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.