Why Drugs Cost So Much / The Issues '04: Why We Pay So Much for Drugs

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As the legislation worked its way through Congress, lawmakers edged closer to legalizing the purchase of prescription drugs from Canada. An amendment sanctioning sales to U.S. pharmacies was sponsored by Representative Gil Gutknecht, a Minnesota Republican, and approved in July by a vote of 243 to 186. Notably, Gutknecht's language provided ample protection for consumers--long the argument cited by the FDA and the pharmaceutical industry for prohibiting Canadian drug purchases. The provision authorized U.S. pharmacies to import prescription drugs made in Canada and other industrialized countries as long as manufacturers used counterfeit-resistant technologies and the drugs were approved by the FDA.

Even while addressing the issue of safety, Gutknecht pointed to what he believed to be the main motivation for resistance to such legislation: "Now, when we talk about safety, I think the real question is, Who are we protecting from whom? Who is really being protected by our FDA? More and more of us are coming to the conclusion that the only people really being protected are the big executives of the large pharmaceutical companies. We ask ourselves, Why are Americans, the world's best customers, paying the world's highest prices? ... I am a Republican. There is nothing wrong with the word profit, but there is something wrong with the word profiteer." Gutknecht's amendment made it all the way to the secret joint House-Senate conference, where it was deleted by members of his own party. But as so often is the case in the congressional editing process, no one is claiming credit.

Another provision in the bill, related to pricing but with the opposite goal, managed to stay in the law. "Subpart 2, Prescription Drug Plans" contained three paragraphs that will have an enduring effect on how much America's elderly pay for prescription drugs:

"(i) Noninterference. In order to promote competition under this part and in carrying out this part, the Secretary--

"(1) may not interfere with the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors; and

"(2) may not require a particular formulary or institute a price structure for the reimbursement of covered ... drugs."

In layman's terms, the bill bars the Department of Health and Human Services (HHS), which purchases drugs for some seniors under Medicare, from negotiating with drug companies to get better prices, a practice the Federal Government employs routinely in negotiations with other contractors, such as defense suppliers. "We could have used Medicare's market power to negotiate lower prices for the medicines the program will be buying," said Senator Patrick Leahy, the Vermont Democrat, last fall before he voted against the final version of the bill. "Instead, this compromise agreement actually prohibits this commonsense approach to cost containment."

While Medicare doesn't currently pay for outpatient drugs, it does pay for certain medications dispensed by hospitals and doctors. Government auditors have long singled out Medicare for paying inflated prices compared with what HMOs and retail pharmacy chains pay for the same drugs. An HHS inspector general's report in 2001 said Medicare reimbursements for two dozen drugs "exceeded actual wholesale prices by $761 million a year."