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RX Bulk Purchasing and Re-importation are the Right Prescription for California

by Jerry Flanagan, 11:00 a.m. PST - (415) 633-1320

Last week three new state and federal bills allowing prescription drug bulk purchasing and drug re-importation from Canada and the European Union were announced that could help to control unfair and unnecessary health care cost increases.

California Assembly Member Dario Frommer (D-Los Angeles) and Senate pro Tem John Burton (D- San Francisco) announced legislation that would direct the State of California to bulk purchase prescription drugs from Canada for use in state run programs and institutions. Senator Kennedy (D- Massachusetts) announced plans to introduce legislation modeled after California's new law, SB 2, requiring business owners to provide health care benefits to their employees, that will include provisions for a national prescription drug bulk purchasing program and for re-importation of drugs. FTCR had called for similar cost controls when SB 2 was signed into law in California in 2003.

Bulk purchasing of drugs is a market-savvy strategy that could help to control costs and defray billions of dollars in potential budget cuts to state health care programs. California has the opportunity to once again lead the country in innovative health care reform.

Under the bulk purchasing model, the state of California could dramatically increase its bargaining power with manufacturers by combining current drug purchases for Medicaid recipients, state employees, patients of state hospitals and health departments, state university students, and prisoners. Bulk purchasing programs can also include private entities.

Prescription drug bulk purchasing has been effectively to control prescription drug expenditures by large U.S. purchasers and Canada to bring down the price of drugs:

** The U.S. Department of Veterans Affairs (DVA) and other federal agencies purchase drugs through a bulk discount established by the Federal Supply Schedule. The DVA saves 52% off of list price of a drug (average wholesale price -- "AWP"). Therefore a drug with an AWP of $50 would be available for $24.

** The Canadian government negotiates bulk purchasing agreements with U.S-based pharmaceutical companies and pays about 60% of AWP --- 40% less than the average Californian.

** Health insurers also use their membership clout to negotiate bulk discounts on drugs to save 33% of off AWP. Therefore a drug with an AWP of $50 would cost an HMO $34.

** In comparison, a cash customer in the U.S. will pay 4% above AWP. Therefore a drug with an AWP of $50 would cost $52.

The two state proposals would direct purchasers to bulk purchase drugs from Canada, many of which are produced in the U.S. but sold in Canada at bulk discounts. In California, the state Department of General Services purchases $176 million worth of drugs for 5 state agencies including the Department of Corrections and the Department of the Youth Authority. The California Health and Human Services Agency is projecting that it will spend nearly $4 billion for prescription drugs for the Medi-Cal program.

Prescription drug companies spend billions of dollars engaging in inappropriate gift-giving and other marketing practices to increase demand for their products and drive up costs:

** Though drug companies often blame high research and development (R&D;) costs as the driving force behind double digit annual increases in drug expenditures, the fact is that pharmaceutical companies spend nearly three times more on advertising and marketing the newest drugs than they do on research and development. In 2001 pharmaceutical companies spent 53% of their revenue on profits, marketing and administration, which includes salaries and overhead.

** Heavy spending on direct-to-consumer (DTC) advertising is associated with large increases in drug spending. According to research by the National Institute for Health Care Management, nearly half (47.8 percent) of the increase in retail spending on prescription drugs from 1999 to 2000 resulted from increases in sales of the 50 most heavily advertised drugs. The number for prescriptions written for these drugs rose nearly 25 percent compared to an increase of only 4.3 percent for less heavily advertised drugs.

** Currently, the pharmaceutical industry spends approximately $5 billion in promotional costs and gifts each year to market drugs to physicians in hopes that the newest and most expensive drugs will be included in the physician's prescribing practices. Several legislative attempts have been made in several states to require pharmaceutical companies to disclose the gifts they give to physicians.