The high cost of prescription drugs

Prescription drugs (hereinafter referred to as “drugs”) come in small bottles, some of which seem quite expensive (e.g., $49 for 20 pills = $2.48 per pill). And while very few Americans pay the full cost out of their own pockets, they collectively bear the portion covered by the government and/or healthcare insurance companies.

The total cost for drugs bought at retail (excludes drugs dispensed directly by doctors) is about one billion dollars per day, which works out to more than $1,000 per person on an annual basis or about 1.8% of Gross Domestic Product. Prescription drug spending, Peter Olson & Louise Steiner,,

The corresponding outlays in other countries are lower, which suggests one of two things: Americans are popping more pills or they are paying more per pill. Query, are we getting our money’s worth?


According to polling sponsored by the GS Strategy Group (affiliated with Patients for Affordable Drugs Now, a Section 501(c)(4) organization), overwhelming public sentiment exists for the Government to curb drug prices. Poll: Majority of voters say lowering drug prices should be priority for Congress, Jessie Hellmann,, 2/5/18.

The Patients for Affordable Drugs Now
website provides no details about this polling, but Harvard-Politico and Kaiser Family Foundation polls are referenced that supposedly show “Americans believe lowering prescription drug prices should be Congress’ top priority.”

The “top priority” for Congress? Hardly, but there has been plenty of talk about this issue and the Trump administration has announced a plan to address it. Discussion follows.

A. Houston, we’ve got a problem - Broadly speaking, drug prices are determined by three factors: supply, demand and competition. If prices rise too high, additional supply will be created, demand will be crimped, and competition will force prices down. So why not simply allow the free market to work, as happens with many goods and services in our economy, instead of getting the government involved? The answer: high drug prices are largely a product of government policies so government policies must be changed to reduce them.

On the supply side, the government tightly regulates the development and approval of new drugs in the name of patient safety. This greatly increases development costs for both successful drugs (the cost of a major new drug can run into the billions) and drug candidates that don’t make the cut (these costs must also be recovered to ensure overall profitability).

New drugs are targeting increasingly narrow disease categories, which contributes to efficacy but limits the ability of drug companies to price their products modestly and make it up on volume. The typical strategy is to set drug prices as high as the market will bear during the period of patent protection, cutting prices only if necessary due to the emergence of newer drugs or generic drugs that deliver equivalent results.

On the demand side, the government covers a portion of drug prices paid under healthcare insurance (HCI) arrangements: employer plans (employers can deduct the costs, but employees aren’t taxed on the benefit), Medicaid, Medicare, and now (for qualifying individuals) GovCare.

Since 1960, the percentage of drug cost paid by Americans out of pocket has declined from about 95% to some 14% currently while there have been corresponding increases in payments by insurance companies and government plans. Prescription drug spending, Peter Olson & Louise Steiner,,


Given this trend, Americans have grown relatively insensitive to the cost of drugs (for all the complaints, they aren’t typically curtailing their consumption). Is it any wonder that spending on drugs as a percentage of GDP has grown by a factor of about three? Ibid.


The foregoing discussion leaves out a major category of the drug business, namely the development and sale of high cost specialty drugs (typically complex mixtures that are not easily identified or characterized, aka “biologics”) to treat specific conditions (varieties of cancer, Hepatitis C, etc.) for a limited class of patients. Such treatments are generally dispensed by doctors versus being sold at pharmacies, and Medicare reimbursement is under Part B vs. Part D.

Prices for specialty drug treatments can run into tens of thousands of dollars or more, and the spending involved represents a growing portion of the overall drug business. Drug pricing: American Patients First,,
5/11/18 (download PDF).

In sum, high drug costs have been spawned by government policies. So now it is proposed to lower these costs by adjusting the existing policies or adopting new ones.

B. Help is on the way – Speaking to Congress in January, President Trump identified the reduction of prescription drug prices as “one of my greatest priorities.” State of the Union Address, transcript, 1/30/18.

And at a Rose Garden event on May 11, the president spoke of steps already taken to reduce drug prices and plans for further action. His administration was embarking on “the most sweeping action in history, he said, to lower the price of prescription drugs for the American people. “We will have tougher negotiation, more competition, and much lower prices at the pharmacy counter. And it will start to take effect very soon.” Remarks by the president on lowering drug prices, transcript,

Three Health and Human Services officials elaborated in a written statement. Help is on the way for Americans for high drug prices, Alex Azar (secretary of HHS), Scott Gottlieb (commissioner of Food and Drug Administration) & Seema Verna (administrator of Centers for Medicare and Medicaid Services),,

•Problem: Amazing new medicines and technologies are great, but the prices are often excessive and “for someone in desperate need of a cure, there is little difference between one that has not been developed and one that cannot be afforded.”

•Actions to date: (1) FDA has been speeding up approvals of generic drugs that provide price competition for beyond-patent-life drugs. Over 1,000 new generic drugs were approved in 2017, breaking the single-year record by some 200. (2) CMS “made a change to improve Medicare that will save seniors an estimated $321 million [that’s all?] in out-of-pocket drug spending in 2018 alone” and “updated a policy to expedite the substitution of generic drugs in Medicare Part D plans.”

•Path forward: “HHS has been formulating the most ambitious reform of drug pricing in the history of our country. Our blueprint for reform . . . four major strategies . . . increase competition in drug markets . . . give Medicare Part D plans better tools to negotiate discounts on behalf of our seniors . . . develop new incentives for drug manufacturers to lower list prices . . . develop options to lower patients’ out-of-pocket spending.

The text of the HHS “blueprint” runs some 35 pages. The summary lists 28 policy proposals, of which 13 are for “immediate actions” and 15 are called “further opportunities.” Most of the proposed steps would be taken under existing administrative authority, i.e., without legislative action, which suggests that fundamental changes in the current system are not contemplated. Drug pricing: American Patients First,,
5/11/18 (download PDF).

C. American Patients First – Stock prices for drug companies and distributors jumped after the president’s drug cost speech on May 11, suggesting a belief that nothing was being proposed that would undermine industry profitability. See, e.g., Trump’s plan to cut drug prices leaves industry relieved, Louise Radnofsky et al., Wall Street Journal, 5/11/18.

Shares of drug stocks rose after the president’s speech, with Merck & Co. up 2.8% and Regeneron Pharmaceuticals Inc. up 6.2%. The Nasdaq Biotechnology index rose 2.7%, outpacing the broader Nasdaq index, which was down slightly. Shares of industry middlemen also rose, with Express Scripts Holding Co. up 2.6% and CVS Health Corp. up 3.2%.

Considering earlier statements by the president about drug companies “getting away with murder,” etc., the proposed steps in the administration’s plan seem relatively modest. Why does Wall Street love Trump’s ineffective drug-price plan? Charles Silver & David Hyman,,

#STREAMLINING NEW DRUG APPROVAL PROCESS – One of the obvious ways to reduce prices for drugs would be reduce the hefty costs for new drug R&D. With the exception of speeding the introduction of generic drugs after patent protection expires, however, the administration does not appear to be proposing action along these lines.

#PRICE CONTROLS – Some liberal critics seem inclined to blame high drug prices on “greedy” drug companies, which view might be thought to justify price controls or others actions to penalize the companies involved. See, e.g., The cost of Trump’s inaction on prescription drug prices, Madeline Twomey,,

The pharmaceutical industry’s representation and influence within the Trump administration do not suggest a true desire to address the primary cause of high drug costs for patients: the prices set by pharmaceutical companies. *** Pharmaceutical companies saved billions of dollars in taxes after Trump signed last year’s tax bill into law. *** [A recent report] notes that five of the 10 largest pharmaceutical companies are using their savings from the tax bill on $45 billion total in new stock buyback programs to benefit shareholders. [None of these companies have] announced plans to use tax savings to lower drug prices for consumers, [and several of them] raised drug prices in 2018—with more than 1,300 recorded increases instituted on January 1.

However, there are no price control proposals or the equivalent in the administration’s plan– only provisions intended to increase price transparency, enhance negotiating position of drug buyers, etc. For example:

mmediate actions: FDA evaluation of requiring manufacturers to include list prices in advertising; Updating Medicare’s drug-pricing dashboard to make price increases and generic competition more transparent; Prohibiting Part D contracts from preventing pharmacists’ telling patients when they could pay less out-of-pocket by not using insurance; Experimenting with value-based purchasing in federal programs; Reforming Medicare Part D to give plan sponsors significantly more power when negotiating with manufacturers.

Further opportunities: Measures to restrict the use of rebates, including revisiting the safe harbor under the Anti-Kickback statute for drug rebates; More measures to inform Medicare Part B and D beneficiaries about lower-cost alternatives; Providing better annual, or more frequent, information on costs to Part D beneficiaries.

#GENERIC DRUGS – After the period of patent protection for a new drug expires, prices may be dramatically reduced as competition from generic products develops. This result is neither immediate nor automatic, and drug companies have used a raft of strategies to postpone the day of reckoning. Here’s how Trump should address the high cost of prescription drugs, Jeffrey Singer,,

Taking advantage of a scheme created by the Hatch-Waxman Act of 1984, drug makers often extend monopoly status by tweaking their products, like a change in pill coating, and obtaining a secondary patent-a process called “ever-greening.” One government study found that from 1989 to 2000 54 percent of all Food and Drug Administration-approved drugs were these so-called “incrementally modified drugs.” Drug makers also take advantage of the FDA’s onerous drug approval process by requesting greater scrutiny of competing generic or new drug entrants, delaying their introduction. *** Competition from new entrants is also deterred by the slow and complicated FDA approval process. A September 2016 report showed a backlog of more than 4,000 generic drugs awaiting approval, with a median time to approval of 47 months. [So the FDA approved a record 1,000 applications in 2017, big deal.]

The approval of generic competitors for conventional drugs is especially complicated for biologic drugs, as the active ingredient(s) of a generic biologic can’t be shown to be chemically identical to those in the original drug. The result therefore turns on judgment as to whether the effects of the generic drug are close enough to make it a “biosimilar.”

Several policy changes re generic drugs are recommended in the administration’s plan. Although seemingly sensible, they wouldn’t have a huge impact on drug prices.

Immediate actions: Steps to prevent manufacturer gaming of regulatory processes such as Risk Evaluation and Mitigation Strategies (REMS); Measures to promote innovation and competition for biologics; Allowing more substitution in Medicare Part D to address price increases for single-source generics.

Further opportunities: Considering how to encourage sharing of samples needed for generic drug development; Additional efforts to promote the use of biosimilars.

#INTERNATIONAL FREE RIDING - For all the angst about lower drug prices in other countries, almost all of which have refused to bear a proportional share of US R&D costs for new drugs, there was no proposal to narrow the price differential by authorizing the importation of lower cost drugs into the US. (Such a practice would vitiate patent protection for drugs developed in the US, which seems like a clearly bad idea.)

Instead, the US will apparently ask other countries to pay more for drugs they import from the US or produce under patent licenses. Don’t hold your breath! US trade negotiators are already “as busy as one-armed paper hangers” with other “mission impossible” assignments from the president.

Immediate action: Working across the Administration to assess the problem of foreign free-riding

#MEDICARE NEGOTIATION – A perennial criticism of the Medicare drug cost reimbursement provisions has been that the government is not permitted to negotiate drug prices on behalf of participants. This point has been raised most often by Democrats, but some Republicans (reportedly including the president) have brought it up as well.

The point is misleading. Drug prices under Medicare
are negotiated, although the negotiating is done by insurance companies competing to provide insurance coverage versus the government on behalf of all participants. Should the federal government negotiate drug prices, Robert Book,, 1/24/18.

In Medicare Part D, private non-profit and for-profit health insurance companies bid to provide prescription drug coverage for Medicare beneficiaries, and separately negotiate prices with pharmaceutical companies (along with providing other prescription-related services). The incentive for Part D plan sponsors to negotiate lower prices comes from the fact that they can then reduce their premiums to Medicare beneficiaries and thus attract more customers. The competition between Part D plan sponsors [has] produced spectacular savings. By 2012, total Part D costs were actually 57 percent below the original forecast.

Overall government negotiation (buying drugs like we buy aircraft carriers) might well result in higher rather than lower drug prices. Thus, private insurance companies have shown more readiness to balk at sky-high drug prices (e.g., breakthrough treatments for hepatitis C at prices in the $80,000 to $95,000 range) than Medicare due to the political dynamics involved. Why does Wall Street love Trump's ineffective drug-price plan? Charles Silver & David Hyman,,

The moment [Medicare] refuses to cover an effective medication because of its price, cries of rationing fill the air. From there it’s a predictable cycle: AARP packs the halls of Congress with seniors in wheelchairs, and pandering politicians inundate the Centers for Medicare and Medicaid Services with calls and letters demanding that it pay for the drug.

Even if money was saved, the unintended consequence would be to discourage drug companies from innovation to develop the new wonder drugs for the future.
Ibid. So it’s just as well that the administration seems inclined to build on the status quo in this area versus seeking to disrupt it.

Immediate actions: Reforming Medicare Part D to give plan sponsors significantly more power when negotiating with manufacturers; Sending a report to the president on whether lower prices on some Medicare Part B [doctor-dispensed] drugs could be negotiated for by Part D plans.

#MEDICARE PART B – Specialized drug treatments for cancer, etc. are high value/ high cost, and they are typically administered by doctors versus being purchased by consumers. There has been considerable controversy about the rapidly rising prices being charged for these treatments, and many in the industry feared that the administration would propose some form of price caps – but it hasn’t happened yet. Big Pharma largely unscathed by Trump’s drug-price crackdown, Joe Williams, Washington Examiner,

The firms had grown increasingly concerned the Trump administration would seek to adjust the rates that the federal health[care] insurance program uses to pay for treatments that must be administered by a physician, commonly known as Medicare Part B. Former President Barack Obama had previously attempted to do just that, and the pharmaceutical industry spent millions of dollars combating it. They were ultimately successful, and the proposal was dropped. The series of actions proposed by Trump on Friday would make a subtler change that experts say is tame by comparison.

Maybe, but the wording of the administration’s proposals re Part B doesn’t provide a clear indication of where things may be headed.

Immediate actions: Sending a report to the president on whether lower prices on some Medicare Part B drugs could be negotiated for by Part D plans; Leveraging the Competitive Acquisition Program in Part B.

Further opportunities: Using incentives to discourage manufacturer price increases for drugs used in Part B and Part D; More measures to inform Medicare Part B and D beneficiaries about lower-cost alternatives.

#OUT-OF-POCKET PAYMENTS – In general, Americans aren’t very sensitive to drug costs so long as someone else is perceived to be paying for them. It’s already been suggested that the rising share of drug costs paid by insurance companies and the government has fueled the run-up in drug costs since the 1960s. Higher out-of-pocket payments could be a game changer. HHS Blueprint,
op. cit.

[One] study found that consumers asked to pay $50 or more at the pharmacy counter are four times more likely to abandon the prescription than a consumer charged $10.

Although the administration’s drug cost plan won’t do much about high drug costs overall, at least in the short term, it probably will lower out of pocket payments for patients. Why does Wall Street love Trump’s ineffective drug-price plan? Charles Silver & David Hyman,,

[The plan] proposes to base copays by Medicare Part D enrollees on the discounted prices that pharmacy benefit managers pay, instead of the phony list prices the drug makers put out [with no estimate of the resulting savings].

It also proposes to cap Medicare beneficiaries’ total out-of-pocket drug costs. In 2015, beneficiaries who exceeded the existing catastrophic threshold spent about $1.2 billion, a small fraction of the $110 billion that Medicare Part D shelled out in total for prescription drugs.

There will be no apparent effort to use the “most obvious strategy” for reducing the need for prescription benefit managers (and the costs they add to the drug distribution process), namely moving more healthcare products from prescription status to over-the-counter (or behind the counter) status. That way, everyone would pay the same price for the products involved and could make up their own minds as to what they wanted to buy.

Free choice isn’t a panacea, just imagine how bad the opioid crisis could get if heavy-duty
pain relief products were displayed on the shelves like toothpaste or soaps, but it could certainly play a part in bringing down drug prices if the administration wanted to have a real impact on this issue.

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