Why Our Drugs Cost So Much

More recently, drugmakers have developed game-changing therapies for a host of serious illnesses, including multiple sclerosis, hepatitis C and several cancers. That means people are living longer lives.

The supply of a newer medicine, however, is controlled entirely by the drug manufacturer that holds the patent rights. That gives the manufacturer a monopoly on the drug for the 20-year life of the patent. During that time, it is free to raise the price as frequently and as much as the market will bear. An example: Last February, the price of Evzio, an auto-injected drug that is used to treat opioid overdose, jumped to over $4,000 — from just $690 in 2014 — just as demand for the medicine was quickly rising. 

You may not realize the high cost of medicine if you’re relatively healthy and have insurance to cover those occasional needs for, say, a week’s course of antibiotics. But if you or someone in your family develops a chronic or serious condition, prepare for sticker shock — even if you have insurance. 

When Janet Huston was diagnosed with a rare stomach cancer in 2009, surgery seemed to offer a cure. But a year later the cancer — called gastrointestinal stromal tumor or GIST — returned with a vengeance. The 66-year-old retired lawyer is now taking an arsenal of drugs, including Gleevec, to contain her tumor and control its symptoms. But the medicines that allow her to lead “a somewhat normal life” cost her more than $17,000 a year, including about $12,000 for Gleevec.

“That’s about 30 percent of my total income,” says Huston, who lives in Des Moines, Iowa, on Social Security and a modest pension from her years as an attorney. “I don’t always take my medication as I should, especially in the months when income taxes and property taxes come due,” she admits. 

It’s not just people like Huston who suffer financially. “High prescription drug prices affect everyone,” Purvis says. “Even if patients are fortunate enough to have good health care coverage, higher prices translate into higher out-of-pocket costs, premiums and deductibles. And greater spending by taxpayer-funded programs like Medicare and Medicaid are eventually passed along to all Americans in the form of higher taxes, cuts to public programs or both.” 

Put even more simply: One reason that your health insurance rates are high is because you are subsidizing other people’s high-cost medicines. For example, imagine the euphoria if a company developed a breakthrough treatment for Alzheimer’s disease. Let’s say it costs $60,000 a year per patient, and it gets prescribed to every American with the disease. To pay for the medicine,  insurance premiums for each privately insured person in the U.S. would increase by more than $140 per month, based on a new calculator developed by the Biotechnology Innovation Organization. 

A Contorted Marketplace

If you needed a new TV, you would do some research, shop around and pick the best model at the price you can afford. That creates competition that pushes prices down. The market for prescription drugs doesn’t work that way. For example, you don’t make the product choice — your health care provider does. And doctors and nurse practitioners often do so in the dark: There’s little information available to compare one drug to another. The Food and Drug Administration (FDA) does not require drug companies to prove that their new products are better than existing products. So many physicians write prescriptions for the drugs they’re most familiar with — and that information often comes from manufacturers themselves. Drug companies spend $24 billion a year marketing to health care professionals. 

Other factors that cause the drug market to be skewed include:

Patent law. Pharmaceutical companies have become adept at coming up with strategies to extend their monopoly on a drug beyond the expiration of its original patent. For example, they can seek approval for a “new” product that is a slight variation on the original, such as extended release formulations, or by creating therapies that combine two existing drugs into one pill. “The longer that a drug company is able to maintain its monopoly, the longer it can continue to charge whatever it wants for its product,” Purvis says.

Limits on Medicare. One of the largest purchasers of prescription drugs, Medicare is blocked by law from negotiating prices. When Congress was debating the law that created Medicare Part D (which took effect in 2006), lobbyists from the pharmaceutical industry convinced legislators that giving Medicare negotiating power would amount to price control. 

Compare Medicare with the Veterans Health Administration (VHA), the part of the Department of Veterans Affairs that handles medical care. The VHA does have the ability to negotiate drug prices. As a result, it pays 80 percent less for brand name drugs than Medicare Part D pays, according to a 2015 report by Carleton University in Ottawa, Ontario, and Public Citizen, a public advocacy group. The VHA gets its negotiating power from its formulary, a list of prescription drugs that it will cover. Medicare and Medicaid, by contrast, are required to cover almost all drugs approved by the FDA, regardless of whether a cheaper, equally effective drug is available.   

Mutiple middlemen. When you pick up a drug at the pharmacy, you often don’t know what its real price is — that is established between the manufacturer and your insurer. You just pay the agreed-upon copay rate. Today, insurance companies rarely negotiate prices directly with drug manufacturers. Instead, most insurers work with pharmacy benefit managers, who negotiate rebates and discounts on the company’s behalf — often in exchange for preferential placement on their list of covered medicines. Pharmacy benefit managers add yet another participant to what is already a complex system.

The R&D Explanation

The pharmaceutical industry offers several responses to the charges of excessively high prices. First, it notes that prescription drugs account for just 10 percent of  the nation’s health care costs; by comparison, 32 percent of costs go to hospital care, according to a 2016 report from Medicare.

It also notes that an open market means that “patients in the U.S. can access the most innovative treatments far earlier than any other country,” says Robert Zirkelbach, executive vice president at the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry trade group. For example, data from PhRMA show that patients in Europe wait an average of nearly two years longer to get access to cancer medicines than American patients. 

But the industry’s primary defense of rising medicine prices are the high costs associated with drug development. 

Drug companies spend over 10 years and up to $2.6 billion bringing a drug to market, according to a 2016 Journal of Health Economics article based on research by the Tufts Center for the Study of Drug Development (which gets a minority of its operating funds from the pharmaceutical industry). Of that amount, $1.4 billion is actual costs — items like salaries, labs, clinical-
trial expenses and manufacturing. The remaining $1.2 billion is “capital costs”: what the company sacrifices by investing time and money in an unproven drug. Some experts dispute these numbers, saying they overstate the true costs.

Even after accounting for their research investments, however, drug companies are among the most profitable public businesses in America. And an analysis from the research company Global Data revealed that 9 out of 10 big pharmaceutical companies spend more on marketing than on research. Most of them also have big budgets for lobbyists to ensure the laws continue to work in their favor. The Center for Responsive Politics puts the number of pharmaceutical industry lobbyists at 804 in 2016.

Further, some drug companies are moving away from doing all of their research in-house and instead are buying smaller companies with promising products. About 70 percent of industry sales come from drugs that originated in small companies, up from 30 percent in 1990, according to a Boston Consulting Group survey. 

In addition, drug companies increasingly focus on products that can generate the highest profits. The majority of drugs approved by the FDA are now expensive specialty drugs. Many drug companies are also pursuing “orphan drugs” — medicines targeting diseases that afflict fewer than 200,000 people. These medications cost an average of $140,000 a year. The catch: Many orphan drugs eventually receive additional approvals as a treatment for other conditions, dramatically increasing the market for the drug. 

The government supports orphan drug development with tax breaks and other incentives. In 2016, the pharmaceutical industry netted $1.76 billion in orphan drug tax credits.

Meanwhile, just five of the top 50 drug companies are spending money on much-needed new antibiotics — largely because these drugs aren’t lucrative, the AARP Bulletin reported in November 2016. “In most cases, people only need to take an antibiotic for a couple of weeks to get rid of an infection. Compare that to medications for chronic conditions — which people go on taking every day for years — and you can understand why drugmakers aren’t particularly interested,” says Erik Gordon, a professor at the University of Michigan Ross School of Business.  

There is nothing illegal with any of this: As publicly owned corporations, pharmaceutical firms focus on their bottom line. “Pharmaceutical executives say they have to be more aggressive to satisfy Wall Street,” says John Rother, executive director of the Campaign for Sustainable Rx Pricing.

But there’s evidence that drug companies will respond if pressured to lower prices. One example is patient-assistance programs. Kristin Agar, a 65-year-old clinical social worker in Little Rock, Ark., was diagnosed with lupus in 2009. Her doctor prescribed Benlysta, the only medication specifically approved for lupus. Her insurer would pay 80 percent, about $2,500 per infusion, but Agar had to pay the remaining $450 per dose.

“I couldn’t afford that,” says the self-employed professional. But when she applied for assistance, she was told she made too much money. “That just infuriated me,” she says. Agar appealed the decision — and got her copay covered by the drugmaker for two years. 

But a consensus is building that more must occur. “People are concerned about drug prices; more are being forced to make trade-offs between paying for their drugs and for food or rent,” says AARP’s Purvis. “The trends that we’re seeing are simply unsustainable.”

There is nothing illegal with any of this: As publicly owned corporations, pharmaceutical firms focus on their bottom line. “Pharmaceutical executives say they have to be more aggressive to satisfy Wall Street,” says John Rother, executive director of the Campaign for Sustainable Rx Pricing.

But there’s evidence that drug companies will respond if pressured to lower prices. One example is patient-assistance programs. Kristin Agar, a 65-year-old clinical social worker in Little Rock, Ark., was diagnosed with lupus in 2009. Her doctor prescribed Benlysta, the only medication specifically approved for lupus. Her insurer would pay 80 percent, about $2,500 per infusion, but Agar had to pay the remaining $450 per dose.

“I couldn’t afford that,” says the self-employed professional. But when she applied for assistance, she was told she made too much money. “That just infuriated me,” she says. Agar appealed the decision — and got her copay covered by the drugmaker for two years. 

But a consensus is building that more must occur. “People are concerned about drug prices; more are being forced to make trade-offs between paying for their drugs and for food or rent,” says AARP’s Purvis. “The trends that we’re seeing are simply unsustainable.”