Why are prescription drug prices so high in the U.S.? The implementation of Medicare Part D in 2006 helped subsidize costs of prescription drugs for Medicare beneficiaries, reducing medication expenditures for patients. However, in many cases, people are still required to pay a significant percentage of their medication costs. For patients with chronic conditions that require lengthy lists of medication to help combat their illnesses, these costs add up quickly. Patients are left frustrated and responsible for paying big bucks. As their pharmacist who sees this frustration firsthand, or as the patient who experiences it, you may be eager to obtain clarity.

There is no question that the United States puts the highest price tag on their prescription drugs in comparison to any other country in the world. The U.S. is paying on average three times more than Britain for the world’s top twenty selling medicines. Researchers have found that U.S. drug prices are consistently higher than markets throughout all of Europe, six times higher than in Brazil, and sixteen times higher than the average in the [lowest-price country.] (http://www.huffingtonpost.com/entry/americans-pay-more-for-drugs-than-anyone-in-the-world_us_561bda8fe4b0e66ad4c89449) The prices are only increasing. From 2008 to 2014, the average prices for the most commonly used brand-name medications [increased by 128% in the U.S.] (http://www.businessinsider.com/ap-multiple-factors-cause-high-prescription-drug-prices-in-us-2015-9)

Especially drugs for serious conditions – particularly cancer – have been increasing in price, something many find morally counterintuitive. “It is sobering to note that of the 12 drugs approved by the US Food and Drug Administration (FDA) for different cancer indications in 2012, 11 cost more than $100,000 per year.” In the past decade, prices for cancer drug therapies have almost doubled, from an average of $5,000 per month to [more than $10,000 per month] (http://www.medscape.com/viewarticle/835182#vp_1), making cancer treatment more and more of a privilege instead of a necessity.

Expensive drugs certainly aren’t exclusive to cancer treatment. An agent was recently approved to treat cystic fibrosis in a subpopulation of patients who carry a specific genetic mutation, by targeting the underlying molecular defect. Named Ivacaftor, this drug costs $311,000 a year. The drug Sofosbuvir, proven to be highly effective in treating patients with hepatitis C, costs $1,000 per pill, equivalent to $84,000 for the typical twelve weeks of treatment. Hepatitis C affects more than 3 million people in the U.S., and several of these patients require re-treatment, costing them more than $100,000. Ledipasvir/Sofosbuvir is a rival drug recently on the market to treat hepatitis C, with a price set at $1,125 per pill. Although the cost for this drug may be lower than for sofosbuvir because it is taken without companion medications and the duration of treatment is normally shorter, the price tag continues to be ludicrous. More on this here

There are several reasons U.S. prescription drugs costs are significantly higher than other countries’. The major variables at play are lack of price controls, research and development costs, limited competition, and lengthy patents. These variables all have a common theme, “rooted in philosophical and practical differences in the way America’s health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.” The expensive and lengthy drug development and approval process, combined with a complicated healthcare system, creates the perfect storm for drug companies to set high prices and become highly profitable at the expense of the sick.

In other developed countries, state-run health systems help regulate the price of prescription drugs by driving “hard bargains” with drug companies, including setting price caps and refusing to cover medicines that they do not think is worth the cost. Additionally, the government systems in many of these countries have a great deal of negotiating power because they are the sole drug buyer. In contrast, the U.S. market is “highly fragmented”, with a range of buyers, including employers, insurance companies, and federal and state governments. As a result, “price negotiations take place on an individual level in the United States, with each private insurance company negotiating with each drug company for the price of each product.” Pharmacy benefit managers also play their part “developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with [drug manufacturers.”] (http://www.medscape.com/viewarticle/835182#vp_6 ) Medicare and Medicaid help cover health care insurance costs for more than a quarter of the entire American population, so you would think that they would have also play a hand in price negotiation, right? Nope! By law, the federal government cannot negotiate for Medicare drug prices or obtain any discounts. Drug companies are left with the power to price their drugs solely for the purposes of profit and without any regulation. For more on PBM’s and price negotiations, see here.

Before 2000, pharmaceutical companies largely didn’t take advantage of this power, understanding that “medicine is for the people. It is not for the profits.” In 1989, drug manufacturer, Burrough Wellcome, set the price for AZT at a ridiculous cost of $8,000 a year, “said to be the most expensive prescription drug in history.” AZT was the only drug available at that time to treat patients with HIV. The New York Times published an article, criticizing Wellcome, who justified his price, saying there was a limited customer base for the drug and that competition would increase soon. However, rival drugs were slow to appear in the market, and a third of the HIV patients did not have insurance that would cover the cost of the drug. Additionally, the government heavily funded the R&D cost for AZT, further undermining the justification behind Wellcome’s price. After continued backlash and protesting from the community, AZT was eventually halted from being traded publicly. Within four days the price was lowered by 20%. The importance of this event is that AZT set a precedent for drug pricing that was not seen up until that point. Even though Wellcome received backlash from the community, he was never in any legal trouble, and even with the 20% decrease AZT was still priced at a very high price of $6,400. Other drug companies began following suit, setting their prices to fully maximize profit. Without any control from the government, these prices essentially have no cap.

The pharmaceutical industry argues that government regulation of prescription drug prices will discourage investment in the research and development of new drugs. The process of getting a new drug approved is both timely and costly, and the industry believes capping drug prices will lower incentive for Research & Development (R&D). Industry groups say that the research and development cost for getting a new drug approved takes one decade and over $1 billion. Drug companies believe high prices are warranted because of the value that these new drugs have to patients and society, and that regulated prices will stifle innovation. Critics of pharmaceutical companies argue that R&D is only a portion of their expenditures, and that more money is spent on marketing and administration. Other analyses have estimated that the R&D cost to get a new drug approved is actually only $150 million, much less than the $1 billion cost estimate. Additionally, many of the companies who set the drug prices and enjoy the profit are not the companies who spend the money on R&D. Take Sofosbuvir, for example. The pharmaceutical company Gilead did not actually develop the product. A smaller company, Pharmasset, Inc. spent $177 million on R&D costs, in addition to $62 million in related costs, over the three years that the drug was being developed. The company expected to profitably sell sofosbuvir for $36,000 a year, but instead sold their company to Gilead for $11.2 billion, who is now selling sofosbuvir for more than twice this profitable amount. Acquisitions like this occur frequently among pharmaceutical companies, revealing that the huge price tag associated with prescription drugs is not a product of innovation, but rather the product of a mutually beneficial business deal.

Regardless of how “R&D” is actually calculated, there is no doubt that getting a new drug in the market is a long, expensive process that involves a great deal of risk. Patents in the U.S. “reward” this risk taking, by providing drug makers exclusivity in the market for twenty years. Patents are filed before the drug is officially approved, but even so, new drugs typically have a monopoly for about twelve years before rival drugs can appear in the market. This significantly contributes to jacked up prices of prescription drugs. Since there is no competition during these twelve years, drug companies generally increase their prices every year until their patent expires, maximizing their return on investment.

Competition is completely eliminated for about twelve years after a new drug enters the market. Well, what about after the patent expires? Won’t competition increase and prices drop? Unfortunately, limited competition is a huge factor contributing to skyrocketing prescription drug prices even after the patent term expires. There is a “large backlog” of generic drugs that are awaiting U.S. regulatory approval, keeping only one or two generic versions in the market and the prices high. Older generics, that used to be quite cheap, have been in short supply over the past decade, due to raw material shortages and manufacturing deficiencies (dirty factories, pills containing the incorrect amount of an active ingredient), further limiting competition and increasing prices. Also, many newly approved drugs treat conditions that are “too rare to attract multiple manufacturers”, such as certain cancer subtypes. This eliminates competition within these small markets and allows these drugs to remain a monopoly. Lastly, several pharmaceuticals have recently been acquiring older drug making companies, essentially buying off their competition and giving them the freedom to set higher prices.

Why are drug prices so high in the U.S.? This is a simple question, with a not-so-simple answer. The complications involved with both the U.S. drug approval process and health care system create unregulated prices, expensive research and development costs, limited competition, and lengthy patents- which all significantly contribute to the expensive price tag on prescription drugs. Medicare Part D patients are especially hit hard with these high costs; given these are generally patients with more serious conditions that require many medications. So, what can you do to help curb these costs? Information is wealth. iMedicare is a tool that provides the information and transparency to make educated decisions about Medicare Part D plans, and minimize the cost of prescription drugs!