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Drug Spending and Pricing

By May 6, 2024Commentary

It is fairly common knowledge that prescription drug spending is high in the United States, largely because our drugs are more expensive than in other countries, but also because we do a lot of prescribing for conditions like anxiety and depression.  According to estimates, the United States spent $722.5 billion on pharmaceuticals in 2023, a 13.6% increase over 2022 and about $2100 a person.  Utilization was responsible for 6.5 percentage points of that increase, new drugs for 4.2 points and price for 2.9 points, but the price component is misleading, as new drugs have very high prices and heavy use of generics can appear to make prices decline.  Most branded drugs continue to experience very high annual price increases. The new weight-loss drugs account for much of the utilization and spending growth.  Semiglutide, used to treat diabetes originally but now more prominent as a weight loss injection, was the top selling drug at $38.6 billion in sales.  (Drug Report)

The traditional oral pill medicine is not a significant part of our spending issue.  Most of those medicines have expired patents and can be obtained in inexpensive generic form.  Increasingly, new drugs are “specialty” medications, so-called because they require careful handling and are often administered as injections or infusions in doctor’s offices or other outpatient settings.  Many of these drugs are used to treat cancer and a course of treatment can be priced at tens or hundreds of thousands of dollars and they now collectively account for have of all drug spending.  The profits for the drug companies are immense, particularly on these specialty drugs.   The actual cost of producing a drug might be 10% of the price.  Drug companies spend most of their money on sales forces and marketing–we all see and hear the ads they constantly run.

The underlying reason that prices are higher in the US is because of our patent system and our method of paying for health care.  The patent system gives drug manufacturers an extended period of exclusivity–no one can copy the drug for many years.  Manufacturers have been creative in finding abusive methods to extend this exclusivity period and lock generics and other competition out.  The rational for patent exclusivity is that it encourages innovation, which is beneficial.  But the improvements in patient outcomes from most new drugs is marginal and it does patients little good to have new drugs they can’t afford.  We should re-balance the patent system when it comes to drugs by only granting exclusivity to new compounds that are priced reasonably and have annual price increases that are very low, certainly no higher than general inflation.  Drugs that are found to have been excessively priced should have their patent exclusivity removed immediately.

Our method of third-party payment for health services, whether employer-sponsored health plans or government programs like Medicare and Medicaid, tends to hide the true costs from patients, among whom demand is created by constant consumer advertising.  And the extensive use of intermediaries like pharmacy benefit managers further obfuscates costs and creates opportunities for excessive profits by multiple parties in the chain of distribution and payment.  There are attempts at creating more transparency, but these are fought tooth and nail by manufacturers and the intermediaries.  The large in-person sales forces that drug companies use to push prescribing by physicians and direct-to-consumer advertising should both be banned.  Drug marketing should be limited to scientific and clinical material available on the internet or in printed form that is understandable by prescribers and patients.  This alone would save tens of billions of dollars in costs that could be passed on in lower prices.

With multiple new expensive cell and gene therapies and specialty drugs coming on the market, coupled with expansion of use of the weight-loss compounds, drug spending is projected to grow by over 10% in 2024. We can get lower drug prices and lower total spending, but like everything in our country today, this will depend on getting money out of the political system.  Drug companies are continually at the top of all industries in political contributions and lobbying expenditures.  Until we stop this, we can’t address most of our serious problems and we are very unlikely to see decreasing drug prices and less spending.

Join the discussion 2 Comments

  • Chris W says:

    Kevin, a relative of mine who worked at Lilly in corporate operations stated that part of the justification for the high cost of prescription drugs was to help recoup the lost R&D dollars (sunk cost) for drugs that never received FDA approval or that just failed to produce the desired results, and thus never made it to market. Your take?

    • Kevin Roche says:

      That is the common justification, but a look at the financial statements reveals that research and development expenses are far less than sales and marketing costs. the overall profit levels of these companies, which are and have been among the highest, indicates that whatever losses they are absorbing are far outweighed by high prices and profits on the drugs they are selling.

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