Letter from the USA The Doughnut Hole in Pharmaceuticals by lindayy


Letter from the USA The Doughnut Hole in Pharmaceuticals

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									                           Letter from the USA
                    The Doughnut Hole in Pharmaceuticals

Accentuating the positive
My last visit to the USA did not start at a propitious time: the US Census Bureau had published
its latest report on Poverty. It indicated that income inequality as measured by the Gini coefficient
had increased from 0.450 to 0.469 in the previous decade. Perhaps more important, it showed that
12.5 percent of the population or some 37 million people lived below the poverty line in 2005.
The same report revealed that people without health insurance had risen slightly to 15.9 percent
of the population in 2005, or 46.6 million people (USCB 2006). But not all was bad news.
Employment in health care increased by 2.3 percent in 2006, against an average of 1.3 percent for
other industries, to reach 12.7 million people (BOL 2006a) and health expenditure finally reached
the enviable level of 16 percent of Gross Domestic Product (GDP) in 2004 (CMS 2006a). Once
again, US health services have made a significant contribution to employment and GDP growth.

A growing industry
As it has been two years since my last letter from the USA on health services, let me review some
of the trends in the US health care industry, before I focus on the doughnut hole.

                      Table 1. United States Health Services Expenditure:
                       Proportion of Gross Domestic Product 1990-2004
                                                   Health Expenditure
                                Year                        %
                                1990                       12.4
                                2000                       13.8
                                2004                       16.0
                         Source: CMS 2006a.

In the last 14 years, health expenditure in the United States increased from about 12 to 16 percent
of GDP (Table 1). This is the highest among the industrialised countries, according to the
Organisation of Economic Co-operation and Development (OECD), and compares with 9.7
percent for Australia. We have to try harder to catch up. Although most of the total health
expenditure continues to be funded from private sources, including private health insurance,
public funding has risen from about 40 to 45 percent in the 14-year period. This increase relied
entirely on federal funding (CSM 2006a). By comparison, Australia s relatively low level of
public funding for industrialised countries amounted to 69 percent in 2003 (Martins 2006a).

The price of health services
For the first time in more than a decade, in 2006, prices for health services have grown slightly
less than the Consumer Price Index (CPI) for all items (Figure 1). This is due mainly to small
price rises in services provided by medical practitioners, and also the increase in the price of
motor fuel by more than of 50 percent in six months that pushed up the CPI for all items. The rate
of growth in the CPI for all items rose from 2.5 percent in June 2005 to 4.2 in 2006 (BOL 2006b).

                            Figure 1. US Percentage Price Rises on Previous Year: All
                                      Items and Medical Care June 1992-2006

   Percentage Rise on
     Previous Year






























                                                  CPI All Items         CPI Medical

Health insurance
Although government insurance provided by Medicare and Medicaid has increased in the 15-year
period 1990-2005, the proportion of the US population not covered by health insurance has
grown from 13.9 to 15.9 percent (Table 2).

                            Table 2. Health Insurance Coverage in United States: 1990-2005
                         Health Insurance Coverage       1990         2000          2005
                                                         Percentage of Total Population
                         Private Insurance                73.2         71.9          67.7
                             Employment based               60.4          63.6         59.5
                             Direct Purchase                  n.a          9.5           9.1
                         Government Insurance             24.5         24.7          27.3
                             Medicaid                         9.7         10.6         13.0
                             Medicare                       13.0          13.5         13.7
                             Military                         4.0          3.3           3.8
                         Not covered                      13.9         14.2          15.9
                         All People                      100.0        100.0           100.0
                        Note: Figures do not add up because some people have more than one type of health insurance
                        and are counted in each type of private and government insurance. The Not covered figures
                        relates to people without any type of health insurance.
                         Source: USCB 2006.

Health insurance premiums have continued to rise well above the CPI increases for all items, and
even the prices for medical care. However, premiums are now growing at a lower annual rate (7.7
percent in 2006) than they did in 2003, when the rate of annual increase reached a peak of 13.9
percent (Table 3). People who can cope with high deductibles are not only paying lower
premiums but also experiencing lower rates of premium increases (KFF 2006a). The market has a
product for everyone who can afford health insurance, with a different price and rate of increase

in premiums. However, the declining coverage, in spite of the increasing proportion of the
population covered by government insurance, indicates that average annual premiums of about
US$11,500 for a family and US$4,200 for single people might be beyond the reach of many
employers and individuals in 2006 (KFF 2006a).

       Table 3. Annual Rise in Health Insurance Premiums United States: 1996-2006
                 Annual Percentage Increase in Premiums by type of Health Insurance
    Year     Conventional     HMO          PPO         POS       HDHP/SO         All

    1996              1.9              -0.2               1.0          1.1              *             0.8
    2001             11.3              10.4              11.6          9.9              *            10.9
    2002             13.8              13.5              12.7         12.2              *            12.9
    2003             14.3              15.2              13.7         13.2              *            13.9
    2004             11.1              12.0              10.9         11.3              *            11.2
    2005              5.0               9.4               9.4          9.1              *             9.2
    2006              8.4               8.6               7.3          8.4            4.8             7.7
Note: HMO: Health Maintenance Organization; PPO: Preferred Provider Organization; POS: Point-of-
Service; HDHP/SO: High Deductible Health Plan with Saving Option, includes both HRA: Health
Reimbursement Arrangements; and HAS: Health Savings Accounts. (*) Included with other types of health
Source: KFF 2006a.

What is new?
So we could say that it is business as usual in the US and ask what is new? Yes, there is always a
new product in the innovative US health insurance industry. It is so new that its impact can hardly
be evaluated. As from 2006, older people covered by Medicare have the option of getting a
prescription drug benefit by paying an additional premium. As might be expected, there are a
variety of plans1 and acronyms. Medicare recipients can either join a free-standing prescription
drug plan (PDP) or a Medicare Advantage plan that will cover both prescription drugs and other
additional Medicare benefits (MA-PD). According to Gold, in 2006 there were 1,429 PDPs and
1,314 MA-PDs. Average annual premiums for PDPs amounted to US$444 and US$216 for MA-
PDs. A reason given for the difference is that MA-PDs can cross-subsidise the prescription drug
program with other benefits (Gold 2006: iii-iv). Deductibles, tiered-copayments and limits may
apply. Beneficiaries will pay 25 percent of the price paid up to a limit of US$2,250.

The doughnut hole
Deductibles and copayments may become substantial depending on the period and type of drugs
involved. When the limit of US$2,250 is reached benefits cease until expenses reach US$5,100
the hole in the doughnut when benefits will resume with beneficiaries paying only 5 percent
(Anderson 2006). Have our Abbott and Costello2 heard about this innovation?

  For some historical reason, as the reader might be aware, health insurance schemes in the US are called
  plans .
  I enjoyed watching a couple with similar names when I was a child.

The last bastion of market freedom
 In view of this new development, it is appropriate to examine some feature of what
pharmaweb.com has called the last bastion of market freedom for pharmaceuticals in
industrialised countries (pharmiweb.com 2004).

                        Table 4. Total Expenditure on Pharmaceuticals
                                 Selected OECD Countries 2003
                                                  Total Expenditure
                               Country             Pharmaceuticals
                                                       % GDP
                        France                           2.1
                        United States                    1.9
                        Italy                            1.9
                        Canada                           1.7
                        Germany                          1.6
                        Japan                            1.5
                        Australia                        1.3
                        Sweden                           1.2
                        Netherlands                      1.1
                       Source: OECD 2005a. Computations of the author.

According to OECD, the United States spent 1.9 percent of GDP on pharmaceuticals in 2003.
This was lower than France (2.1 percent) but much higher than other European countries such as
Sweden (1.2 percent) and the Netherlands (1.1 percent), Australia (1.3 percent) and Japan (1.5

A reason for this relatively higher expenditure on pharmaceuticals according to Phamaweb.com is
that: Unlike other pharmaceutical markets, particularly those in Europe, the most prominent
feature of the US is that it remains a relatively free market. Unlike in Europe and Japan,
government intervention has been minimal and so US pharmaceutical pricing levels have owed
more to general trends in supply and demand than other market influences. This has meant that
international pharmaceutical companies have been able to consistently rely on the US to drive
growth (parmiweb.com 2004). The term relatively is important as there are major constraints on
the market due to FDA regulations and patent holding by the drug companies. Nevertheless, there
is no doubt that people in the US are paying higher prices for pharmaceuticals than in other
countries. A review of pharmaceutical prices by the Australian Productivity Commission
indicated that in the year 2000, US prices were about 3 times higher than those in Australia and
twice as expensive as those in the United Kingdom and Sweden (Martins 2002).

An examination of the Consumer Price Index shows that the prices of prescription drugs and
medical supplies in the US, during the last five years, have risen slightly less (16 percent) than
medical care in general (18 percent) (BOL 2006a). Nevertheless, a study undertaken for the State
of Illinois claims that residents of that state could save up to 51 percent if they imported a basket
of 78 prescription drugs from Australia, including shipping costs (Kamath 2005). The
profitability of the drug companies in the US is apparent. According to the Kaiser Family
Foundation (KFF), in the period 1995-2002 pharmaceutical manufacturers were the most
profitable industry in the US. They had declined to be only fifth in 2005. Still profits amounted to
16 percent of revenue compared with 6 percent for Fortune s top 500 firms (KFF 2006b)

Buyer and consumer responses
Price rises, well above general inflation, have been a major factor in the growth of the
expenditure on prescription drugs. Utilisation has played an even greater role. A KFF study found
that the number of prescriptions per capita rose from 7.9 in 1994 to 12.3 in 2005. The combined
impact of increases in price and utilisation has led 74 percent of employers to impose copayments
in their coverage of prescription drugs for their employees. The value of the copayments doubled
in the 5-year period 2000-2005 (KFF 2006b).

US consumers are always very creative and have responded in a variety of ways. As usual, the
language has been enriched by these experiences. Pill-splitting is a technique whereby drugs are
bought in bulk, at lower prices, and then shared among a number of pill takers. In addition, some
people have resorted to importing drugs from across the 49th parallel from Canada, where drugs
prices are lower. The term reimportation is used for drugs that are imported from Canada but
were originally produced in the US.

Split leverage: the price of diversity
The $64,000-question is what will be the impact of the historic Medicare Prescription Drug,
Improvement, and Modernization Act of 2003? It is forecasted that Medicare will account for
more than a quarter of prescription drug expenditure in the future. This would give it substantial
leverage to negotiate prices with suppliers. However, Medicare legislation prevents it from
seeking negotiated prices directly from manufacturers (KFF 2006b). Instead, this leverage will be
split among about 3,000 separate schemes administrating the drug benefit package. Diversity and
competition will prevail, but at what price?

This is a riveting and never-ending soap opera. No wonder, I keep coming back for more.

                                                                               Jo. M. Martins
                                                                       Washington DC/Sydney
                                                                      September/October 2006.


Anderson, Gerard F., Dennis G. Shea, Peter S. Hussey, Salomeh Keyhani and Laurie Zephryn.
Doughnut holes and price controls. Health Affairs, 21 July 2004.

Bureau of Labour (BOL). 2006a. Employment change from same month a year ago: September
2006. Washington DC: Department of Labor. www.bls.gov

Bureau of Labor (BOL). 2006b. Consumer Price Index. Washington DC: Department of Labor.

Centers for Medicare and Medicaid Services (CMS). 2006a. National Health Expenditure
Aggregates. www.cms.hhs.gov/statistics

Gold, Marsha. 2006. Premiums and Cost-sharing Features in Medicare s New Prescription Drug
Program, 2006. Kaiser Family Foundation. www.kff.org

Kaiser Family Foundation and Health Research and Educational Trust (KFF). 2006a. Employer
Health Benefits 2006 Annual Survey. Menlo Park CA.

Kaiser Family Foundation and Health Research and Educational Trust (KFF). 2006b.
Prescription Drug Trends. June 2006. Menlo Park CA. www.kff.org

Kamath, Ram and Scott McKibbin. 2005. Australia and New Zealand: Recommended expansion
of the Illinois personal importation program. Office of the Special Advocate for Prescription
Drugs. Illinois.

Martins, Jo. M. 2002. Who is winning? The drug companies, the government or the battlers?

Martins, Jo. M. 2006a. Health care and the fiscal burden. Paper presented to the International
Health Policy and Management Institute meeting. Lisbon: September 2006.

Organization of Economic Co-operation and Development (OECD). 2005a. OECD Health Data
2005. Table 9. www.oecd.org

Pharmiweb.com. 2004. The last bastion: U. S. Pharmaceutical prices under pressure.

US Census Bureau (USCB). 2006. Income, Poverty, and Health Insurance Coverage in the
United States: 2005. Washington DC: U.S. Department of Commerce.


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