Plan Seeks to Cure High Cost of Drugs

In this presidential campaign year, the figure is ubiquitous: One out of four Americans, about 70 million people, do not have health insurance. At the same time, Americans are spending about $100 billion on prescription drugs annually, more than double what was spent in 1990.

For the uninsured, that money comes from either government assistance programs or their own pockets. Los Angeles residents, however, may soon be the beneficiaries of a plan to help close the gap.

Councilman Antonio Villaraigosa has unveiled a proposal called, LA-Rx, that would enable the city to make medications cheaper for residents. The plan calls for a city contractor to purchase drugs at bulk rates from pharmaceutical companies and, in turn, sell them to residents at below retail cost.

Although estimates vary about the exact rate of rise in drug costs, anecdotal evidence suggests that there is a serious problem.

"There is no question that prescription drug costs which consumers are paying are escalating and continue to escalate," said Rabbi Hershy Ten, president of Bikur Cholim, a nonprofit organization dedicated to expanding access to health care for the residents of greater Los Angeles.

Concerned with the implications of prescription drug costs for both the Jewish community and the city at large, Ten met with Villaraigosa and his staff to discuss LA-Rx.

The root causes of the issue are economic. Pharmaceutical manufacturers, who have fought court battles with several state governments over health-care costs, claim that they are simply seeking equitable compensation for their risks: Only a very small percentage of drug research ever culminates in a product reaching the market.

The Pharmaceutical Research and Manufacturers of America (PhRMA), an organization that represents more than 100 major U.S. drug companies, also claims that the vast majority of the increase in public spending on prescription drugs is due to the increasing popularity and effectiveness of those drugs, rather than rising costs.

"Some look at the increasing use of medicines and the shift to newer medicines as problems to be solved, not solutions for patients and contributions to affordable health care," said Alan F. Holmer, PhRMA president, in a speech to his colleagues last year.

However, many local governments, health-care providers and ordinary citizens are contesting PhRMA’s position, especially since drug manufacturers expend large sums to advertise their medications.

"In health-care literature, there’s speculation about the dollars spent on marketing vs. true research and development," said Rita Shane, director of pharmacy services at Cedars-Sinai Medical Center. "I monitor [in-patient expenses] on an ongoing basis and deal with the exceedingly high cost of new breakthrough therapies for treatment of patients with severe chronic diseases."

It’s also widely recognized that the pharmaceutical industry enjoys large profit margins, recorded as five and a half times the median of all the industries represented in the Fortune 500 in 2002.

Villaraigosa’s proposal could possibly be the next step in the ongoing battle to reduce drug costs. Several states, including California, Maine and Oregon have already taken advantage of their existing buying power in a variety of ways to coax lower prices from drug makers.

"Many states are responsible for actual delivery of health care to their employees, retirees and Medicaid recipients, [and] they have been pooling their buying power together to negotiate better prices," said Joe Ramallo, Villaraigosa’s communications director.

"No one has yet taken it to the next level, which is what Councilmember Villaraigosa is proposing to do, and use that ability to bulk purchase on behalf of residents as a whole," Ramallo said. "This has been a growing issue of concern to seniors and those who are uninsured."

LA-Rx emerged from a series of town hall meetings on health-care policy sponsored by the Foundation for Consumer and Taxpayer Rights.

The system would work by first enrolling interested Los Angeles residents and establishing the size of the medication buyers pool. Next, the city would contract with an organization called a pharmacy benefit manager (PBM), which would do the negotiating with drug manufacturers.

An open enrollment period would give residents an opportunity to join LA-Rx annually. LA-Rx members would pay an annual fee for administration of the program.

Drug companies, however, would not be forced or coerced to negotiate with the city’s PBM.

"It’s just using market forces, and our understanding is that there are no legal barriers to doing this," Ramallo said. "Drug manufacturers would be foolish not to negotiate if [there is] a pool of 100,000 purchasers, 200,000 purchasers or more. Those are business decisions, and if you don’t do it, your competitor will."

The Jewish community, especially the often-ignored segment of poor, near-poor and elderly Jews in Los Angeles, would stand to benefit from a proposal to cut their drug costs.

The Freda Mohr Center, part of Jewish Family Service, is a nonprofit organization dedicated to aiding a mostly elderly population with health-care issues.

"We see people who [are taking] upwards of 15 to 20 medications," said Nikki Cavalier, center director. "We get a lot of requests for various types of financial assistance … and some of it we can help them with and some of it we can’t."

Cavalier estimated that approximately 80 percent of the center’s clients are Jewish.

Speaking of the prevalence of individuals who cannot afford their medications, Elaine Kau, a center case manager, reported, "I see it on a day-to-day basis. Especially with certain HMOs raising their co-payments and not covering brand-name medications and only covering generics."

"When someone does not take medication that is prescribed by the physician, they are compromising their health," said Ten of Bikur Cholim. "Part of the fiber of the Jewish community is that every life is worth living. That is paramount."

Raising the issue of possible LA-Rx problems, Shane of Cedars-Sinai said, "My concern [is whether] the people administering this benefit [would] end up profiting. Yes, maybe there would be some savings, but it would be hard to know how much of the savings will actually be passed on to the patients."

She added that a local organization might find its work exceedingly difficult "because on a national basis, it is challenging to get [wholesale] pricing on brand-name drugs."

Without accurate nonretail pricing, it would be impossible to know how much money a PBM is saving consumers.

"So my question is," Shane said, "how much additional dollars would be left to the third-party administrator? The purchasing structure of LA-Rx would have to be transparent."

Villaraigosa’s office, however, focused on LA-Rx’s propriety.

"There have been suggestions to regulate PBMs to ensure that they are negotiating on behalf of the pool that they are representing, rather than keeping an unacceptably high level of profit" Ramallo said. "We would go to great lengths to ensure that [PBMs are held accountable]."

One way to do that, according to Ramallo, is to form a nonprofit PBM. "That way there’s no advantage whatsoever for the PBM not to negotiate the best rates for its clients," he said. Under Villaraigosa’s plan, a PBM would be selected through a competitive process that would weigh the benefits of for-profit vs. nonprofit administration.

And although it could conceivably help Los Angeles residents, LA-Rx would inevitably face comparison with the Medicare prescription drug benefit approved by Congress for elderly Americans. Beginning in June, Medicare beneficiaries will have access to Medicare-endorsed drug discount cards and in 2006 full benefits become available.

On the surface, LA-Rx appears simpler and more straightforward than the Medicare drug benefit plan.

"There is a doughnut hole in terms of what people are going to get…. People who are on multiple medications are going to exhaust the benefit very easily, and there is a deductible and monthly premium," Shane said of the Medicare drug plan.

She also pointed out the difficulty seniors will have in understanding their complicated, tiered system of benefits under Medicare.

Cavalier echoed Shane’s concerns about both the Medicare plan and LA-Rx when it comes to the elderly.

"I’d be concerned about the complexity, how people are going to find out about it, how people are going to apply for it … [consumers] already seem to be somewhat confused and uncertain, and they come to us and ask us to help," Cavalier said. "We spend a lot time interpreting and helping them apply for the programs that are out there."

To increase awareness and understanding of the LA-Rx plan, it is currently being circulated within various communities. It may soon be put before the City Council.

"[Consumers of medication] right now have no one to speak for them," Ramallo said. "In this program, they will by pooling together and having a single entity negotiate on their behalf."

"This [proposal] will directly impact the Jewish community, as well as every resident in the city of Los Angeles, [and it] is a process that we want to participate in," Ten said. "This is an issue that crosses all boundaries and borders. If there’s any single unifying factor, it’s the health care of our families."