The dynamics of drug consumption are in a continual state of flux. Businesses and governments are actively seeking to contain costs, and evidence suggests that they are succeeding. Recent data from the Centers for Medicare and Medicaid Services indicate that spending on prescription drugs increased 10.7% in 2003, compared with 14.9% in 2002, and other data suggest that the rate continues to ease lower.
Pharmacy benefit management companies (PBMs) like Medco (NYSE:MHS) and Express Scripts have played a major role in keeping spending in check, in part by pushing generics. These companies have driven the switch from branded drugs to generics with behind-the-scenes actions such as encouraging doctors and pharmacists to provide patients with the lowest-cost medicines.
But there's also another, more direct method of containing costs: requiring higher co-payments.
A recent piece in The Wall Street Journal shows just how high co-payments could go. The report indicates that Georgia state employees now will have to pay as much as $100 if they want certain brand-name drugs. Among the drugs included in the priciest co-pay tier are Pfizer's (NYSE:PFE) Zoloft antidepressant and Wyeth's (NYSE:WYE) and King Pharmaceuticals' (NYSE:KG) blood-pressure treatment, Altace. In contrast, those same state employees can buy generics for just a $10 co-pay. And the state is not alone in its efforts: Almost 40% of all employers have co-pays exceeding $30 this year, versus 10% in 2001.
This is bad news for companies unlucky enough to have drugs not favored by benefit plans. It's hard to imagine consumers paying $30 to $100 if they have the option of paying just $10. Of course, makers of branded drugs aren't going to wither away, thanks to ongoing innovation. But investors also should expect the higher co-payment trend to boost major generic players like Teva Pharmaceutical (NASDAQ:TEVA), Mylan Laboratories (NYSE:MYL), and Novartis (NYSE:NVS).
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
