No Real Competition in Drug Prices

The Wall Street Journal's "Drug Prices Surge Despite Criticisms On Campaign Trail" disclosed overall price increases for the 50 top selling drugs of 7.82%, 6.73% and 6.22% in 2007, 6 and 5.  The statistics were provided by Delta Marketing Dynamics, Inc.  The inflation rate over the last 12 months was 4.1%.

Over the last three years, GlaxoSmithKline (GSK) raised prices for antidepressant Wellbutrin XL 44.5%, Sanofi-Aventis (SNY) raised Ambien 70.1%, and even Pfizer (PFE) raised Lipitor 16%.  These are not new drugs, so the R&D has been recovered long ago.  Gross margins are extremely high on drugs, so increased manufacture costs are of little relevance.  Even sales forces have shrunk, reducing marketing costs.

Pharmaceutical companies initially base pricing on a drug's comparative efficacy and cost savings relative to alternative treatments.  Are the pharmaceutical companies telling us that a drug's efficacy and relative value increases over time – like a fine wine?  The pharmaceuticals listed above are commodity drugs with many branded and genetic alternatives.  In a free market with many alternatives, how are GSK, SNY and PFE able to raise prices?  Shouldn't prices for old drugs fall just like Intel's (INTC) old chips?

Obviously there is no free market for drugs.  Doctors will not give you a prescription with multiple choices, letting you shop for the cheapest.  Most pharmacies don't quote prices over the phone.  In fact, CVS (CVS) won't even tell you the cost (under your insurance) until after they fill the prescription.  All this makes it impossible for the customers to shop.  Add to this that everyone subsidizes Medicaid because the government insists that they get the lowest prices.

The HMO days appear to be coming to an end (outside of Medicare).  Both employee group health plans and individual health insurance policies include ever higher deductibles.  High deductibles are intended to get consumers to shop for medical products and services.  With little transparency in the system, shopping is near impossible.  Call your doctor and ask for the price of an office visit.  He'll likely to tell you:  "I don't know, it depends on what code I put in the computer.  You will find out after I'm done."

The only bright spot seems to be the area of medical testing, imaging and diagnostics.  Competition must be brewing because they are starting to quote prices.  Of course, doctors that don't accept any insurance readily quote prices.

Disclosure: Author has a long put on PFE.

Comments

[Norman Lepo...:]

This is a good article. I am watching the drug stocks now and like the dividends. The only worry is that there is one major variable. The elections. The HMO's took off big time when the Clintons took charge. It is actually thanks to them that the HMO's have become so powerful. If we get Hilary, be prepared for price fixing in all aspects of medicine, especially drugs as well as stronger, more powerful HMO's. This may be true for Obama too. The results will be catastrophic for investors in this sector. Therefore, be careful!

2008 Feb 25 02:15 PM

[Wall Street...:]

Norman Lepoff, M.D.: Do you think consumers are capable of shopping for medical services? Do you think doctors want to be more transparent on pricing?

2008 Feb 25 04:17 PM

[Tom Kellenb...:]

Head-to-head competition and comparison shopping for pharmaceuticals and pharmacies is available now. It's at BidRx.com. Click on "How it works" to watch a brief tutorial. Then register and start an auction by following the prompts to enter a prescription. Pharmaceutical companies compete because similar prescriptions and prices (approximate) are shown. Pharmacies then compete because consumers can get instant bids; these are final bids from participating pharmacies. The service is free for doctors and consumers. Substantial savings are available at each level of competition. Consumers no longer have to call pharmacies to get prices; they can get instant bids. Doctors don't have to learn about prescription prices -- they or staff members can go to the BidRx.com website, 24x7x365.

2008 Feb 25 05:16 PM

[thku4grace:]

I am a big believer in the free market capitalist system. I believe in most cases less government regulation is desirable over more. I know that in all cases every action has a corresponding reaction. However, due to certain specific factors with regards to this market, we need to rethink what is happening here. I believe in patent protection for a specific limited time period so as to support the incentive to research, develop, and then spend huge sums of money from small biotechnology firms supported by investors with the one hope that this new drug will be dragged through FDA trials to a successful conclusion. Investors must be rewarded handsomely for the risk assumed in their investment. I know the government could not nor should not get involved with this system. The problem with this system is that while we allow free market capitalism to incentivize our creative powers, the major drug companies who may later buy into our do a joint effort with these small biotech firms seem to be gouging us on a product that in many cases has inelastic demand. It isn't just that we are subsidizing medicare but we are actually subsidizing the rest of the world. The rest of the world either bands together like in Europe and negotiate a dramatically lower price, or they do as Brazil or China might do, which is ignore the patent and copy the drug, thus making and selling it for a dramatically lower price. Brazil additionally, uses this threat to duplicate the drug so as to weazel a better price. The non-medicare, American then subsidizes everyone else. Now one might say, 'lets just negotiate our own price like everyone else. But we might also be short-sighted in not acknowledging that this reaction will still have an undesirable reaction. That reaction will likely be less lucrative deals paid to the biotechnology firms by big pharma and therefore fewer biotechnology firms will see the investor capital they need to see a drug through research, development, and FDA trials. Additionally, more may have to use their even smaller budget to attempt to market their drugs themselves. We need a more equitable system and there may not be another way then to see other nations pay more, so we can pay less.

2008 Feb 25 07:55 PM

[DrMark27:]

I enjoyed this article, but I wanted to throw in a couple additional details. First, let us not forget that with about one of 20-25 new drug applications making it to market, revenues must not only cover R & D for sold drugs but also all drugs that never did make it to market. I would agree, then, that the older drugs had been more than paid for a long time hence, but there are plenty of other projects that still need funding.

Second with regard to drug pricing, pharmacies must provide their cash prices when asked. Providing you with a co-pay is a whole other animal, however. In order to get this information, the prescription must be processed; the pharmacy incurs a charge from the third party (e.g. Caremark, Medco) every time it bills insurance. Nonetheless, this would still make good business sense if it weren't for the fact that the processing of a prescription takes minutes and not seconds. With pharmacies already being pressed to the hilt to meet prescription volume and time demands, this simply is not feasable. If you want to know your co-pay structure, your best bet is to call the customer service number on the back of your prescription benefits card.

2008 Feb 26 08:08 AM

[Wall Street...:]

DrMark27: Under a straight co-pay, it is easy for a patient to compute their drug cost. The difficulty comes with the new high deductible healthcare plans. The insurance company negotiates the patients’ drug cost with the pharmacy or distributor, and the patient does not know the negotiated cost in advance.

2008 Feb 26 01:01 PM

[Tom Kellenb...:]

DrMark27: BidRx changes the prescription processing paradigm by providing pricing information and claims processing up front when consumers or doctors are searching for prescriptions and pharmacies of choice. Obviously, if a customer pays cash -- a customer without insurance, with a high deductible plan , or for a drug not covered by insurance -- the co-payment is 100%. When a customer has a benefit through BidRx.com, co-payments and insurer/employer/gov't payments are clearly displayed for consumers, doctors and pharmacies. Whatever the payment source, information for consumers and doctors from competing pharmaceutical manufacturers and pharmacies can substantially lower costs. BidRx.com is a U.S. marketplace only at the present time, but it can be international if or when drug product safety can be assured.

2008 Mar 01 01:04 PM

[Lipator:]

In this case, the internet can act as a balance, consumers can now do research on the prices not just for prescription drugs, but just about everything else.

2008 Apr 11 07:21 PM