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S. HRG. 107–644

ERRATA

COMPARATIVE PRICING OF PRESCRIPTION DRUGS

SOLD IN THE UNITED STATES AND CANADA

AND THE EFFECTS ON U.S. CUSTOMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN 

COMMERCE AND TOURISM

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

SEPTEMBER 5, 2001

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(1)

[Errata] 

This errata sheet is being assigned because the hearing title was 

incorrect. The correct hearing title is Comparative Pricing of Prescription Drugs Sold in the United States and Canada and the Effects on U.S. Consumers 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

85–319 PDF 2003

S. HRG. 107–644

COMPARATIVE PRICING OF PRESCRIPTION DRUGS

SOLD IN THE UNITED STATES AND CANADA

AND THE EFFECTS ON U.S. CONSUMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN 

COMMERCE AND TOURISM

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

SEPTEMBER 5, 2001

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

JOHN MCCAIN, Arizona 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

MARK BUSE, Republican Staff Director 

JEANNE BUMPUS, Republican General Counsel 

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE

AND TOURISM 

BYRON L. DORGAN, North Dakota, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

RON WYDEN, Oregon 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

PETER G. FITZGERALD, Illinois 

CONRAD BURNS, Montana 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

(III)

C O N T E N T S 

Page 

Hearing held on September 5, 2001 ....................................................................... 1

Statement of Senator Dorgan ................................................................................. 1

Statement of Senator McCain ................................................................................. 7

WITNESSES

Giroux, Stephen L., Community Pharmacist, Middleport Family Health Center, and Member of the National Community Pharmacists Association, accompanied by John M. Rector, Senior Vice President for Government Affairs and General Counsel to NCPA ................................................................... 62

Prepared statement .......................................................................................... 65

Hubbard, William K., Senior Associate Commissioner for Policy, Planning 

and Legislation, Food and Drug Administration, accompanied by David 

Horowitz and Matthew Eckel .............................................................................. 8

Prepared statement .......................................................................................... 10

Jeffords, Hon. James M., U.S. Senator from Vermont ......................................... 3

Marvin, John, Member of the Alliance for Retired Americans ............................ 32

Report by the Alliance for Retired Americans ............................................... 33

Prepared statement .......................................................................................... 52

Powell, Marjorie E., Assistant General Counsel, Pharmaceutical Research 

and Manufacturers of America ........................................................................... 55

Prepared statement .......................................................................................... 56

Sager, Ph.D., Alan, Professor of Health Services and Co-Director, Health 

Reform Program, Boston University School of Public Health .......................... 68

Prepared statement .......................................................................................... 71

Stabenow, Hon. Debbie, U.S. Senator from Michigan .......................................... 5

Wennar, Elizabeth A., President and Chief Executive Officer, United Health 

Alliance ................................................................................................................. 26

Prepared statement .......................................................................................... 28

(1)

COMPARATIVE PRICING OF PRESCRIPTION 

DRUGS SOLD IN THE UNITED STATES AND 

CANADA AND THE EFFECTS ON U.S. CONSUMERS 

WEDNESDAY, SEPTEMBER 5, 2001

U.S. SENATE, 

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE

AND TOURISM, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:15 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Byron Dorgan, presiding. 

Staff members assigned to this hearing: Moses Boyd, Democratic 

Chief Counsel; David Strickland, Democratic Counsel; Carlos 

Fierro, Republican Senior Counsel; and Ken Nahigian, Republican 

Counsel. 

OPENING STATEMENT OF HON. BYRON DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. The hearing will come to order. This is a hearing of the Subcommittee on Consumer Affairs, Foreign Commerce 

and Tourism of the Senate Commerce Committee. I apologize for 

my delay. I was in a leadership meeting that began earlier this 

morning, and I’m sorry I’m late. 

To begin, I would like to make a brief comment after which I will 

call on my colleague Senator Jeffords, who I think will also introduce someone he sponsors here today, followed by Senator 

Stabenow. 

Let me describe the purpose of this hearing. The Congress has 

grappled with the question of the cost of prescription drugs for 

some time. Many of us feel, and many Americans feel for that matter, that the cost of prescription drugs has risen so rapidly that it 

is very difficult for some who need prescription drugs to be able to 

have access to those drugs. We are talking about a range of issues, 

including providing a prescription drug benefit through the Medicare program and other issues. 

One of the issues that a number of us have worked on, Senator 

Jeffords, myself, Senator Stabenow and others, is to allow access 

to lower priced prescription drugs in other countries for the American consumers. We have enacted legislation in Congress that 

would allow pharmacists and licensed distributors to go to other 

countries and access a lower price prescription drug, the identical 

2

drug, the same pill put in the same bottle, produced in the same 

FDA-inspected plant, bring it back to this country and pass the 

savings along to the consumers. 

The legislation had an amendment attached to it that said it 

must, if implemented, demonstrate cost savings and that it be safe. 

Both the previous Administration and this Administration decided that they could not or would not implement this legislation. 

We will look at reasons for that during this hearing. I happen to 

disagree strongly with both the previous Administration and this 

Administration when they say there could not be demonstrated cost 

savings. In my judgment, that is false on its face. There are clearly 

cost savings demonstrated every day by those Americans who cross 

the border into Canada to access the identical prescription drug for 

a substantially lower price than they could acquire it for in this 

country. 

The issue of safety is in my judgment equally specious. I do not 

think that, as an American, we will discuss some of that this morning, but we are holding a hearing to evaluate this from several perspectives. We need to get this done, and having the previous Administration and this Administration refuse to implement this law 

is a setback but it is not terminal. 

Let me give you some examples of the price disparity. This is 

Zocor. The head football coach of the Atlanta Falcons talks about 

Zocor on television commercials nearly every day. He talks about 

how his life has improved because of Zocor. Zocor is a cholesterol 

lowering drug. It is purchased in this country for $3.82 per tablet, 

20 milligrams, so it was $229.00 for this bottle. In Canada, for exactly the same pill purchased, made by the same company, in the 

same plastic bottle, the cost is $1.82 per tablet. The difference: the 

American consumer pays more than twice as much, no other difference. 

This is Zoloft, commonly used for depression: the cost is $2.34 for the American consumer, $1.28 for the Canadian consumer. 

This medicine is Norvasc, used for high blood pressure. When 

purchased in North Dakota, $1.25 per tablet; when purchased in 

Canada, 90 cents per tablet. 

I went to Emerson, Canada one day and took with me a number 

of North Dakotans, one of whom was Sylvia Miller, a wonderful 

lady from Fargo, North Dakota. Sylvia Miller has diabetes, heart 

problems and emphysema. She takes seven different medications 

every day for her various ailments. Sylvia told me she receives 

$4,700 a year in Social Security benefits and she pays $4,900 a 

year for prescription drugs. On the way to Canada she said, 

‘‘Things don’t add up, do they?’’ But in Canada, she was able to cut 

her monthly prescription drug bill in half. The same FDA-approved 

medicine produced in the same plant. 

Now, the question is, why should Sylvia, at age 70, have to go 

to Canada to access these cheaper drugs. In my judgment, she 

should not be required to do that. So legislation we have drafted 

would allow pharmacists to purchase in Canada and bring those 

drugs back and to pass those savings along to the American consumers. We have been stymied, during both the previous Administration and this Administration, by HHS refusing to implement it, 

and we will talk a fair amount about that today in this hearing. 

3

That is the purpose of the hearing. Let me say again, prescription drug costs are increasing dramatically, 16, 18, 19 percent a 

year, year after year after year. Price inflation and increased utilization are the causes. 

The fact that we have suffered setbacks from two Administrations who have refused to implement this legislation should not 

persuade people we are going to quit. Senator Jeffords and I offered 

this legislation in the Senate, and I would stay from my standpoint, and I assume from his, that we intend to continue this until 

we get it done. 

And frankly, my goal is not to force people to go to Canada to 

access cheaper drugs. My goal is that when we allow that to happen, the pharmaceutical industry will be forced to reprice their 

pharmaceutical products in this country so that the American people are not paying the highest prices for prescription drugs of any 

other consumers in the entire world. That is the goal. 

So, that is the purpose of this hearing. I appreciate those who 

have made an effort to be here today, and let me call first on Senator Jeffords. Senator Jeffords, let me say how much I appreciate 

your leadership on this legislation in the Senate. You have worked 

hard and long on this, and I know that this is the first chapter, 

that we are going to continue and we are going to complete it. Senator Jeffords. 

STATEMENT OF HON. JAMES M. JEFFORDS,

U.S. SENATOR FROM VERMONT 

Senator JEFFORDS. Absolutely, and I can assure you that I have 

the same beliefs that you have and that we must proceed, and 

there is no reason why we cannot with this one. I want to thank 

you for holding the hearing and for letting me take a few moments 

to talk as you have about the unacceptable high cost of prescription 

medicine facing virtually all American consumers. Those high 

prices are even more unacceptable when they are compared to the 

relatively low prices paid by consumers of other industrialized nations. 

I want to also applaud the leadership you and our friend Senator 

Stabenow have continued to show on this important issue. The 

hearing today is especially important because it keeps all of us focused on finding ways to reduce the high cost of medicine and making it more available to our citizens. 

You will hear more about the pricing disparities from a number 

of witnesses today, but I want to take a minute to welcome one in 

particular. Beth Wennar, who is the President of the United Health 

Alliance in Bennington, Vermont, has been at the forefront of finding policy solutions to high prices experienced by Vermonters. 

Beth’s experience and expertise has been invaluable to me in framing both the extent of the problem and the potential solutions for 

addressing it, and I urge the Committee to pay close attention to 

this. 

Last year we were able to enact the Medical Equity and Drug 

Safety, or MEDS Act. It was designed to allow safe FDA-approved 

medicines that are manufactured in plants approved by FDA and 

sold abroad to be purchased by American pharmacists and wholeVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
4

salers to reimport them to the United States. We worked closely 

with the FDA. 

I want to emphasize that. We worked closely with the FDA in developing this law. We sought the agency’s advice about provisions 

which were necessary to insure safety and quality of these medicines. We accepted that advice and included stringent controls in 

the MEDS Act, but now we are essentially being told that the goal 

posts have moved. We are now being told that what FDA then said 

would have worked to ensure safety now no longer would work, 

that the controls FDA advised us to include in the MEDS Act are 

now inadequate. 

Mr. Chairman, I can accept that the MEDS Act was not flawless. 

I can accept that there were some disagreements about whether 

and how it would work, but few doubted the notion that it should 

work. No one argued that the Americans should continue to pay 

prices higher than those of other consumers in other countries. 

President Clinton supported and signed the MEDS Act, and then 

Presidential Candidate George Bush supported it during the campaign. This is not a partisan issue. It is supported by Democrats, 

Republicans and Independents in the House and Senate, all of 

whom are looking for the right answers. 

So today I would argue that the FDA must stop telling us what 

will not work and must now tell us what will work. I hope that 

your witness from the FDA can begin to tell us what is necessary, 

what conditions are needed to make this program available to our 

citizens. We can then take that advice, write the necessary law and 

get to the matter at hand, to insure that Americans have better access to more fairly priced medicine. 

Mr. Chairman, I apologize, but I have to attend another Committee hearing that is examining the issue of stem cell research, 

but before I go, I want to again comment you and Senator 

Stabenow for your leadership on this issue, and thank you for holding this hearing. I know the Committee will listen closely to my 

friend and fellow Vermonter, Beth Wennar, and I will look forward 

to hearing the answers FDA is prepared to share with you about 

how to move forward with this program, and we must move forward. Thank you, Mr. Chairman. 

Senator DORGAN. Senator Jeffords, again, let me say thanks for 

your leadership. You offered the amendment, I was proud to join 

you in the Senate, that actually launched the effort to get this in 

law, and we have been thwarted with respect to its administration 

at this point, but we will get it done. Your leadership is very important on this, and I deeply appreciate it. 

Let me also say that, Senator, you are welcome to go to your 

other hearing. 

Senator JEFFORDS. Thank you. 

Senator DORGAN. Senator Stabenow, you of course were a leader 

in the U.S. House on this issue, and we are delighted that you have 

now joined us in the Senate. As I indicated to Senator Jeffords, I 

look very much forward to working with you on this issue. Although the Administration has not seen fit to implement this legislation, we will get this done and, in my judgment, the sooner the 

better. I feel more confident in getting it done in the Senate with 

you here, and we very much appreciate your efforts. 

5

STATEMENT OF HON. DEBBIE STABENOW,

U.S. SENATOR FROM MICHIGAN 

Senator STABENOW. Thank you, Mr. Chairman. I very much appreciate the opportunity to testify today on an issue that can dramatically lower health care costs for all of our citizens, and that is 

the issue of allowing Americans to purchase safe FDA-approved 

prescription drugs from other countries. 

I want to particularly thank you, Mr. Chairman, for your leadership, as well as Senator Jeffords. You have been the leaders in the 

Senate, I am very proud to have the opportunity to be in the Senate and to join you in that effort. As you indicated, I was involved 

in cosponsoring this legislation in the House of Representatives 

and this has been an issue that has been very very important to 

people that I represent in Michigan. 

It affects every American family, particularly our seniors, who as 

we know, use the majority of prescription drugs. Frankly, Mr. 

Chairman, too many seniors got up, sat down at the kitchen table, 

and have to decide do I eat today, do I pay the utility bill, or do 

I take my medicine. I know you join me in saying that this is simply not acceptable in the United States of America. 

I find it ironic, Mr. Chairman, that in an era of free trade, that 

we have effectively erected barriers on our borders that force our 

citizens in the United States to pay prices for prescription drugs 

that are often twice those paid by our neighbors even in Canada, 

as well as around the world. 

Particularly coming from Michigan, we look at the Canadian border, it is a 5-minute trip across the bridge or by tunnel, and there 

is such a dramatic difference in price, it is absolutely unacceptable. 

As you may remember, during my Senate campaign last year I 

organized bus trips to Canada, took a number of seniors who went 

to physicians and pharmacies in Canada to be able to demonstrate 

the differences in prices. It was a quick 5-minute trip, and we saw 

night and day price differences, and I would like to share those 

with the Subcommittee at this time. 

Mr. Chairman, you have spoken to some of the prescriptions as 

well that we have, but in our trips, we found the differences in 

Michigan, Zocor, a drug to reduce cholesterol, cost $109.73 for 50 

5-milligram tablets. In Canada the exact same prescription cost 

just $46.17, a 138 percent difference in price. 

In Michigan, Prilosec, a drug to treat ulcers, cost $115.37 for 20 

20-milligram tablets. In Canada the same prescription cost just 

$55.10, a 109 percent difference in price. 

In Michigan, Procardia XL, a drug to treat heart problems, cost 

$133.36 for 100 30-milligram tablets. In Canada the same prescription cost just $74.25, an 80 percent difference in price. 

And there are certainly, Mr. Chairman, other examples that are 

on the chart. This literally is the difference between a senior being 

able to eat or be able to pay the utility bill, pay the telephone bill, 

pay the rent, pay the mortgage, and I found as I was at home this 

month again, over and over again, the No. 1 issue people want to 

speak about is the struggle that they are having being able to pay 

the high cost in the United States of prescription drugs. 

6

All of these drugs were manufactured in the United States and 

met all the FDA requirements for manufacturing, safety and purity. 

Furthermore, we should note that Americans paid for much of 

the research that led to the breakthroughs in many of these prescription drugs. I support the R&D tax plan, the efforts at federal 

labs through NIH to provide critical research and funding for that 

research, and yet we in America pay twice as much as anyone else 

around the world while supporting this research. It only makes 

sense that Americans should get the best possible prices on these 

life saving medicines as a return on their investment. 

Mr. Chairman, as you know, the very first bill I introduced into 

the Senate as the junior Senator from Michigan was a bill that 

would eliminate this health care tariff, and it builds on the legislation that you and Senator Jeffords introduced into the Senate, the 

amendment that was passed. 

We have looked at concerns raised by the previous and current 

Secretaries of Health and Human Services, and made some corrections to address what we felt were legitimate issues that could be 

put into this bill to make it crystal clear that there are no safety 

issues, and clearly there is a price savings. 

I welcome anyone who does not believe that there is a price savings to join me in Michigan, it is a beautiful time in the fall, the 

leaves are turning, we welcome it, and I would be happy in a 5-

minute trip across the border to show you the difference. 

Mr. Chairman, I look forward to working with you, to working 

with Senator Jeffords, members of the Committee, and Senator 

Wellstone I know is very involved in legislation as well, to make 

sure that we can finally address this issue. The problem is clear 

and frankly, we have an immediate solution at hand. I know that, 

Mr. Chairman, you join me in a commitment to modernizing Medicare for prescription drugs, but I also know that in the Budget 

Committee that we are going to have a difficult struggle within the 

confines of this budget this year to really put forward the comprehensive prescription drug benefit that we all want. 

And most importantly, that we take the time to do that, time our 

seniors and families do not have. We need to have the same sense 

of urgency in our Congress that our seniors and our families have 

at home when the are trying to pay for life saving medicines that 

they need. We can do something now that does not involve a large 

amount of dollars. We can do something immediately to lower 

costs, and I know Mr. Chairman, that you have that same sense 

of urgency that I have that this needs to be done immediately, and 

I look forward to working with you. Thank you again for providing 

this critical hearing. 

Senator DORGAN. Senator Stabenow, thank you very much. In 

my comments, I failed to mention that Senator Snowe and former 

Senator Slade Gorton also were actively involved in introducing 

and sponsoring legislation in this area. We appreciate your testimony and thank you for being with us. 

We are joined today by Senator McCain. Senator McCain, do you 

have a statement? 

7

STATEMENT OF HON. JOHN McCAIN,

U.S. SENATOR FROM ARIZONA 

Senator MCCAIN. Thank you, Mr. Chairman. I want to thank you 

for convening the hearing on the explosion of prescription drug 

prices. This is of critical importance, and I thank you for your decision efforts on this issue for several years now. 

I joined with my colleagues Senator Dorgan, and Senator Schumer in introducing a bill that would, among other things, streamline FDA approval of generic drugs by closing the loophole that allows brand name manufacturers to receive an automatic 30 month 

stay by simply filing a patent infringement suit against a generic 

manufacturer’s patent challenge or application. The bill would also 

prevent brand name manufacturers from using financial advantage 

to keep generic products from entering the market. 

Mr. Chairman, I think this is a multifaceted issue. I think there 

are a number of parts and pieces of legislation that have been introduced, but the issue of delaying generic drugs from entering the 

marketplace is an important part of this discussion. It is unconscionable on the part of both the patent drug manufacturers as 

well as the generic manufacturers that there are cases where a 

patenting drug company will pay a generic drug company not to introduce that product into the market. There are records of that, 

and they have also used various other legal tactics in order to delay 

entry as well. 

I think that is a fairly easy thing for us to at least make some 

fixes on, but I still have been unable to explain to my constituents, 

and I know you have the exact same situation in the north, why 

they can drive to Mexico and buy a prescription drug at considerably less cost than in the United States of America. I would like 

to ask our witnesses that question because I still do not get it. And 

frankly, nor do a lot of the seniors who live in my state who by a 

simple trip down to Mexico, can buy the exact same drug for sometimes half or less than half the price of its brand name counterpart. 

Thank you, Mr. Chairman. 

Senator DORGAN. Senator McCain, I share your concern about 

the issue of generics, and it does come to the same point, it is all 

about the price and pricing practices, in most cases the American 

consumers are paying the highest prices anywhere in the world. 

And your point about borders, if this truly is a global economy, 

then why doesn’t it work for ordinary folks to give them access to 

prescription drugs made in the same plant, inspected by the FDA? 

In short, why should Americans be prevented from crossing a border to access a prescription drug that was made in America, for a 

fraction of the cost that was charged in their retail outlet. Those 

are the right questions and that is why we are determined to do 

something about this issue. I appreciate your comments and support them. 

We have two panels today. The first consists of Mr. William Hubbard, Senior Associate Commissioner for Policy, Planning and Legislation of the FDA. Then we will have a second panel with five 

persons, and I will introduce them as we ask them to come forward. 

8

First let me welcome Mr. William Hubbard, Senior Associate 

Commissioner, Policy, Planning and Legislation of the Food and 

Drug Administration. Mr. Hubbard, thank you for joining us. Why 

don’t you proceed. 

STATEMENT OF WILLIAM K. HUBBARD, SENIOR ASSOCIATE 

COMMISSIONER FOR POLICY, PLANNING AND LEGISLATION, 

FOOD AND DRUG ADMINISTRATION, ACCOMPANIED BY 

DAVID HOROWITZ AND MATTHEW ECKEL 

Mr. HUBBARD. Thank you, Mr. Chairman. If I may, we are cluttering up the table here with drug samples, to complement those 

that you have. 

I would like to introduce my co-witnesses if I may, Mr. Chairman, David Horowitz, in charge of our compliance branch in the 

Center for Drugs, and Matt Eckel is in our counsel’s office. I, of 

course, have written testimony but, I won’t read that today. I will 

just make some comments. 

You are holding these hearings to examine drug pricing and 

while prices are not FDA’s responsibility, we agree with you that 

prices in other countries are a little lower than in the United 

States. As Alan Sager and others have pointed out, prescription 

drugs are sold in Canada and Europe for up to one half of the U.S. 

price. This is because most developed countries have controls on 

drug prices and the U.S. does not. We are the only major developed 

country that does not set such price limitations. 

It is also apparent that the patient paying cash pays more than 

those who are third party payers and who negotiate a lower price. 

Thus, folks like the elderly, who often lack drug insurance coverage 

and must pay cash for their prescriptions, are often hit the hardest, 

and I think for the Senators from areas with large rural populations, there is even more concern because the rural people get hit 

even harder than that because they don’t have the access to several 

competing pharmacies. 

So, clearly, your constituents’ needs here are real and significant, 

and we do not at all at FDA disagree with them. We have great 

sympathy for that. The question that gets asked of us as a drug 

safety regulatory agency, is whether we can find a way for patients 

to access these cheaper drugs if, in fact, they are clearly there. 

The answer unfortunately from our perspective is that Congress 

can change the law to let these drugs in, but only at the risk of 

lowering safety assurances for the drugs. The current drug regulatory system in the United States is highly protective. 

We believe, Mr. Chairman, that Congress got it right in 1938 and 

1962 when it set up a system that said that drugs had to be approved for a demonstrated safety and efficacy before marketing 

and, therefore, we have the safest and most technologically advanced drug system, in both development and manufacturing, in 

the world. 

The current system is fairly closed, it requires high standards of 

drug manufacturing. It utilizes a network of highly skilled pharmacists and other professionals to control the movement of these 

drugs, and it requires that imported drugs meet those same high 

standards. 

9

This system means that drug counterfeiting is a rare event in the 

United States, despite the fact that, worldwide, counterfeiting is 

endemic. In some countries, there are estimates that perhaps half 

of the drugs on the market are counterfeited. 

I will just give a few examples. These are counterfeit drugs that 

we found in FDA, and it is very very rare we find these. This is 

a recent one, an injectable called Serostim. One of these is counterfeit and one of these is real. If they weren’t marked as counterfeit 

and genuine, none of us in this room could tell the difference, no 

pharmacist could tell, no physician could tell. That is part of the 

problem. 

These particular drugs are hormones and they were brought in 

from overseas and introduced into the market here, and in the 

package are vials of a saline solution and a powder. You pull the 

saline solution into a syringe and then you inject it into the other 

ampule which contains the powder, and you shake it up to actually 

formulate the drug for the person. Well, the problem is the drug 

was counterfeited, and it may be pharmacologically effective, but 

the problem with this drug is that the saline solution was not sterile. It was contaminated with bacteria and endotoxins so using it 

would inject people with septicemia. 

So, this is the problem we worry about with counterfeiting. These 

are very very real counterfeiting issues, although they are, and I 

will repeat, they are rare in this country. 

Now these examples are drugs that people have bought on the 

Internet from other countries. 

This probably was bought by a weight lifter, it is a human 

growth hormone. This purports to be an Eli Lilly product. We have 

no idea whether that’s really an Eli Lilly product or not but it says 

it is. Then in other cases, we just have bags of pills. 

Now, we can look at some of these and try to determine what 

these are, but it is virtually impossible for any pharmacist or physician or anyone else to know what’s in these packages. 

This one apparently is a Roche product called Valium, or at least 

it’s marked that way. But we don’t know if it really is Valium or 

not, and of course Valium is a controlled substance and should not 

be sold in this country without a prescription. 

So, these products are coming in every day. We estimate that 

perhaps as many as two million of these small shipments are being 

purchased by American citizens every year. 

Senator DORGAN. Mr. Hubbard, sorry to interrupt you, but when 

you say these products, you’re not saying these products here, 

every day there is counterfeiting. When you are referring to these 

products, you are talking about products coming in from other 

countries. 

Mr. HUBBARD. Right. 

Senator DORGAN. You had been talking about counterfeit drugs, 

so I just don’t want people to misunderstand what you just said. 

Mr. HUBBARD. Right. We know that some of these are counterfeit. These that I have most recently displayed were ones we pulled 

out of the Dulles mail facility just yesterday. They come in every 

day, and we have no idea whether they’re counterfeit. We don’t 

know. 

10

And so, the FDA’s job is to make sure that when you go to your 

doctor and get a prescription and take it down to the pharmacy and 

get the drug, that you’re getting the real drug, a drug that will be 

safe, a drug that will treat your condition. Of course we believe in 

that, and I’m sure you believe in that too. 

The problem is, we have no way of insuring, when they’re coming 

in from these other countries in this way, to know whether they 

are the real drug or know whether they are safe, know where they 

are coming from, or know where they have been, or whether the 

drug may have been held in some sort of poor condition or in high 

heat, or cold, or it expired and was repackaged, or whatever. 

So while we understand the Senators’ concerns about drug 

prices, we think that opening the doors to these foreign drugs undermines the safety and protection that has served us so well, and 

that’s been the FDA’s concern because our job is safety, and the 

drug price issue is one that we feel ill suited to solve. Thank you. 

[The prepared statement of Mr. Hubbard follows:]

PREPARED STATEMENT OF WILLIAM K. HUBBARD, SENIOR ASSOCIATE COMMISSIONER

FOR POLICY, PLANNING AND LEGISLATION, FOOD AND DRUG ADMINISTRATION

Introduction 

Mr. Chairman and Members of the Committee, I am William K. Hubbard, Senior 

Associate Commissioner for Policy, Planning and Legislation, Food and Drug Administration (FDA or the Agency). I appreciate the opportunity to discuss our mutual concerns related to the importation of drugs into the United States. This topic 

encompasses a range of issues, including the importation by individuals of prescription drugs at land borders or through the mail; the introduction into the U.S. of controlled substances from foreign sources under the guise of personal importation; the 

potential introduction of counterfeit bulk drugs into the U.S. drug supply; and the 

purchase of drugs from foreign sources over the Internet. Let me begin by discussing 

one of our greatest challenges in this area. 

Personal Importation of Drugs Through the Mail 

The amount of prescription drugs for personal use imported through the mail has 

increased in recent years. According to testimony by the U.S. Customs Service (Customs) before the Government Reform Committee in May of last year, seizures of 

parcels containing scheduled or controlled substances at international mail facilities 

increased by 450 percent in FY 1999, primarily due to drug sales over the Internet. 

We estimate that approximately two million parcels containing FDA-regulated products for personal use enter the U.S. each year through international mail facilities 

that Customs could set aside for FDA review for possible violations of the Federal 

Food, Drug, and Cosmetic (FD&C) Act. This estimate is based on an extrapolation 

of data obtained during a pilot project conducted at the international mail facility 

in Carson, California (see below). 

Under the FD&C Act, unapproved, misbranded, and adulterated drugs are prohibited from importation into the U.S., including foreign versions of U.S.-approved 

medications, as is reimportation of approved drugs made in the U.S. In general, all 

drugs imported by individuals fall into one of these prohibited categories. 

From a public health standpoint, importing prescription drugs for personal use is 

a potentially dangerous practice. FDA and the public do not have any assurance 

that unapproved products are effective or safe, or have been produced under U.S. 

good manufacturing practices. 

U.S.-made drugs that are reimported may not have been stored under proper conditions, or may not be the real product, because the U.S. does not regulate foreign 

distributors or pharmacies. Therefore, unapproved drugs and reimported approved 

medications may be contaminated, subpotent, superpotent, or counterfeit. In addition, some foreign websites offer to prescribe medicines without a physical examination, bypassing the traditional doctor-patient relationship. As a result, patients may 

receive inappropriate medications because of misdiagnoses, or fail to receive appropriate medications or other medical care, or take a product that could be harmful, 

or fatal, if taken in combination with other medicines they might be taking. 

11

Personal Importation Policy 

Under FDA’s personal importation policy, as described in guidance to the Agency’s 

field personnel, FDA inspectors may exercise enforcement discretion to permit the 

importation of certain unapproved prescription medication for personal use. 

First adopted in 1954, the policy has been modified several times over the succeeding years. It was last modified in 1988, in response to concerns that certain potentially effective treatments for AIDS patients were not available in the U.S., but 

were available in other countries. The Agency expanded the guidance for humanitarian purposes to allow individuals suffering from serious medical conditions to acquire medical treatments legally available in foreign countries but not approved in 

the U.S. 

The current policy permits the exercise of enforcement discretion to allow entry 

of an unapproved prescription drug if:

• the product is for personal use (a 90-day supply or less, and not for resale);

• the intended use is for a serious condition for which effective treatment may 

not be available domestically (and, therefore, the policy does not permit inspectors to allow foreign versions of U.S.-approved drugs into the U.S.);

• there is no known commercialization or promotion to U.S. residents by those involved in the distribution of the product;

• the product is considered not to represent an unreasonable risk; and

• the individual seeking to import the product affirms in writing that it is for the 

patient’s own use and provides the name and address of the U.S. licensed doctor 

responsible for his or her treatment with the product or provides evidence that 

the product is for the continuation of a treatment begun in a foreign country.

FDA has not officially permitted the importation of foreign versions of U.S.-approved medications, even if sold under the same name, because these products are 

unapproved, and the Agency has no assurance that these products are safe or effective, while safe and effective versions are already available in the U.S. 

FDA believes that the need for its personal importation policy is far less now than 

it was when the current version of the policy was developed in 1988. Now, due to 

faster review times and various regulatory mechanisms through which patients can 

obtain unapproved treatments for humanitarian purposes, the need to import therapies not available in the U.S. has diminished. According to a Tufts University study 

presented in September 2000, 80 percent of new molecular entities approved in the 

U.S. in 1996 through 1998 received that approval within a year of its first introduction on the world market, almost double the rate during the years 1991 through 

1995. 

Implementation of the Personal Importation Policy 

At mail facilities, Customs officials identify parcels that may be violative of the 

FD&C Act. FDA inspectors then determine if these products should or should not 

be permitted to enter the country. If detained, FDA must issue a notice to the addressee describing the potential Federal violation and provide the individual with 

an opportunity to respond. If the addressee does not respond or provides an inadequate response, FDA will give the parcel back to Customs to have it returned to 

the exporter. Due to the requirements for notice and the opportunity to respond, the 

process for detaining and further processing mail parcels consumes large amounts 

of FDA resources. In addition, much storage space would be needed to hold the large 

number of detained parcels pending replies from the addressees. 

FDA’s personal importation policy, as written, is difficult to implement. This is 

due, at least in part, to the difficulty faced by FDA inspectors, or even health care 

practitioners, in identifying a medicine by its appearance, and labeling may falsely 

identify a product. From a practical standpoint, FDA inspectors cannot examine 

drug products contained in a mailed parcel and accurately determine the identity 

of such drugs or the degree of risk posed to the individual who will receive these 

drugs. 

FDA detains and refuses few mail imports for personal use. As a consequence, the 

tens of thousands of parcels that FDA does not review are eventually released by 

Customs and sent on to their addressees, even though the products contained in 

these parcels may appear to violate the FD&C Act and may pose a health risk to 

consumers. We do not believe this is an acceptable public health outcome and are 

working to develop a solution. 

12

HHS Plan to Address Mail Imports for Personal Use 

Due to the inability of FDA to cope with the volume of medications imported for 

personal use through the mail, and because of the public health risks associated 

with these products (as discussed below), FDA has been working to develop a more 

effective personal importation policy. In addition, we recognize that Customs is dependent on guidance from FDA, and one of our goals is to provide clear and simple 

standards for assessing parcels containing drug products. We are discussing options 

for revisions to the Agency’s personal importation policy with Secretary Thompson. 

Carson Mail Facility Pilot 

Earlier this year, FDA and Customs conducted a survey of imported drug products entering the U.S. through the Carson City, California mail facility (the Carson 

pilot). The Carson pilot was proposed by Customs as a means to examine incoming 

mail shipments of pharmaceutical products over a specified time frame in order to 

identify both the volume and the types of drug products entering the U.S. We also 

hoped to better assess the efforts required to cover drug importations at a mail facility, and to gain a better understanding of the public health implications these importations may have for U.S. consumers. 

The Carson pilot ran for a five-week period, with FDA inspectors present for 40 

hours per week. At the onset, Customs took a ‘‘baseline’’ sample in the first week 

by setting aside all international packages that were suspect, or that they would 

have set aside for FDA review had FDA been able to process them. The number of 

packages set aside was approximately 3,300. Multiplying that number by five weeks 

provides an estimated total of 16,500 international packages (650 packages per day) 

that Customs could have set aside for FDA review during the Carson pilot, if the 

ability to process them was not a factor. After the first week, however, Customs actually set aside the number of packages they believed FDA would be able to examine. In general, during each week of the Carson pilot, more packages were set aside 

than FDA was able to handle. 

FDA was actually able to examine 1,908 packages during the five-week pilot, an 

average of approximately 381 packages per week. Neither FDA nor Customs kept 

a count of the packages that were set aside but not examined. Unexamined packages were sent on to the addressees. 

Of the 1,908 packages examined by FDA, 721 parcels were detained and the addressees notified that the products appeared to be unapproved for use in the U.S., 

misbranded and/or a drug requiring a doctor’s prescription. The parcels were 

shipped from a total of 19 countries, and overall, there was no obvious evidence of 

the products being imported for further commercial distribution. On average, the 

Agency was detaining at a rate of 144 packages per week, or about 38 percent of 

those examined. 

Clearly, the Carson pilot demonstrated that the rate of packages coming into the 

U.S. exceeds FDA’s capacity to manage, thus, Customs is left with little choice but 

to forward the majority of packages to addressees. As we stated, we do not believe 

this is an acceptable public health outcome, and we are working to develop a solution. 

Analysis of the Carson Pilot Drug Parcels 

In order to define better the nature of the risk to public health from the types 

of products coming into the U.S. through personal importation, FDA’s Center for 

Drug Evaluation and Research (CDER) reviewed listings of the products detained 

during the Carson pilot. CDER’s review demonstrates that there are serious public 

health risks associated with many of the 721 drug shipments (composed of 197 different drugs) intercepted at Carson. In general, there are two types of risks that 

consumers of these drugs would face. The first type of risk is that associated with 

taking drugs of unknown origin or quality. Second are the very significant risks associated with taking many of these drugs without first obtaining a physician’s prescription and without the continued oversight of the physician. 

Risks Associated with Drugs of Unknown Origin or Quality 

In general, FDA has no information to establish where these drugs were actually 

manufactured and whether necessary current Good Manufacturing Practice requirements were followed. There is also no assurance that the drugs were packaged and 

stored under appropriate conditions to avoid degradation or contamination. 

Approximately eight percent of the shipments contained drugs that could not be 

identified because they contained no labeling; some of these contain only foreign language labeling. Most of these drug shipments were contained in plastic bags; one 

shipment contained drugs taped between magazine pages. 

13

Several drugs do not appear to correspond with any U.S.-approved drugs and the 

risks are therefore difficult to assess. One drug was evaluated for FDA approval but 

was denied approval. This drug is associated with cardiac abnormalities and its efficacy could not be successfully demonstrated. Another drug approved abroad but not 

in the U.S. is associated with medically serious gastro-intestinal complications. Several shipments contained three drugs that were once approved by FDA but have 

been withdrawn from the market based on serious safety concerns, including:

• fatal arrhythmia and dangerous drug interactions;

• loss of white blood cells (agranulocytosis) associated with fatal infections; and

• hemorrhagic stroke. 

Risks Associated with the Absence of Physician Oversight 

The vast majority of the shipments were identified as containing prescription 

drugs, which by definition, have serious toxicities and risks associated with them 

such that they are ‘‘not safe for use except under the supervision of a practitioner 

licensed by law to administer such drug.’’ (Title 21, United States Code, section 

353(b)). Although some foreign Internet sites might offer an online questionnaire, 

we believe that very few, if any, require a prescription from a practitioner licensed 

in the U.S. before dispensing such drugs to U.S. residents. Moreover, after detention 

notices were issued to the intended recipients of the 721 drug shipments, fewer than 

four percent presented evidence of prescriptions to document their relationship with 

a physician in association with the drugs purchased from abroad. The lack of adequate English language labeling accompanying many of these shipments exacerbates the risks associated with the absence of physician oversight. 

During the Carson pilot, as in normal practice, Customs generally separated out 

controlled substances for processing by the Drug Enforcement Administration (DEA) 

before the remaining shipments were provided for FDA review. However, in FDA’s 

review, six controlled substances were identified, including lorazepam, codeine sulfate, loperamide, chlordiazepoxide, chloral hydrate, and diphenoxylate. These drugs 

have the potential to cause addiction or be abused. Life-threatening overdoses are 

possible. A physician’s prescription and oversight are essential for managing these 

risks. 

There are numerous drugs identified on the Carson list that are intended to treat 

conditions that consumers need physicians to properly diagnose. As a result, consumers who bypass physician diagnosis and prescribing may be exposing themselves 

to risks and toxicities that cannot be justified by offsetting benefits to those patients.

• For example, almost ten percent of the shipments were for antibiotics, despite 

the fact that consumers are generally not able to diagnose whether their symptoms are caused by bacterial infections. The overuse of antibiotics continues to 

be a serious public health concern because it is linked to the growth of antibiotic resistant-bacteria.

• Several drugs listed are potent steroids, which are generally prescribed for conditions that are not self-diagnosable. In addition, potential adverse events associated with these drugs, including diabetes, hypertension, and serious infection 

require prompt attention and careful monitoring.

There are many drugs on the list for which it is essential that the proper dose 

be delivered into the bloodstream at the proper rate. Some of these drugs have a 

narrow range in which they can safely achieve their therapeutic effect. At least 

seven such drugs were identified on the Carson list. Without FDA oversight, there 

is the risk that these drugs may not have been manufactured with the necessary 

quality controls to ensure a consistently safe and effective product.

• One seizure medication on the Carson list, for which there were three shipments, could be very dangerous if not manufactured to these rigorous standards. Any change in potency could render the drug ineffective or highly toxic.

• Another seizure drug on the list for which physician monitoring is also essential 

has a narrow therapeutic range and FDA labeling provides a black-box warning 

for hepatoxicity, teratogenicity, and pancreatitis.

More than 30 drugs on the list have serious contraindications and/or drug interactions for which physician oversight is essential. For instance, almost 20 percent 

of the shipments were for various estrogen products for which there are multiple 

serious contraindications that a physician needs to consider before making prescribing decisions and in monitoring the patient. 

14

It is impossible to make a scientifically definitive statement on the public health 

impact of the drug shipments encountered during the Carson pilot without extensive 

chemical testing and analysis of the incoming pharmaceuticals, which would be prohibitively expensive. Based on the observations noted above, however, FDA believes 

that these drugs pose substantial risks to the public health, and we further believe 

that significant changes to the policies governing personal importations through the 

mail are warranted. 

Border Surveys 

Over the last year, FDA has initiated three other surveys to gather data on drug 

products imported by individuals into the U.S. Although these border surveys involve land traffic rather than mail importation, the results of these surveys show 

some similarities to the findings from the Carson mail pilot, as well as some significant differences. 

Southwest Border Survey (August 2000) 

A survey of prescription drugs being brought by pedestrians into the U.S. at eight 

ports of entry along the 2,000 mile border with Mexico was conducted by FDA’s Southwest Import District (SWID) with the assistance of other agencies including 

Customs, the DEA, the U.S. Department of Agriculture, and others. The survey 

looked at activity during four hours on a Saturday (August 12, 2000) at eight border 

ports in California, Arizona, and Texas. The purpose of the survey was to interview 

individuals walking across the border into the U.S. from Mexico who had purchased 

prescription drugs in Mexico to determine 1) what specific types of products are 

being imported, and 2) who is importing these products. 

The data collected from over 600 interviews indicated that the most common importer of prescription drugs during the survey was an older male Caucasian with 

a prescription from the U.S., bringing back primarily antibiotics or pain relievers 

for his own use. Prescriptions were held by 63 percent of the persons interviewed 

(59 percent U.S. prescriptions and 41 percent Mexican). The most common drugs 

and their indications that were purchased in Mexico during the survey were as follows: Amoxicillin (antibiotic), Glucophage (diabetes), Premarin (estrogen), Dolo 

Neurobion (vitamin supplement), Vioxx (inflamation), Retin-A (acne), Tafil (anxiety), 

Celebrex (arthritis), Penicillin (antibiotic), Viagra (impotence), Carisoprodal (analgesic). 

Canadian Border Survey 

On January 6, 2001, in cooperation with Customs, FDA conducted a survey to obtain a snapshot of prescription drug products being brought into the U.S. from Canada via passenger vehicles. During the eight-hour survey at three ports of entry in 

New York, Michigan and Washington, a total of 10,374 passenger vehicles and 58 

buses crossed into the U.S. Of these, 33 passenger vehicles (35 individuals) were referred by Customs to be interviewed. These individuals brought in a total of 47 containers of drug products from Canada. 

The types of products included pain medicines—primarily ‘‘222’’ (a combination of 

acetaminophen, caffeine, and codeine) or similar products. The indicated reason for 

import was that the products were available over-the-counter (OTC) in Canada and 

cost less than in the U.S. The next largest group of products was herbal products, 

with the reason for importation being that the products were not available in the 

U.S. Other products included Tobradex (antibiotic/steroid opthalmic for individuals 

having laser eye surgery); Claritin and Allegra (allergies) purchased OTC in Canada; Sibelium capsules (calcium channel blocker); and a variety of OTC products 

sold in Canada and not available in the U.S. 

Southwest Border Survey (April 2001) 

On April 11, 2001, FDA, Customs, and other agencies conducted a survey of prescription drugs being brought into the U.S. at seven ports of entry along the U.S./

Mexican border. This survey coincided with both Easter vacations from many colleges and the end of the ‘‘snowbird’’ season, when tourists from Northern states visiting along the Southern border return home. 

During the four hour ‘‘blitz’’ a total of 586 persons brought in a total of 1,120 

drugs. Approximately 56 percent had a prescription for the medicines (61 percent 

were U.S. prescriptions, 39 percent were Mexican). The most common drugs purchased in Mexico were: Amoxicillin (antibiotic), Premarin (estrogen), Claritine (allergy), Terramicinia (antibiotic), Ampicillin (antibiotic), Ibuprofen (analgesic), Penicillin (antibiotic), Vioxx (inflammation), Tafil (anxiety), Dolo Neuorobian (vitamin 

supplement), Glucophage (diabetes), Celebrex (arthritis), Naproxen (analgesic), 

Retin-A (acne), Ventolin (pulmonary disease), and Valium (controlled substance/

nervous system depressant). 

15

Controlled Substances 

Although we do not know, nor is it possible to clearly determine, the amount of 

controlled substances brought into the U.S. purportedly for personal use, it is likely 

that such medicines are frequently imported for resale and pose a public health risk. 

The Agency has been working with both Customs and DEA to streamline and clarify 

Federal import policies specifically related to the importation of controlled substances. 

Internet Drug Sales 

Based on surveys conducted in early 2000 by Office of Criminal Investigations 

(OCI) and subsequently by the General Accounting Office (GAO), it appears that 

there are roughly 300 to 400 Internet sites selling prescription drugs, with approximately half located domestically and half located outside the U.S. FDA has long 

taken the position that consumers are exposed to a number of risks when they purchase drugs from Internet sites or other mail order outlets that dispense foreign 

drugs. These outlets may dispense expired, subpotent, contaminated or counterfeit 

product, the wrong product, a contraindicated product, an incorrect dose, or medication unaccompanied by adequate directions for use. FDA cannot provide consumers 

with any assurance that these products were manufactured under current good 

manufacturing practice standards. Taking an unsafe or inappropriate medication 

puts consumers at risk for dangerous drug interactions and other serious health 

consequences. 

Internet sites that provide prescription drugs by having consumers fill out a questionnaire rather than seeing a doctor pose serious health risks. A questionnaire generally does not provide sufficient information for a healthcare professional to determine if that drug is appropriate or safe to use, if another treatment is more appropriate, or if the consumer has an underlying medical condition where using that 

drug may be harmful. 

FDA has undertaken widespread public relations efforts to warn consumers about 

the dangers of buying drugs online, and we have provided extensive information on 

these dangers on FDA’s own Internet site. FDA’s Buying Medical Products Online 

web page is one of the most frequently requested pages on FDA’s website. It consistently ranks among the top twenty requested pages, averaging almost 13,000 hits per 

month. 

Currently, FDA has 90 sites under active review for possible regulatory or civil 

action. Warning letters have been sent to 48 domestic online sellers. Additionally, 

FDA has sent 121 ‘‘cyber letters’’ to operators of Internet sites offering to sell online 

prescription drugs or unapproved drugs. These sites may be engaged in illegal activity such as offering to sell prescription drugs to U.S. citizens without valid (or in 

some cases without any) prescriptions. Cyber letters are sent over the Internet to 

the suspect websites to warn the operators that they may be engaged in illegal activities, and inform them of the laws that govern prescription drug sales in the U.S. 

Cyber letters have a deterrent effect and FDA has seen positive results from using 

them. FDA has received positive responses from 20 percent of the cyber letter recipients and we are continuing to monitor these sites. 

FDA also sends copies of its cyber letters to the home governments of targeted 

websites, when the locations can be identified. Follow-up depends on the ability and 

willingness of the foreign regulatory bodies to investigate and take actions against 

website operators who are illegally shipping drugs to other countries. 

In cooperation with the Department of Justice (DOJ), five preliminary injunctions 

have been imposed on the sale of illegal products, including one product marketed 

as a weight-loss aid containing a potent thyroid hormone which could cause heart 

attacks or strokes, and an unapproved cancer therapy. FDA and DOJ also are pursuing an injunction against the sale of another unapproved cancer therapy over the 

Internet. Additionally, 15 product seizures, 11 product recalls, and the voluntary destruction of 18 violative products have been achieved, generally pertaining to unapproved new drug products including gamma hydroxybutyric acid, gamma butyrolactone, Triax, 1,4 butanediol, and laetrile. Thirty-six foreign shippers have been 

placed on Detention Without Physical Examination and added to Import Alert 66–

57 for targeting sales of unapproved new drug products to the U.S. 

During FY 2001, FDA’s OCI initiated approximately 40 Internet-related investigations and will continue to conduct investigations involving suspected criminal activity related to Internet drug sales as well as other Internet-facilitated criminal violations of the FD&C Act. Of the 133 currently open Internet-related investigations, 

64 are Internet pharmacy cases, where the focus is on the possible dispensing of 

prescription drugs without a prescription. 

In recent years, OCI has initiated 285 Internet investigations and each of these 

investigations have involved a variable number of actual websites—typically rangVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
16

ing from one to 25 or more. OCI has effected 88 Internet-related arrests, 70 of these 

in drug-related investigations. Of the 70 drug-related arrests, 11 have involved 

Internet pharmacy cases. These arrests have resulted, thus far, in 48 Internet-related convictions, 42 of these in drug-related investigations. Of the 42 drug-related 

convictions, five have involved cases involving the sale of prescription drugs without 

a valid prescription. 

In addition, OCI has an ongoing initiative at the Dulles International Airport 

Mail Facility that had its genesis in their first Internet case, which began in 1994. 

The case, which involved a site selling steroids over the Internet, resulted in a successful prosecution and shutdown of the website. The partnership resulting from 

this case has continued, and in the past 18 months, OCI has been involved with 

local law enforcement in the Washington metropolitan area in 98 drug seizures. The 

seizures represent dozens of types of drugs coming in from 13 different countries. 

Of the 98 seizures, 87 of the drug seizures were ordered over the Internet and 

mailed to U.S. citizens; six were mailed to the U.S. by family or friends living 

abroad; four were ordered via a 1–800 telephone number from Canada and mailed 

to the U.S.; and one was transported via an airline passenger in two suitcases from 

Romania. The efforts of OCI, Customs, and local law enforcement have yielded the 

execution of eight search and seizure warrants and led to the arrest and prosecution 

of nine people. 

Conclusion 

Mr. Chairman, FDA remains concerned about any possibility that unsafe drugs 

may find their way into the American drug supply. We will remain vigilant as we 

refine and improve the programs and procedures that we use to ensure the availability of safe medications for consumers. 

We appreciate the Committee’s interest in assuring that the American public has 

access to safe and affordable medicines. We look forward to continuing to work with 

you. Thank you again for the opportunity to participate in today’s hearing. I will 

be happy to answer any questions.

Senator DORGAN. Mr. Hubbard, thank you very much. I have 

read your entire testimony. Let me ask you some questions about 

this, because I am curious. You have spent most of your time referring to counterfeit drugs and the issue of safety. We have about 

$14 billion worth of drugs imported into this country by manufacturers; is that correct? 

Mr. HUBBARD. I don’t know the number, but generally a majority 

of the raw material for drugs come in from foreign sources and the 

finished pharmaceuticals are made in this country. 

Senator DORGAN. Now let me ask you a question about the Canadian system, and I want to focus on that just for a moment, if I 

might. Do we have a system in this country that is substantially 

safer than Canada’s? 

Mr. HUBBARD. I’m not well prepared to describe the safety or 

conditions in any other country. We certainly believe that, we certainly believe that we have the safest. 

Senator DORGAN. Let me just focus on Canada for a moment, because if you are saying the reimportation of prescription drugs 

from Canada by the pharmacist or licensed distributor compromises safety, then you must be prepared to tell me whether you 

think our system is safer than Canada’s. Let me tell you why I am 

asking the question. 

Some, perhaps sometime in the next hour up in Binford, North 

Dakota, a truck is going to come across the border from Canada, 

it is going to have a load of fresh meat on it, cows or hogs have 

been slaughtered and they come over in the form of fresh meat. We 

are not going to inspect that fresh meat. You know why? Because 

our country decided that the Canadian inspection system is fine for 

us, and so we will not inspect that meat. And that is an FDA and 

USDA decision. 

17

I am asking a question about Canada. If a pill is produced, a tablet is produced in an FDA approved plant either in the U.S. or Canada, it goes to a distributor or pharmacist in Canada and ends up 

in a one-room pharmacy in Emerson, Canada, and then a pharmacist from Binford, North Dakota wants to go to that one-room 

pharmacy in Emerson and pay one-tenth the cost for Tamoxifen 

and bring it back across the border and pass the savings along to 

the senior citizens or the women who have breast cancer in 

Binford, and they are told no, they are not allowed to do that because there is a safety issue. 

The question is, what is the safety issue? I want to specifically 

talk about Canada. What is the safety issue? 

Mr. HUBBARD. Let me say in the case of the meat situation that 

you mentioned, by law the Canadian meat processor in Canada has 

to be approved by the U.S. Department of Agriculture and inspected by the Department of Agriculture, and must be what is 

known as equivalent. It is under a very rigorous U.S. set of standards in meat processing. It is likely to be inspected again at the 

border by a USDA inspector. 

Senator MCCAIN. That is not likely. 

Mr. HUBBARD. In the case of drugs, that is not true, that is not 

required for drugs sold in Canada. It may be in fact that the same 

manufacturing plant assigned to a Canadian pharmacy and to a 

U.S. pharmacy can manufacture the medicine, so you are correct 

on that point. The problem is when the drug leaves the manufacturing facility and arrives, and goes out into the Canadian market, 

it is outside FDA’s jurisdiction and therefore, when the pharmacist 

procures that drug, we would have no way of knowing if, in fact, 

that was the real drug. 

Senator DORGAN. Mr. Hubbard, I understand that, but the same 

is true with the cow, or the steer that’s slaughtered in Canada. 

That is outside the U.S. inspection system. We have simply determined that the Canadian inspection system is sufficient for us to 

allow that meat to come in uninspected. 

Now the question is this: If an FDA inspector finds—and this is 

all our legislation deals with, FDA-approved drugs manufactured 

in an FDA-inspected plant, if an FDA-inspected plant produces a 

bottle of medicine and sends it to a pharmacy in Winnipeg, Canada, you are saying that you cannot determine whether the Canadian system of providing safety in the chain of supply is sufficient 

to allow us to have confidence in it? We do it in a dozen other 

areas, but you cannot do it with respect to medicine? 

Mr. HUBBARD. We are not authorized to do that. In your example, USDA is authorized to go to Canada and inspect and set standards for the Canadian meat packing and, in fact, the Canadians do 

not send meat until they meet those standards. In the case of 

drugs, that is not the case at all. 

Senator DORGAN. But you are answering a question I am not 

asking. I am not asking you whether you are authorized, I am asking whether you have the capability to determine whether the 

chain of supply in Canada is sufficient so that we have confidence 

in it just as we do in this country. Why would you not be able to 

do that, and then allow only pharmacists and distributors to be 

able to reimport only those drugs that are produced in an FDA apVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
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proved plant and only those drugs that are FDA approved? How on 

earth can that be rocket science? 

That does not seem to me to be difficult, and yet, the FDA and 

HHS keep saying there is this huge safety problem. I understand 

there could be a safety problem from some areas, but I am trying 

to take the most logical instance here of Canada, where we have 

a lot of reciprocal agreements on what both sides are doing. I am 

assuming that the chain of custody in Canada is equivalent to ours 

with respect to—— Mr. HUBBARD. Well, you can make that assumption and I can 

make that assumption as well. 

Senator DORGAN. Do you know it is not? 

Mr. HUBBARD. I do not know whether it is or not. We don’t have 

authority, we have not looked at the Canadian system, that’s not 

our job. 

Senator DORGAN. So you are telling me that you, you say there 

are safety concerns but you have not looked at the treatment of 

prescription drugs in Canada? 

Mr. HUBBARD. Mr. Chairman, there are safety concerns about 

any drug that goes outside the approval process, and is subject to 

the intermingling of counterfeit drugs, to abuse of the drug or to 

some sort of diversion. Diversion is a very real problem for us in 

the world. Drugs get moved around and go places that, where they 

just lose control, and all kinds of malevolent things can happen to 

them in that process, and that’s our concern. Sure, you or I might 

go to Canada today on a trip and get sick, go to a doctor and get 

a drug and feel confident that that drug from that Canadian pharmacy is good, but the FDA can’t assure that. 

And once you have said Canada is the entree to this big U.S. 

market where the real money is, as it were, then the Canadian system becomes vulnerable to the sorts of international charlatans 

that deal in counterfeit drugs. So even if the Canadian system is 

every bit as good as ours, and I don’t know whether it is or not, 

you are certainly saying that the Canadian system then is open to 

vulnerabilities by people who will try to enter the U.S. market because, again, that’s where the money is. 

Senator DORGAN. Mr. Hubbard, I think from the first moment I 

have understood that the position of both the last Administration 

and this Administration is that there are safety concerns and you 

have made that judgment without understanding what the circumstances are in other countries, especially Canada. I mean, you 

are making it without knowledge of what is happening in Canada, 

and that concerns me. 

Mr. HUBBARD. I think we’re saying that there are 200 countries 

that import products into this country and we are neither authorized nor empowered nor resourced, nor interested in examining the 

systems in those countries because that’s not what we do, Mr. 

Chairman. 

Senator DORGAN. We do it for other products. I just mentioned 

meat, fresh meat, we do it in fresh meat. Right now there is a 

truck stopping at the border coming through, and you know what 

they will do? They will look at a strip that was cut to lay on the 

back. They don’t inspect the meat. They look at a strip that is cut. 

Why? Because we have already been to Canada, and we have said 

19

your plants meet our standards. We are willing to accept that. 

Your trucks come through, and we are not going to stop you. 

Mr. HUBBARD. That’s right, Mr. Chairman. 

Senator DORGAN. Now why can that not work with respect to 

prescription drugs that are made in a U.S. manufacturing plant, 

sent to a pharmacy in Winnipeg, Canada, and then brought back 

across the border by a pharmacist in Binford, North Dakota, why 

can that not work? 

Mr. HUBBARD. I suppose that it could be designed and situated 

in a way where the Canadian manufacturing plant would have to 

meet U.S. requirements. 

Senator DORGAN. What if it is a U.S. manufacturing plant that 

makes the pill and sells it to Winnipeg through a distributor, and 

a pharmacist brings it—don’t talk about a foreign pill, let’s just 

talk about an American pill made in an American plant, FDA-approved plant that is then through a distributor sent to a pharmacy 

in Canada, and you are saying that you cannot assure safety if a 

registered U.S. pharmacist goes to a Winnipeg pharmacy and 

brings it back and passes the savings along to the consumer. 

Mr. HUBBARD. That’s correct, Mr. Chairman. Our concern is that 

once that U.S. manufactured product that we would give an FDA 

seal of approval to leaves the United States, it goes wherever it 

goes, whether it be 10 miles across the border in Canada, or 10,000 

miles to Asia, we have lost control of it. We do not know if it comes 

back what it is, where it came from, whether it’s safe. That’s our 

problem, Mr. Chairman. 

Senator DORGAN. Well, you have more problems than that. I 

want to come back in a second round. Senator McCain. 

Senator MCCAIN. Mr. Hubbard, I am sure you are aware of the 

North American Free Trade Agreement. 

Mr. HUBBARD. Yes, Mr. Chairman. 

Senator MCCAIN. That free flow of goods and services between 

three countries has been a spectacular success. I am sure you are 

aware of that. Why should prescription drugs be an exception to 

the North American Free Trade Agreement? 

Mr. HUBBARD. Well, the free trade agreements with both the 

GATT arrangement and the North American are to give the individual countries the right to set specific safety standards for any 

product for that country. So for instance, a contaminated food in 

Honduras could be sold legally in Honduras but could not come 

into the United States. 

Senator MCCAIN. Mr. Hubbard, I am talking about the North 

American Free Trade Agreement. 

Mr. HUBBARD. The point is that those agreements allow countries to set safety standards that may be different from——

Senator MCCAIN. But not so as to impede the flow of goods and 

services between——

Mr. HUBBARD. Right, they can’t be a so-called trade barrier. 

Senator MCCAIN. Exactly. And clearly what you are talking 

about is a trade barrier, because you are saying that Canadian 

manufacturers cannot manufacture a product or drug that is the 

same whether it goes to the United States or Canada, or certainly 

not one that would allow it to flow freely into the United States. 

20

Is there a manufacturing facility of a U.S. drug company located 

in Canada? 

Mr. HUBBARD. There probably is, I don’t know. 

Senator MCCAIN. What do you do about—you don’t even know 

that? 

Mr. HUBBARD. Oh, drug manufacturers register with the FDA, 

and if there is one there that is registered with the FDA, we inspect it. 

Senator MCCAIN. You don’t know. 

Mr. HUBBARD. I don’t know. There is a registration with thousands of manufacturers, so I don’t know. 

Senator MCCAIN. You don’t know if any of them are from Canada. You come to this hearing well informed, Mr. Hubbard. 

Let me just say, or ask this question. If a U.S. drug company has 

a manufacturing facility, obviously it has to be approved by the 

FDA in Canada, could that product then meet all of your requirements if it were sent to the pharmacy in Canada and then sent to 

the United States? 

Mr. HUBBARD. Well, there is a specific law passed by Congress 

in 1988 that prohibits the reimportation of a drug made in this 

country that goes to another country and then attempts to return. 

It can only be returned to this country if it was by an original manufacturer who basically never lost control of it. So the answer to 

your question is no, it cannot come back in. 

Senator DORGAN. Might I just point out that that specific law is 

the one that we repealed effectively and asked you to implement, 

and you refused to implement it based on what you say are safety 

and cost issues. So I think that I might point out, Senator McCain, 

that you are asking the right question here. If a U.S. pharmaceutical company is manufacturing in Canada, the FDA is up there 

inspecting the plant because they are going to ship those drugs 

down to Grand Forks, Minnesota, to sell them, the question is, can 

a Grand Forks pharmacist go up to Canada and access those drugs 

for half the price and bring them down and pass the savings along 

to the consumer. The answer from Mr. Hubbard is no, they cannot 

do that because we do not think we can assure safety. Is that it? 

Mr. HUBBARD. Well, there are certain requirements that relate to 

safety of drugs and in order for it to be technically feasible for us 

to do that, there are certain requirements. 

For instance, a Canadian drug will have a foreign label on it and 

we would require the American label so the patient can be warned 

of whatever. Also, in other countries, manufacturers may change 

the product slightly, the milligrams may be slightly more or less, 

the color may be different, there may be so-called inactive ingredients. There may be lots of changes that occur in the drug that 

make it not the drug that the U.S. patient receives. 

Senator MCCAIN. I don’t know why they would want to do that 

if they are manufacturing a product that is being sent to the 

United States of America. It seems to me it would cost them more 

to do all those things. 

Mr. HUBBARD. In fact, that’s a business decision and, in fact, 

they do do that. 

Senator MCCAIN. Why is it, do you think, that the cost is so 

much lower in Canada and Mexico for the same drugs? 

21

Mr. HUBBARD. In Canada they use a system called a reference 

price in which they take the lowest price the drug is sold across 

seven countries, that’s mostly European countries and the United 

States. In the United States they use what is called the federal 

supply schedule, which is the price paid by the Defense Department and the VA and other public hospitals. They then say to the 

manufacturer, you can charge no more than the average of these 

seven countries’ prices, so it is a price controlled system, and they 

are maintaining the price that can be charged. They may say, you 

can make so much profit. 

In France they set a price of their own. Different countries set 

their prices differently, but they say this is the price you can sell 

that drug at. 

And of course, generic drugs in this country are competitive on 

the world market. I think the biggest problem is the so-called 

brand name drugs that are still patented. When generic competition occurs, as you yourself said, Mr. McCain, the prices do in fact 

drop dramatically. 

Senator MCCAIN. I am a deregulator, I do not believe in price 

control, but it seems to me that if it costs one-tenth for the same 

drug in Canada, do you think then, that we should look at price 

controls? 

Mr. HUBBARD. I don’t think that’s—I mean, our job is safety. I 

think price controls are an issue for others in the Administration 

to consider. 

Senator MCCAIN. Do you not have obligations to the consumer 

here? 

Mr. HUBBARD. Well, we do. I think we care a lot about this in 

the sense that we try to get generics on the market as soon as we 

can, we work with drug companies to get newly developed drugs on 

the market as rapidly as possible. I think we do try to do things 

to provide access to patients, but this issue of how much they 

charge for a drug is outside our area of expertise. 

Senator MCCAIN. Are you aware of the abuses that are being exercised by some drug companies with the generic drug manufacturers? 

Mr. HUBBARD. Yes, Mr. McCain. 

Senator MCCAIN. Do you think that ought to be changed? 

Mr. HUBBARD. We have expressed willingness to work with committees in Congress to discuss those issues. I don’t believe that we 

have been specifically asked about the particular legislation at this 

point, but we are certainly willing to discuss it. 

Senator MCCAIN. We would like to have your opinion on the legislation, specifically where patent drug companies pay generic drug 

companies to keep a particular generic drug from being manufactured. Are you aware of that? 

Mr. HUBBARD. Yes. 

Senator MCCAIN. I would like to know your opinion on this legislation. It would be helpful. 

I want to say Mr. Hubbard, that disparity in pricing, particularly 

where our two neighbors are concerned, for the exact same drug 

today, forces seniors all over America to make a choice between 

their health and their income, because of the high cost of prescription drugs. So I hope you understand why we are so concerned 

22

about this particular situation and why it is hard for us to respond 

to our constituents as to why it is that the citizens of our two 

neighboring countries pay less for prescription drugs, as opposed to 

our own constituents. I hope you understand the problem we’re trying to address. 

Mr. HUBBARD. Absolutely. 

Senator MCCAIN. I thank you for your forthright testimony. 

Senator DORGAN. Senator McCain, thank you. Let me just observe that I think there are price controls on restricted drugs in 

this country by the pharmaceutical companies; they control the 

price, and they do that with this law that prevents the reimportation. And when Dan Reeves, the coach of the Atlanta Falcons, goes 

on television every night and says Zocor is a lifesaving drug, he 

will describe the miracles of modern medicine of lowering cholesterol and so forth. The problem is that the Canadian that buys 

Zocor pays $1.82 per tablet and the American pays $3.82 per tablet. The question the American consumer asks, as Senator McCain 

asked, why can they not go to a pharmacy in Winnipeg and pay 

the $1.82? 

You say, Mr. Hubbard, it is because of your concern about safety. 

Let me again focus just on Canada, and I think what we would like 

to do is reintroduce this legislation and pass it dealing just with 

Canada, just taking a first step. 

Let me read to you Dr. David Kessler’s letter. He says, ‘‘The Senate bill’’—and he’s talking about our bill that we passed that is now 

law—‘‘allows only the importation of FDA-approved drugs manufactured in approved FDA facilities and for which the chain of custody 

has been maintained, addresses my fundamental concerns. I believe the importation of these products can be done without causing 

a greater health risk to American consumers.’’ I would be interested in your response to Dr. Kessler’s letter. 

Mr. HUBBARD. I think as a potential patient, were I to be ill and 

purchase a drug from Canada, I think I would have a relatively 

high degree of confidence in Canadian drugs, speaking personally, 

because they are close by, our approval systems work together, we 

know them, people go there and purchase drugs, so you know—— Senator DORGAN. What do you mean, our approval systems work 

together? 

Mr. HUBBARD. Well, we often talk to our counterparts in Canada 

when we approve drugs, they will approve them at the same time, 

and there is—— Senator DORGAN. You have more knowledge than you were allowing earlier. 

Mr. HUBBARD. Well, the scientists talk. We talk with the Europeans quite a bit, and there is a lot of collaboration on the underlying data about whether a drug should be approved and its safety, 

so sure, the Canadian system is one we have some knowledge of, 

and I would have some degree of confidence to say as opposed to 

a Third World country. 

But the problem is the system is set up, the way the law is and 

the FDA implements it is designed to deal very specifically with 

the production of drugs and their movement, and drugs in Canada 

are not part of that system, and therefore, we’re saying that we 

cannot provide the assurance of safety. And I will repeat that I am 

23

concerned that any country that became the entree to the United 

States could then become a trans-shipment point for problem 

drugs. 

Senator DORGAN. Mr. Hubbard, in a global economy, every country has entree to every other country, that’s a given. 

Let me ask you how you respond to Dr. Kessler’s evaluation, if 

we just deal with Canada. Just dealing with Canada, is he correct 

that really that dissolves the issue? Because we are going to give 

you a chance to do that, we are going to pass this legislation again, 

and we are just going to take the first step, just Canada, and then 

see if the Administration or the previous, or anybody else involved 

in this thing can honestly say there are safety issues. 

Mr. HUBBARD. I just don’t think that we would be able to provide 

the same assurances of a drug imported from Canada or any other 

country as we could for American drugs. On some level, or some 

scale of——

Senator DORGAN. So you think Dr. Kessler is wrong? 

Mr. HUBBARD. I would never second-guess any former commissioner, I’m sure they are all right about anything they say. 

Senator DORGAN. First of all, I am really disappointed that you 

seem to suggest that the only way you can assure the safety of the 

drug supply of FDA-approved drugs produced in FDA-approved facilities, the only way you can assure that safety is if reimportation 

is only by a manufacturer. What makes the manufacturer such a 

much better importer than a licensed pharmacist? 

Mr. HUBBARD. I think it is possibly the closeness issue, but as 

I said earlier, when this product appears in a North Dakota pharmacy, how do we know, it came from Canada, how do we know it’s 

not a counterfeit? In fact, this one appeared in a pharmacy in Chicago and it was a counterfeit, and no one knew. 

Senator DORGAN. And how did you find that? 

Mr. HUBBARD. I believe there were some questions raised by physicians and our criminal investigators inspected, and found some 

very difficult to find variations in a label, and then after some follow-up testing and all, discovered that a Long Island, New York 

drug wholesaler was purchasing counterfeit drugs from the Middle 

East and bringing it in. It wasn’t really a counterfeit drug, and 

working out of a storeroom in the back, just using water out of a 

tap that wasn’t sterile and, therefore, introducing a very dangerous 

product. 

Senator DORGAN. You are saying it happens rarely here? 

Mr. HUBBARD. It happens very rarely here. 

Senator DORGAN. And it happens more often in Canada, is that 

your point? 

Mr. HUBBARD. We know that in the world it happens——

Senator DORGAN. I am talking about Canada. 

Mr. HUBBARD. I can’t specifically speak to counterfeiting in Canada, I will have to do some research and get back to you on that. 

Senator DORGAN. Well, we are going to give you a chance to implement a piece of legislation dealing specifically with Canada, and 

my hope is that we will have the FDA and HHS support on behalf 

of consumers, and support consumers both by assuring safety and 

assuring reduction in costs by being able to access the same drug, 

the same company, and that we import it to this country. 

24

Now let me tell you, I respect your opinion, I do not mean to 

bring you here to cast disrespect on your opinion. We disagree 

about this, but I am convinced, as are many many experts in this 

country, that we have the will and we can do with prescription 

drugs, just as we have with many other sensitive products, provide 

a safety net with respect to the chain of supply, and allow our 

American consumers to be able to access the identical drug produced in an FDA-approved plant from a Canadian pharmacist and 

to be able to allow the pharmacists in this country on behalf of consumers to do the same thing. 

Let me make just one additional point through a question about 

costs. I have not spent a lot of time on costs, there will be some 

testimony about that, but it is also the case that the HHS and 

FDA, I think primarily HHS, saying that there cannot be a demonstrated cost savings, that on its face will fly in the face of reality. 

Anyone who has purchased drugs in Canada understands that 

there is a very dramatic cost savings for the identical drug produced in an FDA-approved plant. 

So, can you just describe for me if the Administration still believes that you cannot demonstrate a cost saving, and if so, why? 

Mr. HUBBARD. When Secretary Thompson was asked to relook at 

this issue, he asked his Office of Planning and Evaluation, which 

has cognizance over this, to look at the cost issue. And while it’s 

very clear, as you pointed out, that the purchase price in a foreign 

country and the purchase price here is different, the Secretary’s 

staff also included concerns about the various middlemen that 

would want profit from this, and concluded that it was basically inconclusive that cost savings would be as great, the costs that you 

would have in this country. For instance, the wholesaler who received the drug perhaps from the Canadian pharmacy, the pharmacist himself in the United States, would add to the price they 

would pay, assuming they paid what they would view as a wholesale price, which might be a retail price in Canada, and that the 

ultimate saving to the consumer at the end of the line might not 

be anywhere near what the price would be if the citizen actually 

traveled to Canada and actually bought it in Canada. 

And so, that was I think their concern that there would be costs 

in the system to get the drug here and move it around and, therefore, these middlemen would be taking their 10 or 20 profit would 

eat up much of the savings. I think that was their concern, so 

therefore, they concluded that they couldn’t really determine 

whether these cost savings that would seem to be apparent are 

really there. 

Senator DORGAN. And who are they again? 

Mr. HUBBARD. Well, it was the Office of Planning and Evaluation 

in the Secretary’s office who did the study essentially. FDA did not 

do that particular examination. We examined the MEDS Act from 

more of the process of the testing and the documentation and those 

other requirements from the act. 

Senator DORGAN. Well, I will not dwell on this. I think it is quite 

apparent there are very substantial savings and for the very reason 

that you indicated in your written testimony today, that there are 

limits on what can be charged by the pharmacies in the other countries, and the result is, our consumers pay the highest prices in the 

25

world for prescription drugs. The ability to access the identical 

drug from an FDA-approved plant for a fraction of the price, it 

seems to me, clearly demonstrates savings, but we will leave that 

for another day for experts in that particular area. 

Let me again say that I think we will give you the opportunity 

to deal just with the issue of Canada, and the issue of safety and 

chain of supply and cost. It will be my intention, along with my colleagues, to pass legislation in this Congress, and I am confident 

that we will do it, that focuses just on Canada for the moment. We 

will just take the first step, and then we are going to have another 

hearing if there is not an implementation, and I will not be nearly 

as gentle in my nature. 

I should tell you, I am very frustrated by this, enormously frustrated, largely because I think that both the previous Administration and this Administration have gone out of their way to find 

ways not to implement this. The Clinton Administration and the 

Bush Administration have both tried to find ways to not do something. 

Now, I have a lot of folks from my home town, and I come from 

a real small town, and I can identify folks who sit around and find 

ways not to do things, you know, they are crabby all day, and every 

community has people like that. The people that make things happen and make changes in this country are the people that are looking for ways to get things done and make progress. 

I do not want to compromise the safety of our drug supply, that 

is not my intention. Nor do I want our consumers to be handcuffed 

to the highest prices for prescription drugs of anyone in the world 

and then be told that they are prevented from going across the border to purchase a prescription drug made in an FDA-approved 

plant, an FDA-approved drug made in an FDA-approved plant, and 

pay 50 percent or 10 percent of the price because of some arcane 

piece of legislation was passed that represents, in my judgment, a 

sweetheart deal for the pharmaceutical industry. I am hopeful that 

we can change this. 

Mr. Hubbard, you have answered our questions, and I again respect your opinion. I am not disrespectful to someone who disagrees with me, but I expect we will go at this again at some point 

because we are going to pass some legislation in this Congress and 

have additional hearings. I hope that our paths will cross again, 

and I hope perhaps you will be able to say to me that you all have 

taken a good look at the Canadian system, you have some confidence in that system, you have engaged with the Canadians with 

respect to the chain of supply issues, and tell us that there are no 

safety concerns with respect to the way we have reconstructed this 

law. 

So let me give you my thanks for coming here today with other 

members of your staff. 

Mr. HUBBARD. Thank you, Mr. Chairman. We certainly understand that your interests are in protecting the patients as well, and 

obviously we will continue to do this the best that we can. 

Senator DORGAN. Thank you very much, Mr. Hubbard. 

We will call the next panel forward. Ms. Elizabeth Wennar, 

President and CEO of United Health Alliance in Bennington, 

Vermont; Mr. John Marvin, member of the Alliance for Retired 

26

Americans; Ms. Marjorie Powell, Assistant General Counsel, Pharmaceutical Research and Manufacturers of America; Mr. Stephen 

Giroux, Community Pharmacist, Middleport Family Health Center, 

and Member of the National Community Pharmacists Association 

in Middleport, New York; and Dr. Alan Sager, Professor of Health 

Services and Co-Director of Health Reform Program, Boston University School of Public Health. 

We appreciate all of your being with us today. We have received 

the testimony that you have prepared, and we ask that you present 

a summary of your testimony. We will begin with Elizabeth 

Wennar, the President and CEO of United Health Alliance. Ms. 

Wennar, as you know, Senator Jeffords was here and spoke of you 

earlier. Welcome. 

STATEMENT OF ELIZABETH A. WENNAR, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, UNITED HEALTH ALLIANCE 

Ms. WENNAR. Thank you very much for having me here. As you 

mentioned, I am the President and CEO of United Health Alliance. 

By way of a little background, I have a nursing background, I have 

a masters in public health from Yale University, I have a doctorate 

from the Medical University of South Carolina in health administration and policy, and I completed my doctoral dissertation on the 

importation of prescription drugs, particularly looking at Canada. 

Having said that, quite a few things that I have in my testimony 

have already been covered so I will try and not be repetitive, and 

I understand I only have about 5 minutes, so stop me when you 

think you’ve heard enough. 

Senator DORGAN. We have a light system, actually. When the red 

light comes on, a trap door opens. 

Ms. WENNAR. Well then, let that trap door fall into Canada, 

please. 

Mr. Chairman and Members of the Committee, as you are aware, 

today’s healthcare market presents many challenges for consumers, 

purchasers and our political leaders. None is more controversial 

than that of technology in the form of a pill. More often than ever, 

our policymakers and physician providers are being queried as to 

why it is that Americans, particularly senior citizens, must pay 

many times more than their Canadian counterparts for the same 

drug. 

By way of background, what I’m going to do is to share with you 

a little bit of what we have done from a grass roots level in 

Bennington, Vermont. 

United Health Alliance is a nonprofit physician health system organization located in the southwestern corner of Vermont. Our 

partners include a rural hospital and nursing home, a home health 

agency, and just over 100 community-based physicians. We serve 

residents in Vermont, Massachusetts, and New York. Our mission 

is to promote a physician-driven organization whose principal services are to provide advocacy and leadership in the areas of care 

management, contracting, performance improvement and educational programs to maximize value for our membership. 

Although we have committed to 10 guiding principles, none is 

more important to us than assisting the communities we serve at 

becoming the healthiest in the nation. Approximately one year ago 

27

we found although this was an admirable objective, this objective 

was going to be difficult to achieve given the circumstances that existed for some of our elderly. Very simply, they did not have access 

to affordable prescription drugs and, therefore, they were not able 

to comply with the treatment plans prescribed by their physicians. 

Although we had individuals that we knew were seeking their 

medications affordably via bus trips to Canada, this was not an option for the majority of the elderly in the communities we serve by 

virtue of either their medical condition or their financial ability of 

doing so. 

One of our physicians came to us and requested our assistance 

at investigating how we could help a patient of his with breast cancer access her medications from Canada without having to get on 

the bus. Today that patient takes her medication because she can 

afford it. It cost her 90 percent less. 

We compared the costs for 145 seniors for 6 months, and I have 

provided copies of that graph in my testimony. We compared the 

cost for the 145. As you can see, these individuals would have paid 

$81,000 in the U.S. and they paid approximately $22,000 for their 

medications in Canada. Our understanding is that there were no 

substitutes made for these medications, all medications accessed 

were for the treatment of chronic diseases such as diabetes, heart 

disease and cancer. 

A price comparison of more commonly prescribed medications is 

also included in my testimony and you can see here, they are significant. Although there are minor variations across Canada, the 

savings are still significant, and have been reported anywhere from 

30 to 95 percent. 

Although the majority of the individuals using what we call 

MedicineAssist are the elderly on fixed incomes with no prescription drug coverage, we are beginning to see individuals that have 

depleted their pharmacy benefits also attempting to access their 

medications from Canada. 

We have had multiple conversations with employers located in 

our communities and they have told us that they now must consider cutting benefits because they no longer can afford to supply 

the coverage that they have historically. The implications are 

frightening to all of us. 

I’m now going to move to quality. I have heard quite a bit discussed concerning quality. Clearly as a provider network, our major 

concern is the ability of our patients to comply with a given treatment plan. When a patient cannot afford their medications, it’s 

costly for all of us. Are we concerned about quality? Absolutely, Mr. 

Chairman, we are concerned about quality, and there is a quality 

issue and it exists on this side of the border, we would propose. 

When a patient cannot take their medications, they most definitely will consume services elsewhere in our system such as the 

emergency room or by being admitted to the hospital. That is simply not rational. This is not about people that won’t comply with 

a treatment plan, this is about individuals that can’t afford to purchase prescription drugs in the country they live in. 

Also, let’s keep in mind that we are talking about Canada, not 

a Third World country. Having said this, these individuals are 

28

looking to take the risks associated with crossing the border. Many 

of them have told us that they are willing to take these risks. 

I’m going to skip over the portion on why we think that drugs 

are less costly in Canada, but I will tell you clearly, there is no 

simple answer with regard to these issues. Barring any type of regulation of the pharmaceutical industry on this side of the border, 

personal reimportation from Canada under controlled circumstances can provide an interim solution for those who need access to a prescription drug. 

I do believe with the cooperation of the industry, the FDA, the 

Canadian regulators and the U.S. physicians, that under a controlled demonstration project we could achieve a policy that would 

prove beneficial for all the stakeholders until we can produce a better solution. 

In conclusion, I was asked to share something with you by a physician who recently called me. He basically had a patient that came 

to him and asked him to help him get his medications in Canada 

for his high cholesterol. The physician reached into the trash can 

and retrieved a prescription with a note attached to it that had 

been delivered to him earlier that day by his staff. The note read: 

Dear Doctor, Thank you for the prescription but I am returning it 

to you because I went to the pharmacy to get it filled today and 

when they gave it to me, I could not afford it. 

According to the physician, this was a diabetic amputee that he 

had given samples to and had responded extremely well. He did 

what came next, he wrote a prescription. He had no idea that this 

one medication would cost this gentleman on a fixed income over 

$140 a month. He [the physician] noted that that man was on the 

medication and had done extremely well on it. As this patient’s 

caregiver, he felt that instead of solving a problem for his patient, 

he had indirectly created one. Not a good feeling to know your patient will not be able to comply with a treatment plan you prescribe 

for them because he or she cannot afford it, and that you unknowingly contributed to that situation. His answer to the patient sitting in front of him was you bet. The medication for that amputee would have cost $65 in Canada versus $140 here. 

Thank you very much for this opportunity. 

[The prepared statement of Ms. Wennar follows:]

PREPARED STATEMENT OF ELIZABETH A. WENNAR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, UNITED HEALTH ALLIANCE

Mr. Chairman, and Members of the Committee:

Thank you for inviting me to discuss the issues associated with the pricing of 

pharmaceuticals for U.S. consumers. 

As you are aware today’s healthcare market presents many challenges for consumers, purchasers and our political leaders. None is more controversial than that 

of technology in the form of a ‘‘pill.’’ Pharmaceutical spending has almost doubled 

in less than a decade. More often than ever, our policymakers and physician providers are being queried as to why it is that Americans, particularly the elderly, 

must pay many times more than their Canadian counterparts for the same drug. 

Background on United Health Alliance and MedicineAssist 

United Health Alliance is a nonprofit physician health system organization located in Southwestern Vermont. Our partners include a rural hospital, nursing 

home, home health agency and just over one hundred (100) community physicians. 

We serve residents of Vermont, New York and Massachusetts. Our mission is to proVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
29

mote a physician-driven organization whose principle services are to provide advocacy and leadership in the areas of care management, contracting, performance improvement and educational programs to maximize value for our membership and 

customers. Although we have committed to ten (10) guiding principles, none is more 

important to us than assisting the communities we serve at becoming the healthiest 

in the nation. Approximately one year ago we found that although admirable, this 

objective was going to be very difficult to achieve given the circumstances that existed for some of our elderly. Very simply, they did not have access to affordable 

prescription drugs, therefore they were not able to comply with the treatment plans 

prescribed by their physicians. Although we had individuals that were seeking affordable medications via bus trips to Canada, we knew that this was not an option 

for the majority of the elderly in the communities we serve by virtue of their medical condition and/or their limited resources. One of our physicians came to us and 

requested our assistance at investigating how we could help a patient of his with 

breast cancer access her medications from Canada without having to get on a bus. 

Today that patient takes her medication because she can afford them. It cost her 

ninety (90) percent less in Canada. We compared the costs for 145 seniors for the 

first six months to see if what we had heard about the differences in pricing was 

in fact true. While these individuals would have had to pay just over $81,000 in the 

U.S., they paid approximately $22,000 for their medications in Canada. Our understanding is that there were no substitutions for the medications they were currently 

on. All medications accessed were for the treatment of chronic diseases such diabetes, heart disease and cancer. A price comparison of some of the more commonly 

prescribed medications for the treatment of these diseases has been provided along 

with this testimony. Although there is minor variation with some pricing in Canada, 

the savings are still significant and have been reported anywhere from thirty (30%) 

to (95%) percent. Although the majority of the individuals using MedicineAssist are 

the elderly on fixed incomes, with no prescription coverage, we are beginning to see 

individuals that have depleted their pharmacy benefits also attempting to access 

their medications from Canada. As we have conversations with employers located 

in the communities we serve about benefits and coverage for their employees we 

find many are concerned about how to continue the level of coverage they currently 

provide, particularly with the growth in their expenditures for prescription drugs. 

The implications are frightening for all of us. 

Quality 

Clearly as a provider network, our major concern is the ability of patients to comply with a given treatment plan. When a patient cannot afford their medications 

it is costly for all of us. Are we concerned about quality? Absolutely. And there is 

a quality issue and exist on this side of the border. When a patient cannot take 

their medications, they most definitely will consume services elsewhere in our system, such as the emergency room or by being admitted to the hospital. That simply 

is not rational. This is not about people that won’t comply with a treatment plan, 

this is about individuals that can’t afford to purchase prescription drugs in the country they live in. Also, let’s keep in mind that we are talking about Canada not some 

third world country. Having said this, these individuals are willing to take the risk 

to access their medications across the border. Many of them have told us that there 

is certainly no more risk in doing this than they are at by not taking their medications as prescribed or not at all. 

Reasons for Price Differential in Canada and the U.S. 

To put it in the simplest of terms: the Canadian government is the purchaser, 

therefore they have implemented controls over the costs. Next, they do not allow direct-to consumer advertising. My understanding is that this type of marketing is 

only allowed in the United States and New Zealand. Essentially our major mode of 

control is through the approval process by the FDA that essentially controls entry 

into the market, not pricing. In the U.S. with its non-universal coverage structure, 

cost containment is undertaken by a myriad of public and private decision-makers, 

each with their own agenda and objectives. The price differential is of course going 

to appear even greater when you compare a group that has no coverage and pays 

out of pocket. They have no purchasing power, because they have no coverage. This 

is particularly true for about one-third (30 million) of the Medicare population. 

I recently visited with health care providers in France and in Canada and they 

seemed quite perplexed by how we could rationalize the cost/benefit of allowing the 

prescription drugs to be advertised in the manner that they were on television. 

Their point was well taken on two fronts: (1) someone has to pay for the costs associated with this advertising and (2) when I proposed that it was intended to educate 

consumers so that they could be more informed about what was available for their 

30

treatment: they asked where’s the data to support that this was anything more than 

‘‘marketing’’ the drugs the industry wants to sell or promote. They used the example 

of a drug for chronic indigestion allowing you to continue to eat foods that are clearly not good for you. 

Reimportation/Importation from Canada 

Clearly, there is no simple answer with regard to the issues we are discussing. 

Barring any type of regulation of the pharmaceutical industry on this side of the 

border, personal reimportation from Canada under controlled circumstances can 

provide an interim solution for those in need of access to affordable prescription 

drugs. I do believe that with the cooperation of the industry, the FDA, the Canadian 

regulators and U.S. physicians that under a controlled demonstration project we 

could achieve a policy that would prove beneficial for all the stakeholders until we 

can produce a better solution. 

Conclusion 

Before departing to attend this hearing, I received a call from a physician that 

requested that I share a recent situation that he was presented with. He had a patient that asked if he [the physician] would help him get his medications from Canada so that he could afford to take them? The physician said he listened as the patient began to explain the differences in pricing for the medication recently prescribed for his high cholesterol. The physician reached into his trash can and retrieved a prescription with a note attached to it. The note had been delivered to him 

earlier in the day by one of his staff. The note read: Dear Doctor, Thank you for 

the prescription, but I am returning it to you because I went to the pharmacy to 

get this filled and when they gave it to me, I couldn’t afford to pay for it. According 

to the physician this was a diabetic amputee that he had given samples to and had 

responded extremely well, so he did what came next, wrote a prescription. He had 

no idea that this one medication would cost this gentleman on a fixed income over 

$140 for a one-month supply. He noted that the man was on other medications as 

well. As this patient’s caregiver, he felt that instead of solving a problem for his patient he had indirectly created one. Not a good feeling to know your patient will not 

be able to comply with the treatment plan that you prescribed because he or she 

can’t afford it and that you unknowingly contributed to the situation. 

His answer to the patient that was now sitting in front of him requesting help 

with purchasing his medications . . . you bet. 

By the way the medication for the diabetic amputee would have cost approximately $65 in Canada. 

This concludes my prepared remarks. Thank you again for this opportunity and 

I would be happy to try to address your questions.

31

UHAMedicineAssist 

Six-month Summary Analysis 

Time Frame: July–December 2000

Number of patients participating: 145

Number of physicians participating: 19

Number of drug names ordered: 106

Total cost of prescriptions in U.S. $81,006.17

Total cost of prescriptions in Canada $22,361.53

Total savings: $58,963.84

Percent savings: 72.8%

Overall average savings: 68.4%

Range of savings by drug: 28%–97%

Source: United Health Alliance 2000 (MedicineAssist) 

Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic area and by individual pharmacies. 

Sample Drug Pricing 

Drug Number of 

Tabs Canada U.S. Savings 

Tamoxifen 10 mg 60 $7.05 $142.44 95%

Lipitor 10 mg 90 $106.33 $230.58 54%

Plaxil 10 mg 30 $33.01 $94.57 60%

Prozac 10 mg 100 $115.93 $361.28 68%

Coumadin 5 mg 100 $25.52 $90.07 72%

Glucophage 500mg 100 $15.70 $86.26 82%

Prilosec 10 mg 30 $33.88 $144.62 77%

Fosamax 10 mg 30 $36.40 $85.99 58%

Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic area and by individual pharmacies. All dollar figures are reflected in U.S. Currency. 


905wenn1.eps
32

Senator DORGAN. Ms. Wennar, thank you very much. We appreciate your testimony. 

Mr. John Marvin, a member of the Alliance for Retired Americans. 

STATEMENT OF JOHN MARVIN, MEMBER OF THE ALLIANCE 

FOR RETIRED AMERICANS 

Mr. MARVIN. Thank you, Senator Dorgan. I appreciate the opportunity to testify today. I am representing the Alliance for Retired 

Americans, where I serve as a Regional Board Member for the 

northeastern part of the nation. The Alliance, which was established on January 1 of this year, now has 2.6 million members 

across the nation. It is made up of retirees from affiliates of the 

AFL–CIO, community-based organizations, individual seniors who 

joined the Alliance to fight for social and economic justice and civil 

rights for all Americans. I am also representing the Maine Council 

of Senior Citizens. 

Today I submitted testimony which I hope you will read. I really 

want to testify from the gut, if you will. You are talking—you’ve 

heard of the angry young man. Today you’re going to hear from an 

angry old man. The current policy seems to result in a kind of people export into Canada act instead of a workable reimportation act 

into this country. 

This is the fourth year that I have spent organizing bus trips to 

Canada for prescription drugs run on an average of one-third to 

one-half cheaper than here. Last year 25 people caught a bus, 

saved $10,000 from the costs over what they would have paid in 

this country had they bought those same drugs here. 

We always have on most trips at least one person and usually 

more, women who are suffering from breast cancer, which means 

they must take Tamoxifen for virtually the rest of their lives. At 

my local drug store in Augusta, Maine, a month’s supply of Tamoxifen costs $114.99. Last August, that same month’s supply in 

St. Stephen’s, New Brunswick, just across the border, cost $14.50. 

That’s why I am an angry old man about the situation as it relates 

to prescription drugs. 

The trips do two things in addition to being of immediate help 

to those fortunate enough to be able to ride the bus. They highlight 

the fact that persons without drug coverage in this country literally 

pay the highest prices in the world, as you were pointing out, for 

drugs made mostly in Puerto Rico and heavily subsidized by the 

U.S. taxpayer. 

In that respect, I want to point out that the major reason why 

the drug prices in the United States are so high is the pharmaceutical industry has a lock on the supply of needed drugs, backed 

up by law and power. It controls the development process for new 

drugs both here and throughout the world. The laws of this nation 

then protect the market power of the industry by providing patent 

protection for almost two decades. 

To make sure this patent protection stays secure, we add in public financing of the highest risks of development process. The industry spends hundreds of millions of dollars to influence government at all levels. The result is the exploited pricing policies that 

we are discussing here today. 

33

A publication of the Alliance, The Profit in Pills: A Primer on 

Prescription Drug Prices, documents why prescription drug prices 

have increased so dramatically, and the various ways that the 

pharmaceutical industry protects its interests at the expense of the 

American public. Most affected are older persons and those with 

disabilities who take more medications than other segments of the 

population and are most likely to pay the full retail prices. 

I respectfully request that this report be included in the hearing 

record and I would also ask that you, Senator Dorgan, put it into 

the Congressional Record so that all of your can colleagues may 

also have an opportunity to read it. 

Senator DORGAN. Without objection, the publication will be part 

of the hearing record. 

[The information referred to follows:]

THE PROFIT IN PILLS: A PRIMER ON PRESCRIPTION DRUG PRICES, A REPORT BY THE

ALLIANCE FOR RETIRED AMERICANS

[Reprinted from The Profit in Pills: A Primer on Prescription Drug Prices with permission of the Alliance for Retired Americans.]

Dear Reader:

Our purpose in producing this report is to make the public aware of how price 

gouging by the pharmaceutical industry is allowing industry profits to soar at the 

expense of every American citizen and every American company with health benefits. Even the health plans covering younger and working citizens are being 

squeezed because of hyperinflation of prescription drug prices. 

Unfortunately, those ages 65 and older and persons with disabilities suffer the 

most because they take more medications than other segments of the population. 

More than 40 percent of all prescriptions written are for retired Americans, who 

make up 13 percent of the U.S. population. While more than 13 million older Americans and people with disabilities have no prescription drug coverage at all, the coverage other Medicare beneficiaries have is often very expensive (some policies cost 

more than $3,000 a year), inadequate and unreliable. Almost half of all Medicare 

beneficiaries lack coverage for at least part of each year. In addition, health maintenance organizations (HMOs) have dropped more than two million Medicare beneficiaries, many of whom have been unable to find another HMO, and employer-provided health and prescription drug insurance is declining. 

The Alliance for Retired Americans believes the time has come for the federal government to act decisively to resolve the crisis. There is overwhelming support for 

the government to provide prescription drug coverage for the elderly and persons 

with disabilities and to confront drug prices. That support must be translated into 

political action. 

The more than 2.5 million members of the Alliance for Retired Americans, organized in 2001 and growing rapidly, are making the fight for prescription drug coverage for all Medicare beneficiaries their No. 1 legislative priority in Congress. Including pharmaceuticals as a basic, defined Medicare benefit would equip the Centers for Medicare and Medicaid Services, the agency of the U.S. Department of 

Health and Human Services that administers Medicare, to use its national purchasing power to bring outrageously high prescription drug prices under control and 

set national standards for reasonable prices. Medicare drug coverage also would provide current workers with the peace of mind of knowing they will be able to get the 

medicines they need when they retire. Even such corporate giants as General Motors are calling for the addition of a universal prescription drug component to Medicare. Other approaches to use government authority to control and moderate drug 

prices also must be explored and adopted. 

The Alliance believes that drug benefits, like other Medicare benefits, should be 

available to all Medicare beneficiaries with no income test; all medically necessary 

and approved treatments should be covered; enrollment must be voluntary so people 

who now have plans can keep them; provision should be made to encourage current 

employer retiree plans to maintain at least their current levels of benefits; premiums, deductibles and co-payments must be affordable; there must be reasonable 

limits on beneficiary out-of-pocket expenses; and lower-income beneficiaries should 

34

have all costs covered. Most importantly, to make the benefit affordable to taxpayers 

and beneficiaries, drug price cost controls are essential. 

In the longer term, the Alliance believes the enactment of a universal health system that includes pharmaceutical treatments as a basic benefit is required to fully 

address the challenge of availability and reasonably priced drugs. 

Our immediate challenge on behalf of older and retired Americans is to serve as 

a strong voice for the enactment of a drug benefit under Medicare, and for strengthening and improving Medicare and Social Security. For more information on the Alliance and to find out what you can do to help put an end to the outrageous price 

gouging by the pharmaceutical industry, we invite you to visit our website at 

www.retiredamericans.org.

Sincerely,

GEORGE J. KOURPIAS, 

President

EDWARD F. COYLE, 

Executive Director

Serious Choices 

Too many older Americans are forced to choose between paying for their prescription drugs and buying food. But one woman’s choice was even more critical. 

Ms. H had moved recently into Council House, a housing project for seniors in 

Maryland. One day at the elevator she met a neighbor awaiting a delivery from her 

pharmacy. The deliveryman arrived—but when the woman saw how much her drugs 

cost she sent them back. She said she didn’t have enough money to pay for them. 

Two weeks later she was dead. 

Summary 

Prescription drug prices are rising rapidly and are projected to continue to do so 

through at least the next decade. This increase has the most adverse effect on the 

segments of the population without some type of insurance protection. 

Drug spending overall is increasing largely because of three factors: utilization or 

volume increases; availability of new drugs for treating diseases; and rising prices 

for existing drugs. While a number of new drugs have extended and enhanced the 

quality of everyday life for many Americans, they remain too costly and out of the 

reach of millions. 

The pricing chain for drugs is complex and difficult to trace because much of the 

information regarding prices is considered proprietary and hence is not publicly 

available. 

The pharmaceutical market is unique in several ways. Manufacturers charge different prices for different customers and allow for discounts and rebates in order 

to maintain inclusion of their products on the formularies of large purchasers. It is 

the individual consumer without insurance coverage who pays the highest prices for 

prescription drugs. 

Drug manufacturers also enjoy a lower tax rate than other industries. And although they maintain that high prices for new drugs are justified as their recovery 

for research and development expenses, most core research for drugs is funded by 

the federal government, primarily through the National Institutes of Health. Much 

of the companies’ development of drugs actually is for derivatives of existing drugs 

rather than new drugs. 

While the precise cost of drugs is difficult to pinpoint, the profit levels are not. 

In 2000, pharmaceutical companies had after-tax median profits of 18.6 percent, 

compared with 4.9 percent for all other Fortune 500 companies combined. 

Drug manufacturers spend more of their revenues on profits than on research and 

development—and even more on marketing. They dedicate more than 18 percent of 

revenues to profits and 30 percent to marketing and administration, compared with 

12 percent to research and development. 

Promotional spending is directed toward doctors primarily through distribution of 

samples. Since 1997, direct-to-consumer (DTC) advertising has become a more significant part of marketing, accounting for $1.3 billion in advertising outlays in the 

first half of 2000 alone. Drug companies also spend millions in contributions to political candidates and to lobby Congress. 

35

Almost half of all prescription drugs sold in the United States are generic drugs—

but this accounts only for about 10 percent of the costs of all pharmaceuticals. Generic drugs, which cost less than brand-name drugs, are able to enter the market 

only after the brand-name company’s patent expires. These patents often are extended by various means, including deals with generic companies. 

Since the enactment of Medicare 36 years ago, prescription drug treatment has 

become an essential component of medical treatment for older people and those with 

disabilities. For Medicare beneficiaries with serious chronic medical conditions, access to drugs is critical to survival and to the maintenance of an acceptable quality 

of life. 

The most comprehensive approach to providing affordable prescription drugs for 

all Americans is to enact a universal, national health care system that includes a 

prescription drug benefit. Among Medicare beneficiaries, however, a crisis over both 

declining coverage and price escalation has been a top political and medical issue. 

National and state lawmakers are exploring a variety of interim approaches. This 

primer responds to the immediate need of Medicare beneficiaries and discusses a 

number of measures being pursued toward the goal of affordable, comprehensive 

drug coverage for such beneficiaries. 

Introduction 

The high costs of prescription drugs in the United States are not new but in recent years have made it to the front of the nation’s radar screen. Prescription drug 

prices are rising rapidly, having the most adverse effect on the segments of the population without some type of insurance protection, including Medicare beneficiaries. 

As a policy issue, coverage of prescription drugs for Medicare beneficiaries became 

a major component in the 2000 presidential campaign and in many congressional 

races; it continues to be a major issue in the 107th Congress. 

This report attempts to present the trends and reasons why prescription drug 

prices have increased so dramatically, where the money goes, examine proposals to 

address the issue and present recommendations from the Alliance for Retired Americans. 

Principles for a Medicare Prescription Drug Benefit 

The Alliance for Retired Americans is committed to the enactment by Congress 

of a universal, comprehensive and affordable defined prescription drug benefit under 

Medicare. 

The Medicare program is a vital and effective program on which more than 98 

percent of older Americans and millions of persons with disabilities depend. However, Medicare lacks a core component of any comprehensive medical system—prescription drugs. 

Prescription drug prices are rising rapidly, having the most adverse effect on the 

segments of the population without some type of drug coverage. Older Americans 

spend more out of pocket than the rest of the population because they have more 

acute and chronic illnesses, use more prescription drugs for treatment and are less 

likely to have insurance coverage. 

Older Americans, 13 percent of the U.S. population, account for 34 percent of all 

prescriptions dispensed and 42 cents of every dollar spent on prescription drugs. 

Employer-provided health coverage for retirees is declining, and managed care plans 

are capping or dropping drug benefits and dropping out of the Medicare+ Choice 

program. 

The recent proposal to give block grants to the states to create prescription benefits for low-income seniors would be ineffective for the following reasons:

• It would leave millions of moderate-income older and disabled persons without 

protection;

• It would take years to create;

• It would give states wide latitude to restrict benefits;

• It would delay the passage of a true universal and defined Medicare drug benefit; and

• The record of states in enrolling persons in the QMB and SLMB programs gives 

little cause for optimism for expanded coverage.

36

The Alliance for Retired Americans believes that a Medicare pharmaceutical benefit must incorporate the following principles:

• Universal coverage for all who qualify for Medicare benefits;

• The benefit must be comprehensive and include the most current and effective 

treatments and quality controls;

• Enrollment in the benefit should be voluntary so that those who have superior 

benefits can remain in their employer’s plan while assuring enrollment later for 

persons facing erosion or loss of current drug benefits;

• The benefit must have affordable premiums and co-pays and should protect all 

beneficiaries from high out-of-pocket expenses;

• The benefit must not be means-tested; however, low-income persons should 

have all costs covered;

• Dollar coverage of the benefit should be high enough to protect the out-of-pocket 

costs of average-to-higher pharmaceutical users and contain a reasonable cap on 

costs for those with catastrophic bills;

• Employers should be required and/or provided with incentives to maintain and 

expand the level of coverage of current, employer-provided prescription drug 

benefits; and

• Pharmaceutical prices for all consumers must be brought under some system 

of control, including, for example, enforcement of patent limits; negotiations on 

fair prices by the federal government where there is significant public investment in drug development; and provisions to achieve price discounts for Medicare beneficiaries based on the Federal Supply Schedule and comparable to 

prices charged to larger HMOs and hospital chains. Without action on the rising 

price of pharmaceuticals, the cost of a Medicare benefit will not be affordable 

and millions of Americans of all ages will be denied their right to first-class 

health services.

Recent Trends in the Price of Prescription Drugs 

• According to Bureau of Labor Statistics figures, drug prices rose 306 percent between 1981 and 1999, while the consumer price index (CPI) rose 99 percent during the same period.1

• In 2000, total spending in the United States for prescription drugs was $116 

billion—more than twice the $51 billion spent in 1993. And that amount is expected to more than triple to $366 billion by 2010.2

• Older Americans and people with disabilities spend more out of pocket than the 

rest of the population because they have more acute and chronic illnesses, use 

more prescription drugs for treatment and are less likely to have insurance coverage. Older Americans, 13 percent of the U.S. population, account for 34 percent of all prescriptions dispensed and 42 cents of every dollar spent on prescription drugs.3 The average Medicare beneficiary fills 18 prescriptions a year.

• Annual spending per capita in the Medicare population for prescription drugs 

has jumped from $674 in 1996 to $1,539 in 2000 and is expected to climb to 

$3,751 in 2010, an average rate of increase of 9.3 percent. Total prescription 

spending in the Medicare population will rise from $61.2 billion in 2000 to 

$174.4 billion in 2010, an average annual rate of increase of 11 percent.4 The 

Congressional Budget Office (CBO) estimates prescription drug spending for 

Medicare enrollees will total nearly $1.5 trillion over the next decade.5

• Although nearly one-third (30 percent) of Medicare beneficiaries are expected to 

incur less than $250 in drug expenses in 2001, more than four in 10 (43 percent) will have drug expenses greater than $1,000—and 8 percent will have expenses of at least $4,000.6

• Out-of-pocket spending for prescription drugs by Medicare beneficiaries in 2001 

is estimated to average about $686, with 20 percent expected to spend more 

than $1,100.7

• Medicare beneficiaries without prescription drug coverage spend on average 83 

percent more for their medicines than those with drug coverage. About half of 

37

Medicare beneficiaries without any form of prescription drug coverage have incomes less than 175 percent of poverty, which is $15,000 in 2001.8

• As Social Security benefit increases are tied to the CPI and prescription drug 

prices are increasing much faster than the CPI, these trends make prescription 

drugs increasingly less affordable for Social Security beneficiaries. 

Why Are the Prices Going Up So Rapidly? 

Toward the end of the last century, changes were made in the way hospitals were 

compensated that prompted them to reduce the length of stay of patients. This 

‘‘quicker and sicker’’ discharge from hospitals led physicians to increasingly rely on 

prescription drugs for treating patients. Drug interventions, in turn, forestall the 

hospitalization of many other older persons and help them to maintain lives outside 

of institutions. Consequently, the role prescription drugs play in the lives of older 

persons, in particular, has become much greater. 

There is no doubt the introduction of many new drugs has extended and enhanced 

the quality of everyday life for millions of Americans. Technological advances in 

treating diseases include the utilization of new drugs that can arrest or cure many 

cancers, heart disease, high blood pressure, AIDS and other life-threatening conditions. Drugs have contributed to reducing costs of hospitalizations and surgeries, 

but new drugs are more expensive than older drugs, and three times more costly 

than generic drugs. 

The spending increases for prescription drugs are attributed largely to three factors:

• Utilization increases;

• Availability of new drugs for treating diseases; and

• Rising prices for existing drugs.

The volume of drugs sold has increased dramatically. Between 1992 and 1998, the 

number of prescription drugs sold has increased 37 percent. The 3 billion prescriptions sold in 2000 are expected to rise to 4 billion by 2004.9

The increase in utilization or volume of drugs prescribed is greatly affected by 

promotional advertising by manufacturers. 

Manufacturers promote the use of new drug therapies in a number of ways. The 

most common practice is for thousands of drug company representatives to leave 

samples when visiting physicians and hospitals. Advertising directed at consumers 

is a relatively new practice that has grown considerably over the past 15 years. Promotional spending by drug companies reached $13.9 billion in 1999, an 11 percent 

increase from 1998 levels. Of that total, direct-to-consumer (DTC) advertising accounted for $1.8 billion, a 40 percent increase from 1998.10

The price of older drugs is increasing also, but at a rate of less than 4 percent 

per year. Additionally, in order to extend patents, drug manufacturers often will 

issue older drugs in new dosage forms or with other minor changes and charge higher prices. A Congressional Budget Office study found the average list price of brandname drugs increases faster than inflation even after the entry of other therapeutically equivalent (‘‘me too’’) drugs on the market.11

Distribution Chain 

Generally, the chain of distribution begins with the manufacturer who distributes 

the drug by selling it to drug wholesalers, the middlemen between the manufacturer 

and the pharmacies. The wholesaler sells the drug to the retail pharmacy at the 

price of obtaining the drug plus a markup, usually between 2 percent and 4 percent. 

The pharmacist sells to the consumer at the acquisition price plus a markup of 20 

percent to 25 percent. If the customer is insured, he or she will not pay the full 

amount, but rather a copayment of differing amounts depending on the insurance 

plan. If the customer is uninsured, he or she will pay the full cost or highest price 

for the drug.12

38

For every dollar that a consumer pays for a prescription drug at the pharmacy, 

74 cents goes to the drug manufacturer, 3 cents goes to the wholesale distributor 

and 23 cents to the pharmacy.13


905marv1.eps
39

Pricing Chain 

It is extremely difficult to identify the actual cost of a drug because the pricing 

chains are more complex than the distribution chain. This table summarizes key 

pricing terms and the levels at which prices are and are not publicly accessible. 

Some prices are not publicly available, as they are considered to be manufacturers’

proprietary information.

PRICE DEFINITION 

Retail price The price charged by retail pharmacies to individuals without insurance, known as ‘‘cash-paying’’ customers.

Average wholesale 

price (AWP) 

The average list price that a manufacturer suggests wholesalers 

charge pharmacies. AWP typically is less than the retail price, 

which will include the pharmacy’s own price markup. AWP is referred to as a ‘‘sticker’’ price because it is not the actual price 

that large purchasers normally pay. For example, in a study of 

prices paid by retail pharmacies in 11 states, the average acquisition price was 18.3 percent below AWP. Discounts for HMOs 

and other large purchasers can be even greater. AWP information is available publicly.

Average manufacturer price (AMP) The average price paid to a manufacturer by wholesalers for drugs 

distributed to retail pharmacies. Federal Supply Schedule prices 

and prices associated with direct sales to HMOs and hospitals 

are excluded. AMP has a benchmark created by the Omnibus 

Budget Reconciliation Act (OBRA) in 1990 to use in determining 

Medicaid rebates and is not publicly available. The Congressional Budget Office (CBO) estimated AMP to be about 20 percent less than AWP for more than 200 drug products frequently 

purchased by Medicaid beneficiaries.

Nonfederal average 

manufacturer price 

(NFAMP) 

The average price paid to a manufacturer by wholesalers for drugs 

distributed to nonfederal purchasers. NFAMP is not available 

publicly.

Federal Supply 

Schedule (FSS) 

The price available to all federal purchasers for drugs listed on the 

Federal Supply Schedule. FSS prices are intended to equal or 

better the prices manufacturers charge their ‘‘most-favored’’ nonfederal customers under comparable terms and conditions. Because terms and conditions can vary by drug, the most-favored 

customer price may not be the lowest price in the market. FSS 

prices are available publicly.

Federal ceiling price 

(FCP) 

The maximum price manufacturers can charge for FSS-listed 

brand-name drugs to the Veterans Administration, Department 

of Defense, Public Health Service and the Coast Guard, even if 

the FSS price is higher. FCP must be at least 24 percent of 

NFAMP. FCP is not available publicly.

Medicaid rebate net 

price 

The effective outpatient drug price after manufacturer rebates to 

state Medicaid programs. The basic rebate on brand-name drugs 

is the greater of 15.1 percent of the AMP or the difference between AMP and the lowest or ‘‘best’’ price the manufacturer 

charges any purchaser other than Medicaid. Rebates for generic 

drugs are 11 percent of the AMP. Rebates are larger for brandname drugs whose AMP increases exceed inflation in the consumer price index. Information on rebate amounts is available 

publicly; AMP and best price are not available publicly.

VA national contract 

price 

The price the VA has obtained through competitive bids from manufacturers for select drugs in exchange for their inclusion on the 

VA formulary. Contract prices are available publicly. 

Source: GAO, Prescription Drugs: Expanding Access to Federal Prices Could Cause Other Price Changes, August 2000

40

Variations in the price can take place because of the power the drug companies 

have in their market and also because purchasers can be separated into groups that 

vary by their price sensitivity. This practice is known as price discrimination. Pricesensitive group health maintenance organizations (HMOs, see glossary), for example, would decrease the amount of a particular drug they purchase if the price of 

that drug increased, particularly if there are equivalent substitutions available. Doctors who prescribe medications and consumers with insurance coverage that covers 

most of the costs of drugs are considered to be price insensitive. An individual consumer without coverage and without bargaining power would be ‘‘price sensitive’’ to 

costs and more willing or forced either to use a substitute or decrease use. 

Consequently, drug manufacturers charge different prices to different purchasers 

for the same drug. Agencies of the federal government, state Medicaid programs and 

many nonfederal public health entities have access to substantially lower prices 

through the Federal Supply Schedule (FSS) for pharmaceuticals. 

Under the Omnibus Budget Reconciliation Act of 1990 (OBRA), drug manufacturers must provide rebates to state Medicaid programs for their outpatient drugs in 

exchange for Medicaid coverage. The minimum rebate for a brand-name drug is 15.1 

percent of the average manufacturer price (AMP). Medicaid pays the pharmacy its 

acquisition price plus a dispensing fee and gets an average cash rebate of 19 percent 

to 21 percent from the manufacturer. Favored private purchasers with their own 

outpatient pharmacies, such as HMOs and hospitals, may deal directly with the 

manufacturers and consequently pay a price lower than that offered to wholesalers. 

Insurers and pharmacy benefit managers (PBMs, see glossary) obtain both a retail 

discount and a rebate from the manufacturer wielding their bargaining power 

through the use of formularies, i.e. lists of drugs approved for use and reimbursement. It is of significant economic importance to manufacturers to have their drugs 

included in the formularies of large purchasers. The amount of rebates can vary considerably by type of arrangement and by drug. Thus, together with co-pays from 

covered beneficiaries, discounts and rebates, an insurer and PBM likely would pay 

between $30 and $44 for a drug for which the uninsured cash customer would pay 

$52. With rebates, Medicaid would pay about $34 for the same drug. 

Most retail pharmacies, however, do not have the bargaining power for discounts 

that other favored purchasers have, as they must stock a full range of drugs, not 

just those in specified formularies, in order to fill all prescriptions presented to 

them. At the bottom of the chain, it is the noninsured consumer who pays the most 

for a prescription drug.14

Who Pays? 

On average, Americans use about 10 prescriptions a year, but most do not pay 

full price for them. Slightly more than three in four (77 percent) of the non-Medicare 

population have prescription drug coverage. Sixty-one percent have coverage from 

their employer; 11 percent have coverage under Medicaid and 5 percent have private coverage. Nearly one-fourth of the non-Medicare population has no drug coverage, primarily because they do not have health insurance. 

Since Medicare does not have an outpatient prescription drug benefit, at least one 

in three people in the Medicare population—approximately 13 million—have no 

drug coverage at all in the course of a year; nearly half have no coverage for at least 

part of an entire year. Employers cover prescription drugs for 24 percent of the 

Medicare population. Seventeen percent are covered by Medicare HMOs. Others rely 

on Medicaid (12 percent) and other sources (5 percent) for coverage.15 Another 8 

percent purchase Medigap plans, but they must pay for the coverage and are subject 

to high administrative costs and high premiums as well as adverse selection. 

The prescription drug benefit has been a major reason many Medicare beneficiaries are attracted to Medicare HMO plans. However, many of them are losing 

their prescription drug benefit either because of the withdrawal of HMOs from 

Medicare or a decline in the number of plans covering the benefit. Many rural counties now have either no carriers or only one noncompetitive plan. At the end of 2000, 

more than 900,000 Medicare beneficiaries were dropped from their HMOs; they encountered more difficulty finding an alternative HMO than the 700,000 who were 

dropped in 1998 and 1999. Of 237 HMOs once in the Medicare program, only 90 

continue.16 A study of benefits under Medicare+ Choice plans during the 1999–2000 

period shows there was a decline in the number of contracts covering prescription 

drugs from 73 percent to 68 percent.17

41

Source: Adapted from Jack Hoadley, Ph.D., Office of the Assistant Secretary for 

Planning and Evaluation (ASPE), DHHS. Presentation to ASPE Conference on 

Pharmaceutical Pricing, Utilization and Costs, Washington, D.C., Aug. 8–9, 2000.

There also is evidence of decline in either the generosity of the benefit or an increase in cost-sharing. Seventy percent of plans have an annual $1,000 or less limit 

on drugs and 32 percent have caps of $500 or less per enrollee.18 A survey of enrollees in Medicare HMOs found that 72 percent of them saw their annual HMO premiums increase by at least $500 within one year.19

Similarly, employer coverage for retirees and the scope of their benefits has been 

declining in the past decade because of rising costs. Among employers with more 

than 200 workers offering retiree health benefits, 67 percent offered them to Medicare-eligible retirees in 2000, down from 80 percent in 1999, a 16 percent decline. 

Sixty-seven percent of firms of all sizes report that higher spending for drugs contributed ‘‘a lot’’ to increases in health insurance premiums in 2000.20 Another survey of employers reports that drug costs represented 40 percent to 60 percent of employers’ retiree plan costs. Large employers (1,000 employees) are most likely to 

offer retiree health plans. However, 40 percent of them are seriously considering 

cutting back on drug benefits for their retirees in the next three to five years and 

30 percent would consider terminating coverage prospectively for retirees ages 65 

and older.21

Consequently, the number of Medicare beneficiaries without prescription drug 

coverage can be expected to grow considerably, leaving millions more to pay the 

highest prices for their prescriptions. 

The Money Chain: How Are Drug Revenues Spent? 

Drug manufacturers devote more of their revenues to profits and marketing than 

to research and development (R&D). The 12 drug companies with the highest reveVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT

905marv2.eps
42

nues spent three times as much on marketing as on R&D in 2000. More than 18 

percent of revenues are dedicated to profits, compared with 12 percent spent on 

R&D and 30 percent on marketing and administration.22

Profits 

The pharmaceutical market differs from other markets in a number of ways:

• There is a ready demand for the old as well as the higher-priced new therapeutic products, so marketing is intense;

• There is insurance coverage and subsidization for the product;

• Government pays for a substantial share of research that leads to drug development;

• There is government compliance in supporting drug monopolies through allowing market exclusivity under a patent and the extension of patents; and

• There are hidden prices, discounts and rebates.23

The pharmaceutical market differs also in the profits the industry makes compared with others. As can be seen in the following chart, data from the list of Fortune 500 companies show that in 2000, the after-tax median profits of pharmaceutical companies was 18.6 percent, higher than any other industry and considerably higher than the median after-tax profit level of 4.9 percent for the other Fortune 500 companies combined. This translates into $192 billion in revenues and $28 

billion in profits in 2000 for drug companies. In fact, Fortune magazine places the 

pharmaceutical companies at the top in two of three categories—returns on revenues and returns on assets—and second in returns on shareholders’ equity.24

Source: FORTUNE magazine

Not only are pharmaceutical companies more profitable than other industries, 

they also have a lower tax rate. There are five federal tax provisions that result in 

greater tax savings for the drug companies than other major industrial categories. 

A Congressional Research Service report found that while the average tax rate for 

all industries was 27.3 percent between 1993 and 1996, the rate for drug companies 

was only 16.2 percent.25

Research and Development 

Although pharmaceutical companies claim the prices of new drugs are necessary 

to fund ongoing research and development, it is the federal government, primarily 

through the National Institutes of Health (NIH), that pays for the majority of the 

initial drug research in the United States. 

A congressional committee found that of the 21 most important drugs introduced 

between 1965 and 1992, 15 were developed using knowledge and techniques originating in federally funded research.26 A team of journalists from The Boston Globe 

looked at 50 top-selling drugs approved by the FDA over a five-year period. Thirtyfive were new bestseller drugs that the FDA considered most important or most 

unique, and 15 were so-called ‘‘orphan’’ drugs that treat rare diseases. Thirty-three 

of the 35 new drugs and 12 of the 15 orphan drugs received money from NIH or 

the FDA to help in discovery, development or testing.27

Drug manufacturers also maintain that the most expensive aspect of their research is in the clinical trials,28 yet NIH and other federal agencies are sponsoring 

60 percent of current clinical trials and the industry is sponsoring just 11 percent.29


905marv3.eps
43

During the 1980s and early 1990s, NIH required drug companies to charge a ‘‘fair 

and reasonable’’ price for drugs originally developed by taxpayer-funded research 

and development. This requirement was dropped by NIH in 1995. Reinstatement of 

this requirement is part of a proposal now in Congress, but it may not have sufficient support in the face of intensive industry lobbying. 

In addition, a review of the government’s invention reporting system shows NIH 

does not keep track of the drugs invented with taxpayer monies; NIH tracks its 

spending by disease, not by drug.30, 31

Much of drug manufacturers’ development of drugs is not for new drugs but rather copies of existing drugs. This is particularly important to them, as a number of 

patents are expiring between 2000 and 2004. 

Until 1992, the FDA classified every new drug it approved according to its significance for human health. One classification was 1C, meaning little or no therapeutic 

gain, since a drug so ranked was a duplicate of products already available. During 

the period from 1982–1991, more than half of newly approved drugs (53 percent) 

were 1C or copycat drugs, indicating that much of drug manufacturers’ so-called research and development of drugs is actually of the ‘‘me too’’ variety—therapeutically 

equivalent drugs. Thirty-one percent of the approved drugs were classified as modest therapeutic gain, such as a change in formulation, so the drug could be taken 

less frequently. Only 16 percent were ranked as important therapeutic gain or a 

breakthrough drug. Because of industry pressure, the Bush administration eliminated these rankings in 1992.32

In the 1990s, the FDA approved 857 new drug applications. More than one-third 

(311) were new molecular entities (NMEs), compounds that have never been sold on 

the U.S. market. Nearly half (426) were ‘‘new formulations’’ or ‘‘new combinations’’

of compounds already approved. New formulations consist of active ingredients already on the market that have been modified; new combinations contain two or 

more previously approved active ingredients in a new single medicine.33

Marketing 

Pharmaceutical companies’ promotional spending directed toward doctors and consumers topped $8 billion in the first six months of 2000, up 14.3 percent for the 

same period in 1999. The industry employs one of the largest sales forces among 

all manufacturing sectors. Distribution of prescription samples to doctors accounted 

for nearly 50 percent of promotional spending. Nearly half of the samples (45.1 percent) were given to patients over the age of 60.34

Changes to FDA policy in 1997 have allowed drug manufacturers to expand advertising via mass media to consumers. Direct-to-consumer (DTC) advertising, primarily through television ads, totaled $1.3 billion for the first half of 2000 only, 

compared with $1.3 billion for all of 1998 and $1.8 billion for 1999.35

The direct-to-consumer advertising and dispensing of free brand samples by physicians generate market demand whereby consumers are introduced to and encouraged to request the brand-name drugs from their physicians. In a telephone poll 

conducted in 2000, 91 percent of Americans said they had seen or heard an advertisement for prescription drugs in the past year; 34 percent said they had talked 

with their doctor about a specific medicine they saw or heard advertised; and 7 percent said they asked their doctor to prescribe a medicine they saw advertised.36

DTC ads can produce significant returns. In the first 10 months of 2000, pharmaceutical companies Merck and Pfizer together spent $206 million combined on advertising for their arthritis drugs, Vioxx and Celebrex respectively, resulting in combined sales of $3.7 billion.37

Lobbying 

The drug industry spends a considerable amount on lobbying efforts to protect 

their interests. Overall, the industry spent $278.5 million from 1997 to mid-2000 

lobbying the Clinton administration and members of Congress on both sides of the 

aisle. During this period, nearly 300 lobbyists, many former members of Congress 

or former congressional/administration staffers, were hired to fight bills that would 

control their prices and limit their profits.38 During the 2000 election cycle, pharmaceutical companies contributed $26 million to congressional and presidential campaigns, about 30 percent to Democratic candidates and 70 percent to Republican 

candidates.39

In addition, drug companies are financial backers of such front groups as ‘‘Citizens for Better Medicare.’’ In 2000, CBM waged a $50 million ad campaign against 

a prescription drug benefit under the Medicare program.40 Also, at least $20 million 

was funneled through the U.S. Chamber of Commerce during the 2000 election cycle 

for ads defending candidates who oppose governmental solutions to the high costs 

44

of drugs and attacking members of Congress who favored a universal Medicare benefit and systems designed to moderate drug prices.41

Why Not Have More Substitution of Generic Drugs? 

During the 1950s and 1960s, drug manufacturers persuaded doctors to prescribe 

brand-name drugs and state legislatures to prevent pharmacists from substituting 

generic drugs. Those laws were repealed during the 1970s and the drug companies 

then turned their attention to protecting their interests by obtaining patent extensions and using loopholes to stall the introduction of generic drugs.42 For example, 

many patents on drugs can be extended beyond the 17 years of a patent by altering 

dosages or shapes of the drugs for the sole purpose of obtaining another patent on 

essentially the same drug. Companies also are able to acquire 30-month extensions 

on brand patents when they obtain FDA approval to switch the patented prescription drug to an over-the-counter drug. During the extension periods, generic drug 

makers thereby are prevented from introducing their products. 

In 1984, Congress attempted to keep drug prices down through the Drug Price 

Competition and Patent Term Restoration Act—also called the Hatch-Waxman Act. 

The intent of this legislation was to speed up the entry of generic drugs and encourage competition between companies producing generic and brand-name drugs. When 

the first generic is allowed to enter the market after expiration of a patent, it has 

six months’ exclusivity and its price is 75 percent to 80 percent of the brand. After 

other generics are allowed to enter the market, within a 12- to 18-month period, the 

average generic drug price will be one-third the price of the brand-name drug 

price.43 As part of a legislative compromise, the Act allows for brand patent extensions based on time spent in the FDA review process. 

Today, more than 40 percent of all prescription drugs sold in the United States 

are off-patent generic drugs, but the dollar share of the market is less than 10 percent, indicating how far less costly generic drugs are.44 However, a Congressional 

Budget Office study shows that increased competition from generics has not reduced 

the profitability of the prescription drug industry.45

In recent years, the intent and benefits of the Hatch-Waxman law have been undermined by generic as well as brand companies. Through federal investigations or 

lawsuits, several cases have come to light in which brand companies have made 

agreements with generic companies. Typically, the generic company agrees not to 

produce the generic drug in return for substantial compensation from the brandname company.46, 47

In applying for approval from the FDA, generic drug firms are hampered by having to address nearly every aspect of a brand-name patent in the FDA’s registry, 

including patents on such nonessential features as color, size, shape and types of 

containers. Another obstacle is the practice by brand-name companies of filing ‘‘citizens petitions’’ that require FDA investigation of issues raised in the petition. Citizens petitions originally were created to allow individuals to voice concerns to the 

FDA about the safety or efficacy of a generic drug. However, the drug firms abuse 

this provision by filing petitions for the purpose of delaying entry of generic competition. 

Currently, drug patents in force prior to June 8, 1995, have a term of either 17 

years from date of issuance of the patent award or 20 years from the date of filing 

an application for a patent, whichever is longer, plus allowance for up to a five-year 

extension under the Waxman-Hatch Act. Under the Uruguay Round Agreements 

Act (URAA) of 1994, patents issued after June 8, 1995, have a term of 20 years from 

date of filing plus allowance for a five-year extension for court appeals, interference 

actions and certain other delays. The effective patent life, the portion of patent term 

remaining after clinical testing and FDA review, generally is less. Nevertheless, the 

average effective patent life of many drugs has increased by 50 percent over the 

past two decades. The Hatch-Waxman Act, URAA and other laws could add 4.4 to 

5.9 years to effective patent lives of some new drugs, for a total of 13.9 to 15.4 

years.48

Proposed Solutions 

Aside from plans that would expand or provide an affordable prescription drug 

benefit for seniors, a number of proposals have been made to alleviate the high cost 

of prescription drugs and check the growth in prices. A partial list includes:

• Allow the re-importation of drugs by pharmacies and health plans;

• Require drug companies to give local pharmacies the ‘‘best’’ price they give their 

most favored customers, or the average foreign price;

45

• Enact state initiatives to control prices;

• Close loopholes in the Hatch-Waxman Act that allow brand-name drug companies to obstruct entry of generic competitors;

• Elevate cost-consciousness of doctors and patients;

• Reinstate requirement for ‘‘reasonable pricing’’ on products that were researched and developed using taxpayer monies via NIH;

• Authorize the federal government to buy drugs in bulk and at discount for 

Medicare beneficiaries;

• Open the market to more competition by shortening the length of patents and/

or eliminating the practice of patent extensions;

• Enact compulsory licensing; and

• Authorize the NIH to develop a yardstick for comparing prices. 

Allow the re-importation of drugs by pharmacies and health plans. 

In the past, only drug manufacturers were allowed to re-import drugs made in 

the United States from countries where the drugs are available at lower prices. 

A provision allowing the re-importation of FDA-approved prescription drugs was 

included in the FDA and Agriculture Department appropriations bill (H.R. 4461) 

passed by Congress and signed by President Clinton Oct. 28, 2000. It included $23 

million in funding for FDA implementation in the first year. However, Health and 

Human Services Secretary Donna Shalala did not request the monies to begin the 

program because of ‘‘flaws and loopholes.’’ Some members of the 107th Congress 

have asked President Bush to proceed with implementation. 

Many in Congress and others have opposed the measure on the basis of the ‘‘loopholes’’ rather than the concept. That is, drug companies can refuse to allow re-importers to use the FDA-approved labels on their products, effectively blocking re-importation. The measure also does not prevent drug companies from imposing restrictive contract terms on foreign distributors, and a sunset stipulation ending the reimportation system after five years is seen as a disincentive for public and private 

investment in the program. There is also concern that the benefits of the Prescription Drug Marketing Act (PDMA) of 1987 are undermined. PDMA protects consumers from foreign counterfeits and improper storage in foreign countries. Legislation (H.R. 1512) has been proposed in the 107th Congress to close most of the loopholes. 

Require drug companies to give local pharmacies the ‘‘best’’ price they give 

their most favored customers, or the average foreign price. 

Legislation introduced in the 107th Congress (S. 125, H.R. 1512) would make it 

possible for pharmacies to purchase drugs for seniors and disabled persons on Medicare at the lowest price pharmaceutical manufacturers give to such federal agencies 

as the Veterans Administration and military treatment facilities. A report from the 

federal General Accounting Office concluded that enactment of this proposal would 

not necessarily control the increase in drug prices overall, because drug companies 

likely would raise their prices to the federal agencies to offset losses in the reduction 

of prices to Medicare beneficiaries.49 However, an increase in the volume of drugs 

sold would be sufficient to compensate the drug firms for the reduced prices. One 

analysis of a similar bill estimates that after adjusting for increased utilization, the 

net drop in total pharmaceutical industry revenues would be just 3.3 percent.50 A 

variation on this proposal, also introduced in the 107th Congress (S. 699, H.R. 

1400), would allow pharmacies to purchase the drugs at the average price at which 

the drugs are sold in other developed nations. 

Enact state initiatives to control prices. 

A number of states have taken on the problem of high prescription drug costs, 

largely because of inertia on the national level. More than 40 states considered legislation to lower prescription drug costs in their 2001 sessions. 

The state of Maine enacted the ‘‘Maine Rx Program’’ in 2000, which would have 

allowed the state to negotiate lower drug prices with drug manufacturers for Maine 

residents who lack prescription drug coverage. Drug companies found guilty of overcharging for drugs or restricting supplies would have incurred fines. The law also 

authorized the state to establish price caps. The Pharmaceutical Research and Manufacturers of America (PhRMA) filed a lawsuit challenging the constitutionality of 

the law. The case has subsequently moved through the courts. In May, 2001, a federal appeals court ruled in favor of Maine. PhRMA has appealed the case to the 

U.S. Supreme Court.51

46

Legislation has been introduced in a number of other states focusing on lowering 

pharmaceutical costs by various means. Thirty-four states plan to create rebate or 

discount prescription drug cards in 2002 and 32 states are considering purchasing 

pools.52

Several states have already formed bulk purchasing alliances to negotiate lower 

prices for segments of their populations, such as Medicaid recipients or public employees. Attorneys general in several states are considering or taking legal action 

to require drug companies to lower prescription drug prices. At least two states have 

filed lawsuits charging pharmaceutical companies with illegally inflating prices.53

Close loopholes in the Hatch-Waxman Act that allow brand-name drug companies to obstruct entry of generic competitors. 

Legislation introduced in the 107th Congress (S. 812) would streamline the approval process for generic drugs from the FDA. If a brand-name firm pays a generic 

firm to stay off the market, that company’s 180-day market exclusivity as first generic would roll over to the next generic applicant. The measure also addresses 

abuse of ‘‘citizens petitions.’’

Elevate cost-consciousness of doctors and patients. 

Survey data indicate that current Medicare beneficiaries rely on their physicians 

for guidance regarding selection of drugs. Furthermore, generic companies do not 

promote their products to doctors as brand-name companies do. 

To enhance doctor and patient decision making and to ensure patient safety, Rx 

Health Value, a coalition of insurers, unions, private employers, academics and consumer and senior advocacy groups, recommends independent research to provide usable, reliable data for practitioners and consumers in deciding on the use of new 

drugs and how to evaluate relative merits of different drugs within the same class.54

Another recommendation is to publicly fund an independent organization as a reliable source of information on the quality of generic drugs and the equivalence across 

brand-name drugs in the same drug categories.55 Presumably, doctor and consumer 

education also will lead to increased price sensitivity without coercion. 

Reinstate requirement for ‘‘reasonable pricing’’ on products that were researched and developed using taxpayer monies via NIH. 

In effect, this would eliminate the subsidy supplied to the drug makers. An 

amendment to that effect was passed in the House in the 106th Congress by a vote 

of 313–109. It is included in other drug cost-containment legislation (H.R. 1512) introduced in the 107th Congress. However, reinstatement of the requirement may 

not allow for retroactivity, meaning it would not apply to products already on the 

market. Additionally, NIH’s reporting system needs to be shored up considerably for 

this requirement to be effective. 

Authorize the federal government to buy drugs in bulk and at discount for 

Medicare beneficiaries. 

The Health Care Financing Administration (HCFA), which administers the Medicare program, could be given the authority to negotiate price reductions with pharmaceutical companies much as it does with such providers as hospitals, doctors and 

nursing homes. HCFA also could be authorized to use the prescription drug fee 

schedule the Veterans Affairs Department and other federal agencies have negotiated with the drug makers.56

Open the market to more competition by shortening the length of patents 

and/or eliminating the practice of patent extensions. 

This approach actually might produce greater technological breakthroughs because, without the 17 to 20 years of exclusivity on patents, the drug manufacturers 

would have greater incentive to develop the next money-making drug. Patents spur 

innovation, but so do their expiration. Once a drug manufacturer has a blockbuster 

drug, it is inclined to protect the patent on that drug as long as possible, including 

making copycat drugs, in order to continue reaping substantial profits. Closing loopholes on patent extensions could shift attention to new research.57

Enact compulsory licensing. 

This option is discussed most recently in regard to measures African countries 

and Brazil are taking to obtain drugs for treating citizens with AIDS and HIV. A 

1994 international trade agreement protecting intellectual property grants 20-year 

patents to drug manufacturers. However, compulsory licensing allows a government 

in a national emergency to license local or other manufacturers to produce cheaper 

versions of drugs whose patents are held by multinational companies. Compulsory 

licensing in the United States could take the form of allowing the originator of the 

47

drug to have a monopoly for a few years with no extensions, then compelling that 

company to license the drug to other manufacturers in return for a royalty payment. 

Authorize the NIH to develop a yardstick for comparing prices. 

The NIH could be designated the federal agency for developing, testing and producing new medicines. Using this experience to measure costs of research and development, NIH would be in a position to gauge whether prices charged by manufacturers are reasonable or excessive. Federal and state agencies then would contract 

only with manufacturers whose prices were reasonable.58

A variation on this would be to endow a private, nonprofit institute as an independent source of research to verify whether drugs are new or just variations of old 

drugs.59

Conclusion 

Whatever solution or solutions are devised and implemented, the excessive rise 

in prices indicates that immediate action is necessary. 

All developed countries that have lower drug prices than the United States also 

have some form of universal health insurance coverage. While the presence of insurance coverage increases utilization and expenditures for prescription drugs, it also 

provides the means and incentives for governments to control expenditures. For 

Medicare beneficiaries, the urgent need for such coverage is self-evident, as is the 

need for mechanisms to assure the affordability of such a benefit. 

Ultimately, the best and most comprehensive approach to providing affordable prescription drugs for all the American people is to enact a universal, national health system based on a single-payer financing model.

Glossary of Key Prescription Drug Pricing Terms 

Average manufacturer’s price (AMP). Average price paid by wholesalers to 

manufacturer. Established by manufacturers as a suggested list price for wholesalers selling to pharmacies. Also called the wholesaler acquisition cost (WAC). 

Average wholesale price (AWP). Published wholesale price (‘‘list price’’) suggested by the drug manufacturer. It is comparable to a sticker price on an automobile. 

Cost-sharing. Consumers pay a portion or percentage of the price. Co-payments 

are consumer payments of a fixed cost per prescription (for example, $5); co-insurance is payment of a proportion of costs (perhaps 20 percent). (See Tiers below.) 

Discount. The price lower than the base price paid by certain purchasers to the 

retail pharmacy; amount is negotiated. 

Formulary. List of drugs approved for use or payment—in other words, covered 

or reimbursable drugs. An open formulary includes all drugs; a restricted or closed 

formulary covers only the listed drugs. A partially closed formulary specifies drugs 

covered but allows exceptions with prior approval and/or with increased co-payments. 

Generic drug. A generic drug is one that is chemically identical and bioequivalent to the brand-name drug. FDA approval requires that a generic drug must be 

absorbed into the body at essentially the same rate and to the same extent as the 

brand-name drug. 

Health maintenance organization (HMO). A structure for providing managed 

care resulting in lower costs. HMOs under the Medicare+ Choice program are paid 

a fixed monthly amount adjusted for beneficiary’s age, gender, institutional status 

and Medicaid enrollment. They typically yield lower costs and provide benefits, such 

as prescription drugs, not covered under Medicare for enrolled participants. 

Indemnity coverage. As it pertains to prescription drugs, the insured pays for 

the prescription and then is reimbursed or indemnified by the insurance plan. 

Launch price. The price of a new drug as established by a manufacturer when 

the drug is introduced on the market. 

Market power. The degree to which a company exercises influence over the price 

and output in a particular market. Market power is related to the availability of 

substitute products. A drug manufacturer with a patent on an unrivaled drug has 

great market power. 

Monopoly. A market in which there is only one supplier. A drug manufacturer 

with a drug patent has a monopoly on that drug. The patent protects the manufacturer from competition of chemically identical (but not therapeutically equivalent) 

drugs and allows it to set the market price. 

Oligopoly. A market in which relatively few firms have significant influence over 

the price of a product in the market, such as when two or three drugs dominate 

a therapeutic category. 

48

Patent. A patent on a drug protects it from replication competition for a number 

of years. The effective patent life is the portion of the patent term remaining after 

safety and efficacy testing, clinical trials and FDA approval for marketing. 

Pharmacy benefit managers (PBMs). Private companies that contract with 

health plans to arrange discounts from retail pharmacies and manage distribution 

of drugs. They may also perform such functions as paying claims and negotiating 

price discounts via rebates. 

PhRMA. Pharmaceutical Research and Manufacturers of America, an association 

of prescription drug manufacturers. 

Price discrimination. The selling of the same product to different purchasers 

at different prices. 

Price sensitivity. Refers to the extent to which a purchaser would change the 

amount of a product it would buy if the price of that product should rise or fall. 

Rebate. Money that is returned to the purchaser by the seller after the purchase 

has taken place. Usually a percent of the value of the drug dispensed. 

Retail price. The price charged by retail pharmacies to individuals without insurance, known as ‘‘cash-paying’’ customers. 

Therapeutically equivalent drugs. Drugs that perform the same function as 

another drug even though they may be different chemically. Therapeutically equivalent drugs can be in competition with each other for listing on formularies. 

Tiers of co-payments. Refers to the co-payment amount health plans may require for purchasing drugs from a formulary with the purpose of encouraging the 

use of generic drugs. The first tier co-payment would be for generic drugs and require the lowest co-payment, for example $1; the second tier would be for brandname drugs listed on the formulary with a co-payment of $10, for example; the highest co-payment would be for drugs not listed on the formulary, perhaps $20. 

Endnotes 1 Bureau of National Affairs. Special Health Care Policy Report: Drug Prices. Vol. 

8, No. 19. (May 8, 2000) 2 Health Care Financing Administration. National Health Care Expenditures Projections: 2000–2010. (March 2001) [www.hcfa.gov] 3Families USA. Cost Overdose: Growth in Drug Spending for the Elderly, 1992–

2010. (July 2000) [www.familiesusa.org] 4 Congressional Research Service. Medicare Prescription Drug Coverage for Beneficiaries: Background and Issues. (Jan. 26, 2001) 5 Congressional Budget Office. Laying the Groundwork for a Medicare Prescription 

Drug Benefit. Statement of Daniel L. Crippen, Director, before Subcommittee on 

Health of the House Ways and Means Committee. (March 27, 2001) 6Kaiser Family Foundation. The Medicare Program: Medicare and Prescription 

Drugs. Fact Sheet. (February 2001) 7 Ibid. 

8 Ibid. 

9 Bureau of National Affairs. Special Health Care Policy Report: Drug Prices. Vol. 

8, No. 19. (May 8, 2000) 10 Noonan, David. Why Drugs Cost So Much. Newsweek. (Sept. 25, 2000) 11 Congressional Budget Office. How Increased Competition from Generic Drugs 

Has Affected Returns in the Pharmaceutical Industry. (July 1998) [www.cbo.gov] 12 U.S. Department of Health and Human Services. Prescription Drug Coverage, 

Spending, Utilization, and Prices. Report to the President (April 2000). 

[aspe.hhs.gov/health/report/drugstudy] 13Kaiser Family Foundation. Prescription Drug Trends: A Chartbook by Kreling 

DH, Mott DA, Widerhold JB, Lundy J, Levitt L. (July 2000) [www.kff.org] 14 U.S. Department of Health and Human Services. Prescription Drug Coverage, 

Spending, Utilization, and Prices. Report to the President. (April 2000) 

[aspe.hhs.gov/health/report/drugstudy/exec.htm] 15Public Citizen. D.C. Area Consumers Pay More for Prescription Drugs While 

Pharmaceutical Profits Soar. (Oct. 24, 2000) 16Weiss Ratings. Few Options Available for the Nearly One Million Seniors To 

Be Dropped from HMOs by Year-End. [www.weissratings.com] 17 Cassidy, Amanda, Gold, Marsha. Medicare Choice in 2000: Will Enrollees Spend 

More and Receive Less? Commonwealth Fund. (August 2000) [www.cmwf.org] 18 U.S. Department of Health and Human Services. Prescription Drug Coverage, 

Spending, Utilization, and Prices. Report to the President. (April 2000) 

[aspe.hhs.gov/health/report/drugstudy/exec.htm] 19Medicare Rights Center. Trying to Fill the Medicare Gaps. (Winter 2000) 

[www.medicarerights.org] 

49

20Kaiser Family Foundation and Health Research and Educational Trust. Employer Health Benefits 2000 Annual Survey. 21 Hewitt Associates. Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits. Report prepared for Henry J. Kaiser Family Foundation. (October 1999) 22Public Citizen. Drug Industry Most Profitable Again: New Fortune 500 Report 

Confirms ‘‘Druggernaut’’ Tops Other Industries in Profitability Last Year, 2001. 23Schondelmeyer, Stephen. Role of Price Transparency in the Pharmaceutical 

Market. Presentation to ASPE Conference on Pharmaceutical Pricing, Utilization, 

and Costs, Washington, D.C., Aug. 8–9, 2000. 24FORTUNE magazine. [www.fortune.com] 25 Congressional Research Service. Federal Taxation of the Drug Industry from 

1990 to 1996, Memorandum to Joint Economic Committee. (Dec. 13, 1999) 26 Congressional Joint Economic Committee Report. The Benefits of Medical Research and the Role of the NIH. (May 2000) 27The Boston Globe. Public Handouts Enrich Drug Makers, Scientists. (April 5, 

1998) 28PhRMA, Pharmaceutical Industry Profile 2000. [www.phrma.org/ publications] 29 National Institutes of Health. Linking Patients to Research. [clinicaltrials.gov] 30The Boston Globe. Public Handouts Enrich Drug Makers, Scientists. (April 5, 

1998) 31 U.S. General Accounting Office. Technology Transfer: Reporting Requirements 

for Federally Sponsored Inventions Need Revisions. (August 1999) 32Public Citizen. Why the Pharmaceutical Industry’s ‘‘R&D Scare Card’’ Does Not 

Justify High and Rapidly Increasing U.S. Drug Prices. (Jan. 26, 2000) 33 National Institute for Health Care Management. Prescription Drugs and Intellectual Property Protection. (August 2000) 34 IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8 Billion in 

First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad Investment in U.S. 

Reaches $1.3 Billion in First-Half 2000. (October 2000) [www.imshealth.com] 35 National Institute for Health Care Management. Prescription Drugs & Mass 

Media Advertising. (September 2000) 36 ‘‘The NewsHour’’ with Jim Lehrer/Kaiser Family Foundation/Harvard School of 

Public Health. National Survey on Prescription Drugs. (September 2000) 37 IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8 Billion in 

First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad Investment in U.S. 

Reaches $1.3 Billion in First-Half 2000. (October 2000) [www.imshealth.com] 38Public Citizen. Addicting Congress: Drug Companies’ Campaign Cash & Lobbying Expenses. (July 2000) [www.citizen.org] 39 Center for Responsive Politics. Pharmaceuticals/Health Products: Top Contributors, and, Long-Term Contribution Trends. [www.opensecrets.org/industries] 40The New York Times. With Quiet, Unseen Ties, Drug Makers Sway Debate. 

(Oct. 5, 2000) 41The Wall Street Journal. Drug Firms Underwrite U.S. Chamber’s TV Ads. (Oct. 

6, 2000) 42Surowiecki, James. Big Pharma’s Drug Problem. The New Yorker. (Oct. 16 and 

23, 2000) 43Schondelmeyer, Stephen. Prescription Drugs: Demystifying the Industry. Presentation to Health Action 2001 National Grassroots meeting. (Jan. 27, 2001) 44 National Institute for Health Care Management. Prescription Drugs and Intellectual Property Protection. (August 2000) 45 Congressional Budget Office. How Increased Competition from Generic Drugs 

Has Affected Returns in the Pharmaceutical Industry. (July 1998) [www.cbo.gov] 46The New York Times. Medicine Merchants Holding Down the Competition: How 

Companies Stall Generics and Keep Themselves Healthy. (July 23, 2000) 47Federal Trade Commission. Health Care Antitrust Report...Health Care Services and Products. [www.ftc.gov/bc/hcindex/conduct.htm] 48 National Institute for Health Care Management. Prescription Drugs and Intellectual Property Protection. (August 2000) 49Merrill Lynch. A Medicare Drug Benefit: May Not Be So Bad. (June 23, 1999) 50 U.S. General Accounting Office. Prescription Drugs: Expanding Access to Federal Prices Could Cause Other Price Changes. (August 2000) 51 Academy for Health Services Research and Health Policy. State of the States. 

State Coverage Initiatives. (January 2002) [www.statecoverage.net] 52 Bureau of National Affairs. Northeast Lawmakers to Discuss Prescription Drug 

Pricing Issues. Vol. 10, No. 10. (March 11, 2002) 53 Bureau of National Affairs. State Sues Pharamaceutical Companies Charging 

Inflation of Prescription Drug Prices. Vol. 10, No. 9. (March 4, 2002) 

50

54 Rx Health Value: The Independent Information Center. [RxHealthValue

@aol.com] 55Moon, Marilyn. Prescription Drugs as a Starting Point for Medicare Reform. 

Testimony before the Senate Budget Committee. (Feb. 15, 2001) 56Public Citizen. D.C. Area Consumers Pay More for Prescription Drugs While 

Pharmaceutical Profits Soar. (Oct. 24, 2000) 57Surowiecki, James. Big Pharma’s Drug Problem. The New Yorker. (Oct. 16 and 

23, 2000) 58Mintz, Morton. Still Hard to Swallow. The Washington Post. (Feb. 10, 2001) 

(Jan. 2, 2001) 59 Reinhardt, Uwe. How to Lower the Cost of Drugs, The New York Times. (Jan. 

2, 2001) 

About the Alliance for Retired Americans 

The Alliance for Retired Americans is a new senior advocacy organization that 

was created in January 2001 by national and local affiliates of the AFL–CIO, together with community-based organizations, to provide a voice for the rapidly growing numbers of union retirees and older Americans. 

The mission of the Alliance for Retired Americans is to ensure social and economic 

justice and full civil rights for all citizens so they may enjoy lives of dignity, personal and family fulfillment and security. The Alliance believes that all older and 

retired persons have a responsibility to strive to create a society that incorporates 

these goals and rights; and that retirement provides them with opportunities to pursue new and expanded activities with their unions, civic organizations and their 

communities. The Alliance’s public policy and legislative goals will be achieved 

through mobilization of members in an extensive grassroots network in every region, state and district in the country. 

Acknowledgments 

This report was researched and written by Dianna M. Porter, public policy analyst 

with the Alliance for Retired Americans. Ms. Porter previously worked as public policy director at the Older Women’s League and National Council on the Aging, and 

as a professional staff member with the U.S. Senate Special Committee on Aging. 

More recently, she assisted the government of Macedonia in the development of a 

private pension system. Ruby Scott and Brenda Brooks assisted Ms. Porter in preparing the original manuscript for this report. 

CASE STUDIES

Coverage Doesn’t Mean Full Coverage—Ms. M of Suitland, Md., has congestive 

heart disease and is required to take 10 medications. Even though she is under a 

Medicare HMO, she pays full payments and co-payments of about $300 per month. 

The HMO plan has a cap of $1,000 per year for prescription drugs. When Ms. M 

surpasses that amount in June, she must assume the total costs of her prescriptions. She is ineligible for her state’s drug assistance program because her income 

is just above the allowable level of 116 percent of poverty.

Prescription Drug Costs Lead to Impoverishment—Ms. FM of Rossville, Ga., 

is 73 and widowed. Her annual prescription drug costs are about $4,200 ($350 per 

month). Her income is $608.50 a month—$569 from Social Security and $39.50 from 

her husband’s pension. She has had both a heart attack and a hiatal hernia. She 

lost her insurance coverage and used her savings to pay for prescriptions, to the 

point where she doesn’t have enough to pay her Medicare premiums. Fortunately, 

Family Services pays for her Medicare premiums now.

Limited Coverage Lost When HMO Fails—Ms. D of Lebanon, Tenn., has annual 

prescription drug costs of $2,900. In September 1998, Ms. D was forced to join an 

HMO or pay for all of her supplemental insurance, which she could not afford. She 

had a minimal prescription drug benefit, but the HMO folded in January 2001. Ms. 

D’s pension is $322.50 a month and her Social Security is $538 a month. ‘‘It isn’t 

always easy skimping and scraping to stay on top,’’ she says.

Health Plan Coverage Not Enough—Mr. and Ms. R of Lansing, Ill., have annual 

prescription drug costs of more than $4,000. They do not have prescription drug coverage because it would cost about $2,000 to $3,000, while the policy would only pay 

about $1,600.

Some Must Rely on Samples—Ms. N of Los Angeles is 87 and widowed. She pays 

$135.99 for an antibiotic and $59.69 for prescription eyedrops. She is only able to 

take two other prescriptions her doctor has recommended by getting free samples.

51

Dosage Decreases, But Prices Stay the Same—Mr. S of Yarmouthport, Mass., 

is 87 and married. His annual prescription drug costs are about $4,500. Originally, 

Mr. S’s doctor prescribed 10 mg. of one of the drugs, which cost $251.99. The dosage 

was later decreased to 5 mg., but the cost remained $251.99 for the prescription.

Prescription Drug Costs Wipe Out Life Savings—Ms. H of Springfield, Ill., has 

prescription drug costs of $4,000 per year. Over a decade, this has amounted to 

$40,000, depleting most of her life savings.

Food Comes Last—Ms. H of Monroe, Ga., is 83 and widowed. Her annual prescription drug costs are about $3,400 ($283 per month). Ms. H’s monthly income is $691 

from Social Security. Her daughter, who was born with cerebral palsy, lives with 

her. After paying for utilities (about $250 a month) and her prescriptions, Ms. H 

has only $158 for food and other necessities.

Returning to Work Only Way to Pay for Prescription Drugs—Mr. S of Medford, Ore., is 71. His prescription drug costs per year are $2,760 ($230 per month). 

Social Security benefits cover the cost of rent, utilities and food, but not prescriptions. He has diabetes, high blood pressure and high cholesterol, all of which require 

medication. His savings were depleted by treatments for his wife’s ovarian cancer. 

To pay for the drugs they need, Mr. S has gone back to work. ‘‘Our budget would 

be in serious trouble if this old 71-year-old man couldn’t put on his boots and overalls and go to work every day,’’ he says.

Mr. MARVIN. The trips remind the public of how serious the drug 

problems are for seniors and their families, but bus trips are not 

the answer. While there are dozens of people riding the bus and 

going across to Canada, there are literally hundreds of others who 

physically cannot ride a bus to Canada and have even greater 

needs for prescription drugs than those who are fortunate enough 

to be going three. 

Getting drugs through the mail is sketchy at best, thanks to the 

FDA, which always seems to imply that somehow, as we have 

heard this morning, that the Canadians have lesser standards than 

we do. Some diplomacy that represents with our Canadian brothers 

across the border. 

Senator you can help seniors by finding out just what the U.S. 

Customs policy really is. Can we go to Canada and bring out a 3-

month supply? We do that on the bus and the U.S. Customs Service has no problems with our bringing it across, but what about 

getting drugs through the mail? Sometimes they come and sometimes they are intercepted by the FDA. We need to get some firm 

information even now as to what the correct policy is. 

Our people in Maine are well aware that the Canadian government represents its citizens in dealing with the most profitable industry in the world. They want to know why the American government cannot do the same. Our people in Maine know well that the 

Canadian government bans advertising in professional journals, it 

bans advertising in other than professional journals. That’s not 

done in the United States and our people want to know why the 

U.S. Government doesn’t reinstitute the ban on advertising which 

contributes heavily to the cost of drugs in this country. 

Our people want to know why the government in the name of 

health and safety of its citizens cannot regulate the drug industry 

in the same way that the government is involved with regulating 

the utilities. 

I am proud to be a part of Medicare and the Medicare insurance 

program. But I want to demonstrate for you what’s wrong with the 

program. This stool that I brought is a milking stool, and I know 

some of you will be concerned about what happens to the milk proVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00059 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
52

gram, but nonetheless, it represents the Medicare program, if you 

will. This first leg is Part A of the Medicare program, it deals with 

the hospitals. I happen to have hepatitis B and through Part A, the 

tests are taken care of, if I wind up in a hospital because of deterioration of the liver, it will be taken care of through Part A of the 

program. 

Part B, this is supposed to be white, if you will, represents the 

heart of the Medicare program providing for expenses for the doctors. 

But you will notice that my $750 pill bottle, which is the cost 

that I pay for a 6-month supply to deal with hepatitis B, Eupaverin 

HB, that won’t stand on this platform, it falls over. 

There really needs to be a third leg, and I would suggest to you 

that that third leg which is absolutely essential for a total Medicare program is a Medicare prescription drug program. 

The ARA, the Alliance for Retired Americans, has some ideas on 

how to approach this issue and how the Congress could make positive steps. We are calling for enactment of a new Medicare pharmaceutical benefit using the $300 billion reserved in the tax cut legislation for an affordable benefit program. 

Congress should consider a change in Medicare sending by 

spending these funds over a 6-year period as opposed to the proposed 10-year period. By doing that, we could deepen the benefit, 

make it more affordable for the average income persons in the 

Medicare program, but let’s do it and stop debating. That’s what 

the seniors I know in Maine and across the country are saying. 

Senator this angry old man begs you to do something so that I 

can get out of the bus tour business. Thank you for the opportunity. 

[The prepared statement of Mr. Marvin follows:]

PREPARED STATEMENT OF JOHN MARVIN, MEMBER OF THE

ALLIANCE FOR RETIRED AMERICANS

Thank you, Senator Dorgan and all of the Members of this Subcommittee, for this 

invitation to testify today. I am John Marvin representing the Alliance for Retired 

Americans where I serve as a Regional Board member for the northeastern part of 

the nation. The Alliance, which was established on January 1 of this year, now has 

2.6 million members across the nation. Retirees from affiliates of the AFL–CIO, 

community-based organizations and individual seniors have joined the Alliance to 

fight for social and economic justice and civil rights for all Americans. I am also representing the Maine Council of Senior Citizens. 

I am here today because of my work in Maine and New England to organize bus 

trips to Canada so that seniors can buy prescription drugs at much lower prices 

than are available in the U.S. 

In Maine, we are now organizing our 4th annual trip to Canada which is scheduled for September 19–20. On the first trip, I saved $400 on a 12-month supply of 

40 mg. Zocor. I now take Epivirim HB 100 mg. instead. While the savings are not 

nearly as dramatic, I will still pay $150 less in Canada than at my local pharmacy. 

That adds up to about a $300 annual savings to me alone. 

On our second trip, we hit the jackpot. We were well aware of the festering problems for seniors caused by the price of prescription drugs. But Mike Wallace and 

the 60 Minutes television program which featured our trip two years ago escalated 

awareness of the seriousness of the problem by putting a human face on it. In the 

recent elections, it was the rare candidate indeed who did not pledge to do something about the problem even if little has been done. 

This work organizing trips and advocating for programs to meet the prescription 

drug needs of seniors puts me in almost daily contact with people like Vi Quirion 

of Waterville, Maine. She retired from a shirt factory there and has a very modest 

retirement income—primarily from Social Security. Instead of paying $1290 at her 

53

local pharmacy, she will pay $660 in Canada for a 6-month supply of Prilosec and 

Relaten. 

Another couple who will ride with us are Pauline and Leopold Nolette of Biddeford, Maine. Between the two of them, they have prescriptions for drugs like Anucil, 

Zocor and Celebrex. Their Canadian bill will be right around $1162. Their local 

pharmacy in Biddeford would charge $3,879 for the same drugs, an incredible savings of $2,717. 

And we will have on the bus at least one breast cancer patient who must take 

Tamoxifen. A year ago, a month’s supply at her pharmacy in Augusta was $115. The same quantity cost $15 in St. Stephens, New Brunswick, an astounding 79% 

savings. 

What infuriates Vi Quirion, the Nolettes, myself and all the others on the bus is 

that we are buying these drugs in Canada which are for the most part manufactured in the United States of America and shipped there. 

Seniors are upset and we have a right to be. Fewer of us have access to retiree 

drug benefits and frequently our incomes exceed that which would qualify us for 

state low-income drug programs. We are asked to pay literally the highest price in 

the world for prescription drugs. It is even more insane when you realize that most 

people with substantial incomes in this country have prescription benefits from their 

employers. So seniors wind up paying even more for drugs than do the relatively 

well-to-do. Now that’s wrong. 

In Maine we grew impatient with federal inaction. We pushed the legislature into 

passing the Maine Rx program which will ultimately result in price controls applied 

to the products of the most profitable industry in this country. Is it unreasonable 

for U.S. citizens to think that we might pay about the same price for prescription 

drugs as our Canadian neighbors? 

PhRMA, Pharmaceutical Research and Manufacturers of America (which badly 

underestimated the citizen power behind this Maine legislative initiative), chose to 

fight the law rather than to see if there is any truth to Professor Alan Sager’s proposition that lower prices for prescription drugs will induce more volume in business 

so that profits should remain constant. However, it will be unlikely that this law— even with tremendous citizen support—will yield much help for consumers for several years. 

Bus trips get a lot of publicity. We filled two buses in less than 48 hours this year. 

They highlight the problem. Laws providing for re-importation are interesting ideas. 

But neither solves the fundamental problem. To begin with, for every person making the trip there are others far worse-off physically who need the lower-priced 

medications even more, but they cannot physically board a bus. Ultimately, we want 

our local pharmacies to serve as they are intended—community sources of affordable 

drugs. 

This hearing to review the cost of pharmaceuticals in this country in contrast with 

prices in Canada is right on point. The more information that hearings like this provide to the Congress and to the public, the closer we will come to agreement on 

what can and should be done. For the Alliance, and I think that I can speak for 

most seniors in Maine and across the northeastern part of this country, the reasons 

for these contrasts in price are clear. 

Why are prices better in Canada? Well in part, Canadians have a national health 

care system and people of all ages obtain a more comprehensive system of health 

care beginning in childhood and continuing into their older years. Only about 10% 

of Canadian seniors do not have either public or private coverage for drugs while 

up to half of U.S. seniors lack coverage during some time of the year. Only about 

4% of Canadian seniors pay more than $100 in out-of-pocket costs for drugs per 

month while 20% of U.S. seniors do. 

More important, Canadians pay less for drugs because their government bargains 

on their behalf with the pharmaceutical industry. Their drug prices are cheaper because the Canadian government believes, as should this government, that the role 

and impact of pharmaceuticals in people’s lives are too important to leave to market 

forces. On behalf of the Canadian people, their government forces the pharmaceutical industry to bargain and to peg prices close to the average prices of pharmaceuticals in other industrial nations or face a denial of opportunities to market the 

drug in Canada. We should take the same direction on behalf of all U.S. citizens 

needing medications. 

We are also forced to go to Canada to purchase lower cost drugs because of the 

lack of a pharmaceutical benefit within the Medicare program. 

I, and the Alliance for Retired Americans, have some ideas on how to approach 

this issue and how the Congress could take positive steps. The Alliance for Retired 

Americans is calling for the enactment of a new Medicare defined pharmaceutical 

benefit using the $300 billion reserved in the tax cut legislation for an affordable 

54

benefit. Congress should consider a change in Medicare by spending these funds 

over a shorter period of time than 10 years. By doing that, we can deepen the benefit and make it more affordable for average income persons in the Medicare program. But let’s do it and stop debating—that is what the seniors I know in Maine 

and across the country are saying. 

To emphasize the contrast between Canadian and U.S. prescription drug prices, 

members of the Alliance for Retired Americans will board buses later this month 

and travel to Canada from every State that borders our northern neighbor to have 

their prescriptions filled. We hope to show that seniors can save hundreds of thousands of dollars in just one week of short trips. But, we also want to demonstrate 

the absurdity of having U.S. Citizens go to Canada to get the savings. Your enactment of an affordable, comprehensive Medicare drug benefit will end these burdensome trips north and end this national embarrassment. 

The major reason that prices are so high in the U.S. is that the pharmaceutical 

industry has a lock on the supply of needed drugs backed up by law and power. 

It controls the development process for new drugs both here and throughout the 

world. The laws of this nation then protect the market power of the industry by providing patent protection for almost two decades. To make sure this patent protection 

stays secure, together with public financing of the highest risks in the development 

process, the industry spends hundreds of millions of dollars to influence government 

at all levels. The result is the exploitative pricing policies that we are discussing 

here today. 

The inaugural publication of the Alliance, The Profit in Pills: A Primer on Prescription Drug Prices, documents why prescription drug prices have increased so 

dramatically and the various ways that the pharmaceutical industry protects its interests at the expense of the American public. Most affected are older persons and 

those with disabilities who take more medications than other segments of the population and are the mostly likely to pay full retail prices. I respectfully request that 

this report be included in the hearing record. I would also ask that you, Senator 

Dorgan, put it into the Congressional Record so that all of your colleagues may read 

it. 

As I mentioned earlier, some states, like Maine, have become frustrated by the 

lack of action here in Washington. They are trying to take steps on behalf of their 

own citizens to curb prices. But, they are being fought all of the way by the industry 

in the courts and in the press. We support state action to push prices down but this 

is a national policy problem. Most states cannot take on a global industry that so 

vigorously holds on to its privileged economic position. The industry has spent millions of dollars lobbying against a Medicare drug benefit because they believe that 

such a benefit may cut into their profit margins and lead to greater public regulation of their industry. 

Why is it that the Federal Government is so vigorous in bargaining with all parts 

of the health industry to set prices but not with the pharmaceutical industry? Why 

does the Department of Health and Human Services force hospitals and doctors and 

other health providers to take lower payments or compete for government business 

but not force the same constraints on the prices we pay for out-patient pharmaceuticals? There is something wrong with the process and millions of citizens—older 

people and persons with disabilities—are paying the price for government’s timidity. 

It’s got to end. 

In short, we don’t have the luxury of time to wait while nothing happens. Thousands of us face continued deterioration of our health, loss of savings, increased burdens on our families, unnecessary institutionalizations, and, yes death, while the 

pharmaceutical industry seems to be able to stop Congress from acting. Please—listen to our plea. 

I, for one, want to get out of the tour bus business. 

Thank you.

Senator DORGAN. Mr. Marvin, thank you very much for your testimony. 

Ms. Marjorie Powell represents the Assistant General Counsel of 

the Pharmaceutical Research and Manufacturers of America, and 

I imagine you are really excited to follow Mr. Marvin, but why 

don’t you proceed? We are glad you are here. 

55

STATEMENT OF MARJORIE E. POWELL, ASSISTANT GENERAL 

COUNSEL, PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA 

Ms. POWELL. Thank you, Senator Dorgan. My name is Marjorie 

Powell, I am the Assistant General Counsel of the Pharmaceutical 

Research and Manufacturers of America, PhRMA, and I represent 

the companies who discover and develop and secure FDA approval 

to market the innovative drugs. 

I actually am quite pleased to follow Mr. Marvin this morning 

because he did a much more effective job than I could of illustrating what we believe is the primary source of the problem and 

the primary reason why this hearing is being held, which is that 

seniors do need access to prescription medications. They have access to health care through the existing Medicare system, but if 

anybody designed Medicare today, they would definitely include a 

prescription drug benefit, because drugs are the most cost effective, 

beneficial portion of the health care system and we would urge this 

Committee and Members of Congress to enact a Medicare drug 

benefit. 

We think that the issue of importing drugs from Canada or from 

any other country has come up in part because of the political debate about the need for and how to structure a Medicare drug benefit. 

When you look at prescription drug costs within Canada and the 

U.S., you do need to look at the context within which prescription 

drugs are provided in Canada. They are part of a government-run 

health care system where the government imposes price controls on 

drugs, hospital services, physician services, medical specialist services. Those restrictions result in shortages of not only physician 

services and specialist services, access to a variety of medical care 

treatments, but also restrictions on drugs. These restrictions have 

an effect on the health care of people in Canada. 

A recent study found that 20 percent of the physicians in British 

Columbia said that they had admitted patients to either emergency 

rooms or hospitals because those patients had been switched from 

one drug to another because of the restrictive system in British Columbia on the cost and availability of drugs. 

The price controls don’t actually have the effect of lowering the 

proportion of health care expenditures for drugs. A study found, in 

2000, 15.5 percent of Canadian health care expenditures went for 

prescription drugs. In the United States, in the same year, 2000, 

approximately 8.6 percent of health care dollars were spent on prescription drugs. 

There are a variety of reasons why some drugs are less expensive 

in Canada. One of those reasons is that it takes a longer time to 

get new drugs approved to go on the market in Canada today. It 

takes anywhere from one to 2 years longer in Canada than in the 

United States. We used to, back when I first became involved with 

this industry, talk about an FDA drug lag, and because of at least 

two actions by Members of Congress, and because of FDA monitoring this issue, there is no longer a drug lag between the United 

States and Canada, or the United States and a variety of other 

countries. 

56

And those two Congressional actions, Senator, are the Prescription Drug User Fee Act of 1992, allowing the FDA to hire additional reviewers, and the FDA Modernization Act of 1997. 

Let me talk for about a minute about the approval process in 

Canada. There is in Canada a review of drug safety and effectiveness just like there is here. Once the Canadian authorities have approved a drug for marketing, however, that drug must go through 

two additional steps that do not occur in the United States. 

First they must go to the PMPRB, the Prescription Medicines 

Price Review Board, which is a national board that decides on the 

maximum price that a manufacturer can charge to wholesalers. 

Once that happens, and that can take anywhere from 2 weeks to 

2 years, then the manufacturer must go province by province and 

determine a price that the province will reimburse for that drug, 

if the province will reimburse for that drug at all. 

Back in the period from December 1997 to November 1999, 

Health Canada approved 134 new drugs. During that same period, 

Manitoba authorized 36 of those drugs to be on the Manitoba formulary. 

Quebec, which was the most generous of the various provincial 

plans, approved 64 of them. So more than half of those products 

are not available to people in Canada or to U.S. citizens going to 

Canada today attempting to purchase drugs. 

There have been a number of studies of price differences between 

the United States and Canada, and most of the studies are seriously flawed because of selection of products to be sampled, comparisons of retail prices in the United States and wholesale prices 

in Canada, ignoring discounts given to large U.S. purchasers, such 

as insurers, HMOs or PBMs, changes in value of the U.S. dollar. 

But, I come back to my starting point, that the issue of seniors 

having to take buses to Canada is an issue of seniors having coverage for prescription drugs just as they have coverage for hospital 

expenditures, and we have been urging Members of Congress to 

enact a Medicare drug reform benefit. Thank you. 

[The prepared statement of Ms. Powell follows:]

PREPARED STATEMENT OF MARJORIE E. POWELL, ASSISTANT GENERAL COUNSEL, 

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA

Mr. Chairman and Members of the Subcommittee:

On behalf of the Pharmaceutical Research and Manufacturers of America 

(PhRMA), I want to thank you for providing the opportunity to testify on pharmaceutical price differences between the United States and Canada. 

As part of the Medicare reform debate, the cost of some drugs for American seniors and price differences between Canada and the U.S. have attracted the attention 

of U.S. legislators and the media. Before I address these two topics, however, I think 

it is important to briefly discuss in a general way the Canadian health-care system. 

Members of Congress should be aware of the Canadian experience with health-care 

cost-containment policies for pharmaceuticals and other health-care services when 

considering changes to the U.S. health-care system. 

The unintended, adverse consequences of government-driven cost-containment 

policies on access to appropriate medical and pharmaceutical care are not widely 

known. However, the results of such government intervention have been widely felt 

by patients. With respect to pharmaceuticals, cost-containment and price-control 

mechanisms have led to less choice and delays in access to the newest and most 

innovative medicines. In addition, these policies have also led to increases in other 

forms of more costly health care, such as hospitalization. 

57

1The Canadian Pharmacists Association, Provincial Drug Benefit Programs, 1999, (21st Edition). 2Michael Walker and Martin Zelder, Critical Issues Bulletin: Waiting Your Turn, The Fraser 

Institute (Vancouver), 1999. 3 Id.

4S. Pearlstein, ‘‘Health Care on the Critical List: Canada’s Public System is Overwhelmed, 

and Under Attack,’’ The Washington Post, December 18, 1999, p. A20. 5 Angus Reid Group, Inc., February 2000. 

Canadian Health-Care System 

Health care in Canada is administered through the Ministry of Health in each 

of the Canadian provinces and territories. The Canadian system is primarily publicly financed through taxes collected at the federal and provincial levels to provide 

coverage for hospital and physician services. Although often portrayed as ‘‘com- prehensive coverage,’’ Canadian health care is not truly comprehensive in that provinces are obligated to finance only ‘‘medically necessary’’ hospital and physician 

services. Since neither the federal government nor any of the provinces has defined 

‘‘medically necessary,’’ this term has often been inconsistently interpreted. 

An outpatient pharmaceutical benefit is also not nationally mandated. All provinces do provide coverage for seniors and low-income residents and four provinces 

have instituted universal coverage for all age groups and utilize cost-sharing arrangements such as significant co-payments and/or deductibles.1 The majority of 

provinces, including Ontario, provide drug coverage only for seniors and low-income 

residents. Therefore, 56 percent of Canadians live without universal prescriptiondrug coverage. These individuals often receive pharmaceutical coverage through employers, unions, or private insurers. 

In order to control rising health-care costs, Canada over time has implemented 

a number of cost-containment measures. Unlike the U.S., which has a market-based 

system, the Canadian system has controlled costs by relying on government financing and price-control mechanisms. 

In response to dwindling federal funds, provinces have cut spending on healthcare services through de-listing or de-insuring ancillary services, like home health 

care, and increasing cost-sharing for pharmaceutical services. Although successful in 

reducing the rate of increase in health-care costs, the impact on patients has not 

been positive. For example, according to the Fraser Institute, a leading Canadian 

think tank, over 200,000 Canadians are waiting for surgical procedures.2 In 1998, 

the average Canadian patient needing care waited: 

• 13.3 weeks for treatment from a specialist (6 weeks to see a specialist, and 

nearly 7.3 more weeks to receive treatment);

• 11.4 weeks for an MRI scan;

• 25.4 weeks for orthopedic surgery, and

• About twice as long as is considered ‘‘clinically reasonable’’ for radiation for cancer and internal medicine.3

A December 1999 Washington Post article described the Canadian health system as ‘‘on the critical list, overwhelmed, and under attack.’’ For example, ‘‘[In] Ontario, 

the waiting list for MRIs is so long that one Ontario resident booked himself into 

a private veterinary clinic that happened to have one of the machines, listing himself as ‘Fido.’ ’’4 Wait times for prostate cancer patients became so long that a patient group actually formed the Society of those Awaiting Cancer Therapy, according 

to The Wall Street Journal.

Clearly, public dissatisfaction with health-care services in Canada is high and on 

the rise. Recent polls show that 78 percent of Canadians now say that their health 

care system is in crisis.5 In a poll taken in December 1999 by Ekos Research Associates, 93 percent of the 3,000 Canadians interviewed reported that improving health 

care should be the federal government’s top priority. 

Drug Pricing in Canada

In sharp contrast to the U.S. where pharmaceutical prices are largely determined 

by market forces, drug pricing in Canada is regulated by two separate governmental 

bodies. Canada’s Patented Medicine Prices Review Board (PMPRB) is a federal government board that sets the maximum prices for innovative, patented medicines in 

Canada. 

Prior to product launch, a manufacturer can either have discussion with pricingboard officials and submit cost-benefit information used to assist the company in determining its price, or make a formal request for an Advanced Ruling Certificate 

(ARC) for pricing, which occurs only rarely. 

58

6Dr. Bill McArthur, Think Tank Warns Clintonization is Candianization of Health Care, The 

Fraser Institute, January 27, 2000. 

If a manufacturer has not received pre-approval for a price for a new product from 

the PMPRB, the price charged by the manufacturer must be submitted to the Canadian government pricing board within 60 days after introduction so that it can rule 

whether the manufacturer price is excessive. If the price of the medicine is deemed 

excessive by the Canadian government pricing board, manufacturers have two options:

• Make a Voluntary Compliance Undertaking (VCU). A VCU is an agreement by 

the manufacturer with the PMPRB to reimburse the government for the difference between the price it had been charging and the price set by the PMPRB, 

and to accept the maximum price set by the pricing board rather than take the 

dispute further. This, however, does not mean that a manufacturer agrees that 

the price it established was excessive.

• Appeal for Consideration. If no agreement on a maximum price is reached with 

an appeal, the manufacturer can either agree to reduce the price and reimburse 

the government for differential revenues or it can appeal in the courts.

Ultimately, if there is no agreement on the maximum price a manufacturer can 

charge for a product, the Canadian government can:

• Impose a fine on the manufacturer equal to twice the amount of difference between the price actually charged and the government-controlled price;

• Annul the manufacturer’s patent, and

• License the product to another pharmaceutical manufacturer.

In addition, if the government believes that a manufacturer knowingly sets the 

price of a product in excess of the Canadian government pricing board’s maximum 

price, the manufacturer can be charged with a criminal offense. Not only must the 

price differential be reimbursed, but monetary penalties and jail terms are possible. 

Maximum prices are determined by the Canadian government pricing board. The 

PMPRB uses several ‘‘tests’’ in controlling the prices of innovative medicines:

• The Reasonable Relationship Test is designed to ensure that the prices of different dosages or formulations of the same medicine are reasonably related.

• The Therapeutic Class Comparison Test compares the new medicine to other 

medicines in the same therapeutic class and sold in the same markets to ensure 

that prices are reasonably related.

• The International Price Comparison Test compares the average transaction 

price in Canada with prices in other price-controlled countries.

• The CPI Adjusted Price measures changes in the price of a medicine over time. 

It is designed to ensure that the price does not rise more quickly than CPI.

The Canadian government pricing board also establishes classes of new patented 

medicines for which price reviews are conducted. 

Once the maximum price has been set by the PMPRB, the second tier of price 

regulation occurs at the provincial level. Provincial governments have separate 

health-care systems and drug-benefit programs that further restrict access to both 

care and drugs. 

For example, Ontario, the province with the largest number of beneficiaries in its 

health-care system, has historically had one of the most restrictive formularies in 

Canada. From 1990 to 1997, Ontario only gave 35 new, innovative medicines full 

listings. From December 1996 to November 1997, this low rate of listing continued—

Ontario gave full formulary listings to only 13 of the 80 innovative medicines introduced in Canada. 

This double layer of price controls, along with restrictive provincial formularies, 

makes it difficult for Canadians to have access to and coverage for new, innovative, 

life-saving medicines. 

How Canada’s Drug Pricing System Affects Public Health

Cost-containment mechanisms have had a negative effect on access to pharmaceuticals and overall public health. For example, 27 percent of the physicians in 

British Columbia reported that they had to admit patients to the emergency room 

or the hospital as a result of mandated medicine switching.6 Confusion or uncertainty by cardiovascular or hypertension patients due to mandated medicine switching was reported by 68 percent of doctors, while 60 percent observed worsening or 

59

7 Id. 

8 Id. 

9The Lewin Group, The Impact of the Canadian System on Access to New Medical Technology 

Including Prescription Drugs, March 7, 2000. 10 Id. 11 Id. 12 Id. 13The Boston Consulting Group analysis based on J.A. DiMasi et al. (1991) as quoted by the 

Office of Technology Assessment in Pharmaceutical R&D: Costs, Risks, and Rewards, February 

1993. 

accelerating symptoms.7 British Columbia doctors reported similar problems, with 

the end result being an increase in patients who stopped taking their medications, 

which led to increased emergency-room visits.8

As compared to the U.S., Canadians experience longer delays in both access to 

and reimbursement for new pharmaceuticals due to:

• Delays in market approval dates.

• Delays in coverage until formulary decisions are made.

• Restrictions in product reimbursement because of restrictive formularies, reference-pricing schemes, and patient cost-sharing.9

Delays in Market Approval Dates

Although regulatory review times for new products have decreased over the past 

several years, the Canadian regulatory process has consistently taken 1.5 times as 

long as the U.S. system for drug review and approval.10 For example, in 1998 the 

FDA approved new drugs in an average of 365 days, while the Canadian Therapeutic Products Programme (TPP) took an average of 570 days.11

Postponing Coverage Until Formulary Decisions are Made

The delays continue at the provincial level where various government ‘‘gatekeepers’’ review the ‘‘therapeutic value’’ of prescription drugs before they are included in the formulary. In the U.S., most health plans will cover new products either with no restrictions or through prior authorization until a formulary decision 

is made. In Canada, new products are not publicly reimbursed until formulary listing has been completed. Formulary access rates at six months post-product approval 

in Canada ranged from 51 percent in Quebec to less than 10 percent in Alberta, 

British Columbia, and Ontario. Eighteen months following new product approval, 

formulary access rates in Ontario, the province containing almost 40 percent of Canada’s population, were still only 23 percent. 

Restriction in Product Reimbursement

Canadian provinces limit product reimbursement based on formulary restrictions, 

referenced-based pricing, and patient cost-sharing. Although these cost-containment 

mechanisms have lowered utilization of prescription drugs by seniors and low-income adults, emergency-room visits and the use of other medical services increased. 

For example, in the first 10 months following increased patient cost sharing in 

Quebec, savings of $17 million (Canadian dollars) were achieved for income security 

recipients who regularly took drugs for chronic diseases. However, due to the new 

cost-sharing structure, recipients financed one-third of the savings. Drug savings 

were all offset by a $4.1 million increase in other health-care expenditures.12 In another example, British Columbia will only reimburse for two arthritic drugs as firstline therapy. Three commonly-used anti-arthritic drugs in the U.S. are not covered 

under any circumstances. 

U.S.-Canadian Price Differences

Many have asked why drug prices are sometimes higher in the U.S. than in Canada. The answer is based on many variables. However, the main reason is that in 

the U.S. each individual company is generally able to price its own medications 

based on normal market factors, such as supply, demand, quality, value, and costeffectiveness. 

The prices set for medicines reflect the cost of drug development, not only for 

drugs that make it to the market, but also for those that do not. In 2001 alone, the 

pharmaceutical industry is expected to invest $30.5 billion in drug research and development. Estimates by the Boston Consulting Group indicate that the pre-tax cost 

of developing a medicine introduced in 1990 was $500 million.13 And just because 

a drug makes it to market does not mean it is a commercial success. A 1994 study 

conducted by economists at Duke University found that only three out of every 10 

60

14 Henry J. Grabowski and John M. Vernon, ‘‘Returns to R&D on New Drug Introductions in 

the 1980’s,’’ Journal of Health Economics 13 (1994) 338–406. 15See the National Health Expenditure Trends, 1975–2000, published by the Canadian Institute for Health Information (CIHI), 2000. 16 Health Care Financing Administration, OACT, 2001. 17 ‘‘Pricing of Prescription Drugs,’’ United States International Trade Commission, Investigation No. 332–419, Publication 3333, December 2000. 18 Id. 

drug products, or new chemical entities, introduced from 1980 to 1984 had returns 

higher than average after-tax R&D costs.14

The prices also need to generate revenues that meet investors’ expectations to 

continue to attract private investment. Investors seek to be compensated for their 

investment commensurate with risk; drug discovery and development are high-risk 

and require substantial funds over many years before medicines may reach the market. 

In Canada, each company is denied the freedom to set prices for its own innovative prescription medicines. Prices are controlled by the Canadian government. The 

only choice a manufacturer has is to sell at the price set by the Canadian government—or not to sell its product. If a manufacturer opts not to sell its product, the 

government is allowed to authorize a Canadian company to copy and sell the drug, 

even without the patent holder’s permission. In other words, if a manufacturer does 

not sell at a price Canada allows, the government effectively expropriates the value 

of the patent; the patent holder receives only royalties, which historically have been 

only 4–5 percent. 

Outside the United States, most countries choose to interfere in the market and 

set limits or controls on pharmaceutical prices, particularly for new, innovative 

products, to control health-care expenditures. Unfortunately, these practices have 

not worked. As a part of Canada’s total health-care spending in 2000, total expenditures on drugs at the retail level, excluding drugs prescribed for use in hospital settings, have increased faster than other major components of health care, and 

reached a forecast level of 15.5 percent of total health-care expenditures.15 In contrast, in the United States, outpatient prescription drugs as a percentage of U.S. 

National Health Expenditures was estimated to be 8.6 percent for 2000.16

In addition to the use by Canada of price controls on prescription drugs, there are 

other reasons why prices for prescription drugs differ in the U.S. and Canada. 

Prices vary from country to country for a host of reasons, including living standards, 

income differences, willingness to pay, differences in medical practice, product volume, exchange rates, the level of competitive medical service or product prices, patent term and expiration dates, the length of time and costs of drug-marketing approval, as well as government-imposed reimbursement and price controls. 

Another common reason that price differences exist between the U.S. and Canada 

and the U.S. is product liability. Questions of whether to sue, the nature of the 

forum, the level of proof needed to prevail, the nature or size of the case, and the 

level of damages awarded often make product-liability cases in the U.S. more costly 

to pharmaceutical manufacturers than in other countries, particularly in Canada. 

A study released in December 2000 by the U.S. International Trade Office (ITC) 

explored foreign markets and U.S. prices, pharmaceutical development and approval 

processes in various countries, and how prices are established within countries. The 

report also considered how to measure the differences in prices between countries 

and concluded, ‘‘A single, definitive, unbiased measure of comprehensive price differences does not exist.’’ 17

Most Cross-National Price Comparisons are Flawed

Recently, snapshot cross-border comparisons of pharmaceutical prices have gained 

great popularity as ‘‘demonstrating’’ that prices charged in the U.S. are higher than 

those charged abroad. Like any still frame out of a movie, these snapshots often 

mislead and fail to tell the whole story. 

The ITC report examined several studies relating to pricing and determined that 

there are methodological flaws with each. Sample selection issues biased comparisons and ‘‘severely limit the generality of the conclusions of this research.’’ The report also identifies the replacement cost benefit that pharmaceuticals can play in 

overall health care, stating, ‘‘At times, pharmaceutical products are used instead of 

costlier options such as hospitalizations.’’ 18

Virtually all of the cross-border ‘‘studies’’ comparing drug prices have been flawed 

by faulty methodology. Professor Patricia Danzon of the Wharton School, and 

Fredrik Andersson and colleagues at the Battelle Medical Technology and Policy Research Center, have published extensively on the shortcomings of different approaches for comparing drug prices internationally. They conclude that international 

61

19See e.g. Danzon, P., Pharmaceutical Price Regulation: National Policies versus Global Interests, (AEI Press: Washington, DC, 1997). 

price comparisons are misleading and generally based on flawed methodologies, and 

suggest that public policy is all too often influenced by price studies without an understanding of their technical limitations.19

One of the most common flaws of many price comparisons is comparing manufacturers’ list prices for drugs in the U.S. with list prices in other countries. This practice leads to erroneous conclusions because the actual transaction price in the U.S. 

is often significantly lower than the list price, unlike in many other countries. 

Another common flaw is that price comparisons are also typically made on the 

basis of simple averages of the top-selling drugs in a given country for which matching products are available in other countries. This often results in the use of extremely small samples. The studies also typically make no attempt to include the 

most frequently used drugs in comparison countries, nor do they attempt to weigh 

the prices based on the consumption of drugs in countries examined. 

Yet another flaw in many comparisons is that the sampled drugs are not always 

directly comparable. Differences in package size, dosage forms, strengths, indications, and dispensing methods need to be taken into account, but rarely are. In 

short, apples-to-apples comparisons are rare, so reported results must be viewed 

with care. 

Converting foreign prices to local prices for comparison purposes produces another 

type of error, given that changes in exchange rates over time create considerable 

variability in price relationships. 

This problem is further exacerbated by foreign government price setting. When 

faced with a devaluation, U.S. exporters of most products try to raise their price in 

local currency to keep constant in U.S. dollars. This is evident to anyone visiting 

a local bookstore. A $25 book in the U.S. is actually priced on the jacket at Canadian $33. Newspapers costing $1.50 in the U.S. are listed at Canadian $2. But with 

pharmaceuticals, the price ceiling imposed in Canada by the PMPRB—totally disconnected from exchange rates—has no mechanism that allows U.S. exporters of 

medicines to adjust their prices in Canada due to exchange-rate fluctuations. 

Many studies have focused on the final prices to patients or third parties rather 

than revenue received by the manufacturers. However, in most countries, pharmaceutical wholesalers and retail pharmacies are reimbursed at fixed percentage 

mark-ups over the ex-manufacturer price. The margins are set by law and differ 

substantially from one country to another. Many countries also impose a valueadded tax. Even if a manufacturer were to set a uniform wholesale price in all industrialized countries, the final retail price to consumers would vary by as much 

as 90 percent due to these mark-ups. If a manufacturer sold a product for $1.00 in 

North American and European markets, the final price to a consumer would range 

from a low of $1.14 in the UK to a high of $2.08 in Finland. The U.S. price would 

be $1.43. Only the UK and Sweden would have a consumer price lower than that 

available to U.S. consumers. 

There are numerous ways in which ‘‘simple’’ cross-border comparisons result in inaccurate conclusions. While these problems may be well known in academia, they 

are often missing from the public debate. On top of all of the technical problems 

discussed above, it is also important to remember that for U.S., non-government 

purchases, market forces set the price. In other countries, like Canada, governments, directly or indirectly, set the price and no government bureaucracy has ever 

been able to mimic a market-based price for a large number of products on a sustainable basis.

Many Products, Not Just Prescription Drugs, Are Less Expensive in

Canada 

Many products, not just prescription medicines, are generally less expensive in 

Canada than in the United States. This is because the Canadian government imposes price controls and unnecessary regulations on many industries. The Canadian 

government runs marketing boards for most industries. The boards operate within 

a specific province or throughout the entire country. For example, one such board 

is the Wheat Board. As Chairman Dorgan is keenly aware, the Wheat Board in Canada monitors and sets prices on the sale of wheat in Canada. Therefore, the cost 

of wheat products, such as bread, are directly related to the price dictated by the 

Wheat Board. 

Reimportation of Pharmaceutical Products into the U.S.

Although some seniors in the U.S. are traveling to countries like Canada or using 

foreign-based web sites in search of less expensive pharmaceuticals, they may be 

62

putting their health at risk by doing so. Government investigation into the reimportation of pharmaceuticals has shown that it opens our nation’s borders to 

counterfeit medicines and places vulnerable populations at risk. Reimportation proposals are a distraction to the real solution—a Medicare prescription drug benefit. 

Conclusion

In conclusion, although pharmaceutical prices in Canada are sometimes less than 

what they are in the U.S., it is important to remember why this is so. As discussed 

above, there are many reasons for price differences between countries. But the primary reason is government-mandated price controls. In Canada, this has meant limited choice and access to the newest and most innovative medicines. It has also 

meant lengthy delays for other health-care treatments and less access to medical 

technology. So although government-imposed price controls can appear as an attractive choice, they hurt the very people they are designed to help—patients. 

We should learn from Canada’s mistakes—not import them. Nor should we make 

the mistake of adopting a risky and dangerous reimportation scheme instead of addressing the underlying problem by reforming the Medicare program, including enacting a prescription-drug benefit. 

That concludes my formal presentation. I will be pleased to answer any questions 

that the Chairman or Members of the Subcommittee may have.

Senator DORGAN. Ms. Powell, thank you very much. 

Next we will hear from Stephen Giroux, Community Pharmacist, 

Middleport Family Health Center in Middleport, New York, and 

Member of the National Community Pharmacists Association. Mr. 

Giroux, thank you for being here. 

STATEMENT OF STEPHEN L. GIROUX, COMMUNITY PHARMACIST, MIDDLEPORT FAMILY HEALTH CARE CENTER, AND 

MEMBER OF THE NATIONAL COMMUNITY PHARMACISTS ASSOCIATION, ACCOMPANIED BY JOHN M. RECTOR, SENIOR 

VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND GENERAL COUNSEL TO NCPA 

Mr. GIROUX. Thank you, Senator, I am pleased to be here, and 

I might add that I come from western New York, Niagara County, 

home of Niagara Falls, and it is a small community not unlike 

those in North Dakota that you have described several times. 

When someone knows I am from New York, they have a little bit 

different picture than where I am actually from. I have heard you 

tell that story and I related very closely to it because my little village in Middleport has about 1,800 residents, so it’s a similar size 

community. 

Senator DORGAN. That is a big town. 

Mr. GIROUX. Also, in addition to being an actively practicing community pharmacist and owning three community pharmacies as 

well as a home medical equipment business, I am the past president and current board member of the board of directors of the 

Rochester Drug Co-Op, which is a regional drug wholesaler that 

sells about $300 million worth of pharmaceuticals and we do business in New York and Pennsylvania. I am also a past president 

and board member of the Medina Memorial Health System, a nonprofit hospital which buys products far lower than I can as a retailer, even though I do a lot more business than the hospital does. 

And I am pleased to serve on the executive committee of the National Community Pharmacists Association, formerly known as the 

National Association of Retail Druggists. I am accompanied today 

by John Rector, Senior Vice President for Government Affairs and 

General Counsel to NCPA. 

63

I thank you, Senator, for having this hearing today, and these 

are very very crucial issues, both to consumers and to small businesses. 

NCPA, the National Community Pharmacists Association, represents more than 25,000 independent pharmacies where over 

75,000 pharmacists dispense more than 50 percent of the nation’s 

prescription drugs and related services. Independent pharmacists 

serve 18 million people daily. NCPA has long been acknowledged 

as the sole advocate for this vital component of the free enterprise 

system, and for decades has been the only national pharmacy association with universal state association membership, including 

those of the committee members. 

Our members function in the market in a variety of forms. We 

do business as single stores ranging from small apothecaries to full 

line high volume pharmacies; as independent chains, sometimes 

ranging as large as a hundred locations; also as franchises, such as 

NCPA members involved with the Medicine Shop franchise. Whatever form of business entity, however, independent pharmacists are 

the decisionmakers for this wide variety of NCPA members companies. As owners and managers and employees of independent pharmacies, our members are committed to legislative and regulatory 

initiatives designed to protect the public and to provide them a 

level playing field with a fair chance to compete. 

We appreciate the opportunity to assist the Committee in assessing the differences between American and Canadian pharmaceutical prices, and how these prices affect the American consumer, 

and means to bring American prices in line with Canadian prices. 

In May 1999 we endorsed a bipartisan International Prescription 

Drug Parity Act by Representatives Marion Berry, Bernard Sanders and Jo Ann Emerson, and S. 1191, sponsored by you, as well 

as Senator Wellstone, Olympia Snowe, and Tim Johnson. We work 

closely with you, Senator, and Senator Jeffords, and House and 

Senate allies in this important and crucial legislation. 

With the exception of the sunset provision, that legislation was 

nearly identical to the language that was overwhelmingly approved 

by the U.S. Senate, and we have examples of that in the packet. 

Our business, my own business is located about 40 miles from 

the Canadian border. Never a day goes by that in the course of my 

practice of pharmacy that I don’t have a conversation with a patient or a patient’s family member that is concerned with the astronomically high costs of prescription drugs. 

And, at the outset, I must say that we do need a Medicare prescription drug benefit for our nation’s elderly, not some scam like 

President Bush’s cash discount card that gives absolutely no benefit to our seniors by picking PBM’s as market favorites, creating 

an anticompetitive environment that will severely harm the small 

businesses that we represent. In any case, we need to get some relief from the high cost of prescription drugs for the elderly and the 

uninsured. 

This legislation provides an excellent free market safe approach 

to allow our patients access to safe and lower priced FDA-approved 

prescription drugs without bypassing established distribution channels or the important professional services of a pharmacist. After 

64

all, it is the pharmacist who has the well established trust relationship with patients. 

As our President John Carson observed last May, we are deeply 

disappointed that President Bush reconsidered his announced support for this new law and the resulting delay by HHS Secretary 

Thompson and his failure to implement this bill. 

Our house of delegates unanimously approved a resolution last 

year calling for the expeditious implementation of this new law. 

Today we reiterate our views. 

The nation’s retail pharmacists operate in an extremely competitive marketplace on razor thin margins averaging less than 3 percent. My drug wholesaler mark-ups are even slimmer. My wholesaler will use an alternative vendor supplier for pharmaceuticals 

for a savings of as little as 1 to 2 percent. We will move our market 

share to an alternate vendor supplier. 

If we are afforded, through the implementation of this legislation, the opportunity to import or reimport safe FDA-approved 

drugs for a 40 to 60 percent savings, we will do that in a heart 

beat, and these savings will be shared with our members who will 

pass those savings along to the patients that we serve. The competitive nature of our marketplace demands that. 

Importation can be achieved safely and cost effectively by our 

small regional wholesalers and our buying groups through existing 

distribution channels. The large wholesalers and chain pharmacy 

corporations are potentially opposed to this implementation, which 

would not require any authorized purchaser, not require, but it 

would be voluntarily to do this reimportation. Perhaps these companies that oppose that, already operate in an international marketplace and do not want to give up their competitive advantage. 

This current law, we do not want to allow the bypassing of the 

valuable counsel that’s available from the trusted relationship with 

the community pharmacist. We do want to give access to the benefits of lower global pricing to American consumers. 

The Bush Administration is denying American consumers, especially the elderly and the uninsured, equal access to the benefit of 

global prescription drug pricing. This legislation takes this opportunity to do it in a—to allow these pharmacists and their consumers this access in a free market and nonbureaucratic way. 

I have taken the opportunity to bring eight examples, not any 

duplicates of those that you brought, Senator, of Canadian products 

and their American counterparts. We have eight examples, they 

range anywhere from a discount of 6 percent less expensive to a 

maximum of 83 percent in the eight examples I brought. On average that represents a 40 percent lower Canadian dollar price difference between the American price and the Canadian price. 

This is a significant difference. It does not take into consideration the Canadian exchange rate, which is additionally about 40 

percent as we speak today. 

I have an example here, a bottle of 100 tablets, that sells at the 

Canadian pharmacist for $33. That same bottle, same size to the 

U.S. market, nets down to the American pharmacist at $194. That 

is the 83 percent example. 

The next one, this purple pill, which goes off patent, is available 

in Canada for $50.88, and available in the United States for 

65

* The information referred to has been retained in the Subcommittee files. 

$100.48, same dose, a 41 percent lower price, not taking into consideration the 40 cents on the dollar when we take our American 

dollars over there. 

A blood pressure medication, this is the 6 percent difference, blood pressure medication widely used, $73.94 cents for a bottle of 

90 in the United States and $70.63 in Canada, not taking into account the exchange difference of 40 cents on a dollar, and it’s a real 

bargain. 

The next example is a lipid lowering medication, Lipitor, a cholesterol lowering drug I should say, and hormones, female hormones—47% lower in Canada. A bottle of a thousand Wyeth 

Ayerst, manufactured right up on the New York–Canadian border, 

and in Canada nets down to $121.50 for a bottle of a thousand, and 

in the United States the cheapest price I can get is $531.91 for that 

same thousand. That’s a difference of 77 percent, again, before we 

take into consideration the American exchange on the dollar. 

We think this is a dramatic impact, we think it’s criminal in fact 

for our American consumers not to have access to these lower 

prices. We calculated that based on just the 40 percent savings not 

having anything to do with the exchange rate, but that’s about 

$845 million a week or $120 million a day that our American consumers are paying in higher prices every day that this bill is not 

implemented. We think this is very serious money, we think that 

it’s important that we have access to Canadian pharmaceuticals, 

FDA-approved, safe pharmaceuticals, through existing distribution 

channels, and we can accommodate that, as I say, in a heart beat 

through existing distribution channels. 

Mr. Chairman, I thank you for the opportunity to present today, 

and I look forward to helping you in any way possible to get this 

legislation enacted and implemented. 

[The prepared statement of Mr. Giroux follows:]

PREPARED STATEMENT OF STEPHEN L. GIROUX, COMMUNITY PHARMACIST, 

MIDDLEPORT FAMILY HEALTH CENTER, AND MEMBER OF THE NATIONAL COMMUNITY PHARMACISTS ASSOCIATION, ACCOMPANIED BY JOHN M. RECTOR, SENIOR VICE

PRESIDENT FOR GOVERNMENT AFFAIRS AND GENERAL COUNSEL TO NCPA 

Mr. Chairman, Members of the Committee

I am Stephen L. Giroux. I am owner of 3 retail community pharmacies, a home 

medical equipment business and a Hallmark card/gift and old-fashioned soda fountain shop. Our company has about ten million dollars of annual revenue. We are 

located in upstate Western New York. Middleport Family Health Center, Transit 

Hill Pharmacy, Rosenkrans Pharmacy, Lockport Home Medical and Thee Barker 

Store. I am a past president and current member of the board of directors of the 

Rochester Drug Co-Op, a regional drug wholesaler with about 300 million dollars 

of annual revenue doing business in New York and Pennsylvania. I am a past president of and board member of the Medina Memorial Health System (hospital) and 

serve on the executive committee of the National Community Pharmacists Association (NCPA), formerly the National Association of Retail Druggists. [See Exhibit 

A].* I am accompanied today by John M. Rector, Sr. Vice President Government Affairs and General Counsel for NCPA. 

I want to thank you for inviting us to testify on these critical consumer and small 

business issues. 

The National Community Pharmacists Association (NCPA) represents more than 

25,000 independent pharmacies, where over 75,000 pharmacists dispense more than 

50% of the nation’s prescription drugs and related services. Independent pharmacists serve 18 million persons daily. NCPA has long been acknowledged as the 

66

* The information referred to has been retained in the Subcommittee files. 

sole advocate for this vital component of the free enterprise system. For decades 

have been the only national pharmacy association with universal state association 

membership, including those of the Committee’s members. 

Our members function in the market in a variety of forms. They do business as 

single stores ranging from apothecaries to full line high volume pharmacies; as independent chains (e.g., 100 pharmacies) and as franchisees such as NCPA members 

involved with the Medicine Shoppes franchise. Whatever the form of business entity, 

however, independent pharmacists are the decision makers for this wide variety of 

NCPA member companies. 

As owners, managers and employees of independent pharmacies, our members 

committed to legislative and regulatory initiatives designed to protect the public and 

provide to them a level playing field and a fair chance to compete. We appreciate 

the opportunity to assist the Committee in assessing the differences between American and Canadian pharmaceutical prices, how these prices effect the American consumer and means to bring American prices in line with Canadian prices. 

In May of 1999, we endorsed the bipartisan International Prescription Drug Parity Act, H.R. 1885 by Representatives Marion Berry, Bernard Sanders, and Jo Ann 

Emerson and S. 1191 by Senators Byron Dorgan, Paul Wellstone, Olympia Snowe, 

and Tim Johnson. [Exhibit B].* 

We worked closely with Senators Dorgan and Jeffords and their House and Senate allies in support of P.L. 106–387, which with the exception of the sunset provision was nearly identical to the language overwhelmingly approved by the U.S. Senate. [Exhibit C].*

Our businesses are located about 40 miles from the Canadian border. Never a day 

goes by that in the course of my practice of pharmacy that I don’t have a conversation with a patient or a patients’ family member that is concerned with the astronomically high cost of prescription drugs. 

At the outset, I must say that we need a Medicare prescription drug benefit for 

our nations elderly. Not some scam like the Bush cash discount card that gives absolutely no benefit to our seniors by picking PBMs as market favorites creating anticompetitive environment that will severely harm the small businesses that we represent [Exhibit D].* In any case, we need to get some relief from the high cost of 

prescription drugs for the elderly and the uninsured. 

The drug importation/re-importation law P.L. 106–387 provides an excellent free 

market, safe approach to allow our patients access to safe and lower priced, FDAapproved prescription drugs without bypassing established distribution channels or 

the professional services of the pharmacist. After all, it’s the pharmacist who has 

a well-established trust relationship with patients. As NCPA’s president John Carson observed last May, ‘‘We are deeply disappointed that President Bush reconsidered his announced support for the new law and resulting in HHS Secretary Thompson’s failure to implement it.’’ [Exhibit E].*

The NCPA House of Delegates unanimously approved a resolution on October 18, 

2000, calling for the expeditous implementation of the new law. Today, we reiterate 

our views. 

The nations retail pharmacies operate in an extremely competitive marketplace 

on razor thin margins averaging less than 3%. My drug wholesaler mark-ups are 

even slimmer. My wholesaler will use alternate vendor suppliers for as little as a 

1–2% savings. If we are afforded through the implementation of P.L. 106–387 the 

opportunity to import/reimport safe FDA-approved drugs for a 40–60% savings, we 

will do it in a heartbeat. Those savings will be shared with our buying group members who will pass along any savings to the patients they serve. 

Importation can be achieved safely and cost effectively by our small regional 

wholesalers and buying groups through existing distribution channels. The large 

wholesalers and large chains are opposing the implementation of the new law which 

would provide—not require—any authorized purchaser the opportunity to import 

FDA-approved Rx drugs. Perhaps many of these companies already operate in an 

international marketplace and do not want to give up their competitive advantage. 

Obviously the pharmaceutical manufacturers are opposed to any scenario that could 

alter their present monopolistic opportunity for profits. 

We don’t bemoan their financial success. As the most profitable industry in the 

world, we do need them to continue to bring innovative technologies and life improving and even life saving drug products to market—just not at the highest prices in 

the industrialized world. We are also concerned about encouraging patients to obtain their medications directly through mail order or by personal trips across the 

border generally neither are legal under current law and importantly bypass the 

valuable counsel, and services of their trusted pharmacist. 

67

* The information referred to has been retained in the Subcommittee files. 

The brand drug manufacturers are creative marketers. For example, the brand 

name manufacturers have disparaged generic drugs for several years and yet have 

purchased generic companies, formed generic divisions, and attempted to control 

that sector. When one brand name drug company executive was asked why they 

didn’t pursue the generic market by lowering prices of a branded product once all 

of the patents had been exhausted, he said that they would not be able to make 

sufficient money. The brand name drug industry is unique in that it frequently 

raises prices when patents expire and their market share is reduced. 

In a similar vein the brand drug manufacturers have creatively claimed that imported or reimported prescription drugs that they or their parent companies have 

made threatened the safety of the American consumers. For many years consumers, 

through mail order, border crossings, and more recently the Internet, have been obtaining FDA-approved prescription drugs from other countries, however, it was only 

when the U.S. House of Representatives and the U.S. Senate (74 to 21) [Exhibit F] * 

authorized imports by wholesalers and pharmacists that drug makers belatedly expressed serious concerns about the safety of imports. [Exhibit G].*

Interestingly, the drug manufacturers have been importing prescription drugs at 

record levels [Exhibit H].* The drug makers are not sharing the benefits of lower 

global pricing with American Consumers. They are even authorized to import non 

FDA-approved bulk products and export them as finished unapproved prescription 

drugs. By not implementing P.L. 106–387 the Bush Administration is denying 

American consumers especially the elderly and the un-insured equal access to the 

benefit of global prescription drug pricing. 

It’s important to recall that all of the drug makers’ customers are not charged the 

high prices that even the largest retail pharmacies must pay. The drug makers have 

denied retail pharmacies equal access to economies of scale. The discriminatory pricing practices of the drug makers have been the subject of the extensive litigation 

and federal and state legislation. Implementation of P.L. 106–387 would provide 

long overdue relief for pharmacists and consumers in a free market and non-bureaucratic way. For the Committee’s review, I have with me today several examples of 

Canadian prescription drugs obtained from a Canadian pharmacist to show the similarity in quality and price differences for these basically FDA-approved pharmaceuticals. [See Exhibit I.]

Exhibit I 

Manufacturer Drug Package Size Net US Price Canadian Price 

Net Wholesale 

Savings percentage calculated

before Canadian 

Exchange rate of 

42% on US dollar 

expanding the

savings 

TAP Prevacid 

30 mg 

100’s $358.21/100 $200.00/100 44%

Glaxo Smith Kline Paxil 

10 mg 

30’s $65.59/30 $46.04/30 30%

Searle Pfizer Celebrex 

200 mg 

500’s $1109.40/500 $625.00/500 44%

Glaxo Smith Kline Lamictal 

25 mg 

100’s $211.48/100 $33.15/100 84%

Pfizer Zoloft 

50 mg 

100/250 * $202.67/100 $160.00/100

$400.00/250

21%

Wyeth Premarin 

0.3 mg 

100/500 * $73.20/100 $10.58/100

$52.90/500

86%

Astra Zeneca Nexium 

40 mg 

30/28 * $100.42/30 $58.80/28 37%

Pfizer Lipitor 

10 mg 

90’s $167.11/90 $144.00/90 14%

68

Exhibit I—Continued

Manufacturer Drug Package Size Net US Price Canadian Price 

Net Wholesale 

Savings percentage calculated

before Canadian 

Exchange rate of 

42% on US dollar 

expanding the

savings 

Merck Vioxx 

25 mg 

100’s $220.19/100 $125.00/100 43%

Merck Zocor 

10 mg 

60/500 * $181.96/60 $890.00/500 41%

Please note: 

* Different dosage forms (i.e. tablets vs. caplets) or different package sizes (as noted). 

On behalf of the members of the National Community Pharmacists Association, 

we thank the Committee for the opportunity to participate in the ongoing assessment of the need to provide pharmacists and their consumers equal access to global 

pricing of safe prescription drugs.

Senator DORGAN. Mr. Giroux, thank you very much. 

Finally, we will hear from Dr. Alan Sager, Professor of Health 

Services and Co-Director of the Health Reform Program at Boston 

University. Welcome, Dr. Sager.

STATEMENT OF ALAN SAGER, PH.D., PROFESSOR OF HEALTH 

SERVICES AND CO-DIRECTOR, HEALTH REFORM PROGRAM, 

BOSTON UNIVERSITY SCHOOL OF PUBLIC HEALTH 

Dr. SAGER. Mr. Chairman, thank you, and good morning. My 

name is Alan Sager, I am a professor of Health Services at the Boston University School of Public Health, and I am honored to have 

the chance to appear before you today. 

The average American will spend $575 this year for prescription 

drugs. Not seniors alone, that’s the average for all Americans. This 

is the highest spending in the world. Yet 70 million of us have no 

insurance for prescription drugs and dozens of millions of others 

have insurance that is sadly lacking. As a result, we have to choose 

among greater suffering, paying more for medications or changing 

the way we do business. 

If Americans paid average Canadian prices for brand name 

drugs, savings would total $38.4 billion this year alone. Savings 

would range from $56 million in Alaska to over one-half billion dollars in median states like Arizona and South Carolina. Eleven 

states could save over a billion dollars, and California would save 

over $3.2 billion. But the average state like South Carolina or Arizona would save between 500 and $600 million yearly. 

All Americans could enjoy the benefits of Canadian prices. Today, 

as we’ve heard, individual citizens are able to import drugs from 

Canada and enjoy the price differences. The legislation that you 

have been advocating today is overall a good idea, but I fear that 

even if it were to pass, it wouldn’t have the practical effect that 

many of us would hope. That’s because I think the manufacturers 

would produce fewer medications in Canada or export fewer medications to Canada, drying up supplies in Canadian warehouses and 

simply making fewer pills available for importation back into the 

United States. In other words, they would dry up the reservoir. 

69

There have also been concerns that other techniques might be 

employed by manufacturers. 

Still, I think that the aim of the legislation is exactly what we 

are trying to achieve, should try to achieve. Americans could win 

the Canadian low prices by importing the regulatory techniques 

that Canadians employ, not the lower priced drugs themselves. We 

don’t need to wash our medications through a Canadian laundry. 

If U.S. drug prices stay high, insurers and employers will work 

ever harder to suppress drug use through higher copayments and 

formularies and other methods, but suppressing drugs just flies in 

the face of economic and medical realities. 

Economically, the marginal cost of making more drugs is typically very low once you do the research and build the plant. Medically, restricting use denies many patients the medications they 

need, as we have heard, and the nation would directly gravitate toward a Rolls Royce drug market. 

Lowering drug prices requires bringing all stakeholders to the 

table, including drug makers, which requires getting past drug 

makers’ bluster about supposed free markets that supposedly legitimate the world’s highest prices. And also getting past drug 

makers’ threats that lower U.S. prices would destroy research. 

Careful public action is much less likely to damage research than 

is the industry’s commitment to run their business as usual. High 

drug prices frighten many Americans and that can translate into 

precipitous political action two or 4 years from now, and that would 

gut prices, and that will harm research. So I think if we care about 

research, we can’t let the industry control prices. 

That’s like what Clemenceau said about the French generals. He 

couldn’t trust them to control the war, because that led to 4 years 

of blood, machine guns, barbed wire and trench warfare. That’s 

what we face with prescription drugs. 

Our nation generates so great a share of drug makers’ incomes 

that we have to cut prices carefully. Here are four elements of a 

package deal that might be called a prescription drug peace treaty. 

First, the federal government enacts a law to lower brand name 

drug prices to Canadian levels. This alone cuts drug makers’ revenues by $38 billion yearly. 

Second, drug makers would replace most of the lost $38 billion 

through higher volume in the private market. They would be filling 

more prescriptions owing to lower prices. 

Third, the federal government would guarantee the drug maker 

could recoup any amount of the $38 billion that they didn’t make 

up in the private market, through publicly-subsidized purchase of 

medications for people who couldn’t afford even the discounted 

prices. So you take away $38 billion but you give it back to drug 

makers as they fill more prescriptions. It’s simple recycling. All dollars saved are recycled to buy more drugs. 

The fourth element of the peace treaty makes drug makers financially whole. They would have to be paid the extra manufacturing 

costs of the additional pills. Retailers would have to be paid the 

extra dispensing costs. 

As a result, all Americans of all ages can afford the drugs their 

doctors prescribe, drug makers’ profits and capacity to finance research are unimpaired, but we avoid windfall profits to drug makVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00077 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
70

ers through the Medicare prescription drug benefit if the prices 

weren’t contained. 

If this were to happen, I estimate that up to 977 million additional prescriptions for brand name drugs might be filled if Americans could afford them. That’s a high-side estimate. The added cost 

of manufacturing and dispensing almost one billion more prescriptions, which is a one-third increase above current levels, would be 

in the range of $6.4 to $11.8 billion, depending on dispensing fees 

and added costs of manufacture, to protect all Americans against 

the cost of medications. 

That may seem like a low estimate, but I think it’s warranted 

by the likely dispensing costs of these drugs and by the likely actual manufacturing costs. 

To make this work for the long haul, though, we have to continue 

to promote breakthrough research, and that means rewarding 

breakthrough research very generously, but not rewarding copy cat 

research, on which up to 40 percent of research dollars today, in 

my opinion, are largely wasted. 

The final job is to keep costs low and affordable so we can get 

medications to all Americans for the next 5, 10 or 20 years. No one 

tool will suffice, but there some obvious candidates. 

First, cut marketing waste. Drug makers’ marketing costs appear 

to be substantially greater than estimates from industry-related 

sources suggest. The second chart from the supplemental package 

shows how drug makers actually spend their money according to 

their own financial reports, and we see that in that pie chart, that 

31 percent of drug maker revenue goes to marketing and administration, versus only 11 percent to R&D, and the lion’s share of the 

marketing and administration, we believe, does go to marketing. 

The next chart shows the increase in employment in marketing, 

employment in marketing and employment in research between 

1990 and 2000. The blue chart trends up slightly for research, up 

about 10 percent. Marketing employment is up about 50 percent. 

That’s money that we pay for when we buy our pills. 

A couple of other approaches. Measure each drug’s efficacy, and 

compare with the costs, and disseminate the real evidence on 

which drugs work for which patients, perhaps through NIH or 

FDA, or perhaps an independent agency that would have no financial stake. 

The final step is to think harder about profits. For example, in 

1999, Merck reported consolidated before-tax return on revenue of 

26 percent, but Merck apparently garnered an actual 37 percent 

before-tax return on revenue, more than 40 percent greater after 

factoring out its MEDCO PBM-related costs. 

In conclusion, we can learn a great deal from the evolution of 

state efforts to wrestle in the trenches with prescription drugs. 

Their first phase was throwing money at the problem by buying 

medications; that was vital to do. 

Their second phase now is holding down prices. The federal government should marry these two approaches from the start, lower 

prices and higher volume. Winning affordable medications for all 

Americans is the easiest problem to solve in the United States of 

America. 

Thank you very much, Mr. Chairman. 

71

[The prepared statement of Dr. Sager follows:]

PREPARED STATEMENT OF ALAN SAGER, PHD., PROFESSOR OF HEALTH SERVICES AND

CO-DIRECTOR, HEALTH REFORM PROGRAM, BOSTON UNIVERSITY SCHOOL OF PUBLIC

HEALTH

AMERICANS WOULD SAVE $38 BILLION IN 2001 IF WE PAID CANADIAN PRICES FOR

BRAND NAME PRESCRIPTION DRUGS

How to Win Those Savings and Use Them to Protect All Americans against High 

Drug Costs without Hurting Drug Makers or Drug Research 

With State-by-State Savings Estimates 

Disclaimer: As always, I write and speak only for myself, not on behalf of Boston 

University or any of its components.

Acknowledgment: This testimony rests heavily on analyses conducted with my colleague, Deborah Socolar.

Earlier reports and testimony on prescription drug costs and reform methods are 

posted on our web site, http://dcc2.bumc.bu.edu/hs/ushealthreform.htm

Mr. Chairman and members of the Committee—Good morning. My name is Alan 

Sager and I am a professor at the Boston University School of Public Health. I am 

honored by your invitation to testify today.

I. Introduction 

Together, we face two challenges:

• making all needed medications available to all Americans at affordable prices, 

while

• building a durable financial foundation under drug research and delivery in the 

U.S.

I am convinced we can do both of these. One reason is that we already spend 

enough money to do so. But not if we continue business as usual.

II. What is the Nature of the Problem? 

Many Americans can’t afford needed prescription drugs because they lack insurance, suffer low incomes, and face excessive U.S. prices. 

Today, 70 million Americans of all ages have no insurance for prescription drugs. 

Additional dozens of millions have skimpy coverage. 

Yet American prescription drug spending per person this year is the world’s highest. Total prescription drug spending will be about $165 billion this year,1 or roughly 11.6 percent of overall U.S. health spending.2 That is some $575 for the average 

American.3

The drug cost problem will probably worsen. Drug spending in the U.S. is doubling every five years and is rising about three times as fast as overall health care 

spending. Between 1994 and 2000, estimated retail prescription spending rose by 

116.4 percent while total health spending rose by only 34.2 percent. 

If we fail to make vital drugs available to all who need them, public fear and 

anger will grow. But reasonable action today will prevent reckless over-reaction tomorrow. 

Our nation must choose among:

• Suffering: Many of us could suffer and die for lack of needed medications, but 

that is intolerable.

• Paying: We could spend much more public or private money—or both—to buy 

needed drugs, but that is both unaffordable and unnecessary.

• Changing: We could secure more drugs from manufacturers for the amount we 

already spend, plus small extra sums to cover drug makers’ actual incremental 

costs.

Change is the only realistic choice. Buying drugs at lower price levels, such as 

those already prevailing in Canada—as a result of government action 4—is an important first element of that change. Today’s high U.S. prices make medications 

unaffordable for many patients. They induce private efforts to cut drug use, resulting in denial of needed drugs. And they handicap public actions to expand drug coverage for more citizens. 

72

III. U.S. Payments for Brand Name Drugs at Canadian Prices 

If Americans paid average Canadian prices for brand name drugs this year, sav- ings across the United States would total $38.4 billion, I estimate.

Exhibit

Calculating U.S. Savings on Brand Name Drugs If We Paid Canadian Prices in 2001

($ billions) 

1. 2001 brand name drug sales, USA, net of discounts and rebates $113.7

2. Assume undisclosed discounts and PhRMA generics of 10% – $11.4

3. Conservative estimate of sales, USA, brand name prescription drugs = $102.3

4. If U.S. paid Canadian prices, which averaged 62.5 % as high in 2000 – $63.9

5. Savings if paid Canadian prices in 2001 = $38.4

Note: All dollars are those actually paid to brand name prescription drug manufacturers, net of discounts 

and rebates. 

A. How the Savings Were Calculated 

1. To calculate the $113.7 billion starting point, we began with PhRMA’s figure 

on total projected 2001 U.S. sales net of discounts and rebates. We then factored 

out veterinary sales in line with their actual share of PhRMA’s 1999 total. The result: $113.7 billion. 

2. We then assumed undisclosed discounts and rebates plus generic sales by 

PhRMA members equal to 10 percent of PhRMA’s reported sales. (The 10 percent 

figure may be generous, but we wish to be conservative in our estimate of U.S. 

spending and therefore in the estimate of savings gained by paying Canadian 

prices.) The aim is to address PhRMA’s stated concern that some U.S. discounts and 

rebates are not publicly disclosed and are therefore not considered by the Canadian 

Patented Medicines Price Review Board in its international price comparisons. 

3. This yields a conservative projection of human sales of brand name prescription drugs by manufacturers in the U.S. in 2001 of $102.3 billion. 

4. The Canadian government’s Patented Medicine Prices Review Board calculated 

that Canadian brand name drugs’ factory prices averaged just 62.5 percent of those 

in the U.S.A. in 2000. We applied this to calculate how much would be spent in the 

U.S. in 2001 if we paid Canadian prices.5

5. The result: cutting U.S. payments to manufacturers by $38.4 billion this year.6

B. State-by-State Savings 

We apportioned this year’s $38.4 billion in estimated U.S. savings from paying 

Canadian prices among the states.7 The results are shown in the next exhibit. Savings ranged from $3.2 billion this year in California to $56 million in Alaska.

Exhibit

State-by-State Projected Spending on Brand Name Drugs in 2001,

and Savings if the U.S. Paid Canadian Prices 

($ millions) 

Brand Name 

Drug

Spending in 

2001 at

Factory 

Prices 

Savings if 

Paid

Canadian 

Prices 

Brand Name 

Drug

Spending in 

2001 at

Factory 

Prices 

Savings if 

Paid

Canadian 

Prices 

Alabama $1,751 $657 Montana $264 $99

Alaska $150 $56 Nebraska $706 $265

Arizona $1,577 $592 Nevada $539 $202

Arkansas $1,019 $383 New Hampshire $441 $166

California $8,506 $3,193 New Jersey $4,001 $1,502

73

Exhibit

State-by-State Projected Spending on Brand Name Drugs in 2001,—Continued

and Savings if the U.S. Paid Canadian Prices 

($ millions) 

Brand Name 

Drug

Spending in 

2001 at

Factory 

Prices 

Savings if 

Paid

Canadian 

Prices 

Brand Name 

Drug

Spending in 

2001 at

Factory 

Prices 

Savings if 

Paid

Canadian 

Prices 

Colorado $1,095 $411 New Mexico $454 $170

Connecticut $1,528 $574 New York $8,037 $3,017

Delaware $339 $127 North Carolina $2,896 $1,087

D.C. $203 $76 North Dakota $217 $81

Florida $7,001 $2,628 Ohio $4,399 $1,651

Georgia $2,776 $1,042 Oklahoma $1,192 $447

Hawaii $351 $132 Oregon $1,036 $389

Idaho $377 $141 Pennsylvania $5,682 $2,133

Illinois $4,474 $1,679 Rhode Island $451 $169

Indiana $2,323 $872 South Carolina $1,484 $557

Iowa $1,066 $400 South Dakota $227 $85

Kansas $964 $362 Tennessee $2,403 $902

Kentucky $1,765 $663 Texas $6,797 $2,551

Louisiana $1,701 $638 Utah $636 $239

Maine $515 $193 Vermont $207 $78

Maryland $1,894 $711 Virginia $2,404 $902

Massachusetts $2,451 $920 Washington $1,809 $679

Michigan $4,384 $1,646 West Virginia $876 $329

Minnesota $1,683 $632 Wisconsin $1,969 $739

Mississippi $1,086 $408 Wyoming $150 $56

Missouri $2,047 $768 USA $102,300 $38,400

IV. Americans Can Enjoy the Benefits of Canadian Prices 

Importing drugs from Canada has the potential to provide a measure of relief 

from high prices to some or even many individuals, so it should be tried until more 

effective price relief can be obtained. I expect that individual citizens will be able 

to continue to pursue retail importing solutions that lower their costs, but drug 

makers will continue to block effective wholesale importing solutions. If, indeed, importing drugs probably cannot do enough to make all needed medications affordable, 

then more direct techniques will be necessary to give Americans the benefits of low 

brand name drug prices that Canadians now enjoy. 

Americans could try to obtain Canadian prices in three ways. First, we could travel to Canada, as growing numbers of Americans are now doing. Several problems 

arise. They include inconvenience of obtaining a valid prescription and the loss of 

a single, local pharmacy and pharmacist coordinating all of the patient’s medications. Worse, it becomes necessary to transport something relatively heavy, a perVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
74

son, instead of something relatively light, a pill. This defies all we know about 

transportation economics. 

Second, Americans could import drugs from Canada, either individually or collectively. 

Some pursue this approach idealistically because they reside in border states and 

are frustrated by visibly lower prices nearby. They justly bemoan the burden borne 

by older or chronically ill patients who are today forced to travel across the border 

to buy drugs at more affordable prices. The numbers of people who buy medications 

from Canada is impossible to quantify but appears substantial. One Massachusetts 

senior has received over 700 inquiries in the middle few months of 2001 regarding 

methods of ordering medications from Canada by fax through family physicians.8

One objection to this approach is that it creates new and duplicative channels of 

drug distribution, some legal and some possibly illegal. Some have raised questions 

about the safety of the imported medications themselves. 

The other objection is that, were the law changed to allow wholesale importation 

of medications at foreign prices, and if the volume of imports were to swell, the drug 

makers would predictably adapt, as they have adapted to other types of reform in 

recent years. They probably would:

• export lower volumes of medications from U.S. factories to other nations in the 

first place, thereby drying up one source of lower-priced prescription drugs;

• hold down the volume of drugs produced at the foreign factories subject to FDA 

inspection, thereby drying up the other source of lower-priced drugs; and

• try to threaten foreign nations with higher prices if they allow medications to 

be exported to the U.S.9 or simply negotiate or set terms of their sales to other 

nations that prohibit re-sale of drugs abroad.

Therefore, I do not expect importing to do enough to make medications affordable 

for all Americans. 

Allowing easier importation of medications is an attractive idea. But it resembles 

other attractive ideas of recent years—many of them implemented through changes 

in legislation or medical practice—that have failed to make medications affordable 

to all Americans. These ideas include patenting of copy-cat drugs, developing 

formularies, promoting generic substitution, relying on PBMs, and relying on managed care generally. All of these have attempted either to boost competition or to 

reduce spending through care management or price negotiations by fragmented buyers. 

All of these ideas for winning lower prices indirectly seemed appealing. None—

individually or together—has apparently slowed the rate of increase in U.S. drug 

spending. Consider, for example, that generic drugs now account for about two-fifths 

of all U.S. prescriptions but less than one-tenth of drug makers’ revenues 10— indicating that today’s soaring spending is driven by soaring payments for brand name 

drugs. 

Third, Americans could act more directly to win Canadian prescription drug 

prices by importing the general methods that Canadians employ, not the lowerpriced drugs themselves. Adopting Canadian methods in the United States does not 

require moving people to pills or laundering pills through the Canadian pricing 

structure. It does not hitchhike on foreign regulation. Rather, it would mean forthrightly regulating drug prices. 

Simply legislating lower prices for brand name drugs in the U.S. could work but 

passing such a law is obviously difficult politically. As you know, the law that actually passed in October of 2000 provided for re-importing drugs, but it is unlikely 

that this law would actually lower prices even if it were ever implemented, for the 

reasons just mentioned. We again seem to face the dilemma of ‘‘what can work won’t 

pass and what can pass won’t work.’’ This is demoralizing. It breeds cynicism. We 

can do better. 

V. Reassuring the Drug Makers by Negotiating a Peace Treaty 

By themselves, price cuts will hurt drug makers. On the other hand, price cuts 

alone will clearly aid three groups: a) many people who are now able to afford their 

medications; b) the private insurors/HMOs and public programs that help to finance 

medications for most of those people; and c) some people who will be able to afford 

medications (or more of their medications) after the price cuts take effect. But price 

cuts will not help those Americans unable to afford even the newly reduced prices. 

Happily, price cuts can be combined with other approaches to protect both patients and drug makers. If prices are to be lowered to Canadian levels, we should 

at the same time devise methods of addressing all stakeholders’ legitimate interests, 

75

including those of drug makers. And including those of all Americans who cannot 

afford prescribed medications today. 

Doing this requires bringing all stakeholders, including drug makers, to the table 

to conduct serious negotiations. And that requires filtering out manufacturers’ bluster about free markets and manufacturers’ threats that government interventions 

to lower U.S. drug prices will destroy research. 

No free market sets drug makers’ prices. Free markets require many small buyers 

and sellers, so every actor is a price taker, not a price maker. Free markets require 

an absence of artificial restrictions on supply, demand, and price. Free markets require easy entry. And free markets require that all parties have good evidence about 

price and quality. 

In the prescription drug market, patents, mergers among drug makers, entry barriers associated with high research and marketing costs, allegations of anti-competitive practices, patients’ (and, often, physicians’) lack of good information about price 

and quality, and patients’ inability to act as sovereign consumers combine to mean 

that nothing close to a free market acts to set drug prices.11

Nor do drug makers set prices to cover costs of research (whatever those costs 

really are). Drug makers today are obligated to their stockholders to set prices to 

maximize profits. 

If government acts to win lower prices, ‘‘The lights go out in the labs, and there 

is no R&D,’’ according to Tracy Baroni, senior director of policy for PhRMA.12 This 

is an example of what my colleague and I call PhRMA’s fog of fear. 

Reasonably careful, well-tested, and—if possible—negotiated government intervention is much less likely to damage research than is the drug industry’s own insistence on more money for business as usual. 

The drug industry is on a collision course with financial and political realities. 

The industry’s insistence on high prices is frightening and angering many Americans. A few years from now, that anger could translate into precipitous political action to gut drug prices. And that would gravely threaten research (and profits). Worries that this might happen could make today’s drug makers the most nervous verywell-dressed people in America. 

Fortunately, government intervention to lower prices to Canadian levels can—in 

combination with other reasonable steps—be designed to protect and promote research, and even to protect drug makers’ profits. 

Careful U.S. action is vital to protecting and promoting research. Unlike other nations, and unlike some U.S. states, the United States government cannot simply cut 

drug prices without regard for the cuts’ effects on research. Because we buy so great 

a share (and an increasing share) of the world’s brand name drugs, the world’s drug 

makers rely on the U.S. market for a disproportionate share of their profits and the 

dollars they require to finance research. 

Four Elements of a Prescription Drug Peace Treaty 

The challenge is to put together the right package of policies. Here is an interlocking four-part method. 

First, the federal government could enact a law to lower brand name drug prices 

to Canadian levels. If nothing else changed, the price cuts would deprive drug makers of $38.4 billion in revenues from the U.S. market, as calculated earlier. 

But second, drug makers would replace much or most of this $38.4 billion in lost 

revenue through the natural rise in the volume of prescriptions filled in the private 

market. Lower prices allow patients to fill more of their prescriptions and do so 

more often. The relation between price and volume for prescription drugs appears 

to be elastic, meaning that the volume of drugs bought by patients in a private market grows substantially when prices are cut.13

Third, the federal government could guarantee drug makers that they would recoup every penny of lost revenue that was not replaced through higher private market volume. The best vehicle for replacing that revenue would probably be public 

subsidies to assist drug purchases by patients of all ages who are unable to afford 

even the newly discounted prices. The subsidies would be set to ensure replacement 

of all the revenue lost by drug makers that was not recaptured through higher private market volume. This public spending would not result in an increase in total 

spending on prescription drugs. Rather, it replaces some of the drug maker revenue 

lost from the price cut. 

Fourth, the public subsidies would also include dollars needed to cover the actual 

incremental costs of manufacturing the higher volumes of drugs. These are relatively low, compared with current total costs.14 Public subsidies would also cover 

the added cost of dispensing the additional volumes of drugs in pharmacies and 

elsewhere. These two items would result in increased total spending on prescription 

drugs, but these are all that would be required to extend pharmaceutical security 

76

to all Americans. No additional costs would be incurred to pay higher profits to drug 

makers, because drug makers’ profits as a percentage of equity would already be 

preserved and protected at the high levels antedating the peace treaty’s provisions 

for price cuts, higher private volume, and higher public volume. 

Such a peace treaty achieves three things:

1. All Americans—not Medicare beneficiaries alone—can now afford to obtain 

the prescription drugs they require. 

2. Drug makers are kept financially whole. All lost revenue is replaced, and 

the added cost of producing more pills is covered. Drug makers’ profits and capacity to finance research remain intact at today’s levels. This guarantee could 

be maintained for perhaps five years. (It will be useful to consider whether profits should be assured as a percentage of equity or of revenue.) 

3. The actual incremental costs of protecting all Americans are relatively low 

(as estimated in section VI), making the proposal affordable. Cutting prices to 

Canadian levels makes it much easier to expand coverage. Manufacturers make 

up for lower prices with higher volume. In other words, the $38.4 billion 

squeezed out of the drug makers (by cutting their prices) is returned to them 

(because many more prescriptions are filled)—when they serve patients who 

previously could not afford needed medications. Manufacturers do forego windfall profits that they would have garnered from higher volume in the absence 

of the price cuts.

This straightforward approach works most simply for the short run. It makes today’s drugs affordable for all. The arrangement could be designed to run for perhaps 

five years. The main remaining questions concern how to reward drug makers that 

develop new medications and how to constrain the projected explosive growth in the 

cost of pharmaceuticals. These matters are taken up in section VII. 

High drug prices constitute the main logjam blocking the flow of government reforms to win prescription drug security for all Americans. Once prices are lowered, 

it becomes possible to buy medications for all people who need them at a price that 

people and payors can afford. 

VI. Estimating Short-Run Costs 

Those who have sought to design a prescription drug benefit for Medicare have 

experienced great frustration during the past two years. Estimates of the cost of federal government subsidies rose from $118 billion for ten years in the first Clinton 

plan of June 1999 to $318 billion for ten years in the Senate Democrats’ plan of 

June 2001.15

Some of this is attributable to changes in benefits and some to rising estimates 

of underlying drug spending and other factors. CBO projects that drug spending by 

or for Medicare beneficiaries during the decade from 2001 to 2010 will be $1.3 trillion under current law—without a prescription drug benefit. These projections have 

themselves been rising rapidly.16

Sadly, even at the $318 billion level, only about one-quarter of beneficiaries’ expected baseline drug costs of the $1.3 trillion (that is, costs before the Medicare coverage is introduced—costs that would surely rise in the wake of new insurance protection) would be covered, requiring very substantial monthly Medicare premiums 

and out-of-pocket payments.17 A plan with low premiums and low out-of-pocket payments could cost as much as $1 trillion over a decade.18

Some of this is attributable to most proposed legislation’s inability to limit drug 

prices meaningfully, resulting in huge windfall profits for drug makers. Under most 

Medicare prescription drug plans, drug makers would sell substantially higher volumes of medications at only slightly lower prices. Even with 25 percent or 40 percent discounts, drug makers’ incremental revenue would far exceed their incremental cost, generating the windfall profits. 

Much of this is also attributable to drug spending projections that take as givens 

continued unrestricted growth in drug marketing, continued unrestricted introduction of expensive new drugs without careful evaluation of their incremental benefits 

to patients, and other costs, year after year. 

Clearly, unrestricted increases in drug spending are unaffordable. Drug makers 

would like to imagine that they can marry today’s high prices in combination with 

tomorrow’s Medicare prescription drug benefit that boosts volume at those high 

prices. But that is a fantasy. Even without a Medicare drug benefit, restraint is inevitable—through either private or public action. In response to high drug prices, 

employers are establishing higher co-payments to try to suppress the volume of drug 

use. More can be expected in the future if high prices persist. 

But that flies in the face of economic and medical realities. Economically, the marginal costs of making more medications are typically very low, once the research is 

77

performed and the factories are built. Medically, high prices lead to restrictions on 

use that can deny many patients the medications they need. The nation would 

gravitate toward a Rolls-Royce drug economy when it needs Fords and Chevy’s. To make all of today’s medications available to the patients who need them at an 

affordable cost, and to promote research to develop new medications, The nation 

needs two coordinated approaches, one short-run (for perhaps the next five years) 

and the other longer-run. 

Short-run Cost Estimates 

Cutting drug prices to Canadian levels yields markedly lower estimates of the actual short-run incremental cost of financing full prescription drug coverage for all 

Americans—not only Medicare beneficiaries. 

This added cost has two components, retail dispensing costs and actual incremental manufacturing costs. 

I estimate that as many as 977 million additional prescriptions for brand name 

drugs would be filled if all Americans could afford the medications their physicians 

prescribed. This is a deliberately conservative (high-side) estimate.19 It amounts to 

a one-third increase over the total number of retail prescriptions filled in 2001.20

This estimate requires considerable refinement, but it will serve for now to permit 

a rough calculation of the short-run costs of pharmaceutical security for all. 

I estimate that the added costs of manufacturing and dispensing these 977 million prescriptions would be in the range of $6.4 to $11.8 billion annually. 

The lower of the two estimates assumes 

• a dispensing fee per prescription of $3.00 and

• an average incremental manufacturing cost of $3.51 per prescription, or five 

percent of the projected average retail price for brand name drugs in 2001.21

The sum of the two costs is $6.51 per prescription. Multiplying that by 977 million 

additional brand name prescriptions yields an added total cost of $6.4 billion annually. 

The higher of the two estimates assumes 

• a dispensing fee per prescription of $5.00 and

• an average incremental manufacturing cost of $7.03 per prescription, or ten percent of the average retail price for brand name drugs in 2001.

The sum of these two costs is $12.03. Multiplying that by 977 million additional 

brand name prescriptions yields an added cost of $11.8 billion annually. 

This $6.4–$11.8 billion range estimates the full, total incremental cost of filling 

almost one billion additional prescriptions, enough to protect all Americans in 2001. 

Some seven aspects of these estimates are worth noting:

1. These are total incremental costs above estimated 2001 spending on brand 

name prescription drugs. If they are paid publicly, no additional sums for copayments or premiums are needed.

2. These incremental costs are a small fraction (3.9 percent–7.2 percent) of 

the $165 billion projected to be spent on prescription drugs in the United States 

in 2001. That is less than six months’ increase in total prescription drug spending—increases that have been running around 15 percent annually.

3. These incremental costs are a fraction of those estimated to be required to 

cover Medicare beneficiaries alone. Consider the $318 billion Medicare-only estimate for ten years that still leaves very substantial premium and out-of-pocket 

costs, or the $1 trillion Medicare-only estimate for ten years that eliminates premium and out-of-pocket costs that were mentioned earlier.

4. Because these are incremental prescription drug costs, they do not include 

the recycling of the $38.4 billion squeezed out of the drug makers by applying 

Canadian prices for brand name drugs to the U.S. market in 2001. That is because all of this money is returned to the drug makers through higher private 

market purchases and higher publicly subsidized purchases of medication in response to the lower prices.

5. As the $38.4 billion is recycled, the private share of payments for prescription drugs will fall somewhat and the public share will rise somewhat. That is 

because individuals, employers, and insurors/HMOs will enjoy most of the benefits of the $34.8 billion in price reductions, but these private parties will probably pay a smaller share of the costs of replacing the lost revenue. (I have not 

yet estimated the size of these offsetting changes.)

78

6. Additional costs of higher volumes of generic drugs are excluded from these 

calculations. That is because pricing methods for generics are different from 

those for brand name drugs. And discounts are substantially lower. International comparisons of prices typically employ brand name drugs only. As 

noted, generics today amount to only about 8.6 percent of total U.S. prescription 

drug spending, even though they are over forty percent of prescriptions. So 

higher spending on generics should not be substantial under this approach. 

Also, lower prices for brand name drugs would reduce the price differentials between generics and brand name drugs, probably reducing generics’ share of 

total prescriptions over time.

7. The estimates do not reflect one-time costs of building pharmacies’ capacity 

to substantially increase the number of prescriptions dispensed annually. 

VII. Promoting Development of Breakthrough Drugs, and Containing LongTerm Costs So That All Medications Remain Affordable for All Patients 

In the short run, the prescription drug peace treaty described in Section V of this 

testimony would make all of today’s needed medications available to all Americans 

at a surprisingly low incremental cost. 

Looking forward, a number of strategic interventions must be undertaken to keep 

medications affordable for all Americans and for all payors, to promote the development of new breakthrough drugs, and to generously reward drug makers that develop those drugs. 

Clearly, today’s pace of drug spending increases cannot continue; spending that 

doubles every five years is unaffordable. But even reversion to the rates of increase 

of earlier years could raise grave financing problems: five percent or ten percent annual increases in drug spending would be very costly because they build on 2001’s 

$165 billion base. 

A. Spurring Research to Develop Breakthrough Drugs 

Several policy and financing approaches should be considered to encourage breakthrough research. The first is to reward breakthrough research generously. The reward for a new drug should be keyed to the magnitude of its clinical benefit (years 

of life gained, disability reduced, and pain and suffering for patient and family relieved) for the typical patient who uses it, the number of patients who use it, the 

actual risks and actual costs of research borne by the company that develops the 

drug, the drug’s effects on other medical and non-medical costs (costs of physician 

and hospital services, costs of long-term care, and the like), and possibly other factors. 

It should be recognized that drugs cannot be cleanly divided between breakthrough or non-breakthrough drugs. Rather, they should be arrayed on a continuum, with profits set in proportion to the benefits and costs just listed. 

This activity is essential because nothing close to a genuine free market exists to 

reward research. 

One clear step should be to cease to reward copy-cat research. According to 

DiMasi, some 40 percent of pharmaceutical research today is imitative.22 PhRMA 

claims that its members will conduct $23.6 billion worth of research in 2001.23 If 

that claim is accurate and if 40 percent goes to copy-cat research, some $9.4 billion 

is probably being spent sub-optimally from the perspective of society. 

Some would claim that copy-cat research is essential to generating competition, 

and that that is essential to holding down prices. Perhaps that is true in today’s 

world (conceptually though not practically, since prices have not been held down 

very effectively). But holding down prices by regulation is much simpler. And $9.4 

billion is accordingly made available to finance breakthrough research this year 

alone. 

Others would claim that some copy-cat drugs could have superior efficacy or fewer 

side-effects. In these cases, their developers should profit in proportion to the additional value provided by the copy-cat medication. 

In sum, one good way to promote breakthrough research is to pay for it generously, and to refrain from generously rewarding copy-cat research. 

Another good way to promote breakthrough research is to subsidize it publicly 

through the National Institutes of Health. Such subsidies have long been very important to new drug development, and NIH funding has been rising rapidly in recent years. Public dollars often finance the riskiest share of the research. Drug makers should not profit from costs and risks borne publicly, but rather from their own 

efforts. In that way, effort and results are rewarded, not ability to capitalize on the 

accomplishments of publicly-financed research. 

79

B. Containing Costs in Order to Keep Medications Affordable for All 

The peace treaty described in Section V will make today’s medications affordable 

for all. The research promotion just described will continue to spur the development 

of new breakthrough medications. The remaining challenge is to make tomorrow’s 

medications affordable for all. 

This is probably the knottiest job. No one tool will suffice. Although other approaches will probably be necessary as well, I suggest starting with these three 

tools: 

1. Cut marketing waste 

PhRMA does not, apparently, estimate or report its members’ marketing costs. Instead, the drug makers cite an estimate from IMS Health that drug makers’ marketing costs were only $13.9 billion in 1999. (This estimate is unnaturally low, since 

about one-half of it is the retail value of samples, which grossly exceeds their cost 

to drug makers.) The drug makers did report that their own research spending that 

year was $20.4 billion. 

A more skeptical estimate puts marketing spending at $24 billion and research 

at $10 billion. This rests on an analysis of the allocations of drug makers’ revenue 

published in manufacturers’ financial reports. As shown in the following exhibit, 31 

percent of drug makers’ revenue went to marketing and administration, while only 

11 percent went to research and development.24

Exhibit

How Six Drug Makers Spent Their Money, 1999

Marketing and administration 31%

Research and development 11

Production 32

Taxes 6

Other 4

Profit 16

The truth may well be somewhere between the two sets of estimates. Clearly, 

more accurate information and analysis is required to resolve conflicts and inadequacies plaguing some of the currently available data. 

But one piece of evidence is clear—the drug makers’ marketing employment 

soared by 57 percent between 1990 and 2000, while its research employment rose 

by only 10 percent, as shown in the following exhibit.

Exhibit

PhRMA Members’ Marketing and Research/Development Employment, 1990 and 2000

Type of employment 1990 2000 % change 

Marketing 56,014 87,810 +56.8%

Research and Development 43,952 48,527 +10.4%

In today’s world, drug marketing aims to maximize company profits. Drug makers 

rely on their current marketing techniques, despite their high cost, because these 

techniques pay off in higher sales. But it is far from clear that the nation’s patients 

are getting their money’s worth. Often, new medications are being widely marketed, 

advertised, and sold even though they are much costlier than older medications they 

replace—and without adequate evidence that they are markedly more effective. 

This may be good for drug makers but it is not good or affordable for patients. 

At some point, it will probably be necessary for the federal government and the drug 

makers to negotiate simple and enforceable limits on marketing and advertising expenditures. 

80

2. Carefully evaluate the efficacy of each medication and compare efficacy with cost, 

and disseminate the results to physicians and patients. 

If marketing becomes much less important, how will physicians and patients learn 

about which drugs might be helpful, and whether they are worth the money? 

This function should probably be performed by a research office in the National 

Institutes of Health or the Food and Drug Administration, or possibly by a separate 

non-governmental non-profit research corporation. Objective evidence on efficacy 

should be compiled, along with the information needed to calculate a fair return on 

a drug maker’s investment in a new medication. The objective evidence should be 

disseminated to all physicians, along with recommendations from expert panels of 

physicians and scientists regarding which medications are effective and efficient in 

treating various ailments. 

We can marshal the huge sums now badly spent on marketing, and recycle them 

to finance the job of collecting and disseminating this objective evidence. 

Any public agency charged with this work must be insulated politically. It cannot 

be influenced by pressure from cost-cutters to downgrade its assessment of the value 

of a new drug in order to reduce public spending. That would undermine citizens’

trust. We should not substitute information from a public agency motivated to hold 

down spending for information from drug makers motivated to increase spending. 

This consideration might argue for relying on an independent non-profit corporation. 

3. Give more careful thought to what constitutes fair profits for drug makers 

As my colleague and I have noted,25 drug makers’ reported profits have been extraordinarily high since at least the 1970s. The data in the following exhibit indicate 

that the prescription drug industry’s return on equity in 1999 of 35.6 percent was 

2.21 times as great as the 41-industry median of 16.1 percent. And the prescription 

drug industry’s return on revenue of 18.6 percent was 3.58 times as great as the 

41-industry median of 5.2 percent.26

Exhibit

Prescription Drug Industry Returns on

Equity and Revenue Compared with 41-Industry Median, 1999

prescription drugs 41-industry median Rx/41-industry ratio

return on equity 35.6% 16.1% 2.21

return on revenue 18.6% 5.2% 3.58

The profits that drug makers actually garner by manufacturing and selling prescription drugs may be substantially higher than those they report overall. It is important to be clear that, in making this statement, I am not in any way suggesting 

that any drug maker has done anything remotely improper. Corporations report corporation-wide financial results. 

For example, my colleague and I examined Merck’s profits as a percentage of revenue (the only measure that could be calculated) after factoring out the relatively 

low returns on revenue of its Medco PBM subsidiary.27

Merck reports a consolidated 1999 income before taxes of $8,619.5 million on revenue of $32,714.0 million, for a before-tax return on revenue of 26.3 percent. This 

includes revenue and profit on Merck’s large Merck-Medco segment. But how much 

did Merck make on its prescription drug business alone? 28

The answer is that Merck garnered a 37.4 percent before-tax return on revenue 

on its prescription drug business. A brief glance through Merck’s annual report did 

not reveal this number, though it may be there, somewhere. The 37.4 percent return 

on revenue is more than two-fifths greater (42.2 percent greater) a return on revenue than the consolidated 26.3 percent of revenue that Merck reports overall. The 

calculations are shown in the exhibit that follows.

81

Exhibit

Merck Pharmaceutical Segment’s Revenues and Profits, CY 1997–1999

($ millions) 

1997 1998 1999

1. Segment revenue $12,122.20 $12,839.90 $14,418.70

2. Segment profit $7,396.20 $7,367.30 $8,495.40

3. Less all unallocated costs $3,162.90 $2,370.20 $3,109.10

4. Segment profit after unallocated costs $4,233.30 $4,997.10 $5,386.30

5. Segment profit as % of segment revenue 34.9% 38.9% 37.4%

Source, Merck & Co., Inc. 1999 Financial Report, p. 55.29

Drug makers say they need high profits to finance research. But profits do not 

finance research. The profits that they report—and that are so far above those of 

other industries—are the sums left over after they pay for research, manufacturing, 

marketing, advertising, administration, taxes, and other costs. 

Finally, the drug makers are not willing to identify a ceiling on their profits or 

revenues—the level of profit or revenue beyond which no more money is needed to 

finance useful research. Similarly, the drug makers are unwilling to identify any 

floor on their profits or revenues—the level below which vital research would suffer. 

Their position is simple: more money (for themselves) is better. That would make 

sense only if the drug makers operated in a competitive free market. They do not, 

as discussed earlier. 

For all these reasons, it will be necessary to investigate, debate, and negotiate the 

level of profit required to induce drug makers to retain their motivation to innovate 

and produce breakthrough drugs. 

VIII. LEARNING FROM THE EVOLUTION OF STATE PRESCRIPTION 

DRUG POLICY 

Examining the evolution of states’ prescription drug policy in recent decades may 

enlighten future federal action. States’ first phase was paying for drugs. Their second phase is holding down prices. 

All state governments began paying for prescription drugs on a large scale 

through their Medicaid programs. Many others followed with special pharmacy programs to subsidize drug purchases for citizens who did not qualify for Medicaid, 

usually for seniors. 

In the past few years, many states have realized that soaring drug costs were 

raising the costs of both of these activities to troubling levels. 

States therefore moved from financing to price controls Maine legislated an innovative price control law. Vermont sought to cover more citizens under the umbrella 

of its Medicaid rebate. The drug industry has challenged these efforts in the courts. 

If the drug industry prevails, states will try other techniques, such as establishing 

themselves as sole buyers or wholesalers of drugs within their borders, thereby perhaps avoiding a possible Commerce Clause pre-emption of state action. 

Thus far, some states have been motivated, politically, to respond to the crisis of 

high drug prices because state governments feel those prices directly and because, 

it appears, ordinary citizens who suffer from high drug prices have been able to 

make themselves heard by some state governments. 

States can act to cut drug prices without worrying about the consequences for research. The federal government cannot do so. 

The federal government has, in one way, already acted to protect itself against 

high drug prices by legislating low prices for the Veterans Administration and the 

military. Unlike other nations, however, the federal government has thus far protected mainly itself—not all citizens—against high drug costs. 

High prescription drug prices are one of the main reasons many Americans cannot 

afford needed medications. High prices have spurred a number of complicated, 

sometimes well-intentioned, and usually ineffective responses, ranging from PBMs 

to formularies to higher co-payments to obtaining drugs from abroad. 

High prices spur efforts to reduce use. But this can harm patients who would benefit from those drugs, and it flies in the face of the low incremental or marginal 

cost of those drugs. 

82

Instead of cutting use in response to high prices, federal action should cut prices 

to Canadian levels, in order to facilitate higher use, as medically appropriate. This 

is best done as part of a comprehensive prescription drug peace treaty that protects 

the legitimate needs of patients, payors, and drug makers. 

NOTES 

1. PhRMA projects $121.7 billion in U.S. domestic sales in 2001 for ethical prescription drugs. Sold in the U.S. by U.S. and foreign members of PhRMA, these are 

overwhelmingly brand-name drugs for human use. Based on 1999 breakdowns, we 

calculate that 93.4 percent of this is for humans. Applying the 93.4 percent share 

to the $121.7 billion yields $113.7 billion. See Pharmaceutical Research and Manufacturers of America, Pharmaceutical Industry Profile, 2001, Appendix tables 11 and 

12, http://www.phrma.org/publications/publications/profile01/appla2.phtml#

tablel11. It is estimated that some 74 percent of the overall retail dollar goes to 

manufacturers. (See National Association of Chain Drug Stores, ‘‘The Facts about 

Prescription Drug Pricing,’’ Alexandria, Virginia: NACDS, 1999 (unpublished draft), 

3rd quarter 1998, chain drug stores only.) Applying this 74 percent share to the 

$113.7 billion yields $153.6 billion in retail sales of prescription drugs for humans. 

We round up to $165 billion to account for generics manufactured by non-PhRMA 

members. In 1998, spending on generics was 8.6 percent of the U.S. total. That figure was reported by the Generic Pharmaceutical Industry Association, ‘‘Generic 

Share of U.S. Market,’’ Facts and Figures, www.gpia.org/edulfacts.html, but it appears that this site is no longer in operation. 

2. This rests on the Health Care Financing Administration/CMS projection of 

2001 total health spending of $1,424.2 billion. See Health Care Financing Administration, National Health Projections, Table 1, March 2001, http://www.hcfa.gov/

stats/NHE-Proj/proj2000/tables/t1.htm.

3. This reflects our projection of U.S. population for 1 July 2001. The population 

estimate is built on the U.S. population reported in the 2000 Census and increases 

it by the average annual population rise from 1990 to 2000, and adds one-quarter 

of a year to move the estimate from 1 April to 1 July. 

4. David J. Cantor, ‘‘Prescription Drug Price Comparisons: The United States, 

Canada, and Mexico,’’ Washington: Congressional Research Service, Library of Congress, 23 January 1998; see also U.S. General Accounting Office, Prescription Drugs: 

Companies Typically Charge More in the United States than in Canada, Washington: The Office, 1992 (GAO/HRD–92–110). 

5. Patented Medicine Prices Review Board, Annual Report 2000, Ottawa: The 

Board, 11 June 2001, Figure 8. The report expressed U.S. and other non-Canadian 

prices as percentages of Canadian prices; we calculated Canadian prices as a percentage of U.S. prices. 

6. The low Canadian prices for brand name drugs are no aberration. Consider 

these nations’ brand name drug prices as a percentage of U.S. prices in the year 

2000:

Italy 52.9 %

France 55.2

Canada 62.5

Sweden 63.6

Germany 65.3

U.K. 68.6

Switzerland 69.2

Source: Patented Medicine Prices Review Board, 

Annual Report 2000, Ottawa: The Board, 11 June 

2001, Figure 8. 

7. Actual savings in a given state would vary slightly from those calculated here. 

That is because these calculations make three simplifying assumptions:

a) That prescription drug spending in 2001 is distributed among the states 

in the same proportions as reported by the Health Care Financing Administration’s Office of the Actuary for 1998. (See United States Health Care Financing 

Administration, 1980–1998 State Health Care Expenditures Estimates, 29 SepVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00090 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
83

tember 2000, posted on-line at http://www.hcfa.gov/stats/nhe-oact/

stateestimates/.) 

b) That private insurance, Medicaid, and self-pay shares of the market are 

similar from state to state. These actually varying somewhat from state to 

state. 

c) That discounts and rebates are shared evenly among the states; in reality, 

these also vary somewhat from state to state.

8. Personal communication from Hilda BenEzra (regarding Isaac Ben Ezra) to 

Deborah Socolar, 30 August 2001. 

9. The last tactic would be useful only when drug prices are negotiated rather 

than regulated. I am indebted to John McDonough for mentioning this tactic, one 

that drug makers apparently employed when a U.S. state was considering obtaining 

medications from a Canadian province. 

10. Generic Pharmaceutical Industry Association, Facts & Figures. See 

www.gpia.org/edu.

11. The United States government emphatically rejects PhRMA’s claims that a 

free market legitimizes drug makers’ prices, or that cutting prices is dangerous, by 

taking a 42 percent (or so) price discount for medications for the Veterans Administration and the military, and by taking an 18 percent (or so) rebate for the Medicaid 

program. This is the sort of thing foreign governments have long done for all their 

citizens. 

We point to these six specific indicators of the absence of a free and competitive 

market:

1. Prevailing price disparities are themselves evidence of the lack of a free 

market for prescription drugs. While different payors today pay very different 

prices for the same drug, prices would tend to converge if there were a free market. In a free market, price competition would result in the same price throughout the market. 

2. The drug industry’s high U.S. prices—prices many times marginal cost of 

production—also suggest that nothing close to a freely competitive market is at 

work here. In a free market, prices tend to track marginal costs. 

3. The industry’s monopolistic (or oligopolistic) character in many sectors 

gives drug manufacturers tremendous power to set prices. Recent reports have 

documented that there is only limited competition within many major categories 

of medication. For example, in four important categories of drugs, the top-selling three drugs accounted for 71–90 percent of 1998 U.S. retail sales. (National 

Institute for Health Care Management, Prescription Drugs and Intellectual 

Property Protection, Washington: NICHM Research and Educational Foundation, 24 July 2000, p. 2, and p. 6, Figure 4, http://www.nihcm.org/prescription.pdf. Similarly, see Henry J. Kaiser Family Foundation, Prescription Drug 

Trends: A Chartbook, Menlo Park, CA: The Foundation, July 2000, p. 65, and 

p. 69, Exhibit 4.4, http://www.kff.org/content/2000/3019/PharmFinal.pdf.) 

4. This power will grow as drug makers merge into fewer and larger corporations. (‘‘Mergers Could Kill Competition for Drugs, Spur Price Hikes,’’ Associated Press, 28 January 2000.) 

5. Vertical integration—including Merck’s control of a major PBM—is also a 

concern. 

6. And allegations of such anti-competitive practices as suppression of generic 

competitors are further signs of continued monopoly and oligopoly. (See, for example, U.S. Federal Trade Commission, ‘‘FTC Charges Drug Manufacturers 

with Stifling Competition in Two Prescription Drug Markets,’’ Press Release, 16 

March 2000, http://www.ftc.gov/opa/2000/03/hoechst.htm; John Martin, ‘‘Conspiracy to Fix Drug Prices: Drug Makers Keep Generic Drugs Off the Market,’’

16 March 2000, http://abcnews.go.com/onair/CloserLook/wntl000315lCL

lgenericdrugslfeature.html; Ronald Rosenberg, ‘‘Drug Makers Seeks Curb on 

Sale of Generic Cyclosporin,’’ The Boston Globe, 7 April 2000; Michael F. Cannon, ‘‘Suppressing Generic Drugs Fleeces Consumers,’’ Citizens for a Sound 

Economy Foundation Issue Analysis, No. 86, 25 February 1999; ‘‘The High Price 

of Drugs,’’ ABC News, 20/20, 23 July 1999, www.abcnews.go.com/onair/2020/

transcripts/2020l990723ldrugsltrans.html; and Sheryl Gay Stolberg and 

Jeff Gerth, ‘‘How Companies Stall Generics and Keep Themselves Healthy,’’ The 

New York Times, 23 July 2000, http://www.nytimes.com/library/national/

science/health/072300hth-generic-drugs.html.)

12. Cited in Deborah Baker (Associated Press), ‘‘Many in Southwest Lack Drug 

Benefits,’’ Albuquerque Journal, 7 September 2000. Ms. Baroni was testifying before 

the New Mexico legislature’s Health and Human Services Committee. 

84

13. First, some market responses to predictions of lower drug prices suggest that 

high sales volumes would offset threatened price discounts. Three British drug companies’ stock prices rose 3.4 percent (Glaxo), 2.3 percent (SmithKline Beecham), and 

1.9 percent (AstraZeneca) following President Clinton’s January 2000 State of the 

Union speech calling for a Medicare prescription drug program. ‘‘ (Glaxo Leads UK 

Drugs up after Clinton Speech,’’ Dow Jones Newswires, 28 January 2000.) 

Second, we have seen earlier estimates of the price elasticity of demand for prescription drugs ranging from –0.10 to –0.64. (A price elasticity of demand of –0.10, 

for example, would mean that a 1 percent price cut for drugs would result in an 

offsetting 0.1 percent rise in volume of drugs purchased. The increase in volume, 

multiplied by the prices of the drugs purchased, would equal the replacement revenues garnered by the manufacturers in response to the lower prices.) Much of the 

empirical work on price elasticity of demand for medications rests on introduction 

of, or increases in, co-payments for prescription drugs. It is not clear how easily 

these findings can be generalized to price cuts, especially to substantial price cuts. 

Third, a June 1999 Merrill Lynch analysis estimated that a 40 percent price cut 

for Medicare recipients lacking prescription drug coverage would result in a 45 percent volume increase for these individuals. (Merrill Lynch, ‘‘Pharmaceuticals: A 

Medicare Drug Benefit: May Not Be So Bad,’’ Merrill Lynch, 23 June 1999.) That 

translates into a price elasticity of demand of –1.125. (A similar price elasticity of 

demand might also apply to the remainder of the 69 million or more Americans 

lacking prescription drug coverage.) 

Merrill Lynch also estimated that the same 40 percent price cut would net out 

to a 25 percent price cut for Medicare recipients who have prescription drug coverage (because they already enjoy discounts estimated to average 15 percent), and 

that the 25 percent price cut would raise the volume of drugs purchased by 10 percent. We suggest that is a very conservative estimate of the increase in volume for 

Medicare recipients who have prescription drug coverage. Many recipients have very 

shallow coverage, such as a benefit through an HMO with a cap of $500 annually. 

Even with that conservative estimate, the Merrill Lynch report concluded that, 

taking increased sales volume into account, a 40 percent price cut for Medicare 

beneficiaries would yield only a 3.3 revenue loss—or even a slight revenue gain. 

Fourteen months later, Merrill Lynch continues to strongly espouse this general 

position. In August of 2000, Merrill Lynch’s health care manager, Jordan Schreiber, 

has asserted that ‘‘Even with drug price cuts I think there’s a good chance the pharmaceutical group will actually come out as a net beneficiary as the presently uninsured become customers, albeit less profitable customers.’’ (Ian McDonald, ‘‘10 Questions With Merrill Lynch Healthcare Manager Jordan Schreiber,’’ TheStreet.com,

Fund Watch I, 14 August 2000, http://biz.yahoo.com/ts/000814/fund1l000814.

html.

See also Beth M. Mantz, ‘‘Merrill’s Tighe Sees $207.08B in ‘00 Global Drug Revs,’’

Dow Jones Newswires, 25 September 2000.) Other Wall Street observers have recently concurred. (See Derrick Jackson, ‘‘Drug price cuts won’t kill industry,’’ The 

Boston Globe, op-ed, 22 September 2000.) 

14. Once research is conducted and factories are built, it should not be very great. 

We estimate the marginal cost of additional volumes of medications at 5 percent of 

the retail dollar, or about 6.8 percent of the manufacturer’s cost. (Taking the manufacturer’s share of the retail dollar at 74 percent.) How can this be so low? 

First, because producing the medications consumes a relatively small share of the 

average manufacturer’s total revenues. In 1999, for example, only 32 percent of six 

large drug makers’ revenues, on average, was devoted to acquiring raw materials 

and to manufacturing drugs. As this is the average cost, which includes substantial 

fixed costs for engineering, equipment, and workers, then the marginal cost of producing additional volumes will be substantially lower. Costs of raw materials are 

typically very low. One report noted that ‘‘the cost of the raw materials runs only 

a few cents in pills that often sell for up to $15 apiece.’’ (Elyse Tanouye, ‘‘Drug Dependency: U.S. Has Developed an Expensive Habit: Now, How to Pay for It?’’ The 

Wall Street Journal, 16 November 1998.) A revealing example was reported recently. The vital ingredient for Xalatan, a successful medication to prevent glaucoma, costs only about one percent of annual sales. (Jeff Gerth and Sheryl Gay 

Stolberg, ‘‘Medicine Merchants: Birth of a Blockbuster; Drug Makers Reap Profits 

on Tax-backed Research,’’ The New York Times, 23 April 2000.) 

Second, private conversations with managers of drug factories have supported the 

5 percent figure. 

Third, the prices set by manufacturers of generic drugs are very much lower than 

those set by manufacturers of brand name drugs. A Mylan executive has asserted 

that her company sells two-fifths of its 104 products at prices equal to 10 percent 

(or less) of the prices charged by brand name manufacturers. (Patricia Sunseri, 

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‘‘FTC Antitrust Complaint vs. Mylan,’’ 23 December 1998, www.genericaccess.com/

info.html.) 

15. See, for example, 

First Clinton Plan: Associated Press, ‘‘Drug Stocks Soar in Light of Medicare Proposal,’’ The Boston Globe, 30 June 1999; 

CBO’s estimates of cost of first Clinton plan: Robert Pear, ‘‘Budget Office Says 

Clinton Underestimated Cost of Drug Plan,’’ The New York Times, 23 July 1999. 

Underestimates were attributed by CBO to faster growth in underlying drug costs, 

including drugs for nursing home residents (which should be a transfer from Medicaid to Medicare, thus result in no real increase in total federal plus state government costs), more low-income people expected to apply for federal aid in paying premiums and co-payments, and lower expected discounts won by PBMs in a federal 

program than in a private program. 

Senate Democrats’ Plan: Robert Pear, ‘‘Rival Medicare Drug Plans Are Both Ruled 

Affordable,’’ The New York Times, 9 June 2001. 

16. In only eight months from March 2000 to January 2001, CBO’s projections for 

drug spending by or for Medicare beneficiaries during the decade from 2001 to 2010 

rose from $1.1 trillion to $1.3 trillion under current law—without a prescription 

drug benefit. See Dan L. Crippen, ‘‘Laying the Groundwork for a Medicare Prescription Drug Benefit,’’ Statement before the Subcommittee on Health, Committee on 

Ways and Means, U.S. House of Representatives, 27 March 2001, Table 2. 

17. $318 billion divided by $1.3 trillion equals 24.5 percent. 

18. Anjetta McQueen, ‘‘More Money Needed for Prescriptions,’’ Associated Press, 

16 May 2001. 

19. It assumes the following:

Group of people number in group 

added brand name prescriptions/ person total increase in 

brand name

prescriptions

annually 

number of Non-Medicare uninsured 57,000,000 5 285,000,000

number of Non-Medicare underinsured 75,000,000 3 225,000,000

Non-Medicare subtotal 510,000,000

number of Medicare uninsured 13,843,148 15 207,647,225

number of Medicare underinsured 25,936,014 10 259,360,135

Medicare subtotal 467,007,360

Grand Total 977,007,360

20. Some 2.84 billion retail prescriptions were filled in 2000, a five percent rise 

from 1999. Another five percent rise in 2001 would mean 2.98 billion prescriptions 

in 2001. (National Association of Chain Drug Stores, ‘‘Facts at a Glance,’’

www.nacds.org/wmspage provided 1999 and 2000 data.) And the 977 million increase divided by 2.98 billion equals 33.4 percent. 

21. The average price of a brand name retail drug in 2001 is estimated at $70.27, 

making for an estimated incremental cost of $3.51, with the increment estimated 

at five percent of retail. The $70.27 average price was calculated by applying the 

1999 to 2000 rate of increase in price to the average price in 2000. National Association of Chain Drug Stores, ‘‘Facts at a Glance,’’ www.nacds.org/wmspage provided 

1999 and 2000 data. 

22. Cited in Merrill Goozner, ‘‘The Price Isn’t Right,’’ The American Prospect, Vol. 

11, No. 20, 11 September 2000, http://www.americanprospect.com/archives/V11-

20/goozner-m.html. Goozner also reports that ‘‘FDA statistics for the 1990s suggest 

that about half of the industry research is aimed at developing me-too drugs.’’

23. Pharmaceutical Research and Manufacturers of America, Pharmaceutical Industry Profile, 2001, Appendix Table 1, http://www.phrma.org/publications/publications/profile01/appla1.phtml#tablel1.

24. The data were compiled from an opportunity sample of seven large drug companies (now merged into six) whose financial reports were readily on-hand. The 

drug makers are Merck, Pfizer plus Warner-Lambert (which have merged), BristolMeyers-Squibb, American Home Products, Lilly, and Schering-Plough. We are grateful to Robert DeNoble for his careful work in compiling and reducing the financial 

data. The firms’ combined 1999 revenue was $114.8 billion. The firms are generally 

representative of the industry. 

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25. Alan Sager and Deborah Socolar, A Prescription Drug Peace Treaty: Cutting 

Prices to Make Prescription Drugs Affordable for All and to Protect Research: Boston: 

Health Reform Program, Boston University School of Public Health, 5 October 2000. 

26. The prescription drug industry and other industries’ data are presented in 

http://www.fortune.com/fortune/fortune500/medians.html. We calculated the 41-

industry median at the mid-point between the 20th- and 21st-ranked industries on 

each list of 41 industries. 

27. Alan Sager and Deborah Socolar, ‘‘Prescription Drug Spending Is Already 

Enough to Buy All the Drugs All Americans Need,’’ Session on Cutting Drug Prices 

and Expanding Coverage—Federal and State Efforts, Health Equity and Public Hospitals Caucus, American Public Health Association, Monday 13 November 2000. 

28. Merck & Co., Inc. 1999 Financial Report, p. 42. 

29. Note: Unallocated costs are ‘‘indirect production costs, research and development expenses and general and administrative expenses, all predominantly related 

to the Merck pharmaceutical business, as well as the cost of financing these activities.’’

We calculated these unallocated costs by starting with before-tax profits reported 

for all segments (which do not reflect those costs not allocated to any segment) from 

p. 55 of the Financial Report, and subtracting before-tax profits reported on the consolidated income statement (which reflect all costs). See Merck & Co., Inc. 1999 Financial Report, pp. 42 and 55.

Senator DORGAN. Dr. Sager, thank you very much. 

I regret that we are running out of time due to other commitments this morning, but I want to ask just a couple of brief questions. First of all, I think the testimony of this panel has been excellent and provides some interesting perspective about this issue 

from a range of different points on the compass. 

Let me ask you, Ms. Powell, you have heard the testimony that 

preceded yours by the FDA. The question that was left hanging 

was, do the Canadians, and speaking specifically now about Canada, do the Canadians have a regime of safety and quality assurance and chain of custody that should make consumers feel comfortable? So let me ask you that question because your industry 

sells a substantial amount of products into Canada and markets a 

substantial amount of prescription drugs in Canada. 

Do the Canadians, in your judgment, give us reasons to worry 

about the safety of their prescription drug supply? 

Ms. POWELL. Senator Dorgan, I know that the equivalent of 

FDA, the agency of that reviews and approves or denies marketing 

for prescription drugs in Canada, uses fairly similar processes for 

determining safety and effectiveness. I, however, do not know what 

the distribution system is within Canada. I would be happy to do 

some research and get back to you, but I don’t know how the Canadian system insures that the product sold by the manufacturer in 

fact gets to the pharmacy through a chain of custody, I don’t know 

what their chain of custody system is. I would be happy to get back 

to you on that. 

Senator DORGAN. We will ask a number of groups to determine 

that. Mr. Giroux, you run a pharmacy south of the border, so I assume you know what is happening north of the border. Do Canadians have reasons to worry about the safety of their drug supply? 

Mr. GIROUX. In my judgment, clearly not. I think there is no difference between the Canadian system and the U.S. system. If you 

look at any one of these products, they are clearly sealed from the 

manufacturing plant and in all likelihood the bottles are identical, 

as you have already pointed out. They are coming from the same 

plants, from the same machines, and they are sealed in these packVerDate Apr 24 2002 06:25 Mar 04, 2003 Jkt 081587 PO 00000 Frm 00094 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\85319.TXT SCOM1 PsN: CAROLT
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ages with a slightly different label for the Canadian identifier when 

shipped to Canada. 

And as all pharmacists do with any product that comes into our 

doors, when we open the package, it has to be sealed. If it isn’t, 

it goes back. 

Senator DORGAN. Are there common distributors between, for example, a Canadian drugstore north of the New York line and your 

drugstores, are you buying from common distributors? 

Mr. GIROUX. There are several of the larger wholesalers who do 

have facilities in Canada and as I mentioned, probably they are already potentially taking advantage of this. I don’t know. 

Senator DORGAN. So is it likely the chain of custody is probably 

almost identical from a manufacturing plant to the same distributor to the drugstore in Canada as to your drugstore? So it 

would be an identical chain of custody? 

Mr. GIROUX. Absolutely. And I think the example that the gentleman from FDA used in terms of the counterfeit, which I think 

is a somewhat unrelated issue, but he used an example of a product that was actually adulterated in Long Island, New York and 

shipped to Chicago. It had nothing to do with the Canadian drug 

distribution system. That can happen in any chain of distribution, 

not necessarily from Canada to the U.S. I would be totally confident and comfortable buying these products from a Canadian supplier. They are sealed, they are intact, if they weren’t, we wouldn’t 

buy it, plain and simple. 

Senator DORGAN. Dr. Sager, your testimony was interesting because it mentioned some new and interesting approaches, some of 

which may be unable to be dealt with by this Congress, but several 

of you have talked about the need to put a prescription drug package in Medicare. I certainly agree with that and feel strongly that 

we should do it. However, if we do that, and we are oblivious to 

the issue of cost, and we see cost increases of 16, 18, 19 percent 

a year, which includes both utilization and price inflation, we are 

just going to break the bank. 

I think what we have to do is address both issues. We need to 

put a prescription drug program in the Medicare program, but we 

need to find ways to put dominant pressure on prices to the extent 

that we can. That is the reason this reimportation issue is important. Let me reemphasize that my end goal is not to ask people to 

leave this country to go elsewhere to purchase prescription drugs. 

My end goal is that if the distributors and pharmacists can do that, 

the pharmaceutical manufacturers will understand and will reprice 

their product in this country. That is the end stage of this whole 

thing. 

Mr. Marvin? 

Mr. MARVIN. Senator, our people in Maine clearly understand 

that the U.S. Government is involved in the Medicare program negotiating with the prices for hospitals, they’re involved in the Medicare program negotiating prices with doctors, they are involved in 

the Medicare program negotiating with virtually every aspect of 

medicine except prescription drugs. And our people in Maine are 

wondering what’s so sacrosanct about the drug industry that it 

should be exempted from dealing with the U.S. Government as a 

88

negotiator on behalf of citizens as opposed to all the other aspects 

of the Medicare program. 

Senator DORGAN. Ms. Powell, do you want to answer that? 

Ms. POWELL. We support a federal Medicare drug benefit. However, we believe it can most effectively be administered through the 

private sector and there are a variety of models for that kind of 

program, where the federal government is not the sole purchaser 

of the medicines, but the federal government provides support for 

seniors having access to prescription medicines. 

For example, within the Federal Employee Health Benefit program, the federal government pays for Federal employees’ drugs 

but it does not negotiate a price for drugs, it contracts with 

healthcare providers and we think that Congress should look at a 

variety of those kinds of approaches to providing the drug benefit. 

But I certainly would echo that a Medicare drug benefit is needed. 

Ms. WENNAR. A couple points I would like to make here. First, 

the private side, let’s not forget, they to are having some difficulty 

with prescription drug supplies. Even the largest of payers, 

Wellpoint in California, have told us that it’s breaking the bank, 

and they are fairly large in terms of negotiating power, and so I 

think, don’t be fooled into a false sense of security that by going 

to the private sector that you are going to see this problem resolved. 

And I do agree that prescription drugs do need to be covered 

under Medicare because they are critical, as I pointed out, on the 

provider side, the technology is now here to stay in the form of a 

pill and it is going to continue to grow that way. 

I think our concern is that you have to figure out how to have 

access to affordable prescription drugs before you cover it under 

Medicare because if you go out there and you cover it, and you 

can’t control the cost, you very well, as you pointed out, might have 

a major issue. 

The other thing is, I would like to just pose a question. I mean, 

I have heard a lot discussed around quality. You know, just consider it this way on this side. The FDA does not monitor samples 

in physicians’ offices last I checked. They don’t check the temperatures, they don’t check the storage. They don’t take any consideration in terms of looking at things. I don’t know whether they have 

the authority to or not, but a lot of medication is being dispensed 

in the form of samples, and nobody monitors that. 

Why would you be any more concerned about the prescription 

drugs coming in the manufacturer’s bottle from Canada than you 

would be concerned about physicians giving samples out? 

Ms. POWELL. I’m going to disagree with you, because there is legislation. FDA, because of the 1998 statute, has extensive regulations that control the entire process of sample distribution, so I 

think it’s not correct to say that those are not controlled. Let me 

point out——

Senator DORGAN. We were not talking about control, we are talking about whether in practice and whether as a matter of fact you 

have FDA inspectors going out and inspecting samples. 

Ms. POWELL. My understanding is that FDA is authorized to 

monitor the process of samples throughout the distribution system. 

Senator DORGAN. But I am wondering if they do or not. 

89

Ms. POWELL. That I don’t know, but I know that they are authorized to. 

And I would also like to point out that samples constitute more 

than 50 percent of the administration and marketing costs that Mr. 

Sager refers to, and samples are one of the mechanisms that manufacturers have used, along with their voluntary patient assistance 

programs, to address the problems of people who do not have insurance for prescription drugs, and they are one of the ways that I 

know doctors deal with seniors who do not have access to insurance. 

But we think a more efficient way is through a Medicare drug 

benefit. 

Senator DORGAN. Dr. Sager, from an academic standpoint—first 

of all, I appreciate the work you have done, your testimony is very 

interesting as is all the testimony here—from an academic standpoint you heard me suggest that if we cannot do it the way we 

want to do it, then we will legislate the first step by dealing with 

Canada only. Does that make sense to you? 

Dr. SAGER. Well, I think it addresses some of the issues that people have been complaining about, yes, but I’m still worried about 

what I think is the likely response of drug manufacturers, which 

will be to limit the supply available to Canada for reimportation. 

Senator DORGAN. That was my next point. You assume, and I assume, that pharmaceutical manufacturers are making a profit with 

those drugs they sell in Canada, do you not agree? 

Dr. SAGER. Right. 

Senator DORGAN. If they are making a profit and limiting supply, 

it seems to me they would be shooting themselves in the foot. But 

having said that, having observed that, can I ask again from your 

standpoint, would you submit for the Subcommittee your analysis 

of methods by which the industry could thwart what we do? 

Let us assume that we can pass a piece of legislation and get 

past the point of having HHS and FDA decide they are going to 

implement it. We have always understood that there are devices by 

which the industry can try to undermine the law. We have never 

gotten to that point because we have not been able to get through 

HHS at this point, but I think we are going to, and it would be 

helpful if you would, because you mentioned one approach, if you 

would give us from your standpoint as an academician, your 

thoughts about what approaches might be used by the industry 

that could undermine or thwart the intent of legislation like this. 

Now having said that, I must adjourn this hearing because of 

other obligations, but let me make one additional point. I think this 

has been an interesting exchange of views. I think the testimony 

that all of you have brought today has given us a record that a 

number of us will use in various ways, and perhaps those who oppose what I am trying to do will use it as well. 

I did not mention, and I should have, Senator Wellstone and 

Senator Johnson of South Dakota have been very active here in the 

Senate on this legislation, and I should have mentioned them. 

It has been bipartisan, Republicans and Democrats, who are interested in doing something in this area. 

90

Again, thank you for participating. I know some of you have 

come long distances today, but this is a very important issue, and 

we appreciate your attendance. 

This hearing is adjourned. 

[Whereupon, the hearing adjourned at 11:10 a.m.]

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