Drug Makers Criticized for Co-Pay Subsidies

--Americans spend 2.5 trillion annually, 20% GDP, on healthcare cost --Generally 10% of the healthcare cost goes to drugs. For patients with private plans, share increased to 20% By JONATHAN D. ROCKOFF Even as U.S. lawmakers seek new ways to rein in health-care spending, drug companies are quietly circumventing a proven tool for controlling prescription-drug costs: insurance co-payments. Drug makers are increasingly subsidizing these "co-pays" -- the share of prescription costs that insured patients must pay out of their own pocket. Insurers require co-pays to give patients an incentive to be price-sensitive and pick generic drugs over pricier name brands. In the past year, drug manufacturers have broadly expanded their subsidy programs, according to a Wall Street Journal examination of their practices, potentially undermining the cost-cutting incentive. Drugs with co-pays subsidized by their makers include Pfizer Inc.'s cholesterol fighter Lipitor, the world's top-selling drug, as well as more expensive therapies such as Enbrel, a drug for rheumatoid arthritis and psoriasis co-marketed by Wyeth and Amgen Inc. that costs up to $24,000 a year. Drug makers say the subsidies help cash-strapped customers afford their medicines. But health insurers complain that the practice undercuts a proven method for encouraging use of cost-effective generics. Insurers say it's forcing them to pay for costly therapies, and raise premiums to cover the expense. The tension over co-pays lays bare the often conflicting interests of drug makers and insurers amid the legislative effort to overhaul the U.S. health-care system. One of the central goals of the overhaul is to contain the $2.5 trillion Americans spend annually on health care. There is little comprehensive data on the extent of the subsidies or their potential effect on health-care costs. A 2008 study by one New York state insurer indicated that 48 drugs now have co-pay subsidies, but its list didn't include several major pharmaceuticals that Journal research also showed to have subsidies. Spending on drugs is about 10% of overall health-care spending. However, for working-age adults covered by private health plans, drug spending is typically double that or more, according to an analysis by Rand Corp., the nonprofit research organization. Studies show that co-pays -- introduced by insurers and employers in the 1980s -- are an effective way to reduce spending. Every 10% increase in a co-pay reduces drug spending by as much as 6%, according to a 2007 survey of research published in the Journal of the American Medical Association. Prescription-drug sales in the U.S. last year reached $291 billion, according to IMS Health. "The patient, I will tell you, is economically very, very sensitive to co-pays, and a $5, $10, $20, $25 co-pay matters," Abbott Laboratories Chief Executive Miles White told analysts in April, after Abbott expanded its subsidy program for Humira, a rheumatoid arthritis therapy, so customers wouldn't have to pay more than $60 a year out of pocket, down from a maximum of $300. The total cost of a year's prescription for Humira can reach $19,000. In April, Amgen increased its subsidies for Enbrel, a Humira rival, offering to pay for patients' first six months of co-pays and cap their out-of-pocket costs at $10 for each of the next six months. British drug maker AstraZeneca PLC's program for Nexium (the No. 2-selling drug in the U.S., behind Lipitor) is typical of the new co-pay subsidies. Under the program, the company will pay a patient's out-of-pocket costs for the heartburn drug beyond $25 and up to $75 a month. To get the discount, patients simply hand to their pharmacist a rebate card, which they can obtain through their doctor, or by calling the company or -- starting this month -- simply by printing one from the drug's Web site. Ann Runfola, a 63-year-old secretary from Buffalo, N.Y., says she cannot afford Nexium without AstraZeneca's assistance because her $40 co-pay is too much. "I could use that $40 a month to buy groceries," she says. Ms. Runfola switched to a less expensive generic drug, Prilosec OTC, in April after her Nexium discount card expired. But she says Nexium works better, and she intends to switch back because AstraZeneca recently sent her a new discount card. "These people are godsends," she says. Health-insurance executives see it differently. "This is a marketing effort so they don't lose market share," said Eileen Wood, vice president of pharmacy and health-quality programs at CDPHP, an insurer in New York State. "They're just waiving the co-pay so people won't pay attention to cost." There are cases when co-pays work too well: Studies show they deter some chronic-disease sufferers from taking necessary medicines. As a result, some insurers and employers have reduced or even eliminated co-pays for heart and diabetes drugs, for example. Pfizer started providing co-pay rebates for Lipitor two years ago. Lipitor was facing competition from three generic rivals in the same class of cholesterol-reducing drugs known as statins. Initially, Pfizer gave patients as much as $15 off their co-pay each time they filled a prescription if they used a rebate card obtained through their doctor. This year, Pfizer started offering the cards directly to patients. According to Drugstore.com, the overall cost of a common dose of Lipitor is more than $1,400 a year, four to eight times more than its generic competitors. "Initially, we did it quite honestly because we were facing a generic presence in the marketplace," said Jim Sage, who oversees marketing for Pfizer's heart drugs. "We also did it because prescribing decisions were being based not just on clinical factors, but also cost." Many drug makers say the rising co-pays imposed by health plans are making drugs unaffordable for patients. The average co-pay for preferred brand-name drugs like Lipitor jumped 44%, to $26 per prescription, between 2002 and 2008, according to a Kaiser Family Foundation survey. But the rise in co-pays has merely mirrored the rise in the overall cost of brand-name drugs. The overall cost of the most widely used brand-name drugs between 2002 and 2008 jumped by 64%, or more than three times the rate of inflation, according to AARP, an advocacy group for older Americans. Edmund Pezalla, national medical director at Aetna Pharmacy Management (which administers drug benefits on behalf of employers), said that if pharmaceutical companies are serious about making drugs more affordable, they should reduce their prices and eliminate tactics like co-pay rebates. "It's cost-shifting," said Sean Karbowicz, clinical pharmacy manager for Regence BlueCross BlueShield, a major insurer in the Northwest. "The dollars aren't coming out of the members' pockets -- they're coming out of the plan. That results in raised premiums for everyone to pay." A Pfizer spokeswoman said the company "stands firmly behind the value" of its medicines and works with doctors, hospitals and patient-assistance programs to make the company's drugs affordable and to reduce hospital costs. Massachusetts is the only state barring such rebates, under the False Health Care Claims law designed to prevent payments to encourage use of a particular drug, said Nonnie Burnes, the state's insurance commissioner. Drug companies don't offer the help to Medicare Part D beneficiaries out of concern that the discounts could violate the federal anti-kickback law, which also aims to limit use of costly drugs. Write to Jonathan D. Rockoff at jonathan.rockoff@wsj.com