Prescription for Trouble

January 01, 2000  ·  Michael Fumento  ·  Forbes  ·  Economy

It certainly made a great photo op. There was Vice President Al Gore, grabbing a little old lady in East Hartford, Conn. and proclaiming that drugmakers’ profits on pharmaceuticals commonly used by the elderly are "way out of line," that drug prices are racing way ahead of inflation and that the federal government should help pay for drugs under Medicare.

No question, this is a hot button with the voters. Some retirees are genuinely impoverished by their drug bills. Even the Republicans in Congress are talking about Medicare coverage for drugs.

But is it true that drug prices are going haywire? The key source for the Gore proclamations is Families USA, a group that is pushing for an expansion of government health insurance. Families USA says that the costs of the top 50 drugs used by seniors are significantly outpacing inflation. Between 1998 and 1999, says a recent white paper from the group, the drug basket increased 3.9% while the consumer price index went up only 2.2%.

But among the study’s major problems is that it ignores the considerable impact of generic drugs. Of the 44 brand-name drugs on the list 16 have generic equivalents available, including 4 of the top 10, Consider one, Lanoxin, used for treating heart problems. The brand name wholesales at $28.36 for a package of 100; a generic equivalent is only $11.14. Some generics sell for discounts of 80% or even 90% to the equivalent branded drug. Yet the Families USA report mentions comparable generics — in footnotes that require a microscope to read.

Why is there so great a price disparity between two virtually identical drugs? Because the introduction of generics has the perverse effect of increasing the price of branded pharmaceuticals. "It’s well documented that when a drug company loses its patent, rather than lower its price to compete with generics, it [may] raise it," says Joel W, Hay, professor of pharmaceutical economics at the University of Southern California, Los Angeles. "They can no longer compete for price-sensitive customers, so instead they increase their profit margin from those with brand loyalty."

The popular notion is that the pharmaceutical industry is gouging us. The truth is subtler. If your doctor keeps switching you to the newest patented drugs, then, yes, your costs will go up. But if you stay put with any given regimen, your costs are likely to go down over the years as more and more of the pills you are taking become available as cheap generics.