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Why Are Prescription Drugs So Expensive in the United States?

Article Overview:

According to AARP, prescription drug prices in America are higher than anywhere else in the world.1 It makes a popular talking point for politicians, but it hints at a bigger question: Why are prescription drugs so expensive in the United States? The answer speaks to a complicated cross-section between healthcare, regulation, the economy, and politics.

The Prescription Monopoly

cost of prescriptions in usaHarvard Medical School researchers writing in JAMA said that while a confluence of factors pushes prescription drug prices sky high, the primary contributor is the existence of “monopoly” rights for drug manufacturers, rights that are protected by the government.2 The researchers looked at literally thousands of studies published over an 11-year period, to “simplify and explain what has caused America’s drug price crisis,” wrote TIME magazine.3

There were five key findings in the JAMA article that explain the exorbitant prescription drug prices in America. As explained by TIME, the first one is that drug manufacturers in the United States are allowed to set their own prices, which doesn’t happen anywhere else in the world. Part of the reason is that the United States does not have a fully integrated and implemented universal healthcare system. Countries that have a national health program (like Canada or the United Kingdom) have government bodies that either negotiate drug prices to affordable levels or that decide not to cover drugs if the manufacturers set prices that the government feels are excessive. Since there is no comparable entity in the United States, there is no such negotiation process, letting the drug companies set their prices unchallenged.


Drug manufacturers in the United States are allowed to set their own prices, which doesn’t happen anywhere else in the world


In 2003 Congress prevented Medicare from negotiating drug prices

An attempt to give the government a say in the determination of drug prices was quashed in 2003 when a Republican-majority Congress prevented Medicare from negotiating drug prices. The Medicaid program, on the other hand, has to cover any drug that is approved by the Food and Drug Administration, whether or not a cheaper or equally effective generic drug is also available. The JAMA study noted that private insurers do not usually negotiate prices because the third-party pharmacy benefits managers like Express Scripts and CVS Health that administer prescription drugs often receive payments from drug manufacturers to move the market shares in their respective favors. In this way, the drug companies are not only unchallenged in their determination of drug prices, they game the system to ensure that no one else eats into their monopoly.

Generics and Brand-Name Drugs

The concept of a monopoly came up a lot in the JAMA research, specifically that the American system allows for the establishment of “government-protected monopolies” for certain drug manufacturers and their products, which shuts the door on generic products being introduced into the market to keep prices accessible.

Generic drugs are copies of name-brand drugs with exactly the same dosage, intended use, effects, side effects, risks, safety, and strength. In many ways, they are identical in all but name. Generic drugs are priced much cheaper than their more well-known counterparts, which leads many people to assume that they are not as good and to demand for name-brand prescriptions during their doctors’ visits. In reality, the FDA requires that both generic drugs and brand-name drugs have the same standards of safety and effectiveness.

In many ways, generic drugs are identical in all but name

The reason generic drugs are cheaper is because the manufacturers do not have to invest in going through the development and marketing of a new drug. When a drug company introduces a new product to the market, the process represents a significant expense related to the research, development, and promotion of the drug. The FDA grants a patent that gives the company the exclusive right to sell the drug for as long as the patent is valid. When the patent is about to expire, the drug company has the option of applying to the FDA for permission to make and sell a generic, brandless version of the drug. Without having to spend time and money on developing the drug from scratch, this allows other companies to sell the same chemical compound at a much cheaper cost. When different companies start to produce and sell the same type of drug, the competition can drive the cost of the drug down even further, but the FDA still mandates the same standards for both brand-name and generic drugs. Many companies create both generics and name-brand drugs; according to FDA estimates, half of the generic drugs on the market are made by the same companies that put out drugs that are household names.4

Gaming the Patent Game

In the interests of encouraging innovation, the American patent system allows drug manufacturers to stay on as the sole manufacturers of their drugs for a period of 20 years or longer. The FDA further grants those drug companies exclusivity for certain products, such as medications that are used in the treatment of rare diseases. However, the researchers from Harvard Medical School found that some drug companies violate FDA rules by “slightly tweaking the nontherapeutic parts of drugs” like the pill coatings. When generic manufacturers sue the corporations for changing the formula, the corporations pay big “pay for delay” settlements, which helps them hold on to their monopolies longer.5 The JAMA article pointed out how much this manipulation contributes to the excessively high drug prices in America. Prices go down to 55 percent of the original brand-name cost when there are two generics on the market, and they go down to 33 percent of the original cost when there are five generics. Despite the FDA’s stance that generics and brand-name drugs be equivalent in every way,it suits the major drug companies to ensure that the generics are repressed as much as legally possible.

‘Jaw-Dropping’ $11 Billion

Another factor is that there are state laws and federal policies, sometimes drafted with well-meaning intentions, which have the effect of limiting how generic drugs can remain affordable. In more than half the country, pharmacists are legally required to obtain patient consent before switching prescriptions to a generic drug. In 2006, this step cost Medicaid $19.8 million for just one drug: a medication that targets high cholesterol and triglyceride levels, known as simvastatin in its generic form and marketed as Zocor. Pharmacists did not get patient consent to switch from Zocor to simvastatin, so Medicaid had to pay for the more expensive brand-name drug even though the functionally identical simvastatin was more expensive – hence, $19.8 million.

Pharmacists did not get patient consent

The Harvard Medical School researchers noted that drug manufacturers usually point to the inherent research and development cost as a natural driver of high prescription costs, but this defense is not always valid. Several studies have found that the scientific research that culminates in the development of new drugs is funded by federal grants through the National Institutes of Health. On the occasions that the financing is done privately, it comes through venture capital, a form of private equity that is invested in projects that have a high element of risk but have demonstrated the potential for substantial growth and potential.6 An example of this is sofosbuvir, a hepatitis C medication that was developed in academic laboratories and then acquired midway through its production by Gilead Sciences for a “jaw-dropping” $11 billion in 2011.7 In 2015, two senators (a Democrat and a Republican) released a report that stated that Gilead Sciences charged more for its version of sofosbuvir than required in order to recover acquisition costs, clinical research expenses, and marketing.8

Protecting the Strength of the Drug Industry

In their JAMA article, the researchers from Harvard Medical School noted that the arguments made by drug corporations, about “maintaining high drug prices to protect the strength of the drug industry,” intentionally exaggerate the vulnerability of the drug market. In general, companies spend as little as 10 percent of revenue on research and development because the biotechnology and pharmaceutical sectors consistently rank among the “very best-performing sectors in the US economy.” The real reason, said the researchers, is that the prices for prescription drugs are based on what the market can bear.

Companies spend as little as 10 percent of revenue on research and development

The researchers were not optimistic in their conclusion about how the prescription drug market can be fixed. The pharmaceutical lobby is too powerful and Congressional gridlock too politicized for legitimate and effective negotiation to be realistically possible. Even if the landscape were easier to navigate, it would be a very tough balancing act to improve regulation and strengthen oversight of patent protections while still welcoming innovation. Dr. Joshua Sharfstein, the Associate Dean for Public Health Practice and Training at the Johns Hopkins Bloomberg School of Public Health, told TIME magazine that the research presented in the JAMA article presented a high-level view of how the United States has “become an outlier when it comes to drug prices,” chiefly because there is no policy that will address the widespread challenges to the healthcare system that will emerge because of the cost of prescription drugs.

Who Are the Players in the Pharmaceutical Industry?

Orphan Diseases

When Texas A&M University looked at the question of why prescription drugs are so expensive in the US, Lixian Zhong, an assistant professor of pharmaceutical services at the university’s college of pharmacy, explained that brand-name drugs “start out expensive and then tend to go up in price every year.”9 The high cost of development is only one of the factors that combine to produce staggering prices; in 2015, for example, prescription drug spending came out to an estimated $475 billion.10

Prescription drug spending came out to an estimated $475 billion

A curious factor in talking about the price of prescription drugs is that between 2010 and 2015, the average cost of a generic drug decreased; however, their brand-name counterparts not only started off being extremely expensive, they actually went up in price, particularly specialty treatment drugs for rare medical conditions, so much so that the overall average drug price increased on that merit alone.


 According to Zhong, the most expensive drugs treat what are known as “orphan diseases,” which are conditions that have a patient population of fewer than 200,000.


The reason they tend to cost more is that the small patient population translates to a small customer base who will buy the drug before its patent expires, meaning the drug manufacturer has a reduced number of opportunities to make up the cost of development. These costs are sizable; an estimate by the Tufts Center for the Study of Drug Development in 2014 put the figure at more than $2.5 billion per drug, which is an increase of 145 percent from the previous estimate made in 2003. Scientific American explains that there has been “an intense effort in recent years” to increase efficiency and cut down on research and development costs, but the increased complexity of the clinical trial process, as well as a stronger focus on chronic and degenerative diseases (requiring more specialized and therefore more expensive medication) and tests for insurers looking for comparative drug effectiveness data, renders such efforts futile.

High-Risk, Expensive, and Long-Term

John LaMattina, the former head of R&D at Pfizer, one of the largest pharmaceutical corporations in the world with revenue of $52.82 billion in 2016, argued to Scientific American that reports like the one from the Tufts Center would instinctively prejudice the public against the pharmaceutical industry when the truth of the matter (as he saw it) is that drug pricing is more about the value that the drug delivers to patients and not about research and development costs. As insurance companies roll out new requirements to determine the value to the patient, it has had the effect of increasing the cost of development beyond the rate at which efficiency efforts can keep up.11

While expressing concerns with the implications presented by the Tufts study, LaMattina said that the public will learn that drug development is “a high-risk, expensive, and long-term endeavor.”

While orphan drugs tend to be have the biggest price tags, other drugs can still place significant financial burden on patients. Lixian Zhong explained that specialty drugs, medications that can treat chronic and complicated conditions like hepatitis C, cancer, rheumatoid arthritis, and other diseases, can “easily” cost over $10,000 a year.

A 12-week supply of one particular hepatitis C drug can be $90,000, and Texas A&M Today wrote that it could be cost-effective if it was successful at keeping patients out of hospital. Zhong pointed out that 90 percent of people who take the drug are cured, a rate that is much higher than less expensive treatments, especially when the cost of an average stay in hospital can run several thousand dollars every night.

Of course, patients don’t normally pay the full sticker price of the drug. Insurance covers a portion of the cost, and insurance companies cover their own costs by negotiating with drug manufacturers. The drug companies usually have their own patient assistance programs, which cover most of the cost of the people who don’t have insurance or sometimes the entire cost. A number of manufacturers also offer vouchers or coupons as a way to reduce the out-of-pocket costs of their products for people who do have insurance.

The Fragmented Healthcare System

According to Lixian Zhong, it is impossible to consider the problem of prescription drugs being so expensive in the United States without first considering the number of different healthcare players in the country, which has led to a “fragmented” system. The countries that have a single-payer system have governments that have more negotiating power; without such a power in the United States, citizens have to pay more than their foreign counterparts, usually by a significant margin. The flip side of this is that access to new and cutting-edge medications in those other countries depends on economic and political concerns. What this means for American patients is that they do have access to pharmaceutical treatments that the rest of the world does not (yet) have, but they pay a higher price (economically and otherwise) to subsidize the cost of researching and developing the drugs, which is “an inherently risky process,” entailing a lot of preclinical research and three meticulous, large, expensive, and time-consuming phases of human clinical trials. At the end of the day, pharmaceutical companies spend literally tens of billions of dollars on research on drugs, some of which may never make it to market. The ones that do survive the process are known as the lucky ones, and it is these “lucky ones” that the corporations use to try to recoup some measure of their development costs.

Humira and International Examples

In detailing “the true story of America’s sky-high prescription drug prices,” Vox suggests that the United States finds itself in a catch-22 when it comes to trying to balance scientific innovation in treating chronic conditions against who pays for the hard work.12 Compared to the rest of the world, the answer in America is “the public” and by an uncomfortable margin.

Vox uses Humira as an example. Humira is a very popular injectable medication used in the treatment of arthritis and psoriasis. In 2015, global spending on the drug was $14 billion, almost the size of the Jamaican economy. But one country in particular paid far more for Humira than any other; in Switzerland, a prescription for Humira would cost $822; in the United Kingdom, $1,362; and in America, the average cost for a prescription of Humira runs a patient $2,669.

In America, the average cost for a prescription of Humira runs a patient $2,669


 Whether sold in the United Kingdom, Canada, Australia, or the United States, the chemical formulation of Humira is exactly the same.


But, as Vox explains, the regulatory system around the pharmaceutical industry in the United States is unlike any other the world, which leads to some economic and ethical quandaries.

As described, there is no government body in America that regulates drug prices or negotiates the prices of new prescription drugs when they are brought to the market. Australia, for instance, has the Therapeutic Goods Administration, which is a government agency that works with pharmaceutical corporations to hammer out an appropriate price for consumers (the patients). The TGA (and other comparable agencies) make decisions about whether the drugs being discussed are an improvement over older formulations of the medication and whether the new drugs should even be introduced to the market at all.

In America, on the other hand, drugmakers can set their own prices for the products they bring. The closest American equivalent to a TGA is the Food and Drug Administration, which allows every drug that has been proven safe to be sold. The government has no say in how much the drug costs or even if it’s necessary.

Vox writes that if the government did step in to lower drug prices, the decrease in profits “would make pharmaceuticals a less desirable industry for investors.” Without that desire, there would conceivably be less research toward new and advanced cures for chronic conditions. The status quo of exorbitantly high drug prices means that investing in the pharmaceutical industry creates a lot of wealth for some people while pushing the prices of drugs ever upwards, away from most of the American population.

The governments of other countries make the active decision to regulate the price of their respective drug markets because it is in their interests that medical treatment is universally affordable for their citizens regardless of income status. Other consumer goods don’t face this level of supervision because medication can be a literal life-or-death necessity.

This may seem like a sensible approach, but it comes with the acceptance that those governments reserve the right to deny coverage of a drug that may not be worth the price. Bodies like the Therapeutic Goods Administration have the power to refuse a drugmaker to retain leverage in their price negotiations. Since that concept does not exist in the United States, there are certain drugs sold in America that are not available in other countries. When foreign regulatory bodies refuse to approve a particular drug, it is usually a point of great political and public contention.


The price is so prohibitively high that it becomes “functionally the same thing as not even having [the drugs] on the market.”


This might give the impression that there is widespread accessibility to pharmaceutical drugs in America, but one of the Harvard Medical School authors of the JAMA report pointed out that most Americans don’t have the buying power to afford some of the drugs they desperately need. The price is so prohibitively high that it becomes “functionally the same thing as not even having [the drugs] on the market.”
Similarly, Americans might not be getting better treatment. When the TGAs of other countries reject a drug, it is normally done on the basis that the government is not satisfied that the drugs offer enough benefit to justify the price that the drugmakers want. Since this step doesn’t exist in America, this potentially means that consumers are being marketed costly drugs that offer a disproportionately minimal improvement over pre-existing drugs but are boosted by multimillion-dollar advertising campaigns.

No Meaningful Advantage

An example of this played out with Zaltrap, a colorectal cancer drug. Zaltrap cost $11,000 per month, double that of its competitors, but doctors pointed out that it offered no significant benefit over its generic formulations. Explaining the decision in an op-ed piece in The New York Times, three doctors at Sloan-Kettering Memorial Hospital (including the physician-in-chief) wrote that Zaltrap “has proved to be no better than a similar medicine,” and the price of $11,063 was “phenomenally expensive,” so much so that hospital administration decided not to make it available for prescription.13
One of the oncologists who wrote the op-ed pointed out that the prescription drug market in America is the only one where a product could offer no meaningful advantage over its competitors yet sell for over twice the price.

This has led to a situation where the American public is not buying more drugs or using an excessively large amount of prescription drugs, but spending more money on the drugs that it buys and paying more for an identical product than patients in other countries do.

A Regulated Drug Market?

What would the market look like, Vox asked, if the US government got into the drug price regulation game? The obvious answer is that people would have to spend less on drugs, and this might result in health insurance premiums not only easing off in their otherwise astronomic climbs but maybe even decreasing.

Prescription drugs that are as much as 40 percent cheaper than what Medicare pays

But the other side of the coin is that the public would have to give up some of the drugs that insurance plans cover. If a governmental board were to have the power to regulate drugs, it would inevitably make the decision to reject a drug that did not present an appropriate cost benefit. A small-scale example of this is seen in the Veterans Health Administration, which has the authority to negotiate prices for the VA. It is successful in procuring prescription drugs that are as much as 40 percent cheaper than what Medicare pays, but it is forced to settle for fewer products as a result.

There is again the danger that regulating drug prices might not only mean fewer drugs, it might mean less innovative drugs. When investors see a market that will pay handsomely for their products, they will spend more creating the products (prescription drugs, in this case) that the market wants. However, if the market trends toward fewer drugs and fewer groundbreaking drugs, that money will be harder to come by.

This, says Vox, is why the question of why prescription drugs are so expensive in America does not have an easy answer. The price of innovation is reducing accessibility; the price of accessibility is throttling innovation. Creating a federal body that would negotiate prices would make medications cheaper, and it would mean that more Americans would be able to get the medications that could save their lives. It would also mean that research and development of new drugs would decline, perhaps irreversibly. The biotech industry could go into recession, and companies might decide to give up on even trying to bring new drugs to the public market.

25 percent of Americans say they struggle to pay for their medications

Whatever the decision, hard choices have to be made. Speaking to Vox, a health economist presented it in simple terms: Are people comfortable with the idea that they are spending too much for pharmaceutical innovation, especially if they have serious medical conditions that cannot be treated in any other way? The status quo of cripplingly high drug prices, to the point where 25 percent of Americans say they struggle to pay for their medications, might force an answer one way or another.14
Research Articles

Citations:

  1.  “Why Our Drugs Cost So Much..” (May 2017). AARP. Accessed December 4, 2017.
  2. The High Cost of Prescription Drugs In The United States..” (2016). JAMA. Accessed December 4, 2017.
  3. 5 Reasons Prescription Drug Prices Are So High in the US.” (August 2016). TIME. Accessed December 4, 2017.
  4. Generic Drugs, Are They as Good as Brand Names?.” (December 2014). MedicineNet.com. Accessed December 5, 2017.
  5. Supreme Court Lets Pay-to-Delay Ruling against Pharma Stand..” (November 2016). STAT. Accessed December 5, 2017.
  6. Who’s Going to Pay for Future Drug Development (Part 2)?.” (March 2011). Xconomy. Accessed December 5, 2017.
  7. Sovaldi: Gilead Hits Pay Dirt with a Breakthrough Hep C Drug..” (n.d.) Fierce Biotech. Accessed December 5, 2017.
  8. Doctor behind Development of Sofosbuvir Comes under Scrutiny..” (December 2015). CURE Hepatitis C. Accessed December 5, 2017.
  9. Why Are Prescription Drugs So Expensive?.” (December 2016). Texas A&M Today. Accessed December 5, 2017.
  10. Observations on Trends in Prescription Drug Spending..” (March 2016). US Department of Health and Human Services. Accessed December 5, 2017.
  11. Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B..” (November 2014). Scientific American. Accessed December 5, 2017.
  12. “The True Story of America’s Sky-High Prescription Drug Prices.” (November 2016). Vox. Accessed December 6, 2017.
  13. In Cancer Care, Cost Matters..” (October 2012). The New York Times. Accessed December 6, 2017.
  14. 1 in 7 People Don’t Fill Their Prescriptions Because They Cost Too Much..” (June 2017). Vice. Accessed December 6, 2017.