The rising tensions among purchasers, insurers, and providers spilled over to engulf health care's major supplier: the pharmaceutical industry. In 1988, prescription drugs accounted for 5.5% of national health expenditures and were increasing at 8.5% annually, slower than the over-all increase in health expenditures (Levit et al, 1990). With 71% of drug costs borne out-of-pocket by individuals and only 18% paid by private insurance plans, these costs had little impact on insurers.
In contrast, by 1999 prescription drug costs had risen to 8.3% of total health expenditures and were inflating by 17% per year, triple the rate of growth of health care expenditures as a whole. Moreover, with private insurers-especially HMOs-providing far more prescription drug coverage than previously, insurance plans paid for 43% of drug costs (Iglehart, 2001; Heftier, 2001). Pharmaceutical costs were a major factor in the tailspin of HMO profitability and the bankruptcy of many physician groups in the late I 990s (Bodenheimer, 2000). For automaker Chrysler, spending for employees' prescriptions rose 86% from 1993 to 1998, and drug costs consumed 19% of Ford Motor Company's employee health costs. At Blue Cross and Blue Shield of Michigan, drug costs represented 28% of total expenditures, more than the amount spent on physician visits (Tanouye, 1998). In addition, since 12 million Medicare beneficiaries had no prescription drug coverage and millions with coverage had yearly limits of $500 or $1000, the rapidly growing cost of pharmaceuticals for the elderly catapulted into a major national issue. The pharmaceutical industry was becoming public enemy number one (Harris, 2001).
For years, drug companies have been the most profitable industry in the United States, earning a 1999 net-profit after taxes equal to 19% of revenues, compared with 5% for all Fortune 500 firms. The pharmaceutical industry claims that drug prices are justified by its expenditures on research and development of new drugs. In fact, R&D for the largest drug companies consumed only 11% of sales in 1998 while marketing and administration accounted for 34% and profits 24% (Kreling et al, 2000).
In many ways, the pharmaceutical industry has been protected from both price competition and price regulation, virtually assuring high prices and high profits. Unlike many nations, government in the United States does not impose regulated prices on drugs. Government regulations in the United States serve mainly to reduce competition through a system of patent protection. The company developing a new brand-name drug enjoys a patent for 20 years from the date the patent application is filed, during which time no other company can produce the same drug. Once the patent expires, generic drug manufacturers can compete, and do so by selling the same product at far lower prices. For example, in 1999 the brand-name anti-ulcer drug Tagamet cost $2.77 per day, compared with 36 cents per day for the identical generic form, cimetidine (Kreling et al, 2000).
A number of drug companies have waged expensive legal battles to delay patent expirations on their brand name products, or have paid generic drug manufacturers not to marker generic alternatives (Stolberg and Gerth, 2000, Hall, 2001). In addition, the industry attempts to persuade physicians and patients to use brand-name products, spending over $8 billion in 1998 on sales representatives visits to physicians, journal advertising, sponsorships or professional meetings, and direct-to-consumer television ads (Kreling et al, 2000). Clearly, the 1990's purchaser dominance over health care did not extend to the pharmaceutical sector, where suppliers reigned supreme.
