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.” 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.
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.
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. 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.
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.