With 130 prescription drugs coming off patent by 2007, expect state legislatures to become battle zones
L egislative wars brewing in all 50 states over prescription drugs will profoundly affect the cost-effectiveness and profitability of every health care provider and plan. At stake are tens of billions of dollars in drug sales,and how each state will handle formularies in Medicaid and other state-sponsored programs.
Pharmaceutical companies know state legislators hold the keys to the medicine chest, and they are preparing to wage statehouse battles over proposed mandates, formulary restrictions, and how to react to the host of drugs expected to come off patent by 2007.
On one side are the makers of brand-name pharmaceuticals, anxious to keep as much of the market for their products as possible even after patents expire. The legislative tools at their disposal are mandates for coverage of certain drugs, restrictions on when generics can be substituted for those drugs, and unrestricted formularies, particularly for Medicaid programs.
On the other side of the battle line are makers of generic pharmaceuticals, which offer a product the Food and Drug Administration says is biologically equivalent to brand-name drugs, often at a fraction of the price. In 1997, generics accounted for about 10% of the industry’s revenues and 43% of the volume of drugs sold, according to E.W. Thwaite Associates, a generic pharmaceutical consulting firm. The $8 billion generic industry is expected to grow to as much as $20 billion over the next decade, fueled in part by the expiration of patents on heavily prescribed drugs.
By 2007, an estimated 130 major drugs with total branded sales of $40 billion—including Schering-Plough’s Claritin and Eli Lilly’s Prozac—are scheduled to come off patent. In the battle to determine how these and other drugs are regulated, both sides claim to protect patients’ health and offer a cost-effective product. And each predicts dire consequences if it is denied its wish list.
The $80 billion pharmaceutical industry is expected to grow at double-digit rates through 2000, notes Ed Thwaite, who monitors the pharmaceutical industry from his Towata, NJ, consulting firm.
"We see the industry go around with the Chicken Little syndrome. It scares a lot of legislators, frankly," California Assemblyman Martin Gallegos told participants at a November meeting of the National Council of State Legislatures (NCSL) in Tarpon Springs, FL.
Mr. Gallegos, a chiropractor from the City of Industry, CA, in 1998 successfully shepherded a bill through the California Assembly that requires HMOs to continue a prescription when a patient switches from one plan to another, even if the drug is not on the new plan’s formulary. Legwork helped win over the industry as well as consumers, Mr. Gallegos says.
"There is cost containment and quality when there is continuity of care," he says. That is undoubtedly true, but with the million-dollar pharmaceutical war chests chasing legislative votes, will state houses develop legislation that protects both the consumer’s health and pocketbook?
The effect this debate will have on consumers is still unclear, but Mr. Thwaite says this will probably depend on how the two hottest issues are tackled:
• Should anyone be allowed to challenge the FDA’s determination that a generic drug is therapeutically equivalent to a branded drug?
• If so, to whom should that right be given—state legislatures, boards of pharmacy, or some other entity?
The major adversaries are leaving no doubt where they stand on these issues.
"All states should have a system for overriding formularies," says Marjorie Powell, assistant general counsel for the Pharmaceutical Research and Manufacturers of America (PhARMA). "That system should be prompt and efficient, and everyone should know how that system operates."
Restrictive formularies can result in HMO patients—particularly the elderly—using more office visits and hospitalizations, concluded Susan Horn, PhD, and colleagues in a study recently summarized in the Journal of Managed Care. PhARMA uses the study (which was supported in part by the National Pharmaceutical Council) to suggest that loosening restrictions on formularies produces long-term savings in health care expenditures. "But it’s hard for a state Medicaid director to see that savings in the future," Ms. Powell says.
Regulation of managed care formularies came before 23 state legislatures in 1998, according to the NCSL. In addition to California, only Indiana and Kentucky moved to restrict the use of formularies. But legislated formulary restrictions are bound to be proposed as more specific and targeted medications are developed by the pharmaceutical industry, says Ms. Powell.
Pennsylvania, Texas, and Virginia passed laws in 1997 that went a step further and addressed "narrow therapeutic range" drugs for which a generic substitution could not be made, according to the NCSL. Similarly, states increasingly are being asked to require a pharmacist to notify a patient or physician before substituting a generic for a branded drug.
"The motivation for that phone call is to stop the switch," says Charles Mayr, government affairs consultant for Barr Laboratories in Pomona, NY, which manufactures generics. "It institutionalizes the erroneous conclusion that there is a difference between a brand and generic products." Among Barr’s products is the anticoagulant warfarin sodium, the generic for Dupont Pharmaceutical’s heavily prescribed Coumadin.
"Generic drugs are the same," Mr. Mayr says. "The FDA repeatedly has says there is no difference. The only reason you would create any language that says there is a difference is to restrict that point of sale of a substitution for a generic product."
Not so, contends PhARMA’s Ms. Powell. "We think that for products that have a narrow range of effectiveness, particularly products where there’s a serious health problem if the drug doesn’t work, like epilepsy [medication], the patient and the physician should be notified if the pharmacist is going to substitute a different product. And I very carefully say different’ product."
Mr. Mayr predicted that the debate will heat up in the near future as patents expire on drugs for transplant and epilepsy patients. "We are looking at a bulge of products that are going to be available for competition. If you want to control health care costs, the single most visible way to do that is through generic substitution and lowering what comes out of patients’ pockets and lowering what is spent on medicine," he says.
He cites a July 1998 Congressional Budget Office (CBO) report that estimates generics saved consumers $8 to $10 billion in 1994 through pharmacy sales alone.
The growth of the generic industry has been dramatic. Between 1984 and 1996, the CBO calculated, generics’ share of the pharmaceutical market grew from 19% of the volume to 43%. Moreover, the CBO found that federal regulation of new drugs in the market "fell short" in maintaining a balance between encouraging competition from generics and protecting the brand-name industry’s incentive to develop new drugs. Generics can get to the market so quickly after a patent expires that competition has "somewhat eroded" expected returns from research and development, the CBO found.
Contact Ms. Powell at (202) 835-3517, Mr. Mayr at (914) 348-8050, and Mr. Thwaite at (973) 956-7071.