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Drug Discounts Offered to Foster Brand Loyalty

November 19, 2001|TRUDY LIEBERMAN

A prescription drug benefit for all Medicare recipients is a dead issue this year--and perhaps in the foreseeable future. The pharmaceutical industry didn't want one, and drug companies--and their political donations--speak loudly in Congress.

Why does the drug industry oppose a plan that would seemingly increase pharmaceutical use? Drug companies worry that if Congress agrees to pick up the check for prescription drugs for some 40 million older and disabled persons on Medicare, it might balk when it sees the bill. That, in turn, might lead Congress to limit how much it will pay drug makers--a situation that the highly profitable pharmaceutical industry dreads.

With the Medicare program, the government already limits what it pays hospitals for a wide range of procedures. Passage of a universal drug benefit plan for Medicare was doomed long before the Sept. 11 attacks, when the congressional agenda shifted from domestic matters to terrorism. However, the problems of sharply rising drug prices and criticism about pharmaceutical industry profiteering won't disappear as easily.

Not surprisingly, drug companies hope to deflect such criticism by attempting to portray themselves in a favorable light. Not long ago I noticed a full-page newspaper ad for the "Orange Card," a discount plan promoted by GlaxoSmithKline as an alternative to a universal drug benefit. Glaxo, one of the world's biggest drug makers, says its plan would provide discounts of up to 30% for low-income seniors (defined as a household income below $26,000 for an individual and $35,000 for couples with no other drug benefit).

The discounts, however, would apply only to Glaxo products. Novartis, another big drug maker, now says it, too, will offer a discount program. The Novartis CareCard will provide similar discounts on Novartis products. In a press release announcing the CareCard, Novartis issued an industry "call to action," urging other manufacturers to create their own discount plans.

"We're thrilled other companies want to follow and do the same thing," says Mary Anne Rhyne, a Glaxo spokeswoman. "The people who win are the seniors who need help."

The biggest winners, though, may be the drug companies. Several drugs will be losing patent protection in the next couple of years, paving the way for cheaper generic equivalents. So drug makers have an incentive to build customer loyalty for more expensive brand products. In other words, the drug companies will give you a price break if you buy their diabetes or heart medicine instead of the competition's. The idea is not unlike supermarket discount cards or airline frequent-flier programs.

Glaxo and Novartis estimate that about 10 million people might be eligible for their discounts. .

Undoubtedly, some people will save money with discount cards if the medicines they need qualify. Seniors who want to save money on drugs will be inclined to ask for brand-name drugs made by the manufacturer whose cards they are using. Drug makers' discount cards may be another form of direct-to-consumer advertising, says John Rector, senior vice president for the National Community Pharmacists Assn. The many millions of dollars that drug companies spend on direct-to-consumer advertising--industry jargon for all those ads in magazines or on television for products such as Claritin or Pravachol--is a factor in drug price inflation; health insurers say they are already seeing increases of between 15% to 25%. How much seniors will save and how easily they can find the best discount card deal is another matter. Drug industry pricing is a complicated business and pharmacies vary in how much they mark up the price of drugs. Discount cards obscure more fundamental problems in the drug delivery system and mask the real culprit--the relentless rise in the prices charged for medications.

"The new drugs released today are much more expensive than new drugs released five years ago," says Henri Manasse, who heads the American Society of Health System Pharmacists, a trade group for hospital pharmacists. "One of the reasons is the immense pressure from stockholders for return on investment from drug companies. It's a significant public policy issue that needs to be debated."

Discount cards don't get at the real problem. Instead, they reduce costs at only one point in the supply chain--the retail pharmacy. This helps explain why many pharmacists, whose profits get squeezed, don't care for the discount card idea. Cards also hook people into brand-name drugs sold through mail-order firms run by companies called pharmacy benefit management firms, which administer drug benefit plans for employers.

Drug companies typically offer rebates to pharmacy benefit management firms to encourage the use of brand-name products on the approved list of drugs, or formulary, that patients can buy under their prescription plans. Because of these financial arrangements, consumers are more likely to get brand-name drugs than generics if they use mail-order companies instead of the local neighborhood pharmacy.

Even with a discount card, those who buy a brand-name drug when a generic equivalent is available are paying too much. It may seem like a bargain to walk into a drug store and use your card to get a $100 prescription for just $80. But if you could have purchased a generic version of the same drug for $14, you're still paying $66 more than you need to. And that's no bargain.


Trudy Lieberman is the author of "Consumer Reports Complete Guide to Health Services for Seniors" (Three Rivers Press, 2000). Send comments to: Health Matters appears on the third Monday of the month.

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