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The Other Drug War

Produced and Directed by Jon Palfreman and Barbara Moran
Written by Jon Palfreman

NARRATOR: This week in Washington, Congressional leaders are racing against the clock to deliver a long promised Medicare Prescription Drug Bill. Mindful of the critical role seniors will play in the 2004 election, George W. Bush is pushing hard to sign a bill before Congress adjourns.

GEORGE W. BUSH: The budget I proposed, which Congress passed, provides 400 billion additional dollars to modernize Medicare and provide a prescription drug benefit. 400 billion!

NARRATOR: Tonight on Frontline, the inside story of America's war over soaring prescription drug prices.

AARP RALLY: This is our battle...affordable drug coverage for people. Are you with us?

NARRATOR: On one side America's seniors fighting for lower prices.

DOROTHY SEARLES, East Waterboro, Maine: It costs, I'd say close to a thousand dollars for one month.

JOHN MORAN, Senior Activist: It's pure and simple greed.

NARRATOR: On the other side, the drug industry warning that price controls will put at risk new cures for everything from cancer to Alzheimer's.

MARJORIE POWELL, PHrMA: When government imposes price controls on an industry, innovation dries up.

NARRATOR: Tonight, FRONTLINE examines the battle ground of America's other drug war.

NARRATOR: The passengers on this bus are drug traffickers, but they are not interested in cocaine or heroin. They're after Lipitor, Vioxx and Fosamax, the prescription drugs they need to live. With no drug insurance, Ray and Dorothy Searles of East Waterboro, Maine, spend nearly $1,000 dollars a month on prescription drugs. They're heading to Canada in search of cheaper medicines.

DOROTHY SEARLES, East Waterboro, Maine: Hopefully, because we each have approximately four prescriptions apiece a month, we're praying for good, substantial savings.

RAY SEARLES, East Waterboro, Maine: Well, we're hoping this is going to do the trick, going up here. We've never done it before. We're going to try it and see.

NARRATOR: These bus trips started in the late 1990s, when Maine seniors became progressively alarmed at the skyrocketing cost of prescription drugs. Seniors are the biggest users of prescription drugs. Only 12 percent of the population, they use one third of all prescribed medications.

CARLEEN SIMPSON, Saco, Maine: These are all the medications that I have to take daily. This drug here is Lipitor. This keeps my cholesterol down, and this is about $140. This is my Fosamax. It's $142 a month for four pills.

NARRATOR: Add in Prevacid and Zoloft, and Carleen Simpson faces a monthly bill of nearly $600.

CARLEEN SIMPSON: It was getting so it was more than my Social Security, so I was debating whether or not to eliminate some of them. Then I heard about the bus to Canada, and I just had to get on that bus.

NARRATOR: Armed with a six-month prescription for the drugs they take, the seniors cross the border, anxious to see if their long journey will pay off.

INTERVIEWER: How'd you do?

RAY SEARLES: Great.

DOROTHY SEARLES: We did wonderful, actually. This is the equivalent to Tagamet. Then I have Imipramine, or something like that.

CARLEEN SIMPSON: Blood pressure pills, Fosamax for my bones, Prevacid for my esophagus-

WOMAN: I must have saved two thirds.

RAY SEARLES: Half.

DOROTHY SEARLES: At least half.

RAY SEARLES: Half.

DOROTHY SEARLES: At least half.

CARLEEN SIMPSON: I'm happy. Very happy! [laughs]

WOMAN: It would be just very nice if we could, you know, have this benefit back in the States and we didn't have to make the trip.

INTERVIEWER: Going to come back?

CARLEEN SIMPSON: Oh, gosh, yes! You better believe it. [laughs] We just went back in to get a card.

NARRATOR: Seniors like these had stumbled on a paradox. Canadians were getting brand-name drugs developed and made in America, but due to Canadian price controls, they were paying half as much as Americans.

CARLEEN SIMPSON: I think it's disgusting. Every country practically in the world gets drugs cheaper than we do.   Japan, Germany, England, France-- they all-- Canada-- they all get the same drugs cheaper than we do.

DOROTHY SEARLES: I don't understand why the United States cannot stand up for their people, the government -- the people that we put in office -- can't override these pharmaceutical companies and give us some benefits.

NARRATOR: How did it happen that seniors ended up in this position?

NEWSREEL ANNOUNCER: President and Mrs. Johnson and Vice President Humphrey arrive for ceremonies that will make the Medicare bill a part of Social Security coverage.

NARRATOR: In 1965, Congress enacted two large federal health programs: Medicaid for the poor and Medicare for the elderly. But while Medicaid covered drugs, Medicare did not.

UWE REINHARDT, Princeton University: It's a historical accident. In '65, there really weren't a lot of drugs. And such as there were, were cheap and could be afforded. Therefore, no one even thought that that was a big issue. And it really became an issue only in the late- -mid to late '80s, when drugs became more powerful, more effective, but also more expensive.

NARRATOR: By the mid 1980s, Congress was trying to fix things.

SENATOR: [1990] Madam President, on Thursday I will introduce legislation to assure that our states--

NARRATOR: Time after time they brought the issue to the floor of the House and Senate.

SENATOR: --prescription drug prices--

NARRATOR: But each time they failed to pass a law.

Sen. DONALD RIEGLE (D), Michigan: [1994] --that needs to be reformed, and one that I think we can and must reform this year.

Sen. EDWARD M. KENNEDY (D), Massachusetts: [1999] Mr. President, senior citizens deserve coverage of prescription drugs under Medicare, and it's time for Congress to see that they get it.

Rep. GIL GUTKNECHT (R), Minnesota: [1999] I'm introducing the legislation today. I'm calling on my colleagues from both sides of the political aisle to join me in this debate.

Vice Pres. AL GORE, Democratic Presidential Nominee: [2000] --somebody who will fight for you, somebody who will give a prescription drug benefit for all seniors.

NARRATOR: During the 2000 election, both candidates promised a drug benefit for seniors.

Gov. GEORGE W. BUSH, Texas, Republican Presidential Nominee: A promise made will be a promise kept to our seniors!

NARRATOR: But by the time of the 2000 campaign, America's uninsured seniors had begun to give up hope that the federal government would ever act. So the people of Maine decided to do something on their own. The increasingly popular bus trips to Canada had begun to attract the attention and support of local politicians, in particular, Democratic state senator Chellie Pingree.

CHELLIE PINGREE (D), Maine Senate, 1992-2000: On the last three bus trips, the seniors who have gone have actually saved over $105,000. So just think of that. It's amazing. Quite amazing.

NARRATOR: The involvement of Pingree, the majority leader of the Maine Senate, inspired a radical proposal from the seniors.

CHELLIE PINGREE: It all started with a meeting in my office. A senior activist said, "I've got this great idea. I think, since we've been taking these bus trips up to Canada, we ought to put a bill in in the state of Maine that says if you want to sell prescription drugs in the state of Maine, you have to do so at the same price they do in Canada." And really, I didn't think we'd get, you know, that much support for it. I started taking it around to some of my colleagues. I was the majority leader at the time. And a lot of them said, "Oh, gosh, Chellie. Another one of your crazy ideas."

NARRATOR: But the U.S. pharmaceutical industry took Pingree's crazy idea very seriously. It took out ads and pressured politicians. Through its trade organization, PhRMA, it dispatched lobbyists to Maine with one instruction: Kill Pingree's bill.

CHELLIE PINGREE: And one of them actually passed us a note during the debate that said, "Based on the position the two of you are taking, you will never receive any more contributions from us." And that was the amazing thing. I mean, I was the majority leader of the Senate. They were basically saying, "You can't pass this law in the state of Maine."

NARRATOR: But despite PhRMA's efforts, Maine didn't give up. On May 11th, 2000, the Maine legislature held a crucial vote on what had become known as Maine Rx, a bill that enabled the state to bargain for cheaper drugs, as authorities did in Canada.

CHELLIE PINGREE: We actually had a unanimous vote in the Senate and almost unanimous in the House. It was really exciting. I just felt like I was representing the people who really needed to have a voice on this issue and, you know, thought that-- that there was nothing that was going to stop us.

[www.pbs.org: More about Maine's program]

NARRATOR: Against all odds, Maine's seniors had taken on the drug industry and won. In Main Street coffee shops, the mood was defiant.

CARLEEN SIMPSON: If we bargain with every pharmaceutical company and said, "If you're selling it for so much, I can't afford it, I'm not buying it," what would these pharmaceutical companies do? Would they consider losing Maine as a market? I don't think so!

NARRATOR: Commissioner of human services Kevin Concannon now had to get the drug companies to cooperate. And he had a major bargaining chip: the state's Medicaid program covering the poor, that purchased nearly a quarter of all drugs sold in Maine.

KEVIN CONCANNON, Com'r, Maine Dept of Human Services '95-'03: Medicaid is the largest single purchaser of prescription drugs. So therefore, the industry wants to make sure their drugs are available through Medicaid programs.

NARRATOR: As the person responsible for Medicaid purchases, Concannon planned to shut out those companies that didn't provide a similar discount for Maine's uninsured seniors.

KEVIN W. CONCANNON: Well, our view was, let's get that discount for the people in our state who cannot obtain it on their own and who do not have prescription drug insurance.

UWE REINHARDT, Princeton University: It seems a natural thing to say, "Look, I'm buying drugs for poor people in this state at this price. I have senior citizens who are also poor or near poor, and I want the same price." That doesn't seem so off the wall or even so un-American, when you come right down to it.

NARRATOR: But the drug industry regarded Maine Rx as a dangerous step toward government price controls.

MARJORIE POWELL, PhRMA: We don't think the government should be setting prices and telling companies what they can charge. We think that prices should be set through the market, through negotiations. That's the way the private sector negotiates.

NARRATOR: On October 26th, 2000, PhRMA unleashed their response to Maine Rx.

KEVIN W. CONCANNON: The very day the law became effective, 90 days after the legislature ended, PhRMA filed their lawsuit.

NARRATOR: In the Portland federal district court, the pharmaceutical industry sought and won an injunction barring the state from going ahead with Maine Rx. The state's bold plan had been stopped in its tracks.

For seniors, elation turned to anger.

JOHN MORAN, Senior Activist, Maine: It's pure and simple greed. The drug companies always had their way, and its very, very difficult for them to give up that position. Even though they gave it up in Canada and throughout Western Europe, they held onto the position that they could charge whatever they wanted to in this country for their meds and get away with it.

NARRATOR: America's drugs are made by a dozen or so large companies. Vilified by critics as price-gouging bullies, most have long given up talking to the media, preferring instead to be represented by their trade group, PhRMA.

But two companies agreed to talk to FRONTLINE and give their side of the story: Indianapolis-based Eli Lilly, whose products include Prozac for depression and Zyprexa for Schizophrenia, and the New Jersey-based Merck corporation, famous for drugs like Vioxx for arthritis and Fosamax for osteoporosis.

Lilly is a $70 billion company employing 41,000 people worldwide. In 2002, they sold over $11 billion worth of drugs. We asked Lilly CEO Sidney Taurel why such a large company would be worried about a small state like Maine.

SIDNEY TAUREL, CEO, Eli Lilly and Company: If the Maine program was adopted by other states, it could have very dire consequences. Many countries outside the United States have a form of price controls, and those price controls have affected tremendously innovation. I know, particularly, the case of France, where I lived for eight years. And 30 years ago, because of the quality of its scientists, pharmaceutical-- France was number two in pharmaceutical innovation in the world. And today, after 30 years of price controls, it is number nine.

NARRATOR: According to Merck's CEO, Raymond Gilmartin, states like Maine should think twice before interfering with an American system of innovation that has worked so well.

RAYMOND GILMARTIN, CEO, Merck & Co. Inc.: Well, there's been some tremendous advances through medicines in the past decade and, in fact, the last 20 years-- I mean, the fact that by lowering cholesterol with a cholesterol-lowering drug, you can reduce total mortality for people with coronary heart disease, prevent secondary heart attacks, prevent the incidence of stroke.

SIDNEY TAUREL: Very often, pharmaceuticals will help avoid much more invasive, costly and painful types of medical interventions. For example, we no longer have very many ulcer operations, thanks to anti-ulcer compounds.

NARRATOR: According to Taurel and Gilmartin, the fact that Americans spend more on drugs than ever before signals the U.S. industry's research success rather than its corporate greed. U.S. drug makers produce the vast majority of the world's best-selling drugs, including Lipitor for cholesterol, Clarinex for allergies, Celebrex for arthritis and Fosamax for osteoporosis.

CARLEEN SIMPSON: What I complain about is the fact that you get a new drug, why does it have to be so expensive? Why invent it if the common person can't afford it? Why does it have to be $140-something a month for 30 pills? I mean, come on!

NARRATOR: It's an intriguing question. The chemical ingredients for each pill cost only pennies. So if pills can be mass-produced by the million, why then do drugs cost so much? According to Merck and Lilly, the answer to this simple question is the key to understanding the drug industry.

SIDNEY TAUREL, CEO, Eli Lilly and Company: The cost of pharmaceuticals is very affected by the cost of research. The research into pharmaceutical products is long, is expensive and is risky. It takes 12 to 15 years between the time we develop a concept to the time we have a product on the market.

NARRATOR: This is the industry's story of why new drugs like Vioxx and Prozac cost so much to develop. Typically, drug discovery begins with an idea for a new disease target, often licensed from a university laboratory or biotech company. Then industry researchers start sifting through tens of thousands of compounds, looking for one that will hit the target.

THOMAS SALZMANN, Merck & Co., Inc.: The vast majority of those fail. Years are going by while this happens. Frequently, 5 or 10 years could elapse just in this period of the research until we get to a molecule that we think is suitable to take to the next step.

NARRATOR: Now they test the candidate drug in animals, to look for toxic side effects. If it is toxic, the scientists must go back to the drawing board and start all over again. Only 1 in 50 drugs pass this stage and make it to clinical trials in humans. The surviving drugs now enter the most expensive part of the process, three phases of human clinical trials, which eat up the majority of development costs. For every five drugs entering clinical trials, only one will make it to market.

SIDNEY TAUREL: And finally, only 3 products which reach the marketplace out of 10 will recoup their costs of R&D. So it's a very, very, very risky business. And as a result, investors expect high returns to compensate for the high risks of this business.

[www.pbs.org: Read his interview]

UWE REINHARDT: The total cost per successful drug-- it's certainly somewhere in the hundreds of millions. It's just like drilling for oil. When you drill for oil, you drill a lot of dry holes, nothing there, and eventually you hit a gusher. And all the cost of the dry holes have to be recovered from the oil in the gusher. That's well known in oil. The same is true in the pharmaceutical industry. All of the dead ends that they run into, the cost of that has to be charged, ultimately, to the successful drug.

NARRATOR: Two of Merck's gushers that have made billions are the arthritis drug Vioxx and the asthma medication Singulair. Both were developed under the direction of Merck scientist Jilly Evans.

JILLY EVANS, Merck Research Scientist: They say in a pharmaceutical career, you're very lucky to touch one drug that makes it to market. One drug. So I count myself as very lucky I've had Singulair and Vioxx. Singulair-- it was a long process-- 19 years, really, from the beginning of the project to the launching in '98. But it's well worth it.

NARRATOR: Evans also helped pioneer the arthritis drug Vioxx, which many seniors use at a price of nearly $100 a month.

JILLY EVANS: I have a great deal of sympathy for the older person who is spending 30 percent of their income on pharmaceuticals. I'm not at all trying to say that I know the answers. I do know that you won't have innovative research if you don't allow pharmaceutical companies to make a good profit.

NARRATOR: Evans's creations were certainly profitable. In 2002, Singulair earned Merck some $1.5 billion. Vioxx did even better, earning $2.5 billion. That's nearly as much as the entire budget of the state of Maine. And while the industry claims it needs its profits to pay for all the thousands of drugs that fail, critics are not so sure.

MARCIA ANGELL, M.D., Harvard Medical School: The drug companies make the case that their prices are so high and that total expenditures are so high because their R&D costs are very high, as though they were just eking out, just barely managing to survive.

NARRATOR: Marcia Angell, former editor of The New England Journal of Medicine, does not believe that price controls will threaten new drug discovery for one main reason.

Dr. MARCIA ANGELL: The pharmaceutical industry is stunningly, staggeringly profitable. The 10 drug companies on the Fortune 500 list last year took in net profits of 18.5 percent on sales. That's 18.5 percent. That is stunning. The median for the other industries on the Fortune 500 list was a little over 3 percent, 3.3 percent of sales. And this has been the case for the last 20 years.

NARRATOR: Given such stellar profits, would price controls really kill innovation? The claims and counterclaims go back and forth.

MARJORIE POWELL, PhRMA: When government imposes price controls on an industry, innovation dries up. If you think of regulated industries, there is not a lot of new research and development. The pharmaceutical industry in the United States, because it's not been operating under price controls, is the engine of new research and development.

KEVIN W. CONCANNON, Commissioner, Maine Dept of Human Services, Feb. 1995-Feb. 2003: I know they have to be profitable to maintain their ability to do research and to provide a product, but they don't have to make the margins that they make. There's nothing written in stone somewhere that says, hey, they have to make 20 percent margins.

NARRATOR: To shed light on this polarized dispute, FRONTLINE asked two independent experts for their analysis: Princeton economist Uwe Reinhardt, a widely respected commentator on U.S. health policy, and Richard Evans, a drug industry analyst with the New York research firm Sanford C. Bernstein & Co., highly regarded for its unbiased financial reports.

RICHARD T. EVANS, Sanford C. Bernstein & Co.: I think, as a society, we've got two important questions here. One is, how do we make sure that everyone has access to the existing technology? And how do we make sure that we do that in such a way that we don't wreck our access to better technology tomorrow?

UWE REINHARDT: This is one of the problems with health care in general and pharmaceutical products, in particular. The U.S. market at the moment is really the engine of innovation because we are willing to tolerate, so far, high prices. And that, of course, gives our industry, our pharmaceutical industry the money to fund R&D.

NARRATOR: So what would happen to R&D if we controlled prices as they do in Canada?

RICHARD EVANS: If we control prices today, then management is going to spend less on R&D and we're going to get fewer products tomorrow. So if we want price controls today, we've just got to realize that we're a capitalist society, we finance these companies and control these companies and measure these companies through the capital markets. They're going to restrain R&D, which means we're going to get fewer products. It is an inevitable trade.

UWE REINHARDT: What would they cut? They wouldn't cut reasonably sure blockbuster things that may not be all that great in terms of what they actually do for people but there's a big market. They wouldn't touch that. They would go after smaller niche products with high risk.

NARRATOR: One such niche product is Lilly's life-saving drug for septic shock, Xigris, currently available at over $6,000 per treatment.

RICHARD EVANS: It was a very difficult drug to discover and develop. It's a very expensive drug to manufacture. If you didn't think that you were going to be able to set the price for Xigris -- i.e., if you really felt that it was going to be set for you -- I bet Lilly probably wouldn't even have developed it. Or let's take a Roche drug, Fuzeon, which was just priced in Europe at $22,000 a year, and it's the only drug for AIDS patients who have become resistant to other therapies. It's an exceedingly expensive drug to manufacture. If back in the days when you were just planning that drug, if you felt that you wouldn't have the ability to set that price -- in other words, that price would be set for you -- you never would have developed that drug.

[www.pbs.org: Read the extended interview]

NARRATOR: So what will Maine Rx mean for the drug industry?

UWE REINHARDT: Well, if the people of Maine control prices and no one else does, it won't have much of an effect because Maine is not that big a state. If a lot of states did it and the revenue stream to the drug industry would go down, I think it would be crazy to assume that that would not affect research and development. It would.

NARRATOR: In Maine, seniors and politicians acknowledged the issue of future innovation but were more focused on getting lower prices today.

CHELLIE PINGREE (D), Maine Senate, 1992-2000: We're all completely committed to major advances in medicine and in prescription drugs, but this is the health care system. And you're not talking about a computer chip or a Rolls Royce or some product which, you know, maybe you have the right to make all the profits you want in the world. This is something that keeps people alive.

NARRATOR: One year on, Maine Rx was still mired in the courts.

STEVEN ROWE, Maine Attorney General: PhRMA has unlimited financial resources. We know that. But we have great legal staffs and we have great arguments, and I think, you know, we're in the right here. We're trying to make prescription drugs affordable for people.

NARRATOR: On March 5th, 2001, Maine's appeal was heard by the 1st Circuit Court of Appeals in Boston. And this time, the court sided with Maine. But again, PhRMA wasn't beaten. It persuaded the court not to let Maine Rx go ahead immediately, allowing them to appeal the case to the U.S. Supreme Court. Observers everywhere waited to see what would happen.

RICHARD T. EVANS, Sanford C. Bernstein & Co., LLC: If Maine were successful in the Supreme Court, I think two years later, you've got virtually every state doing the same thing.

NARRATOR: Alarmed by the idea that other states might follow suit, PhRMA --long the opponent of federal action -- now started lobbying the U.S. Congress to pass a drug bill for seniors.

MARJORIE POWELL, PhRMA: In this day and age, when drugs are such an important part of the health care system, to have the federal program for seniors not cover drugs just makes no sense. So we're urging members of Congress to enact a Medicare drug benefit.

NARRATOR: Currently, drug companies have many private customers, like HMOs, and one big government customer, Medicaid. If Congress simply added a drug benefit to Medicare, as the Democrats propose, government would then control, by some estimates, 52 percent of the drug market, and with it, the power to dictate prices.

So instead, PhRMA was pushing a Republican plan, where federal tax dollars subsidized hundreds of private insurers, purchasers big enough to negotiate but not to dictate drug prices. But observers were skeptical that Congress could reconcile two such different plans.

UWE REINHARDT, Princeton University: We have the deadlock that is sort of 50-50, which is paralytic, so nothing can happen. So I think this is, in fact, where the states have to take the lead.

NARRATOR: Maine wasn't the only state involved in the prescription drug war. In the Northwest, the state of Oregon had a history of taking bold positions on difficult health issues, from rationing to euthanasia. Oregon's government realized that along with seniors there was another group affected by skyrocketing drug prices: the uninsured poor, covered by Medicaid. This became the top priority of Governor John Kitzhaber, a former emergency-room physician.

Gov. JOHN KITZHABER (D), Oregon 1995-'03: They're eating up the Medicaid budget. The size of the increase was stunning. Between the last budget cycle and this budget cycle, pharmaceuticals went up over 60 percent. As costs increase in the U.S. system, the way we deal with it is we squeeze people out. We deny access to other people. So the fact that the drugs were going up was resulting in other people not getting access to anything, you know, like insulin, like penicillin.

NARRATOR: Kitzhaber realized that if the state spent health dollars more efficiently, Medicaid would reach more people. But he believed that Oregon's current drug usage was riddled with waste.

Gov. JOHN KITZHABER: I have a young man who works for me that had pain in his wrist, and he went to see his doctor and came back with a prescription for Celebrex, which is an enormously expensive anti-inflammatory drug. That cost about $75 a month. There's no clinical evidence to suggest that Celebrex is any more effective than across-the-counter Ibuprofen, Advil, at $7 a month for an otherwise healthy young man with no history of gastrointestinal problems. So the difference is $68 -- $68 that contributed to the escalation of health care costs but didn't produce a health benefit.

NARRATOR: Kitzhaber believed that such waste was happening all over Oregon, and the only way to reduce it was to make people aware of the true costs and benefits of available drugs.

Gov. JOHN KITZHABER: Instead of asking simply how we can simply finance this increasing cost, we should be asking why do these drugs cost so much in the first place, and what are we getting in terms of health for this huge, growing expenditure?

NARRATOR: Out of these discussions, Oregon would later build its own drug bill, based not on controlling prices but on maximizing value for money.

But observers realized Kitzhaber had hit on a crucial point that was true for all Americans. As long as people remained ignorant of both the benefits and costs of drugs, there was little hope of controlling expenditures. The key was information. In pockets across America, there were growing discussions about the costs and the benefits of prescription drugs.

That debate became central to the survival of this business, Fraser Papers in northern Maine. Fraser Papers employs over 1,000 people. Although the workers had health insurance, union leader Joel Pelletier began to realize that rising health costs -- especially prescription drug coverage -- were threatening their jobs.

JOEL PELLETIER, Union President, Fraser Papers, Inc.: I've been working at a paper mill since I've been 19 years old. The employees are bearing more and more of the costs of the health care because, quite frankly, the employers can't afford it. So we're giving our pay raises to the insurance premiums.

NARRATOR: In an unusual example of close cooperation between management and workers, Fraser took a bold step. It fired its managed care company and hired a consultant, Brent Churchill, to analyze meticulously where their health premiums were going. And his analysis showed that, among other things, prescription drug costs were out of control.

At monthly union meetings, Churchill gave workers and management the grim facts.

BRENT CHURCHILL: Lipitor, from August of last year through July of this year-- you can see that just that one drug alone is nearly $40,000.

NARRATOR: So Churchill suggested a way every worker could help: avoid expensive brand-name drugs and choose generics.

BRENT CHURCHILL: I mean, there's a huge savings, in some cases, in going from that brand name over to the generic. In this particular one you're looking at, the brand costing $114 and the generic costing $13.16.

FRASER WORKER: I just can't believe the amount for the generic versus the name brand.

JOEL PELLETIER: You know, you got pay the bills. And it comes to the point where the bills are more than what you can make, well, you lose your business. The business goes down. And it's happening.

NARRATOR: As drug spending escalates, more and more health care plans are putting pressure on workers to use generic drugs. New York-based Barr Laboratories is one of the largest makers of generic drugs. It produces drugs much more cheaply than companies like Lilly and Merck. This line is packaging generic Prozac, a mega-blockbuster drug which earned Lilly over $2 billion a year until one day in 2001, when its patent ran out. The day the patent expired, Barr Labs was ready to go.

BRUCE DOWNEY, CEO, Barr Laboratories Inc.: The first day that we were authorized to ship generic Prozac, fluoxetine, we shipped a hundred million capsules. We shipped on Friday. By Monday morning, the product was widely distributed in the United States. And in a matter of just weeks, we had captured 80 percent of the market.

NARRATOR: Some six months later, the wholesale price of Prozac had fallen from $240 a bottle to less than $5, saving American consumers billions and decimating Eli Lilly's profits. But Eli Lilly insists the only reason a generic manufacturer like Barr can pull this off is because it didn't bear the costs of inventing Prozac.

ROBERT ARMITAGE, Gen'l Counsel, Eli Lilly and Co.: It's equivalent, really, to the motion picture industry. If you want to copy a Divorced, once a movie comes out on digital video disc, it might cost you 50 cents to copy it. But that first DVD you make is perhaps a $2 million or $300 million investment, by the time you look at the cost of a movie and the cost of its promotion. So we're almost in exactly the same boat.

NARRATOR: Lilly concedes that companies like Barr have an important role, offering yesterday's drugs at low prices. But Lilly points out that generic companies will simply not invent the drugs of tomorrow for diseases like cancer and Alzheimer's. Only brand-name companies, ready to invest billions of dollars a year, can do this.

SIDNEY TAUREL, CEO, Eli Lilly and Company: If America is responsible for the great majority of pharmaceutical innovation, it is because we have a free market system which allows innovation to prosper. And the prospects for the future, in terms of finding new cures, will be achieved only if we keep that free market environment going.

MARCIA ANGELL, M.D., Harvard Medical School: It's a threat. It's a threat to the American public. They are saying, "Don't mess with us. Do nothing about our obscene profits. Do nothing about these unsustainable increases in prices, or else we will not give you your miracle cures." Well, guess what? They're not giving you the miracle cures in the first place.

NARRATOR: Critics like Marcia Angell charge that the industry is not telling the whole story. For all the talk of innovation, many of today's best-selling drugs are similar to drugs already on the market. The success of these so-called "copycat" drugs, the critics claim, has as much to do with marketing as with medicine.

Gov. JOHN KITZHABER (D), Oregon, 1995-2003: They spend massive amounts of money advertising. Merck spent $160 million last year advertising one of their major drugs, which is more than Anheuser-Busch spends to advertise Budweiser. It's more than PepsiCo spends to advertise Pepsi-Cola.

TELEVISION COMMERCIAL: Ask your doctor about Vioxx.

Gov. JOHN KITZHABER: It creates a demand for a particular brand-name drug without any consideration of the fact that there may be other drugs to treat the same condition that are just as effective, or more effective but less costly.

NARRATOR: Since 1997, direct-to-consumer advertising has reached all parts of America, and many doctors complained it was distorting the practice of medicine by creating demand for the most advertised drugs.

TELEVISION COMMERCIAL:   Why wait? Ask your doctor about a bone density test.

FRANK BAUMEISTER, M.D., Oregon Health Resources Commission: It's been shown that about 30 percent of physicians will provide the drug. It's easier to write a prescription than to give a long dissertation and explanation to try to dissuade a patient when your waiting room is full and you've got a patient in the next examining room that's been waiting, particularly if you don't think it's going to make that much difference.

SIDNEY TAUREL: I think direct-to-consumer advertising has some very important public health benefits. One is you can see, for the majority of the products which are advertised, that they deal with conditions which, according to medical experts and the data available, are under-treated, diseases such as depression, such as diabetes, such as hypertension, such as high cholesterol. All of these areas are today under-treated, and direct-to-consumer advertising helps educate patients and bring them to the doctor's office.

UWE REINHARDT, Princeton University: My feeling is a good doctor should say, "Yeah, it's a good drug" or say, "Actually, let me show you. I have a study here. That drug, for the money, isn't worth it." But in fact, even doctors tell you most of the information about drugs comes to them from people who are trying to sell a drug.

NARRATOR: The bulk of the industry's marketing effort is aimed not at consumers but at the doctors who have the power to prescribe.

Dr. FRANK BAUMEISTER: And the physicians get their education in that way, and that education is not objective. It's very biased. But in a way, the physicians are at the mercy of the drug salesmen.

Dr. MARCIA ANGELL: There is a conflict of interest there. It's as though you look to beer companies to educate you about alcoholism. They have $8 billion worth of free samples. The doctors hand out the free samples, and from that point on, both the doctor and the patient are hooked on that particular drug. And believe me, it's not going to be a generic, and it's not going to be a drug that's just going off patent. It is going to be a new, newly patented, high-price drug.

[www.pbs.org: Read her interview]

NARRATOR: Various experts have tried to break down just how a drug company spends its money. According to analyst Richard Evans, about 16 cents of every dollar the drug industry earns is spent marketing to doctors and patients. That's more than the industry spends on R&D.

RICHARD EVANS: There's just way too many sales people. The best thing to do, for the industry to model, is to pull back sales and marketing 5 percent and spend it on R&D.

So let's say you go ahead and do that, but you move first. Your biggest problem is your competitors have more share voice in the market and more product demand than you do. It's a pathway to putting yourself out of business. It's not that the industry loves having a lot of sales reps. I don't know a single CEO that wouldn't prefer to trade salespeople for research. You can't. You can't unilaterally disarm.

NARRATOR: The state of Oregon knew that the industry wouldn't reduce its marketing, so it came up with its own solution. In Kitzhaber's view, the antidote for aggressive marketing was to give physicians what they lacked: an unbiased, objective source of information, something we take for granted with most other commercial products.

Gov. JOHN KITZHABER:   Imagine how difficult it would be for you, as a consumer, to buy a toaster or a car or an appliance without Consumer Reports, that gives you objective information to compare those products. That doesn't exist in the drug market today. Really, all we're trying to do in Oregon is to create a Consumer Reports for prescription drugs.

NARRATOR: Thus was born Oregon's drug bill. Oregon's Consumer Reports sought to protect physicians from drug reps and guide them to drugs that delivered the most health care bang for the buck. Drugs which failed to demonstrate their value would not appear on Oregon's so-called preferred drug list.

Lobbyists descended on Salem, Oregon, to try and stop the bill in its tracks.

Dr. ALAN BATES, Oregon State Rep.: At the end of session, in the Oregon legislature, PhRMA had 26 lobbyists in the building trying to stop this bill from going through. The pressure was intense.

Gov. JOHN KITZHABER: And they managed to keep the bill bottled up in committee and never had a public hearing, which is pretty remarkable in a state like Oregon that prides itself on public process. Well, I told them that if they didn't put the bill on the floor, I was going to veto the entire budget for the Department of Human Services, over a billion dollars, and call them back in two weeks to rebalance the budget, and then get on the state plane and go around the state explaining how the leadership was in the pocket of the multi-national drug companies. And miraculously, the bill showed up on the floor, actually, late on the last night of the session.

OREGON POLITICIAN: Thank you, Mr. President. This is what is called the Practitioner Managed Prescription Drug Plan.

Gov. JOHN KITZHABER: It passed by a comfortable margin in both houses.

NARRATOR: Now came the hard part. Oregon's Health Resources Commission convened a series of open hearings to compare drugs in head-to-head studies for safety and efficacy. Blockbuster drugs, which had enjoyed such success when marketed directly to patients and doctors, now had to survive the scrutiny of Oregon's scientific watchdogs. And by August, 2002, it was clear that many blockbusters had failed to make the preferred list.

JOHN SANTA, Office for Oregon Health Policy & Research: Well, one of the first classes that we looked at was a class called proton pump inhibitors, the heartburn drugs.

NARRATOR: In this class were drugs like Prevacid, Nexium and Prilosec.

Rep. ALAN BATES: There are out there at least 125 carefully done studies on those drugs. Luckily, in this group of drugs, they don't conflict with each other much. They all say about the same thing. Those drugs are all effective and do a good job.

Dr. FRANK BAUMEISTER: And if there's no difference, in terms of activity, then the only criterion on which to measure was price. And that's what they did.

JOHN SANTA: And we chose Protonix, Aciphex and Prevacid, and all three have increased their market share, especially Protonix. We did not choose Prilosec or Nexium. And both drugs have decreased significantly in terms of their market share.

[www.pbs.org: More on Oregon's list]

NARRATOR: Many other blockbusters didn't make Oregon's Consumer Reports. Vioxx and Celebrex were passed over in favor of cheaper alternatives, as was the pain medication Oxycontin, which was passed over in favor of much cheaper generics.

What do the drug companies think?

SIDNEY TAUREL, CEO, Eli Lilly and Company: In general, I think the more information physicians have about the benefits of drugs and their costs, the better they are going to be. Where I object is when this results in saying drug A is the only one that you can prescribe to all your patients. If you prescribe drug B, you have to get an approval from a bureaucrat.

Gov. JOHN KITZHABER: I think it's a fair question, and we designed this bill to make sure that we didn't substitute government regulations or rules for clinical judgment.

Dr. FRANK BAUMEISTER: We have an exception process built into this program.

Gov. JOHN KITZHABER:   All you have to write is "Do not substitute" or "DNS" right across the face of the prescription, and we pay for whatever the other drug is. I think a lot of states have tried things like this, but very few states have actually got anything through their legislature, and that many of the states that have, immediately are sued by the drug companies. Maine was sued. Michigan was sued. And they're deciding whether to sue us here in Oregon.

NARRATOR: PhRMA's lawsuit had tied up Maine Rx for three years. But on January 22nd, 2003, the case was finally heard by of the U.S. Supreme Court. A Maine delegation traveled to Washington to watch what they hoped was the last chapter of their struggle. But inside the Court, which is off limits for television cameras, the nine Supreme Court Justices had many tough questions for Maine. Justice Breyer: "How could Congress possibly want a statute which would hurt Medicaid patients?" Justice Scalia: "You think that's one of the valid uses of the authorization provision, so that a state could shake down drug companies?"

CHELLIE PINGREE, (D) Maine Senate, 1992-2000: Many of us left the United Sates Supreme court and said, This does not look good"-- you know, sort of feeling like, you know, I'm not sure these guys are listening. I mean, I felt like it's a shakedown of senior citizens in our country, and I was really worried that we weren't going to be able to proceed.

NEWSCASTER: The U.S. Supreme Court today gave the green light to Maine's pioneering yet controversial prescription drug law.

NARRATOR: In a surprising 6-3 decision issued in May, the Court ruled against PhRMA and lifted the injunction against Maine Rx.

STEVEN ROWE, Maine Attorney General: We've got the ball now and we're moving forward. And we're going use it to lower prescription drug prices for the Maine citizens.

CHELLIE PINGREE: It was just an amazing thought that the state of Maine-- that they could take that challenge all the way to the Supreme Court and win was a great victory for all of us, a very, very exciting notion.

NARRATOR: At almost the same time, events accelerated in Washington. President Bush suddenly sent out new signals he was now willing to compromise on his stand that he would support a prescription drug benefit only if it were part of a broader reform effort to privatize Medicare.

Pres. GEORGE W. BUSH: We've got a growing consensus in both houses of Congress and in both political parties, a consensus that our seniors need more choices and better benefits, including prescription drugs.

NARRATOR: Then last June, both Houses of Congress voted for their different versions of a 400 billion dollar Medicare prescription drug benefit for seniors.

SENATOR BILL FRIST: Tonight Seniors and individuals with disabilities through this bill will get relief from high prescription drug costs and outdated often inadequate medical care.

JULIE ROVNER, NPR: Both the House and Senate actually passed their bills on the same night.before the July 4th recess. And I think everybody thought it was about to happen.

UWE REINHARDT, Princeton University: Bush needed it, republicans needed it and the democrats wanted it. There was an alignment there. On the other hand, the cognascenti knew there are very tricky issues that have to be negotiated.

NARRATOR: Before President Bush could sign it into law, the two very different drug bills needed to be reconciled by a special conference committee. But could a deal be crafted that would satisfy all the parties: from the drug industry to uninsured seniors?

JULIE ROVNER, NPR: I think the major sticking point is that Republicans really considered the drug benefit to be secondary to reforming Medicare. For instance privatize the program or put a cap on overall Medicare costs. Those are things that the democrats think are anathema, that they say would undermine Medicare, which they see as one of the crown jewels of government policy. And they're simply not willing to see Medicare destroyed-- and that's the word they've been using-- in order to get this drug coverage.

NARRATOR: The drug industry also wanted the 400 billion dollars to be spent by private HMOs, rather than the government. This would protect their ability to set prices and give them a nice windfall.

UWE REINHARDT, Princeton University: The 400 billion, a lot of that money would be pure gravy for the drug companies for pills that have already been researched. All you've gotta do is push a button and pump out another hundred thousand pills.

NARRATOR: But events aren't all going the drug companies' way. While congress negotiates, states are keeping up the pressure, with several actually seeking to import drugs from Canada, an idea that appeals to some in congress as well.

To prevent this, Eli Lilly and other drug companies have announced that they will strictly limit the number of drugs they sell to Canada.

Meanwhile, back in Washington, the drug bill was in trouble. After five months of negotiations, observers were increasingly skeptical that congress could deliver a deal before it adjourned.

RICHARD T. EVANS, Sanford C. Bernstein & Co.: I'm less optimistic. We've had the entire summer and fall to bridge what is probably an irreconcilable ideological gap. And we've failed.

NARRATOR: Then, on November 13, 2003, Congressional Republican leaders stepped in to try and force a last minute compromise. While some Senate liberals and some House conservatives have signaled their opposition, chances for a Medicare drug bill have now improved..although final passage remains uncertain.

RICHARD EVANS: The drug industry views a Medicare drug benefit as ultimately inevitable. And I think the industry feels that with a Republican in the White House and Republican majorities in both chambers of congress that now's the time.

NARRATOR: What began with seniors organizing bus trips to Canada has grown into a major political crisis that has shaken the mighty drug industry. Whether the states or the federal government take the lead--the question remains: can drug companies continue to charge Americans the highest prices in the world? Or will this conflict lead to the end of a free market in prescription drugs.

The Other Drug War

PRODUCED AND DIRECTED BY
Jon Palfreman
and Barbara Moran

WRITTEN BY
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EDITOR
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PRINCIPAL PHOTOGRAPHY
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ANNOUNCER: Tonight's report continues at FRONTLINE's Web site, which offers a closer look at how the states have taken on the pharmaceutical industry, answers to some frequently asked questions about drug costs, FRONTLINE's extended interviews, a chance to join the discussion about this issue and more at pbs.org.

Next time on FRONTLINE:
HE WAS A LOST SOUL. "He believed violence was the only effective tool."
ON A POLITICAL MISSION. "He wanted to bring about a new world order."
"..President Kennedy cut down by an assassin's bullets.."
DID LEE HARVEY OSWALD ACT ALONE? OR WAS HE PART OF A VAST CONSPIRACY?
"I'm just a patsy!"
40 YEARS LATER, REVIEW THE EVIDENCE AND DECIDE FOR YOUR SELF.
WATCH FRONTLINE.

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