Prescription Drug Costs: Why Do They Keep Going Up?

Roxanne Nelson, BSN, RN

August 23, 2016

The high cost of prescription drugs in the United States (US) has been the focus of much discussion and debate in recent years, as price tags continue a precipitous march upward.

The issue is raised again, this time by researchers from Harvard Medical School in Boston, Massachusetts, in a new paper published in the August 23/30 issue of JAMA. Specifically, Aaron S. Kesselheim, MD, JD, MPH, an associate professor of medicine at Harvard, and colleagues examined the wave of price hikes that have occurred in the past few years.

From 2010 to 2012, the rise in drug cost was more modulated because of expiring patents on many widely used medications, note the authors. However, cost has now begun climbing once again, highlighted by several new and very expensive products that entered the marketplace, as well as steep price increases in older drugs.

Between 2013 and 2015, there was about a 20% increase in net spending on prescription drugs, which outpaced "a forecast 11% increase in aggregate health care expenditures," they note.

Currently, the cost of prescription drugs now accounts for an estimated 17% of total healthcare spending, and coverage constitutes 19% of employer-based insurance benefits.

Blame Industry

In their paper, the Harvard group places the blame for high drug costs mainly on industry.

The high prices largely arise "from the approach the United States has taken to the granting of government-protected monopolies to drug manufacturers, combined with restriction of price negotiation at a level not observed in other industrialized nations," they write.

In addition, unlike the situation in nearly every other advanced nation, the US healthcare system permits drug manufacturers to set their own price for any given product, they add.

Thus, pharmaceutical manufacturers are able to maintain high prices based on two market forces: protection from competition and negotiating power.

With that in mind, Dr Kesselheim and coauthors believe that the most "realistic" short-term strategies that would address escalating costs include enforcing more stringent requirements for the award and extension of exclusivity rights, enhancing and encouraging competition by ensuring timely availability of generic drugs, providing greater opportunities for meaningful price negotiation by government payers, and educating all stakeholders about making these choices.

"I think the answer is that we need to imagine policy solutions at multiple different levels," Dr Kesselheim told Medscape Medical News.

"There are things Congress can do, such as promoting public funding of science to encourage future treatment development, investing in comparative effectiveness research, funding for the Federal Trade Commission, and re-examining policies that provide market exclusivity for noninnovative products," he explained. "There are also things that physicians and patients can do, such as talk more about drug costs, look for less expensive evidence-based alternatives, and talk to their legislators."

"I think it's a multipronged issue," Dr Kesselheim added.

Approached for comment, Joshua P. Cohen, PhD, research associate professor at the Tufts Center for the Study of Drug Development, Boston, agreed that there is a lack of national bargaining power in a multiple-payer system, such as the one that exists in the United States, and that state and federal regulations often prohibit payers from fully using their clout when negotiating deals with the drug industry.

"But that said, I think it's inaccurate to state that the drug industry 'sets its own prices,'" he commented. "That may be true for products that are new and in unique therapeutic classes, because in those cases industry has plenty of pricing power," he added. "But most new drugs are not first-in-class or unique. Most have competitors. The industry has to keep that in mind when it starts its pricing negotiations with payers."

Also commenting on the study, Holly Campbell, a spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade organization for the pharmaceutical industry, says that this study "advances a misleading narrative by understating how the competitive marketplace for medicines in the United States helps control costs and provides patients with access to innovative treatments and cures faster than in many parts of the world.

"In the United States, generic utilization rates are nearly 90 percent, competition occurs among brand name medicines and large, powerful purchasers negotiate aggressively," said Campbell. "In fact, Express Scripts, the United States' largest pharmacy benefit manager, now touts that hepatitis C treatment is less expensive here than in western countries thanks to their aggressive negotiation."

Branded and Specialty Products

In their paper, Dr Kesselheim and colleagues set out to better understand the factors that have contributed to the most recent price escalation hike and possible policy options that could help curb rapidly increasing costs. They reviewed the literature published in peer-reviewed medical and health policy journals for an 11-year period beginning in 2005.

According to their findings, the primary reason for rising costs is the high price of new branded products that are protected by patents.

Even though these products make up only 10% of all prescriptions in the United States, they account for nearly three quarters (72%) of drug spending.

In the 8-year period between 2008 and 2015, the price tags for the most common branded drugs increased 164%, which was far in excess of the consumer price index of 12%.

Additionally, the authors note, the annual cost of a growing number of "specialty drugs," which make up a group of high-cost, generally injectable biologics, exceeds $250,000 per patient.

While these high-priced products have historically been limited to drugs used to treat rare conditions, new high-cost products used to treat millions of patients have now entered the marketplace. As an example, a growing number of new oncology drugs now exceed $100,000 per course of therapy.

Increasing Competition

A lack of competition allows for manufacturers to set high prices for brand-name drugs, but the authors note that competition between branded agents generally doesn't result in lower prices.

The only form of competition that has consistently and substantially lowered branded drug prices comes from the entry of generic drugs into the marketplace, which occurs once a patent expires.

Dr Cohen pointed out that the United States has a healthy generics market with relatively low generics prices. "Hence, the pricing picture is complicated, particularly since close to 90% of scripts are now for generic drugs," Dr Cohen told Medscape Medical News.

The study authors agree that prices of most generic drugs remained reasonably stable between 2008 and 2015, but rising costs of these products are also concerning. The price tags of almost 400 (approximately 2% of the sample investigated) have risen by more than 1000%, the most notorious being the astronomical price hike by Turing Pharmaceuticals of pyrimethamine (Daraprim) in 2015, which saw the price increase by 5500%.

The costs of several other older drugs have also jumped, including isoproterenol by 2500%, nitroprusside by 1700%), digoxin by 637%, and, most recently, the epinephrine auto-injector (EpiPen, Mylan) by 400%.

There are also problems that arise with generic entry into the marketplace, the authors point out. Generic entry, for example, can be delayed when a manufacturer is able to extend a patent along with the drug's exclusivity.

Another issue is "pay for delay" deals, in which pharmaceutical manufacturers with patents that are nearing expiration pay companies to delay the introduction of a generic version. Pay for delay has become a particularly contentious issue and has entangled the US Federal Trade Commission in several lawsuits that have made their way all the way to the Supreme Court.

As an example, the tyrosine kinase inhibitor imatinib (Gleevec, Novartis), considered to be one of the most successful targeted agents ever developed, came under scrutiny because of its dramatic increase in cost and patent disputes. In 2014, Novartis settled a case concerning a version of imatinib developed by a subsidiary of the generic manufacturer Sun Pharmaceuticals Industries, which subsequently delayed the entry of a generic version into the marketplace by about 7 months.

Other issues with generics involve application backlogs at the Food and Drug Administration, which can delay entry. Even after access to the marketplace has been achieved, the number of manufacturers producing a certain drug depends on many factors, such as availability of raw ingredients, mergers within the industry, and the demand for the product.

Uneven Negotiating Power

Drug prices are higher in the United States than the rest of the industrialized world, partly because of the lack of standard negotiating power that exists in nations with national healthcare care and/or drug review systems.

Compared with other industrialized nation, per capita spending on prescription drugs in 2013 in the United States was $858 vs an average of $400 for 19 other countries.

The costs of the 20 highest-revenue-grossing drugs were an average of 3-fold higher in the United States than in the United Kingdom, and these disparities between the United States and comparable nations remained even after adjustment for undisclosed discounts, or "rebates," that manufacturers offer to US payers.

In 2010, note the authors, the estimated average postrebate prices for drugs were about 10% to 15% higher in the United States than in Canada, France, and Germany.

The US system is a mix of public and private payers that vary greatly in their ability to negotiate lower drug prices.

One example often cited is Medicare, which accounts for almost a third (29%) of the nation's prescription drug expenditure, but it is prohibited by federal law from negotiating for lower prices. In addition, Medicare is also required to offer coverage to all products in certain therapeutic categories, such as oncology.

Conversely, other government programs are not bound by the same restrictions. Medicaid is entitled to receive a rebate (discount) of at least 23.1% of the average manufacturer price for most branded drugs and has protection against increased prices that exceed the inflation rate.

In the same vein, Dr Kesselheim and his colleagues point out, the Veterans Health Administration, which provides healthcare services for veterans and their dependents, is also entitled to a rebate — in this case, of at least 24% of the average price — and also has broad authority to exclude products from its formulary.

In the private sector, negotiating power is far more varied, especially with the advent of prescription benefit management companies, which have become prominent intermediaries that help employers or insurers promote appropriate prescription drug use and decrease its cost.

In some cases, note the authors, they have been able to negotiate prices for certain drugs, but aggressive negotiation still has not become the norm.

But while European nations and others have greater bargaining power, there may be a tradeoff for that, Holly Campbell from PhRMA pointed out. "Price differences that may exist between the United States and other countries are often achieved through price controls that result in restricted access to medicines and fewer choices for patients," she said.

"For example, new data show patients in Europe wait an average of nearly 2 years longer to get access to cancer medicines compared to patients in the United States," Campbell said. "Even after this wait, patients in Europe still have access to far fewer medicines."

Campbell added that even as more Americans have coverage, many more patients are facing high pharmacy deductibles, rising out-of-pocket costs, and other barriers to care, putting their ability to stay on needed therapy at risk. "Instead of focusing on proposals that will stifle innovation, we need to concentrate on pragmatic solutions, including increasing competition for older medicines, modernizing the drug discovery and development process, removing barriers that limit paying for value and engaging and empowering consumers," she said. "In doing so, we will enhance the private market and address costs holistically."

This work was funded by a grant from the Laura and John Arnold Foundation and the Engelberg Foundation. Dr Kesselheim is a Greenwall Faculty Scholar in Bioethics and is supported by the Harvard Program in Therapeutic Science, reports receiving grants from the Food and Drug Administration Office of Generic Drugs and Division of Health Communication, the Laura and John Arnold Foundation, and the Engelberg Foundation. Coauthor Dr Sarpatwari is supported by the Greenwall Foundation and the Robert Wood Johnson Public Health Law Research Program and reports receiving a grant from the Laura and John Arnold Foundation and fees for consulting on drug pricing policies from Leerink Partners. No other relevant financial relationships have been disclosed.

JAMA. 2016;316:858-871. Abstract

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