Almost daily, healthcare providers are lambasting mushrooming drug costs as the cause for fiscal woes that can't be blamed on Medicare cutbacks.
It seems surprising then that some politicians would even consider adding prescription drug benefits to Medicare-a system overripe for an overhaul.
Hospitals and managed-care organizations in every corner of the country are already struggling to keep up with skyrocketing drug spending. Propelling the explosion are an extraordinary pace of new drug development, unprecedented promotion of the products to doctors and patients, and a sea change in drug pricing.
How bad is the situation?
Spending on prescription drugs is rising at 12% per year, more than double the 5.1% increase in national health expenditures, according to HCFA data based on five-year figures through 1998. Many think the double-digit increases will continue for some time.
Already pharmaceuticals claim nearly 8%, or about $100 billion, of national healthcare expenditures (See chart, p. 33). As the parade of new drugs keeps rolling, some predict that the pharmaceutical share of health spending could double during the next 10 years.
Outpatient drugs-such as those designed to treat impotence, allergies or stomach upset-tend to draw the most attention, sparked by the billions of dollars spent on them. But that doesn't mean there aren't plenty of expensive inpatient drugs: from ReoPro, a biotech clot-buster that costs about $1,500 per patient use, to Gliadel, a $10,000-plus time-released wafer that doctors implant to combat brain cancer.
Regardless of how and where the drugs are administered, expenses are rising fast. The distinctions between inpatient and outpatient drug costs are blurring, as health systems feel more of a pinch, regardless of whether the expenses are incurred through the systems' insurance plans or by taking on risk-sharing agreements with payers.
Can anything be done to rein in drug costs?
Yes, but mostly around the edges. Cutting costs overstates the possibilities. Pharmacy spending will continue to rise. What we can do is reduce the rate of growth and figure out who will pay the bills.
Booming supply and demand. The boom times in drug spending are easy to explain, believe it or not. The problem, as in most economics, is simple supply and demand: The supply of new drugs is exploding, and consumers are demanding them as never before.
New drugs used to almost dribble onto the market, giving doctors and payers the time to consider their merits. But remarkably prolific drug companies are cranking out completely new products-from pills to vaccines-at a breakneck pace.
And guess what? Most of the drugs really work.
The Food and Drug Administration, criticized for evaluating new drugs too slowly and bolstered by user fees paid by the industry, slashed the time for approvals: 11.7 months, on average, in 1998, compared with 31.3 months a decade earlier.
In 1998, the FDA approved 39 new drugs, including such blockbusters as Viagra, manufactured by Pfizer. That pace was even down a bit from 1997 when 49 new drugs made it to market.
The drug boom presents "a happy dilemma," says Grant Lawless, a physician and a pharmacist who is vice president of medical and pharmacy affairs at Highmark Blue Cross and Blue Shield, Pittsburgh.
"We have never had better choices of drugs. However, they're very expensive," he says.
'I'm OK, but I could be better.' Drugs that can improve patients' quality of life have revolutionized the way many people think about medication. Drugs like penicillin have been prescribed short-term to cure an infection. But many modern drugs, such as Claritin for allergies or Prilosec for stomach upset, can be taken for decades to smooth the rough edges of life more than to eradicate disease.
At Highmark, for instance, the No. 1 drug expense is for stomach pills called proton pump inhibitors, such as Prilosec. The successors of well-known anti-ulcer drugs, such as Tagamet, these drugs make iron stomachs available to everyone.
"Much more than Viagra ever was, these are the ultimate lifestyle drugs," Lawless says. He says the average patient would explain the attraction as: "I take it so I can go out and eat as many tacos as I want."
The next-biggest drug expenses at Highmark are anti-allergy and antidepressant medications. Together, these three drug groups account for 15% to 18% of Highmark's drug spending. By next year, Lawless expects they will claim 25% of the drug budget.
Highmark, like many plans, uses preferred lists of drugs, or formularies, that emphasize generic drugs when appropriate and include brand-name products for which the insurer has negotiated price breaks.
The use of tiered copayments motivates patients to use the most economical drug first (See chart, p. 32).
But the copayments are modest, from $5 to $12 at most, and scarcely communicate the true costs of the drugs or the price differences among them.
Therefore, Highmark, like some other plans, is considering implementing copayments calculated as a percentage of drug costs, perhaps as much as one-third.
"I think we'll have more of a coinsurance relationship," he says.
Controversial? Sure. But something has to change-and soon.
When a copayment goes "from $5 to $30 to $40 a month, that will get their attention," Lawless says.
Volume alone doesn't explain the gravity of the cost problem. Each new wave of drugs seems to crest at a higher price point.
Powerful drugs, such as Betaseron, can retard the chronic, devastating march of multiple sclerosis through patients' nervous systems. But the tariff for payers can be a shocker.
"We usually think of prescription as running around $50 a month, but with these drugs it's around $500," says Norman Canterbury, director of clinical pharmacy programs at Arkansas Blue Cross and Blue Shield, Little Rock.
Take, for instance, a pair of entirely new pain relievers used to treat severe arthritis that hit the market this spring: Celebrex, made by G.D. Searle and Co., followed by Vioxx, manufactured by Merck and Co. Called Cox-2 inhibitors, the drugs relieve pain and inflammation just like high doses of ibuprofen or aspirin but minus serious side effects, such as stomach ulcers. At about $150 per month, the new drugs cost nearly 20 times more than the old standbys.
Although Viagra grabbed more headlines last year, Celebrex has garnered more sales faster. When it comes to busting budgets, Cox-2 inhibitors are practically child's play. New biotech wonders for rheumatoid arthritis, such as Enbrel, can cost $1,500 a month. Despite the cost, patients and doctors love the drugs because they're so effective in treating a painful and recalcitrant disease.
Bargains or rip-offs? For providers and insurers, the drug flood exacerbates the thorny problem of separating worthwhile drugs from pretenders. If the drugs really work and, for instance, reduce or eliminate hospital stays, they might even be bargains.
"Which new technology is really (effective), and which is just chrome?" asks Jim Donnelly, director of Fairview Purchasing Network, the purchasing arm of Fairview Hospital and Healthcare Services, Minneapolis.
Nowadays this is a question of vital importance.
"We've seen about 10% of the (annual) drug budget used on new supplies," a fundamental change from just a few years ago, Donnelly explains. Until recently, he says, hospital pharmacy and purchasing executives had to grapple with only one or two really extraordinary drugs each year. Sure, big sellers from the past such as Activase, a clot-buster, or Omnipaque, a contrast agent with few side effects, were challenging, but they came out alone or maybe in pairs, he says.
Now the rule of thumb is three, four or even five blockbusters per year, any one of which would be clinically tough enough for providers to keep up with and financially tough enough for payers to cover.
Together, the new drugs are like a steamroller that flattens budgets and crushes attempts at clinical common sense.
At Fairview, Donnelly says, pharmacists, clinicians and purchasing managers are doing their best to tackle the biggest threats by developing clinically based standards of use for:
* Drugs to combat nausea and vomiting, especially the pricey but popular Kytril.
* Brawny and expensive antibiotics, called quinolones, which include Trovan.
* Designer anti-clotting drugs, such as Activase, Retavase and Abbokinase.
'I want it, I need it.' Demand for drugs has never been higher. Many patients feel gypped if they walk away from an office visit without a prescription in hand. The expectation of some magic helper isn't new. What is? Patients now expect the brand-name drug they saw on television.
Nothing fans the flames of animosity among drugmakers, providers and payers more than the revolution wrought by the advertising of prescription drugs directly to consumers.
Since 1997, when the FDA began allowing companies to broadly tout the benefits of specific prescription drugs to patients, drug advertising spending has skyrocketed to more than $1.3 billion in 1998, up 23% from $1.1 billion the previous year and 394% from $266.3 million in 1994, according to IMS Health, a Plymouth Meeting, Pa.-based drug information and consulting firm.
Some of the heaviest consumer advertising has been for conditions that are hardly life-threatening, such as seasonal allergies or baldness.
Is there a literate person in this country who hasn't seen an ad for Claritin, the antihistamine sold by Schering-Plough Corp.? Probably not, because last year Schering spent $185.1 million on consumer ads, according to Scott-Levin, a Newtown, Pa.-based consulting firm to the pharmaceutical industry.
From television spots, featuring spokeswoman Joan Lunden, to plastic drugstore bags, Claritin ads are everywhere. And the payoff has been huge: $2.1 billion in 1998 sales, according to Scott-Levin, making it the leader in its category.
A convenient punching bag for drug critics, consumer advertising is neither inherently evil nor a sure-fire success, supporters say.
Ads for effective asthma treatments help build awareness and compliance that can reduce hospitalizations and improve overall health.
But even a $60 million consumer ad budget couldn't prevent Pravachol, an anti-cholesterol drug made by Bristol-Myers Squibb Co., from losing ground to Lipitor, sold by Pfizer. In fact, Bristol-Myers pulled the plug on its consumer ads earlier this year. And analysts say the Pravachol ads probably encouraged people to see their doctors for help in lowering cholesterol. But the doctors picked Pfizer's drug Lipitor as the champion over Pravachol.
No matter the hand-wringing, consumer advertising won't fade. Industry sources estimate consumer ad spending will grow by another 50% or so this year.
The standard recipe for dealing with drug issues, whether by an insurer or a health system, is a formulary.
In the most extreme case, closed formularies, patients must pay 100% of the costs of drugs that are not on the formulary.
Most of the time these formularies reinforce the financial deals that insurers, health systems or middlemen called pharmacy benefits managers put together with manufacturers for specific drugs within treatment categories.
Rising costs mean formulary management is more important than ever.
The latest twist is preauthorization for drugs such as Celebrex to make sure they're being prescribed only when absolutely necessary.
Act like a system. The steady drumbeat of hospital consolidation may have created health systems in every market, but the number that are operating coherently is a matter of intense speculation.
Without doubt, far too few have tapped the buying power from their larger scale to control pharmaceutical prescribing and spending.
Formularies must be expanded from single hospitals to entire networks, asserts William Larkin, vice president of pharmacy purchasing at the Greater New York Hospital Association.
Making systemwide decisions can spell political trouble, however, because it forces some physicians to give up power in controlling drug decisions. A systemwide pharmacy and therapeutics committee, as these drug arbiters are usually known, simply doesn't have enough seats for everyone, so tough choices about membership have to be made.
"If (administration) doesn't have the stomach to wage that kind of battle, they're going to go nowhere (in managing drug costs)," Larkin says.
Once the roster is set, managing a centralized pharmacy and therapeutics committee isn't much more difficult than running one at a stand-alone hospital. And Larkin is upbeat about the chance to enlist doctors in the cause of prudent drug spending.
"When you talk to doctors on the economic level, they've been hurt by managed care, and they understand that something has to give," Larkin says.
Most hospitals and health systems have responded to the drug onslaught by buying in bulk through group purchasing organizations. But the newest drugs, usually with little new competition, are practically immune to this approach. And even for mature products price relief through herd purchasing is apparently nearing its limits.
"For the first time I can ever remember, the whole portfolio of drugs shows no downward trend," says Ronald Small, corporate pharmacy director of Wake Forest University Baptist Medical Center and affiliated hospitals in Winston-Salem, N.C. "Essentially we've reached a point where you can't drive any more out of the acquisition cost of drugs."
With little give on prices, Small and others say the real gains are to be made in attacking utilization and gauging the cost and benefits according to outcomes. The idea, sometimes called pharmacoeconomics, has been around for years, but Small says it really hasn't been given its due.
He says he aims to change that by using some of the drug industry's own weapons.
Small says "counterdetailing" is key. In the drug trade, detailing is trying to change prescribing habits by going after prescribers with an army of salespeople, or detailers, supported by big-time advertising and marketing campaigns.
And according to data from Scott-Levin, drug companies are pumping more money than ever into detailing, or office promotion (See chart, p. 34). The industry spent $5.7 billion on direct selling last year, a 15% increase over 1997. The number of sales calls for the drug Trovan exceeded 1 million, and total sales calls hit 59 million, a 12% rise (See chart, this page).
Small counterattacks with his own data-and lots of it-culled from the latest scientific literature to tilt doctors his way.
"We're not saying, 'Use this drug because it's cheaper,' " Small says. Instead, the message is, " 'It's equally or more efficacious-and by the way we will save money,' " he says.
If you listen to providers like Small, you might be forgiven for thinking the Cold War is still smoldering.
"We look at cost containment and reduction," Small says. "We want to minimize the inflationary increases, but we know we'll have increases related to the new (drugs). With the other drugs, we contain where we can."
Super-duper antibiotics are a sore point. Inpatients often get one of several antibacterial bruisers, which Small collectively calls "gorillacilin. It kills everything, including your pocketbook."
Sure, it's easy for doctors to prescribe the antibiotic equivalent of an atom bomb, just to make sure. But Small is targeting unnecessary use of wide-spectrum antibiotics, trying to help doctors understand when a fly-swatter makes more sense than a sledgehammer.
Most hospitals use tightly controlled formularies, or menus of drugs that doctors are supposed to prescribe. Small is working on a systemwide formulary that would apply not only to the three hospitals the system owns but to nursing homes, outpatient facilities and even doctors' offices. Finally, Small also wants to bring in provider-owned QualChoice HMO, with 90,000 enrollees.
That combination would give Small incredible clout with drugmakers and the opportunity to put his outcomes-based approach into full practice by influencing which drugs patients take before they're ever admitted to a hospital.
Beyond the formulary, Small is also developing more-explicit prescribing guidelines based on DRGs for 11 separate diseases.
Small thinks big. He has even approached the drug companies that win the spots in the system's formulary to run local direct-to-consumer ads that support the medications in the formulary.
Since Small's formulary includes Allegra instead of Claritin, he cracks, "We'll be going up against Joan Lunden, of course."
But he seems willing to try anything that will contain costs while still delivering quality care.
Pinning the donkey. So what's the big deal anyway? Some say we should stop whining and be thankful for so many new medical treatments.
"I don't think it's inherently bad that drug costs are increasing," says Phil Patrick, marketing director of managed-care services at IMS Health.
Because the drugs work, spending more makes perfect sense to patients-as long as someone else is picking up the tab.
Thus, everyone in healthcare, except the drugmakers, is furiously playing pin the drug tab on the donkey.
It's a fact, Patrick says, that "costs are increasing faster than plans can raise the premiums."
And he reckons that about half of drug costs are recovered through higher premiums. The remainder comes from higher copayments for prescriptions, rising tabs to patients for office visits and insurers' profits.
Some drugs, such as ReoPro, which is sold by Eli Lilly and Co., have convincing data to show that they can cut total treatment costs by reducing common complications from cardiac procedures.
But even drugs such as those that delay the onset of Alzheimer's disease present another drug problem.
"Essentially this creates a higher standard of living for the American citizen for which somebody has to pay," Patrick says. "The entire U.S. culture hasn't come to grip with who pays for that."