SUSAN DENTZER: Sixty-seven year-old Bessie Johnson has a raft of serious medical conditions, ranging from congestive heart disease to high blood pressure. Frequently in and out of the hospital, she has seen her health improve recently with the aid of prescription drugs like Tricol for her high cholesterol and Celebrex for arthritis. But that improvement has come at a steep price. Johnson is paying about $450 a month for her medications -- a heavy load considering that she and her husband, Irvin, have an income of just over $13,000 a year.
BESSIE JOHNSON: If I don't have enough money to pay it, I just got to try to get the main ones that I need. Most of the time I have been lucky so far to get half of it, when I can't get the whole.
SUSAN DENTZER: Bessie and Irvin's caregiver, Calvin Hackett, helps juggle their medications -- and worries about the consequences for their health.
CALVIN HACKETT: It just gets to be very expensive. It's a balancing act of which one to get this month, which one to let go.
SUSAN DENTZER: Beneficiaries of Medicare, the federal health insurance plan for 39 million elderly and disabled Americans, the Johnsons are only too aware of what may be the program's biggest shortcoming. Although it covers the lion's share of hospital bills and doctors' care, Medicare offers no coverage for prescription drugs for patients not in the hospital. Now President Clinton will address the problem as part of a Medicare reform package he is set to unveil on Tuesday.
PRESIDENT CLINTON: I will propose a detailed plan to strengthen Medicare, I will also for the first time propose a way to help senior citizens with their greatest growing need, affordable prescription drugs. It is a huge issue out there for seniors.
SUSAN DENTZER: The President's plan calls for making a new drug benefit available to everyone on Medicare who wants it. It would be paid for in part by higher monthly premiums from beneficiaries -- but would also be heavily subsidized with hundreds of billions of dollars of projected budget surpluses that the President proposes to devote to Medicare. On a recent lobbying trip to Capitol Hill, these senior citizens from Baltimore expressed concern about the need for drug coverage.
SENIOR CITIZEN: I think this is a vital issue. I'd like to know what's being done about it.
SEN. BARBARA MIKULSKI (D-MD): I personally would like to add a prescription drug benefit to Medicare. We have to figure out how to make it financially sound and feasible.
SUSAN DENTZER: Senator Mikulski's comment underscores the dilemma facing the nation's policy makers. On the one hand, they know they must find a way to improve prescription drug coverage if the nation is to live up to the promise of providing health care for the elderly and disabled. Democratic Congressman Pete Stark of California is among the Congress's leading health policy makers.
REP. PETE STARK (D-CA): Prescription drugs are becoming a more important part or a bigger part of our overall health care, medical care for seniors. People are going to the hospital less, having less surgery, and most of the important breakthroughs in helping our health, controlling it, and maintaining our health, curing illness have come through pharmaceutical protocols rather than more invasive protocols like surgery. And it's growing by leaps and bounds.
SUSAN DENTZER: That growth is the key reason overall spending on prescription drugs is rising 10 percent a year, roughly twice the rate of the increase in overall health spending. And that leads to the other side of the policymakers' dilemma: How to afford the bill for prescription drugs when Medicare already could face a massive funding shortfall. Republican Congressman Bill Thomas of California:
REP. BILL THOMAS (R-CA): The question is: How do you bring prescription drugs into Medicare in a way that you can provide a realistic drug benefit to seniors who want one, and preserve the financial integrity of the system at the same time?
SUSAN DENTZER: Nobody has more of a stake in the solution than the pharmaceutical industry. Alan Holmer is president of the Pharmaceutical Research and Manufacturers Association, the industry's leading trade group.
ALAN HOLMER, President, Pharmaceutical Research and Manufacturers Association: We support expanded drug coverage for seniors, but we feel it's very important that it be done the right way.
SUSAN DENTZER: But the industry didn't always support a drug benefit under Medicare. It has long been leery of big government being too involved in administering health care -- a fear that persists today. Ray Gilmartin is chairman and chief executive officer of Merck, one of the largest pharmaceutical companies.
RAY GILMARTIN, Merck: The big concern about a government-run program is the level of bureaucracy, the amount of regulation put on it, and price controls. And our experience with those types of systems in other parts of the world suggests that that starts to erode the ability of the pharmaceutical industry to innovate.
SUSAN DENTZER: By contrast, Gilmartin says --
RAY GILMARTIN: The U.S. pharmaceutical industry is the most successful in the world. A number of factors are responsible for that: that we spend a lot of money on research but also we have a basically free market in the U.S. for pharmaceuticals , which provides the incentives for innovation. So as a result of that, over the past ten years the U.S. industry has discovered about half the drugs that were introduced into the world market.
SUSAN DENTZER: Stephen Schondelmeyer, a pharmaceutical specialist at the University of Minnesota, says the industry has become wildly profitable as a result.
STEPHEN SCHONDELMEYER, University of Minnesota: Pharmaceuticals average a profit margin of about 18 percent or more, and the median Fortune 500 company -- that is, the average of the best in America -- was about 4.4 percent. Their profitability margins are far beyond where other industries are. They're growing more and faster, and the gap is growing wider, which tells us that there is something not right working in the market.
SUSAN DENTZER: And in fact, says Schondelmeyer, the market doesn't function as freely as the pharmaceutical industry would have you believe. For example, the companies produce many products under long-term patents. Those protections reward them for innovation by giving them the exclusive right to sell these products for 17 years. But the companies also exploit those protections through lawsuits and other measures aimed at prolonging patents well beyond that period.
STEPHEN SCHONDELMEYER: If the patents become too long, then it results in much higher prices and results in a lack of competition among these patent protected products.
SUSAN DENTZER: Schondelmeyer says that other industrialized countries have dealt with this problem through regulation.
STEPHEN SCHONDELMEYER: In most other industrialized countries around the world, they have some form of government health insurance or government-delivered health care. They have either price or profit controls on the pharmaceutical industry where they attempt to evaluate what a reasonable price is for drugs, and negotiate with the industry, or set prices for the industry.
SUSAN DENTZER: The result is relatively low prices for pharmaceutical drugs abroad, and prices that are 30 to 100 percent higher in the United States. Consider the popular antidepressant, Prozac. In the US, the average wholesale price for a basic monthly dose of the drug is about $78; that's substantially higher than the equivalent $33 wholesale price that is paid in Canada and the United Kingdom. Similar differences are found in prices for the estrogen-replacement drug Premarin; the cholesterol-reducing drug Zocor and other top-selling drugs.
STEPHEN SCHONDELMEYER: If the world pharmaceutical market is this big balloon and we look at that balloon, everybody in the world is squeezing on that balloon except the United States. Where would you expect the balloon to bulge out? That one place where there is no pressure.
SUSAN DENTZER: As a result, in the United States the industry is largely free to set prices wherever it wants, then negotiate lower ones for favored customers like HMO's. That leads to a huge disparity in prices in the US market -- with uninsured elderly people like Kitty Door in Baltimore paying on average twice the price of favored customers.
KITTY DOOR: I don't have any plan at all, prescription plan. I do wish the prescriptions weren't so expensive.
BERNARD SMITH: Something should be done about the pricing of medicine and the profit that's made on it. I had no idea there was such a discrepancy.
SUSAN DENTZER: Now lawmakers across party lines are raising questions about the pharmaceutical companies' pricing practices.
Republican Senator Olympia Snowe of Maine:
SEN. OLYMPIA SNOWE (R-ME): I can't imagine that all these price increases are justified. I think that they have to be, you know, concerned and circumspect and to be vigilant in making sure that these, these price increases do not get out of hand and are not justifiable.
SUSAN DENTZER: When it comes to covering prescription drugs under Medicare, the industry wants prices to be negotiated between it and large dispensers of drugs, such as HMO's. It doesn't want prices set in any way by the government; that includes the mandatory discounts the government gets for drugs paid for by programs such as Medicaid or veterans' health care.
ALAN HOLMER: We think private sector solutions are going to provide competition and choice into the way that will make it most likely to provide quality health care for patients.
SUSAN DENTZER: Specifically, the industry favors the approach being drafted by Congressman Thomas, who co-chaired a bipartisan panel on Medicare reform with Democratic Senator John Breaux of Louisiana. Based on a concept known as "premium support," it would offer beneficiaries a choice of health plans, including souped-up options that would cover prescription drugs. The government would pay most of the cost and beneficiaries would pay the rest.
REP. BILL THOMAS: Drugs are integrated in the negotiated package. That's clearly what needs to be done. A market based, negotiated price structure is a way to reduce the costs of Medicare over the long run, is exactly the same way that you integrate prescription drugs.
SUSAN DENTZER: But critics such as Stark say the industry would merely be negotiating prices with many HMOs and other health plans that have shown little ability to hold down drug prices or rising drug demand. That's why he and many other Democrats in Congress support a different approach. It would add prescription drug coverage to the traditional Medicare program, but hand the job of administering that benefit off to private firms, including so-called pharmacy benefit managers. Like other government contractors, those firms would bid against each other to offer the benefit under Medicare.
REP. PETE STARK: We should get a good, fair price, a good bargain for the taxpayer's dollar, and a decent return to the pharmaceutical companies. That's how business is done when you deal with the government.
SUSAN DENTZER: But what Stark calls a good, fair price, the industry fears could still lead to price controls.
RAY GILMARTIN: It's certainly something that we are happy to continue to discuss, but it's not something that we're supporting at this time.
SUSAN DENTZER: Tomorrow President Clinton enters publicly into this debate with his own Medicare reform plan. He is expected to come down somewhere in the middle, borrowing liberally from Stark's and Kennedy's approach, while also taking pains to make it more acceptable to pharmaceutical companies. Meanwhile, the industry is reserving comment until it sees final details.