BATTLE LOOMS ON HIGH COST OF DRUGS

WASHINGTON - John Marvin, a retiree with heart problems from Augusta,
Maine, recently took seven of his neighbors with similar ailments to
Montreal. Their mission? To buy drugs.

A six-month supply of Zocor, a cholesterol reduction agent made by
Merck & Co., cost $400 in Canada, according to the 70-year-old Marvin.
That is $200 less than what he pays at his local pharmacy.

"What we'd like to do is mail-order these drugs," Marvin said. "There
were comparable savings on all the drugs our group bought."

The skyrocketing cost of pharmaceuticals and their growing role in
senior citizen health care has become a hot topic in the nation's
capital. A yearlong effort by a bipartisan commission to solve
Medicare's long-term funding woes was on the verge of collapse and at
the last minute extended its Monday deadline for another week. One
major sticking point: Demands that a prescription-drug benefit be
added to the program.

The pharmaceutical industry, one of the most powerful lobbies in
Washington, donated more than $10 million to congressional campaigns
in the last election cycle. It remains adamantly opposed to including
a drug benefit in traditional fee-for-service Medicare. Medicare
actuaries say adding such a benefit could add from $10 billion to $40
billion a year to the $220 billion program, depending on how it is
structured.

On the surface, industry opposition to expanding the government
program seems odd. A Medicare drug benefit would increase demand for
drugs among seniors who now either forego treatment or avoid filling
prescriptions because they can't afford them.

But the Pharmaceutical Research and Manufacturers of America is more
afraid that the government would use its massive buying power to
demand deep discounts on the price of drugs. Indeed, Rep. Tom Allen
(D-Maine) already has re-introduced a bill that would require drug
companies to charge senior citizens the same price paid by Medicaid
and the Veterans Administration, which use their buying power to
negotiate steep discounts from list price for drugs.

Drugs in the U.S. cost on average about 50 percent more than in Canada
and three times what Mexicans pay for comparable drugs. But
pharmaceutical corporations justify their high U.S. prices by pointing
to the savings that drug therapy generates for other parts of the
health care system--reduced hospitalizations, for instance.

The companies also contend that reducing prices would eliminate the
industry's incentive to develop new drugs, an area where the U.S.
leads the world.

"Government involvement in paying for drugs will inevitably lead to
price controls and that will choke off innovation," said Alan Holmer,
president of the pharmaceutical group.

Last month, the group said it could accept a drug benefit, but only if
it is limited to the private insurance plans that might one day
compete for senior citizen health-care coverage.

So far, private insurers, health maintenance organizations and
pharmaceutical benefits managers have been singularly unsuccessful in
holding down the cost of prescription drugs. Spending by ailing
Americans on pharmaceuticals grew 51 percent between 1990 and 1995, an
average of more than 8 percent a year. Last year, drug spending grew
16.6 percent, to more than $102 billion, fueled in part by the $1.3
billion spent on the now ubiquitous consumer advertising.

"The pharmaceutical companies have been very successful in dealing
with smaller entities," said Marilyn Moon, a health-care analyst at
the Urban Institute. "When they have to deal with the government, the
whole world will know what their prices are."

Democrats' demands that something be done to help seniors cope with
escalating drug prices now threatens to undermine the work of the
National Commission on the Future of Medicare, which was charged with
suggesting alternatives to a system that is slated to go broke in
2008. The primary reform under consideration is called "premium support."

If it passes the commission and Congress, the Medicare program of the
future would have the government create a model package of benefits,
let insurers offer bids to provide that coverage and then pay a set
percentage of the average price of the competing plans. Seniors would
pay the difference as a co-payment.

But even if premium support is adopted, traditional Medicare, which
currently covers 85 percent of the nation's 39 million retirees, would
continue to exist. The swing votes on the 17-member commission, Laura
D'Andrea Tyson, chairwoman of the Council on Economic Advisers during
the first Clinton administration, and Stuart Altman, a health policy
expert at Brandeis University, say they could join Republicans and
centrist Democrats in backing premium support only if there is a
universal drug benefit.

Indeed, Tyson used industry arguments to justify her call for a
government drug program. "If we were designing Medicare today rather
than 35 years ago, we'd put drug coverage in because it is a more
efficient way for people to take care of themselves," Tyson said. "Not
covering it is not efficient."

Prescription drugs are playing an increasingly important role in the
treatment of disease, especially among the elderly and disabled who
are covered by Medicare. While Medicare covers 14 percent of the
population, Medicare beneficiaries account for an estimated 37 percent
of the nation's prescription bill.

The average senior citizen requires 30 prescription medications per
year, compared with eight for the population as a whole. Because
outpatient medications are not reimbursed by Medicare, these consumers
are the ones most likely to pay full price at their local pharmacies.
HMOs, which rarely cover seniors, negotiate bulk buying discounts with
the pharmaceutical companies or drug store chains.

"The elderly are the least likely to have insurance for drugs and they
are the most likely to go to the commercial marketplace that has the
highest prices," said Steven Schondelmeyer, a professor of health
economics at the University of Minnesota. "Those with the greatest
need and the least coverage are paying the highest price."

Opponents of adding a prescription benefit to Medicare counter that 65
percent of seniors have some form of insurance that pays for some or
all of their medicines. They are covered either through employer-paid
retiree health plans, individually purchased Medigap insurance
policies or, for the very low income, Medicaid.

Their fear is that a new government benefit would lead more employers
and individuals to drop coverage and let the taxpayers pick up the
tab.

Proponents of a universal drug benefit note that employers are rapidly
dropping drug coverage for their retirees. Plus, the cost of most
Medigap insurance policies that pay for prescription drugs is so high
that it amounts to prepaying for drugs. Healthy seniors don't buy the
policies until they need them.