The Investment Value of Generic Drugs

Have you noticed that things aren’t working quite as you hoped?

I have, and it has made me want to hit back.

When the prescription drug act was passed in December 2003, I had big-time misgivings. It bothered me that a Republican president would sign into law a bill with future costs greater than the unfunded liabilities of the Social Security retirement program.

Yes, you read that right. We’re not talking mere billions here. We’re talking trillions. We’re talking about a bill that purports to help some senior citizens with prescription drug costs by forcing all seniors to buy an insurance policy whose premiums and deductibles are now rising faster than other medical expenses. We’re talking about a bill that sucks billions out of citizen’s wallets— and then goes on to suck more billions out of the U.S. Treasury. 

We’re talking about legislation that is great for the pharmaceutical and insurance industries. But lousy for citizens and taxpayers.

Let me be specific. In spite of those rising insurance premiums, the Trustees for Social Security and Medicare estimate the cost of Medicare Part D over the next 75 years at $7.2 trillion. The comparable figure for the entire Social Security retirement program is $5.7 trillion.

The worst thing about Medicare Part D is that it has institutionalized unsustainable pricing. It has also foreclosed an adaptive response from private industry. The genius of our economy has been its ability to make goods and services available at prices people can afford— Think Ford for the creation of the Model T, GM for the creation of installment credit, McDonalds’ for fast food, or Wal-Mart low-cost retailing. But Medicare Part D institutionalizes bureaucracy and cripples adaptive response.

If enough Americans sought their prescription drugs in Canada, Mexico, or Europe what used to be called the ethical drug industry would have an incentive to figure out how to produce what is needed, at prices people can afford. Instead, our friends in Congress created a massive payment system to support Big Pharma. While they were at it, they put the insurance industry on the same gravy train.

So what can you and I do about this?

We can fight back. We can become Insurgent Consumers. We can fight to take the country back from Big Pharma and Big Insurance. Best of all, we can do it by keeping money in our pockets rather than putting it in theirs.

For many, doing this should be relatively easy: With the typical retiree taking an average of four prescription drugs, almost everyone has a shot at substituting a low-cost generic drug for a high-cost drug.

Here’s a personal example. Last year I took two prescription drugs, Lipitor for high cholesterol and Rythmol SR for atrial fibrillation, a non-life threatening heart condition that affects many people who are over age 65. Lipitor costs about $100 a month. Rythmol SR (SR stands for sustained release) costs about $400 a month. That’s about $6,000 a year, if anyone actually paid retail.

There are a number of generic statin drugs that reduce cholesterol. The company that makes Rythmol created the sustained release version so it could continue charging a high price for the drug even though it was off patent. Reconstituting drugs to maintain pricing is a common industry practice. The generic form of Rythmol (propafenone) is available for $77 a month. So the drug company is charging $323 a month to add sustained release.

When insurance is considered, my total annual cost (insurance premiums, deductibles, and uncovered drug costs) would be about $3,250 with non-generics. Substitute generic propafenone for the time release formula and annual costs plummet to about $1,080. Substitute a generic statin for Lipitor and the annual total cost can drop as low as $440. (You can play “what-if” with your personal all-in costs by using one of the online Part D calculators such as the one available at www.walgreen.com.)

The direct saving in my case can be as much as $2,810 a year. To have that amount available to spend after taxes, a 15 percent tax bracket senior would need to have $3,305 in dividend or interest income. To have $3,305 in investment income, you would need to have about $165,000 invested in the domestic stock market or about $125,000 invested in 5-year Treasury obligations.

In other words, active— insurgent— consumer decision-making can be worth twice as much as the average American has in retirement accounts.

Next Sunday:  The revolt against Ma Bell.