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Firms Raise Prices Significantly On Certain Prescription Drugs By Elyse Tanouye
A curious thing turned up in some key inflation indicators recently huge price increases for certain prescription drugs. The prescription-drug prices set by producers in May rose 10.7% from the month before, driven by a 585% surge for tranquilizers. The increases were surprising because President Clinton's attack on the industry in 1993 appeared to have tamed drug inflation. Indeed, drug makers have kept overall price increases at 2% to 5% a year since then, according to both the producer price index and the consumer price index. But those aggregate numbers mask substantially higher prices in two groups of drugs -- newly introduced pharmaceuticals and generic versions of older drugs that affect the budgets of millions of patients and their health plans. And there are indications that the prices of some older branded drugs may be headed even higher. Last week, Merci & Co. announced it was abandoning its policy of limiting price increases of individual drugs to the projected consumer inflation rate plus one percentage point, though it said it would keep the weighted average price increase of its entire product line at or below the consumer inflation rate. At one time, new drugs were typically launched at less than $2 a pill, but some new products are now breaching that ceiling: $7 to $10 a pill for the impotence drug Viagra; $4 a pill for the diabetes treatment Rezulin; $11 to $15 a pill for the migraine drugs Imitrex and Maxalt; $500 to $1,000 for a course of treatment to rid toenails of fungal infections; and $10,000 a year or more for some biotechnology products. Surveying the pipeline of drugs expected to hit the market soon, Peter Penna, Cigna Corp.'s vice president of pharmacy management, feels both "dread and hope" as he hears many of them touted as potential billion-dollar blockbusters. For example, new pain relievers called Cox-2 inhibitors are likely to be priced at about $5 a pill, replacing drugs costing about 20 cents, Mr. Penna says. Sticker shock is striking buyers of generic drugs, too. Two months ago, Donald Rindler, 63 years old, was stunned when he was charged $77 to fill his monthly prescription for the generic tranquilizer lorazepam. The price was up 450% from the $14 a month the Maria Stein, Ohio, resident had been paying. The extraordinary price rise in lorazepam and 13 other generic drugs made by Mylan Laboratories Inc. has sparked something of a furor. Mylan is widely rumored to have cornered the market for the raw materials in some of the drugs, allowing it to raise prices. With lorazepam, for example, competitors complain that Mylan reached an exclusive agreement with a major supplier of the tranquilizer's raw material, cutting off other generic drug companies. Then Mylan more than tripled the drug's price to $122.11 for 100 two-milligram tablets, and other lorazepam makers followed suit. Left without a raw-material supplier, Purepac Pharmaceutical Co. had only enough supply to last through July, forcing it to raise prices and ration the drug among customers, says Andrew Berson, Purepac's vice president and general counsel. A spokeswoman for Geneva Pharmaceuticals says it had dropped lorazepam late last year because of low prices. When it later decided to re-enter the market after Mylan's move, she says, the raw material that was still available had skyrocketed in price, forcing Geneva, a unit of Novartis AG, to raise its price. A Mylan spokeswoman denies that the company cornered the market, saying the company negotiated some long-range contracts for raw materials to guranantee its ability to produce its drugs. The contracts included sizable price increases for the raw materials, as well as revenue sharing agreements, she says. At the same time, she adds, Mylan decided to "test the waters" for price increases on products it was considering dropping. "We could have dropped them -- that was part of the discussion. We chose not to do that," she says, noting that the 14 drugs involved contributed just $25 million of the company's $555.4 million in sales last fiscal year and that some were losing money. Although Mylan's price
increases appear to be the most substantial, other generic-drug
companies say they are also either dropping or raising prices
on drugs that aren't providing an adequate The price increases have led Democratic Rep. Pete Stark of California to request that federal antitrust regulators investigate generic drug prices. A spokeswoman for the Federal Trade commission declines to comment. Drug companies have more pricing flexibility and power than many other industries. That is because the physicians who make decisions about prescriptions aren't sensitive to prices, and neither are the patients whose prescriptions are paid for by third parties. Managed care health plans emerged as a serious threat to drug companies a few years ago when they tried to get physicians to select cheaper drugs, but a public backlash is now constraining them. The actual cost to manufacture drugs is usually less than 10% of the price, allowing companies to set initial prices of new drugs based on what the market will bear. In some cases, the market is filled with similar drugs, such as blood-pressure medications, and new entrants are priced lower than the market leaders to compete. But in other cases, drugs are priced according to the concept of value. That usually means comparing a drug's cost with that of big-ticket medical costs, such as surgery, that make even high-priced drugs look pretty cheap. For example, Johnson & Johnson's Sporanox and Novartis's Lamisil cost $500 to $1,000 for a course of treatment but replace repeated surgical procedures that cost several thousand dollars, says Mick Kolassa, who participated in pricing Lamisil when he worked at the drug maker and is now a vice president at Strategic Pricing Group, a consulting firm in Marlborough, Mass. Also fueling drug costs is growing demand for certain drugs, particularly new ones, because of extensive drug-company marketing and the growth in prescription benefits, especially among the elderly. For health plans, drug costs are out pacing increases in other areas of medicine. At PacifiCare Health Systems Inc., drug prices have been rising about 14% annually and are expected to jump 16% next year, says a spokeswoman at the Santa Ana, Calif., health-maintenance organization. Drug costs at Cigna's managed-care plans have risen about 10% annually for several years, Mr. Penna says. Managed-care organizations are trying a variety of measures to contain their expanding drug budgets. Some limit or refuse to cover certain drugs, such as Viagra. PacifCare is switching some of its plans to "closed formularies," which cover the cost of only a select list of drugs. United HealthCare Corp. has implemented a tiered co-payment structure so that, for example, patients pay $8 for generic drugs, $15 for preferred drugs and $25 for drugs that aren't on the plan's preferred list. That has significantly reduced the pharmacy budget's growth rate, in part because more patients are agreeing to use generics, says Frederick Dunlap, president of the HMO's Florida and Puerto Rico operations. In the face of rising costs, employers are beginning to question whether prescription-drug benefits are such a good idea, Mr. Penna says. He adds that unless the drug industry is careful, "it will kill the goose that lays the golden egg."
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