in 2007 (the year after the program is implemented), assuming that
prescription drug expenditures increase at the same average rate that
they have increased over the last five years, 17 percent. We deflated
the 2007 expenditures for overall inflation, assumed to be the same as
it has been for the past 5 years (2.5 percent CPI), to express the
figure in real 2003 dollars.

We do not believe that the average Medicare beneficiary will view this
legislation as providing meaningful relief from the financial burden of
prescription drug expenditures. Our results were alarming:

-   The average Medicare beneficiary (without prescription drug
    coverage) spending \$2,318 in 2003 would find that his or her
    out-of-pocket costs for prescription drugs (including the premium,
    deductible, co-payments, and "doughnut") are higher in 2007, despite
    the new prescription drug benefit, and would total \$2,954 (in real
    2003 dollars).

-   A Medicare beneficiary with relatively low expenditures in 2003 of
    \$500 (i.e. the bottom third of spending) would find his or her
    out-of-pocket payments for prescription drugs are \$790 in 2007
    (real 2003 dollars).

-   A beneficiary in the middle third of spending has prescription costs
    of about \$1,500 in 2003, and would find that his or her
    out-of-pocket spending for prescription drugs is \$1,566 in 2007
    (real 2003 dollars).

-   A person in the top third of prescription drug spending, with costs
    of \$3,000 in 2003, would find that his her out-of-pocket costs
    reach \$4,112 in 2007 (real 2003 dollars).

-   A person with prescription drug expenditures in the catastrophic
    range, \$6,000 in 2003, would face reduced out-of-pocket spending of
    \$4,120 in 2007 (real 2003 dollars).

We tested to see how sensitive our findings were to the assumed rate of
growth of prescription drug expenditures, and changed the assumed rate
of growth from the recent level (17 percent) to a more moderate level of
12 percent per year. If prescription drug growth moderates from
historical levels to 12 percent per year, then the average Medicare
beneficiary will face out-of-pocket costs in 2007 of approximately the
same level as those of 2003, even after enactment of a Medicare
prescription drug benefit (\$2,318 in 2003; \$2,323 in 2007).

# 

# Drug Costs are Increasing at an Unacceptably High Annual Rate 

# forcing U.S. Consumers to Pay Higher Prices 

# than Consumers in Europe and Canada[^4]

The fundamental problem that will continue to drive up consumers'
out-of-pocket costs *and* taxpayer costs (to fund a future Medicare
prescription drug benefit) is the unrestrained double-digit annual
increase in prescription drug expenditures. Prescription drug
expenditures (which include both price increases and utilization
changes) have been increasing at an annual rate of about 17 percent.[^5]
**2001 marked the seventh consecutive year of double-digit expenditures
growth for prescription drugs**.[^6] The average consumer uses ­­­10.8
prescription drugs per year. Americans spent \$122 billion on
prescription drugs in 2000, and \$142 billion in 2001.[^7] Projections
for 2002 and future years are considerably higher.[^8] Prescription drug
spending represents about 10 percent of health care spending.[^9] On
average, Medicare beneficiaries use 28.5 prescriptions per year, and
this number is expected to increase to 38.5 by 2010.[^10] Just last
week, Families USA reported that the prices of the 50 drugs most
frequently used by the elderly increased at 3.4 times the rate of
inflation in 2002.[^11]

We can benefit from experiences of other countries that have more
successfully addressed the challenge of reining in prescription drug
expenditures without sacrificing quality or efficacy. When New Zealand
introduced a system of reference pricing in 1993, prescription
expenditures had been increasing at a rate of 10 to 20 percent a year.
With reference pricing, the rate of increase slowed and stabilized to
only 3 percent per year since the mid-1990s.[^12] (As described below,
reference pricing is a pricing structure that bases prices paid for
drugs on the comparative effectiveness of various medicines. It rewards
the manufacturers of cost-effective medicines.)

Lessons can also be learned from recent state efforts to get more "bang"
for the prescription drug buck. Michigan, for example, began to phase-in
its preferred drug list (which requires prior authorization for drugs
not on the list) in February 2002. Within four months, well over 90
percent of prescriptions for drugs of most therapeutic categories were
from the preferred list. Average weekly pharmacy cost per claim (in
Medicaid fee-for-serve) was cut by \$3.39, a reduction of 7 percent from
projected costs.[^13]

Oregon has done pioneering work in conducting intense public reviews of
the scientific evidence regarding the cost-effectiveness of medicines
for various therapeutic drug categories, and has used these reviews as
the basis for its preferred drug lists in Medicaid. When the Oregon
Health Sciences University and the Oregon Health Resources Commission
reviewed opiods for treatment of non-cancer pain, they determined that
there was insufficient evidence to draw any conclusions about the
comparative effectiveness of different medications such as Oxycontin and
morphine sulfate (LA). After this finding, sales of the preferred
generic and benchmark drug for this category (morphine sulfate)
increased by 20 percent.[^14]

A recent AARP International Forum on Prescription Drug Policy[^15]
showcased the United States' costly failure to address the issue of
making prescription drugs affordable to all. Among the facts presented
by experts from around the world were:

-   U.S. drug prices are the highest by far when compared with prices in
    European countries, ranging (for a 5-year average) from 67 to 143
    percent higher than European countries (France, Germany, Italy,
    Netherlands, Spain, Austria, Belgium, and Finland) (Paul Kanavos)

-   Prices paid for patented drugs in 2001 were 69% higher in the U.S.
    than the prices paid in Canada (Bob Nagakawa)

-   European countries have used a wide range of techniques to curb
    prescription drug expenditures, with an emphasis on attaining
    "value-for-money" for their prescription drug expenditures and
    experimenting with policy changes to curb prices. Techniques
    include: practice guidelines; encouragement of generics;
    prescription audits; reference pricing; limits on prices for me-too
    drugs; taxes on promotion expenditure; developing a market for
    parallel imports; and fixed or revenue budgets for the industry
    (Paul Kavanos)

# Steps that Congress should take to rein in growth of

**prescription drug expenditures**

Congress could provide substantial relief to consumers and taxpayers
alike if it took aggressive steps to curb the growth of prescription
drug expenditures. In an effort to maximize benefits and minimize
financial burden on beneficiaries, Congress should adopt a two-prong
policy: it should enact legislation that would rein in prescription drug
expenditures, and it should build a prescription drug benefit into
Medicare. If Congress were to enact a Medicare benefit that combines a
modest prescription drug benefit without aggressive cost containment,
the path it seems to be on, the end result will be skyrocketing
prescription drug expenditures, larger federal budget deficits, and
continued high profitability for the pharmaceutical industry. As noted
above, other countries have aggressively pursued creative policy-making
to get more bang for their prescription drug Euro or Pound. The U.S.
should establish the goal of greater value per prescription drug dollar
as a top priority. Other countries have devised policies that curb
expenditures without sacrificing quality of care; the U.S. should learn
from their experiences.

Some of the steps that Congress could take to protect taxpayers at the
same time that it protects consumers include:

1.  **Structure the new Medicare prescription drug benefit in a way that
    puts the full purchasing power of the federal government to work
    negotiating on behalf of consumers and taxpayers.**

We can learn a lot from the experience that the federal government had
in negotiating a low price for CIPRO with Bayer. While there was
criticism that the agreement allowed Bayer to make an extraordinary
profit, according to a press release issued by the Department of Health
and Human Services, HHS was to pay 95 cents per tablet (with options to
buy additional supplies at 85 cents and 75 cents) compared with a
previously discounted price of \$1.77 per tablet.[^16] This was at a
time that the average wholesale price of the drug was \$4.67, according
to the Wall Street Journal. Measured against the average wholesale
price, the prices negotiated by DHHS represent a discount of 80 to 84
percent. This reduction in price came at a time of national emergency
and concern on the part of Bayer of any appearance of profiteering at
the time of crisis, but nevertheless it sets the parameters of what can
be achieved through negotiations by the federal government.

A report released earlier this week by U.S. PIRG also demonstrated that
the federal government has the ability to negotiate dramatically lower
prices when it sets this as a priority. The federal supply schedule
price is the price that the federal government pays for prescription
drugs for certain government employees and beneficiaries of federal
programs such as veterans and employees of the Department of Defense. A
U.S. PIRG survey found that uninsured consumers in various regions of
the United States pay prices 66 percent to 80 percent *higher* than the
federal supply price average.[^17]

Developments in the states also illustrate the potential of joining
together to expand purchasing power. Vermont, Michigan, and South
Carolina joined forces a little over a year ago to get favorable prices
for their combined pool of 1.5 Medicaid beneficiaries. A Vermont state
staffer recently reported that by joining together, the three states
have managed to save 25 to 50 percent more than they had saved
previously, when they implemented preferred drug lists separately.[^18]

The House bill's reliance on the participation of numerous private
insurance industry participants also rules out the possibility of
putting the purchasing power of the federal government to work on behalf
of consumers and taxpayers. Individual companies, each with several
hundred thousand to several million enrollees, will not have the
leverage to negotiate the deep discounts that would be achievable by the
federal government. The House and the Senate bills actually include
language that prohibits the federal government from negotiating low
prices for prescription drugs for Medicare beneficiaries (other than for
the fallback provision in the Senate bill).[^19]

2.  **Increase the "bang for the buck" for taxpayer and consumer
    prescription drug dollars by encouraging the purchase of medicines
    that are the most cost-effective (as opposed to the most heavily
    advertised).**

Neither the House nor the Senate bills incorporated a provision that
could have dramatically increased the information available to the
public about the comparative effectiveness of different medicines.
Bipartisan legislation introduced by Congressman Allen and Congresswoman
Emerson would provide a source of evidence-based information about the
comparative effectiveness of drugs. H.R. 2356, the "Prescription Drug
Comparative Effectiveness Act of 2003," would authorize the National
Institute of Health and the Agency for Healthcare Research and Quality
to conduct research and studies in order to provide doctors and the
public with valid, evidence-based information about various medications.
This amendment builds on a model that has been developed in the state of
Oregon to free state governments and consumers from reliance on often
misleading direct-to-consumer advertising for their information about
the effectiveness of prescription drugs. It replaces biased information
with scientific, evidence-based information. The Allen/Emerson amendment
was rejected by the House Rules Committee.

Senator Clinton offered a similar amendment to the Senate bill,
amendment number 1000, and this was defeated in the Senate. It is
difficult to understand why both the House Rules Committee and the
Senate would reject the development of objective, scientific information
that would help accomplish more cost-effective prescription drug
expenditures. We note that the House accepted a more modest but related
amendment (offered by Congressmen Bereuter) as part of the Labor/HHS
appropriations bill on July 10, 2003, and we urge you to work to keep
this provision in the final appropriations bill.

Better evidence-based information in the public domain is vitally needed
in the prescription drug marketplace to make it possible to get better
value for our prescription drug dollars. This type of information would
make it possible for consumers to achieve savings that they now can get
by buying drugs from Canada. It would free consumers from the biased
information that comes to them over the airways and in magazines in
direct-to-consumer (DTC) advertising.[^20] It would also help doctors by
providing them with information about cost-effectiveness of drugs and
decrease their reliance on marketing information provided by the
pharmaceutical industry. When it comes to drugs, newer isn't necessarily
better ... but it is likely to be more expensive and more heavily
advertised.

3.  **Consider adopting strategies that have been successful in other
    countries to curb prescription drug expenditures without sacrificing
    quality.**

While the basic research (as outlined above) is the first essential
step, the next logical step is to design a cost-sharing structure that
provides consumers with incentives to use the most cost-effective
medication. Private insurance companies are increasingly using
tiered-copayments to encourage enrollees to use relatively low-cost
generics, or alternatively drugs that are on a "preferred drug list."
Many countries have successfully lowered their expenditures by adopting
"reference pricing" systems. With reference pricing, independent
researchers study the comparative effectiveness of alternative drug
therapies (e.g., Vioxx, Celebrex, or ibuprofen for arthritis), select
the most effective treatments, negotiate low prices, and develop
preferred drug lists that provide the most effective drugs at the lowest
cost, thereby maximizing the cost-effectiveness of health spending.

Research shows that reference-based pricing in British Columbia has
achieved substantial savings. For example, after implementation of
reference pricing, there was a 29 percent decline in the use of
higher-priced ACE inhibitors (which control high blood pressure), with
savings to the government and consumers of \$6.7 million in the first 12
months, without a change in the overall utilization of
antihypertensives.[^21]

4.  **Speed generics to the marketplace.**

Perhaps the easiest "cost-effectiveness" case can be made for increasing
the use of generic drugs instead of high-priced brand drugs, whenever
generics are available.[^22] Fortunately, both the House and the Senate
Medicare prescription drug bills include provisions that would close the
loopholes that delay the introduction of generics. In the past, the
Congressional Budget Office has scored the potential savings of similar
provision to be \$60 billion over ten years.[^23] This provision is
important, and benefits not only Medicare beneficiaries but all
consumers.

## Conclusion

The steps outlined above merely scratch the surface of policy options
that Congress should consider to ensure that the prescription drug
marketplace better serves *all* consumers -- not only those fortunate
enough to have prescription drug coverage or the means to pay the high
prices charged for medicines that can save lives and dramatically
improve the quality of life. We urge you to call on experts in this
country and from around the world to help you shape options this year
and in future years that will allow *all* consumers to afford the
medications that they desperately need.

There is an urgent need for Congress to take steps immediately to rein
in the growth of prescription drug expenditures. By using taxpayer and
consumer dollars to buy more cost-effective medications, billions of
dollars could be saved. **If our nation could cut the rate of growth of
these expenditures, we would create a win for consumers and a win for
taxpayers**. If we fail to rein in the growth of expenditures, any new
Medicare prescription drug benefit will be hard-pressed to provide
meaningful relief to Medicare beneficiaries, whose out-of-pocket costs
will continue to grow. Congress would be breaking a promise to
beneficiaries, and it will fail to meet their expectations that a new
benefit will provide much needed relief.

[^1]: Consumers Union is a nonprofit membership organization chartered
    in 1936 under the laws of the State of New York to provide consumers
    with information, education and counsel about goods, services,
    health, and personal finance. Consumers Union\'s income is solely
    derived from the sale of *Consumer Reports*, its other publications
    and from noncommercial contributions, grants and fees. In addition
    to reports on Consumers Union\'s own product testing, *Consumer
    Reports,* with approximately 4.5 million paid circulation, regularly
    carries articles on health, product safety, marketplace economics
    and legislative, judicial and regulatory actions that affect
    consumer welfare. Consumers Union\'s publications carry no
    advertising and receive no commercial support.

[^2]: This testimony and our report focuses on those consumers who have
    no coverage for medicines in 2003. The impact of HR 1 on those with
    coverage through past employers, through medigap, or through
    Medicaid is different and depends on a number of factors including
    whether employers cut coverage. The Senate and House bills differ in
    how they treat dual eligibles with both Medicaid and Medicare
    coverage. Consumers who currently have medigap drug coverage (paying
    extra premiums higher than anticipated benefits) will view the
    benefits of the legislation differently than those without any
    coverage today.

[^3]: This report is posted at our website, www.consumersunion.org.

[^4]: See also, "Backgrounder: The Pharmaceutical Industry and Consumers
    -- Key Factors Affecting Affordability of Prescription Drugs,"
    Consumers Union, February 2003, available at www.consumersunion.org.

[^5]: Page 5, *Prescription Drug Trends: A Chartbook Update,*
    Sonderegger Research Center, School of Pharmacy, University of
    Wisconsin -- Madison, and The Henry J. Kaiser Family Foundation,
    November 2001. The National Institute for Health Care Management
    (NIHCM) estimated that retail spending on prescription drugs grew at
    an 18% rate in 1998, a 19% rate in 1999 and 2000, and a 17% rate in
    2001. *Prescription Drug Expenditures in 2001: Another Year of
    Escalating Costs*, NIHCM Foundation, May 6, 2002.

[^6]: Levit, Katharine et.al. "Trends in U.S. Health Care Spending,
    2001", *Health* Affairs, vol. 22, no. 1, January/February 2003, p.
    155-156; Steinbrook, Robert, M.D. "The Prescription Drug Problem,"
    *New England Journal of Medicine*, Vol. 346, No. 11, March 14, 2002,
    p. 790.

[^7]: "Inflation Spurs Health Spending in 2000," *Health Affairs*,
    Volume 21, no. 1, January/February 2002, p. 173.

[^8]: IMS Health estimates that expenditures were \$192 billion in 2002.
    Robert Langreth, "The New Drug War," *Forbes*, March 31, 2003.

[^9]: "States and Insurers Find Prescriptions for High Drug Costs,"
    *Wall Street Journal*, Sept. 11, 2002.

[^10]: Medicare Current Beneficiary Survey.

[^11]: "Out-of-Bounds: Rising Prescription Drug Prices for Seniors,"
    Families USA, July 2003.

[^12]: "Post-Election Briefing on the Minister of Health," August 2002,
    Pharmaceutical Management Agency (PHARMAC), New Zealand, p. 24.
    Available at <http://www.pharmac.govt.nz/download/2002_PEB.pdf> .

[^13]: Remarks of James K. Haveman, Jr., Director, Michigan Department
    of Community Health, "Michigan's' Pharmaceutical Best Practices
    Initiative," October 10, 2002. Available at www.oregonrx.org.

[^14]: Oregon Health Resources Draft Report and Remarks of Alan Bates
    D.O., Oregon's Evidence-Based Approach to Prescription Drugs.
    Remarks of Governor John A. Kitzhaber, M.D. Oregon Drug Conference,
    October 11-12, 2002. Available at www.oregonrx.org.

[^15]: Information about the presentations is available at
    http://www.kaisernetwork.org/health_cast/hcast_index.cfm?display=detail&hc=882.

[^16]: HHS, Bayer Agree to Cipro Purchase, press release, United States
    Department of Health & Human Services, October 24, 2001.

[^17]: P. 11, "Paying the Price: A 19-State Survey of the High Cost of
    Prescription Drugs," U.S. PIRG Education Fund, July 2003.

[^18]: Savings from Multi-State Pools Described in Presentation to
    Legislative Drug Group," BNA's Health Care Policy Report, July 7,
    2003.

[^19]: *See* H.R. 2473, Title VIII, Medicare Benefits Administration.

[^20]: For more information about misleading DTC advertising, see *Free
    rein for drug ads? Consumer Reports*, February 2003.

[^21]: Sebastian Schneeweiss et.al., "Impact of Reference-Based Pricing
    for Angiotensin-Converting Enzyme Inhibitors on Drug Utilization,"
    [CMAJ]{.underline}, March 19, 2002, 166 (6), p. 737.

[^22]: For more information on generics, see "The stalling game:
    Sweetheart Deals and Patent Extensions Keep Lower-Cost Generic Drugs
    from Consumers," Consumer Reports, July 2001.

[^23]: CBO has not yet scored HR 1 as passed by the House, and we do not
    have an estimate of the savings from this year's generics provision.
    It is likely to be lower than \$60 billion because of some
    regulatory steps taken administratively.