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Are Escalating Prices Putting Some Prescription Drugs Out of Reach?

The cost of prescription drugs in the United States has long been a subject of intense debate. According to an August 2016 Consumer Reports study, the profit-seeking strategy of insurance companies and pharmaceutical companies is the main reason for the escalating prices. Here are a few facts relating to the cost of prescription medication in the U.S.

  • Drug prices have increased by over 10% annually in each of the last three years.
  • The Wall Street Journal analyzed 30 popular drugs and found that their price rose by eight times the rate of inflation from 2010 to 2014.
  • Over one-sixth of all healthcare spending in America in 2015 was on prescription drugs, which is more than double the rate in the 1990s.
  • There are high profile cases of so-called price gouging by Big Pharma. A famous example was the 5,000% increase in a life-saving drug called Daraprim; the cost per pill rose from $13.50 to $750 overnight.
  • Approximately 60 drugs doubled in price within a year from 2015 to 2016.
  • 20% of Americans that use prescription drugs say they (or a family member) skip their medication or cut it in half because it is so expensive.

We could continue in this vein, but instead, we’ll focus on the reasons why the cost of drugs is rising so quickly.

3 Commonly Cited Reasons Why Prescription Drugs Are Expensive

Lack of Competition: According to a study by the American Medical Association (AMA), market exclusivity is the #1 reason why manufacturers charge so much for medication. Patents in the United States last much longer than in other countries; it is normal for a manufacturer to gain exclusivity for up to 20 years after a patent issue. They increase the cost of the drugs by up to 5% per annum, but prices rise sharply as the end of the patent draws near.

The cost of an EpiPen is closing in on $600 for a pack of two, even though it contains about $10 worth of epinephrine. The auto-injector is the reason for the expense, and it has a patent until 2025. Drug development and marketing is extremely expensive, so it is hard for new competitors to enter the market and fight established brands. Would-be newcomers also lack the distribution channels of larger rivals and don’t have enough knowledge of the regulatory process.

America needs more competition because the AMA found that when two generics enter the marketplace, the cost of a drug falls to 55% of its original price. When five generics hit the market, the cost falls to just 33% of its initial price.

Cost of Research & Development (R&D): According to industry groups, it takes 10 years and $1 billion on average for a new drug to reach the marketplace from its origin. Biologics are the most expensive new drugs, produced by living cells under specific conditions, a process that costs far more than mixing chemicals to make medication.

However, detailed research suggests that the cost of R&D is nowhere near high enough to justify such a huge price increase. Companies seldom spend more than 20% of their budget on R&D, and frankly, the pharmaceutical and biotechnology sectors are among the most profitable in America. In reality, the price tags are only as high as the market can bear.

The entire “companies must recoup their costs” mantra is a falsehood, as sunk costs are just that. Manufacturers will only continue to create drugs and pay for clinical trials if they know they can charge a high price at the end of the cycle. Companies continue to create Alzheimer’s drugs even though in the period from 2002-2011, all but one of the 400+ clinical trials covering 240+ drugs was a failure.Why? Because they know that a successful trial is worth an incredible amount of money.

Drug Manufacturers Set the Price: Companies in the United States set the price for prescription drugs, a practice followed by very few nations around the world. In other countries with national health programs, government bodies negotiate the price of drugs or refuse to cover excessively expensive drugs. None of this happens in the U.S. The Medicare drug benefit program, established in 2003, cannot negotiate drug prices. Medicaid covers all FDA approved drugs even if there is a cheaper or more effective version available. Finally, private drug insurers have no reason or incentive to negotiate prices.

Fixing the Issue

The most commonly espoused fixes are:

  • Allowing Americans to purchase cheaper drugs from other nations where governments set price controls.
  • Allowing Medicare administrators to negotiate drug prices.

Alas, there is major opposition to both ideas; they claim that cutting the cost would take money away from potential cures. In reality, Big Pharma spends far more on marketing than R&D, so perhaps they should pare back advertising. Here are three more ideas:

  • Cap Copayments: In a handful of states, drug makers place high-cost drugs in categories to ensure consumers pay up to 30% of the cost. States such as California, Delaware, and Montana have laws capping the amount an insured consumer pays for a drug at the pharmacy counter. The cost is still relatively high, up to $250 a month, but is less than in most states.
  • Performance Related Pricing: Another idea is to price a drug based on its effectiveness. An example is benefits manager Express Scripts paying differing amounts for a set of oncology drugs depending on how they perform against different forms of cancer. The plan targets drugs that perform well against one type of cancer but not so well against others. For instance, Tarceva prolongs life for over 5 months on average for those with small cell lung cancer, but it only prolongs life for pancreatic cancer sufferers by 12 days. Under this program, manufacturers receive more money when the drug treats small cell lung cancer.
  • Transparency Measures: Lawmakers in states such as New York have introduced transparency measures to ensure drug companies make details of the costs of R&D and marketing public. Those in support of the measure say it will force manufacturers to justify their high prices.

Final Words

While all of the above ideas have flaws, at least they are attempts to improve the existing prescription drug climate. To answer the question at the start of the article,yes, escalating prices are putting some prescription drugs out of the reach of consumers. If the proper measures aren’t in place sooner rather than later, the problem will only get worse.

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