AARP Responds To Critics Of Pricing Study
5 CommentsBy Ed Silverman // March 10th, 2008 // 3:17 pm
Last week, we wrote about an AARP study that concluded drugmakers increased their prices last year by an average of 7.4 percent for brand-name meds most commonly prescribed to the elderly, and the increase was about 2.5 times the overall inflation rate. However, the the study was criticized over methodology and motivation.
One reader, for instance, wrote: “The two drugs among the top 25 with the greatest increases (Ambien and Norvasc) are both available generically. Thus, the vast majority patients (more than 90 percent) on either drug experienced a cost decrease of 50 percent to 80 percent. AARP intentionally ignores this so it can grab headlines. Not only do the headlines help AARP to advance its political agenda, it also stands to benefit financially since it has a financial interest in the largest Medicare drug plan.”
So we asked John Rother, AARP’s policy director, to reply. This is what he wrote: “This probably deserves a more detailed rebuttal, but as an overall response I would say the ‘anonymous’ critic is completely off base.
“The drugs analyzed were very carefully selected to be the ones both heavily prescribed. The inclusion of those with generic substitutes just makes the point about how marketing still seems to dominate competition on price. Patients on those two branded drugs experienced cost increases, not decreases, because we used most commonly prescribed as our selection basis. Of course, we promote generic substitution. The industry hasn’t offered a persuasive explanation of why branded drugs whose patents expire have their prices increased.
“AARP does not consider financial impact on the United Healthcare Part D plan in any of our policy work or analysis. Anyone who knows us understands that there is a firewall between our policy operations and anything that produces revenue. We believe prices should be ‘forced’ lower, not to increase United’s profit, but to make drugs and the Part D premiums more affordable.
“The ‘anonymous’ critic seems to take the position that simply documenting price increases is somehow a self-interested activity. On the contrary, we believe that prices of pharmaceuticals in the US are too high by any standard, certainly in comparison to prices elsewhere, and that these price trends are unsustainable if continued. Putting pressure on the industry to explain its pricing behavior is, we believe, in the public interest. We await a more constructive and substantive response.”
Jack2
I personally don’t think Rother addressed his anonymous critic’s comments. He either doesn’t understand automatic subsitution laws, or he does and still chose to author a one-sided perspective to appeal to his readers. I think it’s the latter.
Bob Freeman
John, the answer is relatively straightforward although exceptions will occur.
In the months leading up to patent expiry price will be raised consistently, although wholesalers expect this and may stock up at “old” prices. The patent-holder knows market share will plummet so what it does manage to sell, the profit/unit will be high, approaching that of monopoly prices where the firm operates in the price-inelastic portion of the demand curve. (Assuming, of course, that the company knows price elasticities, which is a fairly big assumption)
When the first generic enters the market (the 180-day exclusivity window), its price will be about 15% or so lower than the brand’s. Pharmacies, however, will make huge per Rx profits. Consider this as an example: When Zocor became generic I asked my pharmacist in a large chain what the cash price would be for a 30-day supply of the leading statins. For generic simvastatin it was $122.00; for Crestor, 102.00; for Lipitor, $97.00. Of course, managed care will pay less through negotiated rebates. This kind of price structure will hold until additional generics enter the market after the 180-period and market share of the branded product (a branded generic, if you will) will fall by 90%. The manufacturer will continue to increase prices because (again), it has very little share so it might as well hold unit profits high.
If the innovator wants to buy market share (say in mail order pharmacies) you’ll see intense price competition with generics. Mail order companies may stay with the branded generic just to insure a stable supply of the product.
And yes, Jack2 is absolutely correct: state mandated generic subsitution will drive utilization toward the lowest priced, commonly available generic, the source of which can change frequently.
Bob Freeman
John, I failed to state the obvious: two pricing decisions are made: one is the manufactuer’s and the other the retailer’s. While the cost of goods in a prescription may account for 75% or higher of the final charge, it is possible, through the use of generics, for the retailer to hold it’s usual and customary retail price and increase margin. Again, contracts with managed care will determine the professional (or dispensing fee), so there’s not a lot a retailer can do other than to lower ingredient costs.
Dan
With AARP, they seem to be either really objective or unclear on thier stance with the pharma industry, as members of this Association have historically taken both sides.
Atlex
Undoubtedly, Mr Rother and his colleagues as the AARP missed out on their economics and statistics classes or they intentionally ignore data for their own purposes. In addition, with their vested interest in AARP health insurance and Part D plans, they also talk out of both sides of their mouth.