High Drug Prices in the United States

By September 12, 2016Commentary

As long as I have worked in health care, which is now getting to be too long, prescription drug prices have been an issue, and they now are constantly on the front pages again.  These high prices cause real pain for patients who have high cost-sharing, especially on specialty drugs, or who are uninsured.  And pricing concerns have spread from branded and specialty drugs to even generics.  An article in the Journal of the American Medical Association explores the issue of drug pricing.   (JAMA Article)   As with most things in health care in America, the list price of a drug is largely irrelevant, since public and private third-party payers end up covering most of the cost.  Those payers and their PBM intermediaries get a bewildering variety of discounts and rebates.  But when you read various drug price and utilization trend reports, it is clear that unit prices have continued to increase at an unhealthy pace.  And drug pricing contributes to our above average national health spending.  Per capita medication spending in the US was $858 in 2013, compared to an average of $400 for other developed countries.  The primary reason for these high prices is lack of competition, which stems from two primary sources–patent laws and FDA approval requirements.   In other countries, this lack of competition is offset by national health insurance systems’ greater ability and willingness to attempt to set a drug price by fiat, even if it means the manufacturer refuses to sell at that price and patients lack access to the medication.  In the US, fragmented payers have less ability to negotiate and government rules sometimes make it hard to negotiate lower prices.

One way to increase competition would be to eliminate the FDA approval exclusivity that often extends beyond patent lives.  Another would be to limit patent lives relating to drugs.  The drug companies suggest this might limit innovation, but at the profit margins these companies have, I don’t think that is believable.  And a lot of the research leading to new drugs is actually done in academic and research center settings.  The scientists doing this work are unlikely to stop because of profit concerns.  So there is room to limit the period of exclusivity.  There still wouldn’t be competition during the shortened exclusivity period, but it would constrain the time during which there is excessive pricing.  Even when exclusivity ends, the FDA’s slowness in acting on generic applications, and manufacturers’ cleverness in adding minor tweaks to drugs to extend exclusivity, often inhibit more extensive competition.  Obviously, these barriers should be removed.  And manufacturers that use litigation or other tactics to delay generic competition should be made to pay the full extra cost to all payers and patients as damages.  There is often competition within even branded drug classes, but payers are often inhibited by government regulation or other factors from being able to get the lowest possible price.  For example, CMS requires Part D plans to include more than one drug in a class on the formulary and Medicare does not use its program-wide clout to negotiate prices across all Part D plans.  All these restraints should be removed and payers and PBMs encouraged, if not forced, to do whatever is possible to negotiate the lowest possible price for a medication.  And this means that physicians’ and patients’ freedom to choose an expensive drug over a cheaper one must be removed unless there is a very clear clinical justification why the more expensive one has to be used.

Drugs cost very little to manufacture in most  cases, and certainly compared to their prices.   Gross margins usually exceed 80%, which means most of the cost is in sales and marketing.  If drug companies spent no money on sales and marketing, other than providing neutral factual information, they would save immense amounts of money and prices could be lowered commensurately.  And I think this is exactly what should happen.  There should be a neutral, government-sponsored forum that makes information about medications available and any other forms of communication with patients or physicians should be banned, including direct-to-consumer and direct sales interactions with prescribing clinicians.  If we are serious about lowering drug prices that is the single most significant step that could be taken to lower prices.

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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