Rising Drug Costs: A Peculiar American Phenomenon

By Nolan Abramowitz

Patients in the United States face some of the highest drug costs in the developed world. This has led to an increasing number of Americans being unable to afford medications that could dramatically improve or save their lives. Take, for example, Brien Anderson, a lymphoma patient, who was prescribed Imbruvica, a new groundbreaking cancer drug. After one year of taking the medication, Mr. Anderson was able to go into remission. However, his private insurance company told him they would no longer pay for the drug due to rising costs. He would have been forced to pay over $10,000 per month because his income was high enough to disqualify him for drug support programs. Unable to afford the medication, his health began to deteriorate and he had to undergo surgery. Likewise, Jacqueline Racener, a Medicare patient with leukemia, was also forced to stop her prescription for Imbruvica because she faced costs of over $7,000 per year. Half of Imbruvica users are on Medicare and face similar costs, causing them to forgo life sustaining treatment. Imbruvica is listed at over $115,000 and was developed by Johnson and Johnson and Pharamacyclics LLC, resulting in $1 billion in sales for 2015.

A recent report from the Journal of the American Medical Association (JAMA) found that drug prices are higher in the United States than elsewhere in the world because US manufacturers can set their own prices; the government allows protected monopolies due to patents; and the FDA takes a long time to approve generic drugs. Furthermore, drugs that treat rare diseases can be protected indefinitely with patents for a single manufacturer under current US patent laws. Most importantly, the study found that drug prices are not justified by increasing research and development costs. This is because most R&D costs are met by grants from the National Institute of Health (NIH) and from various venture capital firms. Drug manufacturers only spend on average 10-20% of revenue on R&D. Pharmaceutical companies, especially those that manufacture rare drugs, are taking advantage of inelastic demand to raise prices to unaffordable levels.

Furthermore, Medicare and Medicaid, the largest insurers in the US, are not allowed to negotiate prices. These same Medicare patients, who represent almost a third of US retail drug spending, also cannot receive direct aid from drug companies. Even individuals with private insurance plans are not immune from rising drug prices. Over the last few years, more Americans have moved away from traditional copay insurance plans where they would pay predictable prices for prescription medications. To save on basic insurance costs, these individuals have switched to high deductible plans that can cause unpredictable drug prices for an extended period of time. Many cheaper insurance plans offered on state health insurance marketplaces through the Affordable Care Act have deductibles as high as $6,000 that don’t cover many types of drugs. Insured Americans are having a harder time getting approved for the medications they need because their insurance companies are dropping coverage of certain medications, requiring extensive referral processes, or limiting the amount of time medications can be used for.

Increasing drug prices will continue to impact the health and financial stability of millions of Americans. In 2015, the average person in the US spent $858 on prescription drugs. On the other hand, the average across 19 other developed nations was just $400 per person. Moreover, in 2014, the increase in drug prices was 12.6%, which far outpaced inflation numbers that have been hovering around 0% to 2% for the past three years. In addition, price hikes for other medical costs such as surgeries and doctor visits have been relatively low compared to the increases in drug prices. Seventeen percent of overall health care expenses are devoted to paying for prescription drugs. Moreover, the cost of the most widely used brand name prescription drugs increased 125% from 2008-2014. Well known examples include: Mylan pharmaceuticals increasing the cost of Epipens from $57 in 2007 to over $500 in 2016, Turing Pharmaceuticals increasing an anti-malaria medication 500% to $750 per pill from $13.50, and Hepatitis C drugs made by Gilead cost $900 to $1000 per pill. Not only are costs increasing for patients, but an increasing number of insurance companies are changing their drug coverage plans.

Increasing drug prices have caused many patients to rely on nonprofits such as the Patients Access Network Foundation to help cover prescription drug costs. However, it is hard to qualify for these programs, so some patients are still stuck facing costs they can not afford. Moreover, some drug manufacturers offer subsidies as well. However, these programs can hurt health care in the long run by inducing individuals to buy certain drugs based on discounts, hurting competition in the industry. Larger companies are able to offer more enticing discounts and outperform their generic competitors. In the long run, these large companies would increase demand for their product, increase their public relations, and eventually increase prices.

Mylan Pharmaceuticals is a prime example of drug companies taking advantage of a lack of competition in the auto injector industry for allergies. When Sanofi’s, a competitor, was forced to perform a voluntary recall on its Auvi-Q auto injector, Mylan was able to vastly increase the price of its EpiPen device. The price of EpiPens has increased to over $500 from just $57, but there have been no increases in manufacturing or R&D costs. Mylan has also been taking advantage of Medicaid by classifying itself as a generic drug to pay less in rebates. Medicaid requires a 23.1% rebate for brand name drugs, but only a 13% rebate for generics. This way Mylan was able to save hundreds of millions of dollars and continue to increase its profit. The firm spent over $35 million in TV ads in 2014, up from $4.8 million in 2011. Mylan is taking advantage of the sense of security parents feel when they have EpiPens for their children and are willing to pay high prices to keep their children save from life threatening allergies. In the end, parents are just paying for peace of mind. Since the price increase, Mylan’s CEO Heather Bresch’s total compensation has increased from $2.4 million to over $18 million.

The government is taking steps to take the burden off of patients so they can afford the medications they require. By 2020, new Medicaid and Medicare resolutions will be passed to take away policies that lead to higher drug prices. The government needs to ensure more transparency about prices in the industry and allow a competitive drug marketplace to form. Also, insurance companies should make their customers more aware of cheaper generic alternatives. The FDA could help increase competition by decreasing application approval timelines and regulations facing generic drugs. There is currently a backlog of 4,000 generic drug applications, up from a consistent level of about 400 applications a year until 2002.

The healthcare industry needs to be more strongly regulated by the government because all of its actions have direct human costs. Current policies allow pharmaceutical companies to take advantage of the economic conditions they face, leading to high drug costs that are unique to the US. Policy makers must act to reduce drug costs and make prescriptions more affordable so medical breakthroughs can reach the people that need them the most.