Except for the gifts from drug companies, there are few frills in Janet Silvester’s office. The director of pharmacy services at Martha Jefferson Hospital in Charlottesville has a simple desk, piled high with files and papers. Her gift collection is much more impressive. She holds up what looks like a blue and white Austrian vase. There’s a paperweight, a pen, a hat, a mug, a shirt — all gifts from drug sales reps. "I’d much rather they stop by and say, ‘We’re cutting your drug costs by 5 percent this year,’" she remarks.

Silvester is burdened by too many real concerns to be swayed by tokens, however. She’s got a pharmacy budget that’s already overspent by several hundred thousand. Her drug costs are 29 percent higher than last year, while the federal government is cutting Medicare reimbursement. The most recent cuts will reduce revenue an estimated 5 percent to 7 percent. With a 50 percent Medicare population, that’s a tough pill to swallow. "Here we are a community hospital, trying to give quality care," she says, taking off her glasses, rubbing her eyes. "And I have to figure out how to balance cuts in reimbursement and rising drug costs that I can’t control."

Illustration by Andre Lucero

Silvester’s story is not unique. Talk to most any pharmacist, health-benefit manager, hospital administrator, employer, and it’s the same: Rising prescription drug costs are at the core of their budgetary woes. Utilization is up, with pharmaceutical spending increasing nearly 22 percent. Americans are using more prescriptions, for more conditions. The cost imbalance is underscored by the often-quoted anecdote of U.S. residents crossing the border into Canada to buy the same drugs for much less.

For their part, drug companies say that drugs are expensive because so much research and development money is needed to invent them and get them past regulatory hurdles. Moreover, even though new drugs may cost considerably more, they actually can significantly lower health costs down the road. An expensive medicine to lower cholesterol, for example, may cost a lot, but it may save tens of thousands of dollars several years later by eliminating a patient’s need for multiple bypass surgery.

For now, though, there’s no question that drugs cost more in Virginia and the rest of the United States. For employers offering prescription health benefits, per-member drug costs have more than doubled. Prices for heavily advertised antihistamines such as Claritin, Zyrtec and Allegra increased by 612 percent; anti-depressants like Prozac, Zoloft and Paxil increased by 240 percent; cholesterol-lowering drugs such as Lipitor, Zocor and Pravachol increased by 194 percent; and anti-ulcerant drugs like Prilosec, Prevacid and Pepcid increased 71 percent.

The hardest-hit budgets involve the elderly. Many health maintenance organizations are dumping them because they cost too much money. Many Virginians over 65 are stuck with Medicare plans that will not pay for the drugs they need. With most on fixed incomes, they face grim choices: buy groceries or pay for prescriptions? What about employers offering prescription health benefits? They’re also caught between rising costs and the question of who’s going to pay. "We’re going to see premiums going up," says Judith Cahill, executive director of the Alexandria-based Academy of Managed Care Pharmacy. Some companies won’t have as generous a pharmacy benefit, and some are considering reducing benefits to $1,000 per year. But others say they are unwilling to decrease benefits. If these increases continue, how can they pay for the coverage? "It’s a delicate balance," says Ann Collins, vice president of corporate benefits for Philip Morris Management Corp. "Prescription drug costs are rising at an alarming rate, and while Philip Morris has to be positioned to control costs, we do not want to limit employee access to drugs they need."

That’s part of the problem. What patients want and what patients need may be two very different things. Covered employees can pay as little as $10 for a $350 prescription. For some, a new, expensive drug may be lifesaving and its absence life altering. But what about the employee who sees a prescription drug ad on TV or in a magazine and demands his doctor prescribe the latest in allergy relief, anti-depressant medications, drugs that stop hair loss, or cure erectile dysfunction? "Direct to consumer advertising is driving demand," says Mark Pratt, a lobbyist and executive director of the Virginia Association of Health Plans. "They see these ads and go into the doctor’s office with a printout of what they want the doctor to prescribe." And according to several studies, about 80 percent of the time, the doctor will do it.

More and more, pharmaceutical companies are going after higher profits by bypassing health care professionals and appealing directly to consumers, who may or may not be qualified to decide whether they truly need a drug. Last year the drug industry spent $1.8 billion on direct-to-consumer ads. That’s an increase of 41 percent over last year. Those with the best ads sell the most drugs. The ad budget for the antihistamine Claritin was higher than Coke and Diet Coke, combined. And the top 10 advertised drugs accounted for 22 percent of all retail drug spending.

Issues concerning direct-to-consumer ads grew in earnest after 1997, when the Food and Drug Administration relaxed rules on advertising. Previously, the FDA required extensive side effect listings, which were often confusing for the consumer, especially in broadcast advertising. So the FDA prepared guidelines that made it easier for drug manufacturers to reach lay audiences. Consequently, that attractive woman in the TV ad giving her grandson a bath makes us all believe that our lives will be complete if we take the drug. "I don’t want to minimize the value of innovation, because there have been phenomenal advances. Groundbreaking medicines to save lives. But we have to make sure it is appropriate for the patient," says Martha Jefferson’s Silvester. Carol Forster, a pediatric and adolescent medicine doctor at Kaiser Permanente’s Reston Clinic, says that patients (and in her case parents) are sometimes naive when they are influenced by ads. "They think this medicine is the answer to their problem," she says. "But we have to ask, ‘does this medicine do what they want?’ We have to look at the evidence behind the [advertising] claims."

Illustration by Andre Lucero

One big problem is that many such drugs were designed for patients who are hard to treat. Thus, they are more expensive. "Many of these were designed as a drug for when others don’t work," says Cahill. There’s the arthritis pain reliever Celebrex that costs $63, compared with over-the-counter ibuprofen for $6. Or Prilosec, the anti-ulcer drug for $102 versus over the counter cimitidine for $11. "What’s wrong with Maalox?" asks Silvester. According to PhRMA, the Pharmaceutical Research and Manufacturers of America lobby, pharmaceutical price increases have been modest in recent years, about 4.5 percent. Greater prescription drug use, not higher prices, have contributed to the increase. The industry spends many times more on developing new medicines than it does on ads, the lobby claims.

Answering criticism of high drug prices, pharmaceutical companies often blame the costs of research and development and the time required for testing before drugs are accepted by federal regulators. Often in development for 12 years, drugs can cost up to $500 million to prepare for market. Even so, only 3.6 percent of profits from new drugs gets plugged back into research and development, according to a study by the National Institute for Health Care Management.

"I think at base, the rise in drug expenditures is driven by increased utilization," says Allison Keith, director of economic and science policy analysis at Pfizer Inc., NYC. Pfizer, a major drug company, is the manufacturer of the number one selling, cholesterol-lowering Lipitor, one of the lower priced new drugs. "The puzzling questions are whether more people [are] getting healthier and saving costs in the system."

More and more companies and their managed care providers are asking those questions, too. Philip Morris, Kaiser and many others are now looking at the newer, more expensive drugs and determining if they are medically necessary and appropriate. Kaiser’s national network gives them access to 9 million patients, and that data is used when studying a drug’s appropriateness. That’s how the company develops what’s called a drug formulary, which is a listing of approved drugs that serve as a guide for prescribing within various health plans.

Generally there are several tiers in the formulary, with generics being at the first level. "Pharmacists, doctors, nurse practitioners on our committee review old and new drugs and determine whether they are appropriate to add into our treatment," says Forster, a pharmacist before becoming a doctor, who co-chairs Kaiser’s Pharmacy and Therapeutic Committee. Kaiser has an open formulary —an option many employers are choosing —which means drugs are placed into categories. Once a drug in a certain class has been prescribed and failed, drugs from another class can be prescribed.

Self-insuring, larger companies design their own benefit plans and set aside funds to cover expenses. Generally a third party administers the claims — gives more control over costs. An option that Susan Cabell, vice president of administration for Martha Jefferson Health Services, Charlottesville says, works well. "If you do your homework ... you can be proactive," she says. Cabell faces an unusual challenge as a health care provider and employer: The hospital is trying to maintain costs, and she’s trying to retain employees with good benefits. One way she can meet that challenge is by offering employees a three-tiered formulary. Generic drugs are the cheapest for employees in the co-pay scheme, and they are the first tier. When employees go outside the formulary, it costs the employee more.

Still, drug costs represent 15 percent of Martha Jefferson’s total claims, and so Cabell says it takes employee and physician education and creative benefits design. Their pharmacy plan has a network of pharmacies that have negotiated lower drug prices through their benefits administrator, Optima. Again, if an employee goes out of the network, he pays more. "We have to balance high quality care and services," Cabell says. "We have to make sure they understand there is only so much the hospital can pay. And some people say, ‘I’ll buy it if it’s outside the formulary.’"

Some states are turning to cost controls to keep drug prices in check. In Maine, so many people were flocking to Canada for cheaper drugs that legislators shrugged off intense lobbying by drug companies and adopted the country’s first prescription drug cost controls. The bill, if signed by Gov. Angus S. King, will establish a Fair Drug Pricing Board to make sure people in Maine pay no more than Canadians. Other border states are considering price controls, and California is about to set price caps relative to European markets. Virginia has no such effort under way.

Meanwhile, employers need to put more emphasis on managing pharmacy benefits in their health plans. They need to go through drug utilization reviews, look at prescribing patterns of physicians and bring pharmacists into the administration of the plan. Kaiser’s drug benefit management is a good example of this, says Cabell. It’s also how Trigon Blue Cross Blue Shield is solving its drug dilemmas, says Ron Lyons, vice president of pharmacy for Trigon in Richmond. He says it boils down to education and compliance. Trigon’s goal this year is to educate doctors by giving them detailed, individualized prescribing reports that compare why some drugs are cheaper and work the same as others. "We need to start creating a dialogue," he says.

It’s pretty clear that we’re taking more drugs than ever. And for some, life is better for it. But as costs continue to rise, and employees continue to want the best and the most expensive for nothing, the question lingers: If we demand the Cadillac of drugs, who’s going to pay?