Why Are Drugs SO Expensive?

Picture this: A man –probably in his mid-30s–rubs
his knee as his dog looks on quizzically. A seated woman cringes as she massages her
finger joints. A kettle squeals. Voice over: “This is your wake up call. If you have
moderate to severe rheumatoid arthritis, month after month, the clock is ticking on irreversible
joint damage. On-going pain and stiffness are signs of joint erosion. Humira can help
stop the clock.” We’ve all seen ads like this one and (to varying
degrees) allowed name-brand drug titles to become absorbed in our minds. But what’s the
cost of these new drugs? Did you know that the average retail price in the US of one
carton (containing 2 dosing pens) of Humira is $5,684? This is according to the website
GoodRx, which compares drug prices. But in Canada, you can purchase the same dose for
about $1600. The good news is that soon pharmaceutical
companies will have to include the price of prescription drugs that are over $35 in their
TV ads. So now you can add the “erosion” of your bank account to the list of possible
side-effects! Why does it cost so much to buy prescription
drugs in the US? Today I’m walking you through the history of prescription drug regulation
and the ways that drugs are currently distributed as we try to understand these disproportionately
high costs across the US. Americans spend a ton of money on medicine.
According to the Organization for Economic Cooperation and Development, we spent nearly
$1,200 per capita on prescription drugs per year in the period from 2014-2016, far out-spending
people from other industrialized nations. In fact, the Pew Charitable Trusts conducted
a study of the drug spending estimates assembled by several public and private organizations.
It turns out that spending on prescription drugs in the U.S. is not only rising, but
also that it is expected to outpace growth in other parts of the health sector. But why? According to Austin Frakt, in the
New York Times, this is not because Americans are buying more medicine than people in other
affluent nations (he cites a 2013 report by the Association of the British Pharmaceutical
Industry to support this claim). It’s also not because Americans buy a greater percentage
of name-brand drugs than generics than people in other countries (he cites a 2018 issue
of the Journal of the American Medical Association to back this up). Instead, this is because
there are less stringent government policies limiting prices of brand-name drugs in the
US than there are in other affluent nations. But it isn’t that drugs aren’t regulated
in the US. In fact, they have been for almost two hundred years. In the early years of the
country, medical groups would compile lists of standardized drugs, but it wasn’t until
after the Mexican-American War (which lasted from 1846-1848) that the government really
began to crack down on bad medicine. During this war, 1,721 American soldiers were
killed on the battlefield while 11,550 died from “collateral causes.” While some of
these deaths resulted from poor food and living conditions, many were the bi-product of tainted
drugs given to the soldiers. Public outrage led to the signing of the Drug Importation
Act of 1848, which aimed to prevent these types of low-quality drugs from entering the
country. Of course, all sorts of untested remedies
were being made, advertised and sold within the US. In 1905, the American Medical Association
began to require drug companies to prove that their drugs did what they claimed if they
were going to advertise in their publication or in related medical journals. A year later,
President Theodore Roosevelt signed the Pure Food and Drug Act, making it illegal for states
to buy or sell mislabeled or tainted food, drinks, and drugs. Sadly, this version of the act didn’t do
enough to keep consumers safe. In 1937, an elixir called sulfanilamide killed 107 people,
many of whom were children. And in 1938, the Federal Food, Drug, and Cosmetic (FDC) Act
began a new system of drug regulation that set limits on poisonous matter in drugs. Wait….limits?
Shouldn’t it be no poisonous matter? Well, I guess what doesn’t kill you makes you
stronger. It also permitted the government to inspect
factories. The FDA began to oversee manufacturing practices and set quality controls. And it
also became authorized to stop the illegal sale of drugs by pharmacies. In the 1960s, the FDA started working with
the National Academy of Sciences and the National Research Council to measure the effectiveness
of thousands of marketed drugs. Ten years later, it required that all medicines be sold
with information describing its risks and benefits to the patent office. In 1983, after
cyanide-laced Tylenol capsules killed 7 people in Chicago (and others in copy-cat crimes
around the nation), Congress made it a crime to tamper with packaged consumer goods. So, what does all of this have to do with
the high price of prescription drugs? Well, much as the government became involved in
regulating the quality and packaging of drugs, it also became involved in regulating the
distribution of both brand-name drugs and their generic counterparts. So, if you’re wondering, a generic drug is
a pharmaceutical that contains the same chemical substances as a brand-name drug. For example,
fluoxetine is the generic version of the anti-depressant, Prozac. In 1984, the Drug Price Competition and Patent
Term Restoration Act (also known as the more snappy Hatch-Waxman Act) was passed. It allowed
the FDA to approve applications for generic versions of brand-name drugs—and this part
is important– without the manufacturer of the generic drug repeating research that proved
the safety and effectiveness of the brand-name version. Not needing to repeat the research, combined
with not needing to advertise their brand-name in flashy commercials (such as the one that
I described earlier), allows the producers of generic drugs to sell their product to
consumers at a much lower price. This is all well and good. But here is the
important caveat: generic drugs cannot be sold until the patents on brand-name drugs
expire. Generally, patents filed since 1995 last for 20 years from the date that the drug
was invented. However, during much of this time, the drug is still being tested. The
amount of time that the patent lasts once a drug has gone to market can vary. This is
why the Hatch-Waxman Act allows manufacturers of brand-name medications to apply for up
to an additional five years of protection. Another side-bar: the Hatch-Waxman Act does
not apply to biologics, or medications made from a living organism and its products. So, here is the bottom line: patients who
require new drugs or biologics that are still under protection must pay the market price
in the US. This leads us to the million (or really trillion
dollar) question: Why are brand-name drugs and biologics more expensive within the U.S.
than they are in Australia, Canada, New Zealand, and a host of other European nations? This answer pivots on how drug prices are
negotiated. In countries that have universal health coverage, a single entity usually buys
drugs in bulk from their manufacturers. The only organization that functions this
way in the U.S. is the Veterans Administration, which purchases its large inventory through
a single centralized purchasing and negotiating operation. It can also refuse to buy brand-name
drugs that have not been proven more effective than generics. In the rest of the country, however, multiple
buyers (including Medicare, state Medicaid agencies, and private insurers) negotiate
separately with each drug manufacturer. Less leverage often leads to higher prices. At the same time, most private insurance companies
outsource negotiating medicine costs to pharmacy benefit managers, also known as “PBMs.” PBMs manage prescription drug benefits on
behalf of health insurers, drug plans, large employers, and other payers. You can think
of them as middlemen who use their purchasing power to negotiate rebates and discounts from
the drug manufacturers. Rebates on prescription drugs are generally paid by a pharmaceutical
manufacturer to a PBM. The PMB shares some of this rebate with the health insurance company.
These rebates are mostly used for expensive brand-name prescription drugs in categories
in which there are interchangeable products. The idea is to create an incentive for the
PBM and health insurance companies to include certain products on their lists of covered
treatments. But the problem is this: since these rebates
are calculated as a percentage of a manufacturer’s list price, the PBMs have an incentive to
favor purchasing higher-priced drugs. Several reforms have been proposed to regulate
PBMs. Most of these center on providing greater transparency related to the size of rebates
and how much of these are shared with payers or patients. It will be interesting to see
which, if any, are implemented over the next few years. For the most part, consumers who are lucky
enough to have good drug benefit plans, simply pay a copay for their medications. This enables
many to remain blissfully unaware of what their prescriptions actually cost for uninsured
patients. And for the uninsured, these high prices can be deadly. In 2018, the Kaiser
Foundation published a study that showed that people without insurance were more than three
times as likely to say that they postponed or did not fill a prescription drug due to
its high cost. So… what are some potential ideas to reduce
the cost of prescription drugs in the US? For the answer we might look back at history.
Public outcry after the death of soldiers led to the Drug Importation Act of 1848. Protests
after sulfanilamide killed 107 led to government regulation of drug contents and manufacturing
practices. Outrage after people were killed by poisoned Tylenol caused the government
to regulate packaging. There’s similar sustained public outcry about the high costs of medication
today. But part of the driving factor behind effective change in the past was that we had
hard data about the direct negative impacts of badly handled medication. But today it’s
challenging to determine the exact number of deaths that have resulted from patients
postponing or failing to take their medication due to its high cost. The other half of the dilemma is for the public
to discern what they are fighting for. It is very difficult to understand the subtle
economics of drug pricing. Even I got a little confused in that PBM paragraph. But, several
ideas have been put forward as potential solution. This includes: moving towards a single-purchaser
system, limiting the cost of new drugs and biologics, pricing new drugs based on their
comparative effectiveness, and demanding more transparency out of PBMs.


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