The pricing of prescription drugs has been a hotly debated topic for the last several years with it reaching a crescendo in the U.S. during the 2016 state, congressional, and presidential elections. Over the last decade, the money generated by prescription drug companies from sales in the U.S. has doubled. Estimates show that U.S. consumers purchased more than $250 billion worth of prescription drugs in 2015 alone.
Undoubtedly, high revenues have been helped by repetitive price increases.1 Pharmaceutical companies are unique in their capacity, due to little regulation and oversight, to raise prices. From 2010 to 2015, prescription medicine revenue in the U.S. skyrocketed, growing at average rate of 61%, almost three times faster than increases in sales volumes.2
Because of the ability of health insurance companies and benefit executives at leading pharmaceutical companies to negotiate discounts and benefit packages, many in the industry argue that list prices on prescription drugs aren’t actually a reliable indicator of what Americans pay. However, Bloomberg analysis of 39 medicines whose global sales exceed $1 billion a year showed that only six of the drugs had price increases in line with or below inflation, even after estimated discounts were factored in.1
Factors that determine Drug Pricing
With that as the backdrop, let’s briefly look at some of the major factors that determine how drugs are priced within the U.S. market.
Pharmaceutical companies focus on a variety of factors when pricing drugs with the main objective of generating the most revenue. In order to price prescription medicine, pharmaceutical companies will look at a number of factors, but the three most common are quality, competition, and R&D costs.
1. Quality
Drug companies must consider whether a new drug offers unique benefits to customers, knowing that a drug that offers more benefits can be sold at higher prices.
Possible benefits that a drug might offer when treating a specific ailment include:
- Increased efficacy
- Increased therapeutic effectiveness
- Reduced negative side effects
- Reduced onset of action
- Convenience in terms of how the drug has to be taken and how frequently, and
- Biological variability, in other words, differences in how the drug works for different sexes, races, ages, and ethnicities
It’s also important to note that the pharmaceutical industry also considers whether a drug can limit the need for additional treatments. Drugs that allow customers to avoid further expenses including doctor or hospital visits are frequently priced higher because of the additional savings they offer customers.
2. Competition
When pricing a new drug pharmaceutical companies will look at how many other drugs are already available that treat the same condition. If there are already a number of drugs on the market that address the same disease then new entrants will likely price their product lower than the competition.
In order to limit competition, pharmaceutical companies rely heavily on patent laws. Designed as a tool to promote innovation, the patent system allows drug manufacturers to remain the sole manufacturer of drugs they’ve designed. A recent article from the Journal of the American Medical Association (JAMA) illustrated a number of methods that drug companies deploy to maintain their monopolies, including adjusting the nontherapeutic parts of drugs to game the patent system. These same companies also pay large “pay for delay” settlements to generics manufacturers who sue them over these patents.3
Laws in approximately 26 states require that pharmacists get patient consent before switching to a generic drug. Historically, this has cost Medicaid millions of dollars because pharmacists have no personal incentive to seek patient consent meaning that Medicaid ends up paying for costlier brand name drugs even when cheaper products are available.2,3
3. R&D Costs
Frequently, drug manufacturers cite research and development costs when defending high prescription prices. However, research that leads to drug discovery is usually funded by the National Institutes of Health, by venture capital, or other wealthy benefactors.
So what can be done?
1. Increase competition in the market for high-priced drugs
As we all know competition usually means lower costs for the end user. Because the markets for a number of prescription drugs that treat aggressive and life-threatening diseases have minimal competition, these medications usually come with pretty steep price tags. There is the potential to save billions of dollars for those patients in desperate need of these drugs if the government permitted the manufacture of competing versions of these medications.
2. Prevent remedies for common ailments from being priced as rare drugs
Orphan drugs are drugs for rare diseases which affect a very small number of patients. Because of the very small market for such drugs, developing and manufacturing them would normally not be profitable.
The Orphan Drug Act of 1983 supports development of drugs for rare diseases by giving pharmaceutical companies incentives such as enhanced patent protection. While it makes sense to provide unique benefits and incentives for medicines used to improve and heal rare illnesses, these same privileges should not be extended to drugs used to treat more commonly seen diseases with much larger and diverse patient populations.
3. Enhance discounts and benefits for Medicare patients
Current U.S. laws exempt biosimilars (i.e. no-name copycat drugs) from the 50% discount that innovator biologics (i.e. original brand name drugs) are required to offer Medicare patients. As a result, many patients are dissuaded from using these “copycat” drugs because of the higher price. This consumer behavior can slow the introduction of biosimilars into the market, and in doing so reduce competitive rivalry and allow brand name drugs to continue being priced at a premium.
4. Government Intervention
In a recent Consumer Reports Poll, 77% of people who currently take medication responded that government should allow more generics onto the market sooner and 74% stated that the government should pressure drug companies to charge less.5
Based on the report, some suggestions for government intervention include:
- Set a limit on out-of-pocket costs for the end consumer
- Approve more generic versions of common drugs
- Allow drugs to be imported from legitimate Canadian and European sources
Conclusion
Access and affordability are often impediments to patients receiving the best possible treatment. The right way to improve these two factors is still being debated and contested. There is an opportunity for consultants to make an impact.
Kevin Anderson is a graduating medical student at Duke University School of Medicine and will be starting at LEK Consulting later this year. He’s most passionate about healthcare redesign, patient engagement, and the life sciences. His free moments are spent traveling and enjoying sporting events with his wife and daughter.
Image: Pexels
References:
- Langreth, Robert, et al. “Decoding Big Pharma’s Secret Drug Pricing Practices.”Bloomberg.com, Bloomberg, 29 June 2016, www.bloomberg.com/graphics/2016-drug-prices/
- Laporte, John. “Topic: Pharmaceutical Industry in the U.S.” Statista, www.statista.com/topics/1719/pharmaceutical-industry/
- Kesselheim, Aaron S., et al. “The High Cost of Prescription Drugs in the United States.” JAMA, vol. 316, no. 8, 23 Mar. 2016, p. 858, doi:10.1001/jama.2016.11237
- Tuttle, Brad. “Why Are Prescription Drug Prices So Expensive in the U.S.? | Money.” Time, Time, 14 July 2016, time.com/money/4406167/prescription-drug-prices-increase-why/
- Flows, Capital. “5 Ways To Stop Rising Drug Prices Now.” Forbes, Forbes Magazine, 30 Mar. 2017, www.forbes.com/sites/realspin/2017/03/30/5-ways-to-stop-rising-drug-prices-now/
- Consumer Reports. “Is There a Cure for High Drug Prices?”, 29 July 2016, www.consumerreports.org/drugs/cure-for-high-drug-prices/
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