High Drug Prices, Complexity of Drug Development and What the Market Will Bear

By Claire Thayer, August 30, 2016

The escalating cost of prescription drugs is of concern for all of us and impact stakeholders all across the health continuum: patients, payers, providers, as well as policy makers.   A recent Consumer Reports study, Is There a Cure for High Drug Prices?, offers these 5 reasons drug costs are ballooning:

• Reason #1: Drug Companies Can Charge Whatever Price They Want
• Reason #2: Insurance Companies Are Also Charging You More
• Reason #3: Old Drugs Are Reformulated as Costly ‘New’ Drugs
• Reason #4: Generic Drug Shortages Can Trigger Massive Price Increases
• Reason #5: Specialty Drugs Are Costing All of Us

This week, the Journal of the American Medical Association (JAMA) released an in-depth article, The High Cost of Prescription Drugs in the United States, which explores literature from January 2005 to July 2016 for sources of drug prices in the U.S., justification and consequences of high prices and possible solutions.  The authors conclude that “high drug prices are the result of the increasing cost and complexity of drug development but also arise in large part 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.”

Among overall study findings:

• In 2013, per capita spending on prescription drugs was $858 compared with an average of $400 for 19 other industrialized nations.
• In the United States, prescription medications now comprise an estimated 17% of overall personal health care services.
• The most important factor that allows manufacturers to set high drug prices is market exclusivity, protected by monopoly rights awarded upon Food and Drug Administration approval and by patents.
• The availability of generic drugs after this exclusivity period is the main means of reducing prices in the United States, but access to them may be delayed by numerous business and legal strategies.
• The primary counterweight against excessive pricing during market exclusivity is the negotiating power of the payer, which is currently constrained by several factors, including the requirement that most government drug payment plans cover nearly all products.
• Another key contributor to drug spending is physician prescribing choices when comparable alternatives are available at different costs.
• Although prices are often justified by the high cost of drug development, there is no evidence of an association between research and development costs and prices; rather, prescription drugs are priced in the United States primarily on the basis of what the market will bear.