Prescription drug prices in the United States

Prescription drug prices in the United States have been among the highest in the world. The high cost of prescription drugs became a major topic of discussion in the new millennium, leading up to the U.S. health care reform debate of 2009, and received renewed attention in 2015. High prices have been attributed to monopolies given to manufacturers by the government and a lack of ability for organizations to negotiate prices.^[1]

History

Pharmaceutical drugs are the only major health care service, in which the producer is able to set prices relatively unrestrained, according to Peter Bach from the Health Outcomes Research Group, Memorial Sloan Kettering Cancer Center, New York and Steven Pearson from the Institute for Clinical and Economic Review, Boston.^[2] As of 2004, prices of brand name drugs were significantly higher in the United States than in Canada, India, the UK and other countries, nearly all of which have price controls, while prices for generic drugs tended to be higher in Canada.^[3]

In 2005, the Government Accountability Office (GAO) had examined the change in US drug retail prices from January 2000 through December 2004 and found the average usual and customary (U&C) prices for a 30-day supply of 96 drugs frequently used by people enrolled in BlueCross BlueShield Federal Employee Programs had increased 24.5%. Drilling down, the average U&C prices for brand prescription drugs increased three times as much as the average for generic drug.^[4]

In 2007, the AARP published a series of studies showing that prescription drug prices have been rising significantly faster than general inflation.^[5] The American Enterprise Institute, a conservative think tank, criticized the methodology as overstating drug price inflation.^[6]

A December 2015 NYT editorial stated that "drug prices have been pushed to astronomical heights for no reason other than the desire of drug makers to maximize profits", pointing in particular to strategies carried out by Turing Pharmaceuticals and Valeant Pharmaceuticals to acquire rights to make and sell generic drugs that had administrative exclusivity and then raise the prices dramatically, which were widely condemned inside and outside the pharmaceutical industry.^[7] In response to these moves, the Department of Health and Human Services (HHS) and both houses of Congress held a public meeting and hearings resepectively to investigate price gouging.^[8]

Drug expenditures

Spending on pharmaceuticals, defined as expenditure on prescriptions medicines and over-the-counter products, excluding pharmaceuticals consumed in hospitals,^[9] has been mentioned together with price, although not being the same. Historically, spending on pharmaceuticals accounted for 11.5% of U.S. national healthcare expenses in 1960, gradually falling to a low of 5.5% in 1980, before rising back to 10.4% in 2000. Between 2000 and 2013, it ranged between 10% and 12% of the total healthcare spending in the U.S.^[10] In 2010, prescription drug expenses were 10% of the $2.6 trillion of total health care spending in the United States, making the third largest portion of healthcare expenditure. It followed only hospital spending and physician and clinical services.^[11]

As of 2013, US "pharmaceutical spending," excluding hospital pharmaceutical spending, was $1,034 per capita in the OECD's international comparisons.^[9] In 2006, data from the Medical Expenditure Panel Survey was analyzed to determine the costs of healthcare for American households. It showed that 19.1% of Americans spent more than 10% of their income on healthcare related expenses. Those Americans were considered to have a financial burden due to their healthcare spending.^[12] In 2003, data from the Medical Expenditure Panel Survey showed that only 9.5% of Americans with Medicare coverage had no prescription drug expenses, while 61.6% had prescription drug expenses up to $2,083, and 28.9% of those on Medicare had expenses higher than $2,084.^[13] The study also found that families with low income tended to have higher prescription drug expenses during the year. 18.9% of poor households paid more than $4,724 compared to 13.2% and 12.5% who had prescription drug expenses between $2,084-$4,723 and $1–2,083, respectively.^[13]

Effects

In 2006, data from the Medical Expenditure Panel Survey was analyzed to determine the costs of healthcare for American households. It showed that 19.1% of Americans spent more than 10% of their income on healthcare related expenses. Those Americans were considered to have a financial burden due to their healthcare spending.^[14] The high cost of prescription drugs has forced many Americans to use cost-cutting measures and has also led to reformed healthcare legislation.

Prescriptions from other countries

The Washington Post wrote in 2003 that "U.S. Customs estimated 10 million U.S. citizens brought in medications at land borders each year. An additional 2 million packages of pharmaceuticals arrive annually by international mail from Thailand, India, South Africa and other points".^[15] Prescription drugs also entered the country in large quantities through Canada because of the price differential of prescription drugs in the two countries. In 2004, it was estimated that Americans purchased more than $1 billion in US dollars in brand-name drugs per year from Canadian pharmacies to save money.^[16]

Prescription non-compliance

Another common way that people saved money, was to skip or reduce dosages or fail to fill a prescription entirely due to cost restrictions. A quarter of Americans taking prescription drugs said in June 2015, they had not filled a prescription in the past 12 months due to cost, and 18 percent reported they "cut pills in half or skipped doses" according to a Kaiser Family Foundation survey.^[17] Similar studies, done ten years prior, found numbers very similar to the 2015 numbers from the Kasier Family Foundation survey. In 2007, it was estimated that 23.1% of Americans (51 million) had did not adhere to their prescription instructions due to the cost of prescription drugs. This is compared to only 8% of Canadians who skipped doses or failed to fill a prescription in the same year because of the cost of prescription medications.^[18] The number of Americans who reported cost-related non-adherence to their prescriptions was more than double the amount of Canadians. The factors that contributed to whether or not a person was more likely to not follow their prescribed medication instructions were age, the number of checkups with a physician, ongoing health problems, income, and insurance coverage.^[18][19] For example, adults between the ages of 18-35 were more likely to skip doses or fail to fill a prescription than those 75 years of age or older.^[19] Those with fewer visits to a physician and those with chronic illnesses or disabilities were also more likely to report noncompliance. The reason for those with ongoing illness or disabilities to skip doses is likely due to the increased complexity and the higher prices of the drugs needed.^[19] Income and insurance coverage were also major factors determining whether or not a patient would take their medication in the correct doses for the correct duration of time. Those who lacked insurance coverage or were in low-income brackets had very high rates of non-compliance with their medication, even though the United States has drug coverage policies for those with low incomes.^[19] Those whose healthcare spending is more than 10% of their income and causes a financial burden to the patient, are considered uninsured, whether they actually have health insurance or not.^[18]

Affordable Care Act

In 2010, the Patient Protection and Affordable Care Act, commonly known as Obamacare or the Affordable Care Act, was created. The goal was to increase the number of people who had healthcare in the United States and reduce the impact that individual healthcare spending had on households, especially since many Americans had lost their health insurance coverage in the Great Recession. While the Affordable Care Act has many provisions which will help achieve its goals, there are two in particular that aim to reduce the burden of prescription drugs on American households. Both relate to the Medicare Part D coverage gap. Under current Medicare coverage, people pay the deductible until they reach the limit of $3,310. They then enter the coverage gap where they pay approximately half the total cost for the drug. Once the yearly out-of-pocket expenses reach $4,850, the catastrophic coverage phase begins and the patient only pays a very small amount for continued medication.^[20] The first provision in the Affordable Care Act that aims to reduce the prices for prescription drugs was enacted immediately in 2010. It provided a one year, $250 rebate to those patients in the coverage gap to help pay for their medication. The second provision was enacted in January 2011 and created a 50% discount on brand-name prescription drugs for seniors within the coverage gap. Subsidies will continue to be provided until 2020 when the coverage gap will be closed.^[21]

Reasons for high prices

Variability and non-transparency

As of 2015, the price of a pharmaceutical drug depends on who is paying and numerous other variabilities, per the acting administrator of the federal Medicare and Medicaid programmes: list price, wholesale price, average wholesale price (pharmaceuticals), rebates, supplemental rebates, markups from hospitals, markups for physicians, drug price for inpatients versus outpatients, formulary (pharmacy) tiers, mail order price, biosimilar prices, "patent expirations, compounds, samples, and many other ways that end up obscuring the reality of the price paid, who pays it, and how all of it influences treatment decisions."^[22]

Drug company profits

A Kaiser Family Foundation survey from June 2015 found the public citing "drug company profits as the number one reason for the high cost of prescription drugs (picked by 77%), followed by the cost of medical research (64%), the cost of marketing and advertising (54%), and the cost of lawsuits against pharmaceutical companies (49%)."^[23]

As of 2015, several pharmaceutical companies had developed a new business strategy "of dominating noncompetitive markets for older drugs and then increasing the price substantially".^[24]

Pharmacy benefit managers

Pharmacy benefit managers (PBMs) may increase drug prices they charge to their clients, in order to increase their profits. For example, they may classify generic drugs as brand name drugs, because their contract does not contain a definition, or only an ambiguous, or a variable definition. This allows PBM's to classify drugs "for one purpose in one way, and for another purpose in another way", and to change the classification at different points during the life of a contract. This, as of 2010 unlitigated freedom, affects "drug coverage, making contract terms, and the reporting about the satisfaction of contract terms".^[25]

PBM's can make confidential business agreements with pharmaceutical companies, which PBM's have called collective buying power, then set a (lower) reimbursement maximum amounts to drugstores for generic drugs and set (higher) charges to insurers. This practice is also known as "spread pricing".^[26] There are examples where PBMs can double drug costs.^[26]

Drug rebates

Drug manufacturers may offer to pay an insurance company a rebate after they have sold them a drug for full price. This is largely invisible to the consumer, because a drug company does not report how much money it returns to the payer. In 2012, the aggregate in the US has been estimated at $40 billion per year.^[27]

Orphan drugs

Drug companies can price new medicines, particularly orphan drugs, i.e. drugs that treat rare diseases, defined in the United States as those affecting fewer than 200,000 patients, at a cost that no individual person could pay, because an insurance company or the government are payors.^[28] An orphan drug may cost as much as $400,000 annually. The orphan drug business model could come under increased payer regulation.^[29]

FDA backlog in generic drug application review

Generic drugs cost less and companies wishing to manufacture generic drugs must show in their US Food and Drug Administration (FDA) applications that they guarantee quality and bioequivalence. In fiscal year 2014, the FDA had not approved any of about 1500 such applications by the end of 2014.^[30] The slow pace of the FDA review (6–12 months even for a priority review) has not allowed the market to correct itself in a timely manner, i.e. not allowed manufacturers to begin to produce and offer a product, when a price is too high. The following suggestions have been made: prioritize review of applications for essential drugs, i.e. move them up in the queue. If the FDA felt unable to make this largely economic evaluation about priority, the Department of Health and Human Services (DHHS) Office of the Assistant Secretary for Planning and Evaluation could do this. Second, the FDA could temporarily permit compounding. And third, the FDA could "temporarily permit the importation of drug products reviewed/approved by competent regulatory authorities outside the United States".^[24]

In a January 2016 senate hearing, the director of the FDA’s Center for Drug Evaluation and Research said, that increasing numbers of generic drug applications had "overwhelmed the FDA staff and created unpredictability and delay for industry",^[31]:2 but that the FDA is ahead of schedule in reducing the backlog since then.^[31]:11

Relationship between drug research and development and retail price

Pharmaceutical companies argue, that the prices they set for a drug are necessary to fund research. 11% of drug candidates that enter clinical trials are successful and receive approval for sale.^[32] Although the cost of manufacturing is relatively low, the cost of developing a new drug is relatively high.^[33]:422 In 2011, "a single clinical trial can cost $100 million at the high end, and the combined cost of manufacturing and clinical testing for some drugs has added up to $1 billion."^[34] It has been stated that the U.S. pharmaceutical industry is able to invent drugs that would not be profitable in countries with lower prices, because of the high drug prices in the United States.^[33]

Critics of pharmaceutical companies point out that only a small portion of the drug companies' expenditures are used for research and development, with the majority of their money being spent in the areas of marketing and administration.^[35]

European pharmaceutical companies are as innovative, or perhaps even more so, than their U.S. counterparts, despite price controls. In addition, some countries, such as the United Kingdom and Germany, encourage comparative effectiveness reviews, whereby cost-benefit analyses of rival drugs determine which perform best.^[36]

Solutions

Discounts

Private insurers can negotiate discounts, and discounts are mandatory for State Medicaid programs, administered by the Health Resources and Services Administration (HRSA).^[2] Per HRSA's 340B Drug Pricing Program drug manufacturers must provide outpatient drugs "to eligible health care organizations/covered entities at significantly reduced prices".^[37]

At the same time that drug companies must offer lowest prices to DHSS for Medicaid, it strongly disincentivizes the drug companies against lowering drug prices. Medicare is forbidden by law to negotiate with the drug industry.^[22]

Value-based prices

An effort is being made to determine if the value of a drug justifies its price. Such measures include cost-minimization, cost-benefit, cost-effectiveness, and cost-utility analysis.^[38] They take into account the total costs, including hospital stays, repeated dosages, etc. and, comparing it to a similar treatment, determines whether a drug will actually minimize costs and whether it is more effective in curing the patient. These cost analyses can all be calculated from the point of view of the hospital, the healthcare system, the government, and the patient, so what is best for one party may not be best for another in terms of cost, making the value of a drug in terms of its price, sometimes a difficult thing to measure.

Quality-Adjusted Life Years (QALY) is a cost-effective measure that determines the value of a drug in terms of the quality of life achieved after taking a prescription drug, rather than the number of years the medication extends a patient's life.^[38] However, QALY is subjective to each patient and brings up moral dilemmas such as whether or not it is cost-effective to do a life saving operation on someone who is elderly or has other complications.

Policy makers

The FDA has a "priority review process" for drugs which compete with another drug whose price exceeds its value-based price. Congress could also grant the FDA the ability to change the exclusivity period for new drugs.^[2] The FDA could also temporarily allow the import of drugs approved for sale outside the United States.^[24]

In December 2015, the DHHS held a public meeting and both houses of Congress had hearings on off-patent drugs with limited or no competition.^[39]

Canada's model

In Canada, the Patented Medicine Prices Review Board determines a maximum price for all drugs. The government is purchasing drugs similar to how the United States purchases medications for military personnel, but on a much wider scale.^[36]:280

Healthcare providers

Healthcare providers can substitute three-month for one-month supplies of medicines. A three-month supply represented a 29% decrease in out-of-pocket costs and an 18% decrease in total prescription costs in one study.^[40]

Individual importation of lower cost prescription drugs from foreign countries – as done by 2% of U.S. consumers in 2011 and 2012 – is likely not an effective public health solution.^[41]

See also

• Medicare Part D
• Medicare Prescription Drug, Improvement, and Modernization Act
• National pharmaceuticals policy
• Prescription costs
• Sri Lanka National Pharmaceuticals Policy

Further reading

• Malcolm Gladwell High Prices. How to think about prescription drugs. The New Yorker. October 25, 2004. accessed 28 November 2015.

References