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RX Bulk Purchasing

by Jerry Flanagan, 12:00 p.m. PST, (415) 633-1320

Yesterday several California legislators announced a package of legislative reforms aimed at reducing the cost of prescription drugs for California patients, state agencies, and public health programs.

The most promising of the reforms is a bill that would allow patients and business owners to purchase lower cost drugs by joining a bulk purchasing pool run by the California Public Employees' Retirement System (CalPERS). FTCR has called for such a program in addition to health insurance premium regulation and hospital rate setting as strategies to reduce the cost of health care and provide universal access.

The following statement was released yesterday along with the bill package announcement.

Statement of Jerry Flanagan
California Health Consensus Project &
The Foundation for Taxpayer and Consumer Rights

For the last 2 years, the Foundation for Taxpayer and Consumer Rights and the California Health Consensus Project have conducted town halls across the state with consumers, hospital executives, physicians, nurses and business owners to forge a consensus on policies to make health care affordable for all Californians. Prescription drug bulk purchasing and other strategies to decrease the cost of health care were common themes in those discussions.

Prescription drug expenditures, along with health insurer overhead costs, have consistently been the fastest growing component of health care spending. Expenditures for prescription drugs are increasing at double-digit rates. Annual prescription drugs expenditures now represent nearly ten percent of national health care spending.

Consumers, whether insured or uninsured, are facing increasing out-of-pocket costs for their prescription drugs. Employers offering drug coverage to workers or retirees are increasing co-payments and deductibles. For the first time in a decade, average working California families are struggling to afford adequate health care.

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

Currently, the U.S. Department of Veterans Affairs and the Canadian government save 30-60% off the cost of U.S. made drugs as a result of negotiating lower rates for bulk quantities. Those savings are based on market friendly principles -- the more you buy, the cheaper it is.

The federal government has consistently yielded to pressure from the pharmaceutical industry. In fact, President Bush's drug benefit guarantees a financial windfall for pharmaceutical companies by barring bulk discount negotiations.

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 industry spends two to three times more on advertising and marketing the newest drugs than they do on research and development.

* A 2001 report based on analysis of companies' SEC filings and annual reports, on average, 11 percent of revenues went to research and development (R&D;), and 27 percent went to marketing, advertising, and administration.

* Promotional costs (e.g., providing samples to doctors, sending representatives to doctors, advertising to consumers, advertising in medical journals) have nearly doubled since 1997, rising to $19.1 billion in 2001, according to a GAO analysis of industry data.

The pharmaceutical industry has consistently been the most profitable industry over the past eight years, with profits four to five times higher that of the average Fortune 500 firm.

* Between 1994 and 2001, pharmaceutical industry profitability ranged between 14 percent and 19 percent, while the median for all Fortune 500 firms ranged between 3 percent and 5 percent.

* In Fortune Magazine's 2002 survey of the top performing companies, the pharmaceutical industry ranked first on all three measures of profitability: return on revenues (18.5 percent); return on assets (16.3 percent), and return on shareholders' equity (33.2 percent).

The pharmaceutical industry contributed heavily to Congress in preparation for the Medicare prescription drug debate.

* The Center for Responsive Politics reports that the pharmaceutical industry was the 9th-ranked industry in terms of total campaign contributions during 2002, contributing $23 million during the 2002 election cycle.

* All drug companies and their trade association (PhRMA) employed 623 lobbyists in 2001, more than six for each member of the Senate, and more than one for each member of the House.

Pharmaceutical companies have taken advantage of loopholes in the 1984 federal Hatch-Waxman patent law in order to delay introduction of low-cost generics.

* In 2000, the average retail price of a prescription for a brand-name drug was more than three times the price of a generic drug ($65.29 vs. $19.33).

* The delay of the introduction of three new generic drugs -- Hytrin (hypertension); Cartizem CD (a heart drug); and K-Dur 20 (potassium supplement) -- cost consumers over $300 million in potential savings.

* Twenty-nine state attorneys general sued Bristol-Myers-Squibb (BMS) accusing the company of illegally blocking cheaper generic alternatives to its cancer drug, Taxol. The states claimed that BMS' anticompetitive practices caused them to pay more for the drug, and are seeking the return of $200 million to $250 million in estimated overcharges.

Federally-funded research has played a major role in private sector research and development, contributing to medicines for conditions including cancer and AIDS.

* As of 1997, 54 out of 84 cancer-fighting drugs approved by the FDA were the products of federal funding.

* In a 1995 study conducted at the M.I.T.'s Sloan School of Management, researchers found that of 11 of the 14 drugs it identified as the most significant over the preceding 25 years were developed or discovered using government funds.

A federal audit has found that California health officials failed to collect up to $1.3 billion owed to the state by pharmaceutical companies - an amount that, if recovered, would more than offset Gov. Arnold Schwarzenegger's proposed $880 million cut in state health programs for the poor and elderly. However, the $1.3 billion in overdue payments did not appear in the Governor's budget proposal.

Governor Schwarzenegger has received $21,200 from Johnson & Johnson and $20,000 from Allergan in campaign contributions. And Dimensional Fund Advisors -- a investment fund manager in which Arnold is a major owner-- has Pfizer as a client. The more money that Pfizer makes off of overpriced drugs, the more they can invest in Arnold's company.

On February 24, the heir to the Johnson & Johnson fortune, Robert Wood Johnson IV, will hold a $500,000 per person fundraiser for Governor Schwarzenegger in New York.

Whether Governor Schwarzenegger does what's best for the pharmaceutical industry, or allows pharmaceutical companies to continue to price-gouge small businesses and patients in the state who cannot afford health care, will determine whether he will abide by his campaign promise to stand-up to special interests. After all, the pharmaceutical industry may very well be the world's most powerful corporateer.