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Out of Reach?

The rise in drug prices is causing the public to ask why. The reasons include the hefty research costs, consumer advertising and the growth of managed care.


Dorothy and Clarence Cardella, a retired couple in their 70s living in Pasadena, pay more than $300 a month out of pocket for prescription drugs to maintain their health. Clarence has had two heart surgeries and requires costly medications, while Dorothy takes drugs to treat her diabetes and a thyroid condition.

Medicare covers their doctor bills and any hospital visits, but the federal health program doesn't cover prescriptions. While the Cardellas' household income is fixed, the cost of their medications is anything but: The prices just keep going up.

Recently, Dorothy's doctor suggested a new insulin drug for her diabetes. It costs $230 a month. The cash-strapped Cardellas can't afford it, so Dorothy's doctor has given her free samples.

"At this rate," she says, "we'll soon be broke."

The Cardellas' situation is hardly unique. Prescription drug prices are rising much faster than the rate of general consumer inflation. The burden for this ballooning bill falls most heavily on those who can least afford it--older Americans living on fixed incomes, and the working poor with inadequate or no health insurance.

Most Americans don't feel the rise in drug prices directly because they purchase prescription medicines through their employee health plans or their HMOs, where they don't pay the full price, often making only a $10 or $20 co-payment. The rise in drug prices does hit this group indirectly: Many health insurers have blamed higher drug costs as the reason behind hikes in medical premiums or restriction of benefits.

But drug inflation is felt most keenly by people like the Cardellas, who are among an estimated 15 million Medicare recipients who pay out-of-pocket for arthritis medications that ease their pain, or heart drugs that help them stay alive. (The Cardellas could get drug coverage by joining a Medicare HMO, but they have long-standing relationships with doctors who aren't in HMOs.) So they and millions of others essentially pay retail for their medications. And it is this group of people that has prompted consumer groups, politicians and the elderly to question why medicines cost so much and why prices keep going up.

Are there legitimate reasons behind this trend? Or are we just being gouged? Experts say there are a host of factors nudging prices upward, including the shift of patients into HMOs, and increased costs for advertising and research and development.

One reason why retail prices are going up is the rise of managed care, which now covers 60% of the insured population in the United States and an even higher percentage in California. Large HMOs and other managed care plans use their bargaining clout to demand discounts when they make bulk purchases of prescription drugs. Pharmaceutical companies, critics say, have tried to recoup some of this lost revenue by charging more to patients who have no one to bargain on their behalf--people without drug coverage who must pay full retail prices. This practice is known in the health industry as cost shifting.

Another factor is that the new generation of designer drugs is expensive to produce. When Genentech introduced Activase, a genetically engineered drug that dissolves artery clots that can cause heart attacks, the price was $2,200 a dose. Company officials defended the cost, citing very high research and development expenses. Creating a complex, genetically engineered drug versus producing a conventional drug is like the difference between making a $20 watch and crafting a fine Swiss timepiece.

Indeed, the process of taking a drug from the laboratory to the patient's bedside is a lengthy one, requiring as much as 15 years and costing from $300 million to $500 million. And success is not guaranteed. Often there is a vast difference between how a compound behaves in the test tube and how it acts on humans.

New drugs typically require three phases of tests on human subjects to demonstrate that they work and don't produce serious side effects. Most therapies founder along the way, perhaps proving less effective on humans than when tested on animals, or producing unexpected toxic effects. Only one medicine out of five makes it through human clinical tests, said Jeffrey Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America, an industry trade group in Washington, D.C.

For drug companies, these research duds are a necessary cost of doing business, much as a dry well is to an oil-exploration company. The drug makers argue, however, that prices for the one in five therapies that do make it to market must compensate for the costs associated with those that don't. Consequently, the successful drugs have higher prices. How exactly pharmaceutical firms set prices for a particular drug is a closely guarded trade secret; it's safe to say, however, that the price often bears little relation to development or manufacturing expenses for the that product.

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