For Immediate Release: March 4, 2004

SAN FRANCISCO, CA – A new report by the Pacific Research Institute finds that past predictions of prescription drug profits are unfounded. According to The Potential Impact of the Medicare Prescription Drug Benefit on Pharmaceutical Companies, the new Medicare legislation could cause drug industry revenues to increase by 3.2 percent, or decrease by up to one percent, over the 2006 to 2013 period.

A recent widely cited study by Alan Sager and Debora Socolar of Boston University grossly overestimates the impact of the Medicare prescription drug benefit on pharmaceutical company profits.

“The Sager-Socolar study significantly overstates the potential increase in drug industry revenues and profits. The estimates in the study suffer from several key shortcomings that result in impacts well outside the range generally accepted by government and private-sector analysts,” says the PRI report, prepared by the Health Policy Economics group of PricewaterhouseCoopers.

The Sager-Socolar study claims pharmaceutical industry profits would increase by $139 billion, or 38 percent, between 2006 and 2013. The PRI study, Potential Impact, finds that estimate at odds with the Congressional Budget Office, four times larger than generally accepted calculations, and unaware of the impact of changes in discounts.

Potential Impact charts the impact of increased drug utilization from the Medicare legislation and finds that the Sager-Socolar study “ignores any systematic differences in the populations without drug coverage and with full coverage” and “implies an unrealistic increase in drug spending.” The academic study, says Potential Impact, also fails to consider that the drug industry provides rebates which will lower drug industry revenues.

“These changes in rebates on their own will lower drug-industry revenue for Medicare beneficiaries by between two percent and seven percent,” the study says.

“In terms of total drug spending as projected in the national health accounts, these changes translate into an increase of 1.5 percent or a decrease of 0.4 percent. The increase in revenues would be about one-quarter of the Sager-Socolar estimate.”

“This modest change in revenues,” concludes Potential Impact, “could not cause the significant change in profits estimated in the Sager-Socolar study.”

To receive a copy of The Potential Impact of the Medicare Prescription Drug Benefit on Pharmaceutical Companies, visit our website at http://www.pacificresearch.org//publications/id.544/pub_detail.asp

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About PRI
For more than two decades, the Pacific Research Institute for Public Policy (PRI) has championed individual liberty through free markets. PRI is a non-profit, non-partisan organization dedicated to promoting the principles of limited government, individual freedom, and personal responsibility.