Don’t Hate the Player, Hate the Game: Drug Pricing in America

March 14, 2016
Taken from the March/April 2016 issue of The Women's Health Activist Newsletter.

Earlier this year, Turing Pharmaceuticals faced intense public criticism after the company bought a 62-year-old drug and increased its price by 5,000 percent.1 Turing’s unusually outspoken Chief Executive Officer, Martin Shkreli, strongly defended the decision, even going so far as to argue that the new price was still below market value.2 Shkreli’s brazenly unapologetic attitude — along with some eyebrow-raising behavior on social media — quickly earned him the title of “most-hated man in the United States.”3 A few months later, his arrest on unrelated charges of securities fraud was widely greeted with cheers.4

Unfortunately, this moment of schadenfreude has diverted attention from a much larger problem: while Turing Pharmaceuticals’ actions were indefensible, they were also far from unique.5 Equally discouraging is that everything the company did was completely legal — and there is nothing to prevent it from happening again.

Prescription drug price increases are actually incredibly common in this country, with some drugs experiencing multiple price increases in a single year. In fact, research consistently shows that many drug manufacturers raise the prices of their products annually at rates that are substantially higher than inflation.6 Over time, such price increases add up. For example, the price of cancer drug Gleevec has more than tripled — increasing from $24,000 per year to over $90,000 per year — since its launch in 2001.7 Unlike what happened with Turing Pharmaceuticals, however, these “normal” increases rarely lead to public outrage.

Equally problematic is the skyrocketing prices at which new products enter the market. There is strong evidence that, instead of pricing their products competitively, many drug manufacturers are setting their launch prices at, or slightly above, the prices of existing products, resulting in an endless race to the top.8 This phenomenon is particularly evident among cancer drugs, where the median launch price has more than doubled — from $4,500 per month to more than $10,000 per month — over the past decade.9

The combination of high launch prices and subsequent price increases has led to prescription drug spending trends that are widely viewed as unsustainable.10 And whether the public recognizes it or not, virtually everyone in the U.S. is already feeling the effects of drug manufacturers’ behavior.

Briefly, if you live in the U.S., you are paying for prescription drugs. Many taxpayer-funded programs like Medicare, Medicaid, and the Veterans’ Health Administration — not to mention various state and local programs — purchase prescription drugs. When government spending for such programs increases due to prescription drug prices, it will eventually affect all Americans in the form of higher taxes, cuts to public programs, or both.

In addition, by definition, prescription drugs costs are spread among everyone in a given health insurance pool. Thus, even if an insured person is not taking any prescription drugs themselves, they still pay for them through their premiums. For example, recent research has found that the costs associated with a new anti-cholesterol drug would increase annual premiums by $124 for everyone in a typical insurance pool.11

Prescription drug costs can also increase cost-sharing in a similar manner. A recent report found that insured patients were responsible for less than 3 percent of their total drug costs when they exceeded $50,000 per year.12 To help cover the remaining 97 percent of the costs for such patients, insurance plans have had little choice but to increase cost-sharing for less expensive drugs.13

A primary example of this phenomenon is the growing use of coinsurance, where patients pay for a percentage of their drug costs rather than a traditional flat copayment. This type of cost-sharing directly exposes patients to prescription drug prices — and any subsequent price increases.

Coinsurance has become particularly popular under Medicare’s outpatient prescription drug coverage, Medicare Part D. In 2016, 97 percent of Part D enrollees in stand-alone prescription drug plans will have two or more formulary tiers — or groups of drugs with different levels of cost-sharing — that use coinsurance.14 The percentage of drugs covered with coinsurance has also increased steadily under such plans, growing from 35 percent in 2013 to 57 percent in 2016.

Given Medicare’s outsized influence in the health care system, it’s likely only a matter of time before other insurers begin to rely more heavily on coinsurance as well. This spillover effect is already apparent in the Health Insurance Marketplace, where most plans rely on coinsurance for prescription drugs on higher formulary tiers. The average coinsurance is around 40 percent but can reach as high as 60 percent.15

Unfortunately, the much higher levels of cost-sharing that often result from coinsurance can lead patients to stop taking necessary prescription drugs. A particularly jarring example is the finding that cancer medications with cost-sharing of more than over $500 were four times more likely to be abandoned than cancer medications with cost-sharing of $100 or less.16 This type of behavior typically leads to poorer health and higher health care costs in the future.17

Recognizing that some patients are having trouble accessing their high-priced products, many drug manufacturers have begun to publicly campaign against high cost-sharing.18 This movement clearly has merit, since every patient should have access to the medications they need to stay healthy. But, it is disingenuous for the drug industry to argue that cost-sharing is the problem, when the highest levels of cost-sharing is typically the result of coinsurance, and therefore is directly linked to prescription drug prices.

Interestingly, high prescription drug prices and price increases are a uniquely American problem. While the U.S. is hardly alone in its use of prescription drugs, people in other countries are not paying nearly as much for them.19 Pharmaceutical manufacturers argue that this discrepancy occurs because other countries have implemented price controls that limit their contributions to research and development costs. Thus, Americans have to pay higher prices in order to ensure that drug companies can continue to develop new products

This claim is debatable. More importantly, however, there is actually a more relevant reason that Americans pay much more for our prescription drugs: we have done nothing to stop this from happening.20 Unlike many other countries, which negotiate and/or control drug prices directly, the U.S. relies on market competition and an extremely fragmented health care system. This decision has effectively allowed drug manufacturers to price their products at “what the market will bear” with no real consequences beyond fleeting bad press.21

Nevertheless, policymakers have made it abundantly clear that they do not support the U.S. negotiating prescription drug prices on behalf of its citizens, and politically influential pharmaceutical manufacturers are equally unenthusiastic about the idea.22 On the other hand, it is becoming increasingly obvious to everyone involved that the status quo is not acceptable. So, what might help? In a word: competition.

Many Americans are surprised to learn that the Food and Drug Administration (FDA) only requires drug manufacturers to demonstrate a statistically significant improvement over placebo. Unfortunately, this also means that we typically have very little information about whether a new prescription drug is any better than existing products. The widespread availability of such research — known as comparative effectiveness research (CER) — would help create evidence-based competition and reduce spending on unnecessary and/or ineffective treatments.

Fortunately, CER is already available from a highly credible source: drug manufacturers. Several countries require drug manufacturers to provide CER as part of their coverage determination processes.23 For example, Germany requires drug manufacturers to provide a dossier of CER studies to demonstrate that their product is better than the previously existing standard treatment. Consequently, it would not be burdensome or even unusual if the U.S. started asking drug manufacturers to provide such studies for its health care system as well.

Finding a way to create meaningful competition among similar drug products would also finally topple the pharmaceutical industry from its self-created pedestal. Most industries that operate in a free market environment are effectively required to demonstrate that their products are an improvement over their competition; it is only fair to ask drug manufacturers to do the same.

It is clear that we cannot continue giving drug manufacturers a blank check for prescription drugs. The combination of skyrocketing launch prices and relentless price increases is simply not sustainable for patients, payers, or taxpayers. While expanding the availability of CER won’t fix all of the pharmaceutical market’s problems, it is a much-needed step in the right direction. After all, the next Martin Shkreli will be here before we know it.

Leigh Purvis is the Director of Health Services Research in AARP’s Public Policy Institute. Ms. Purvis heads the Institute’s work on prescription drug issues, with a particular emphasis on prescription drug pricing, biologic drugs, and prescription drug coverage.

The continued availability of external resources is outside of the NWHN’s control. If the link you are looking for is broken, contact us at nwhn@nwhn.org to request more current citation information.

Resources

  • The NWHN wrote about this issue in the January WHA: Massion CT, and Fugh-Berman A, “RX for Change – Hepatitis drugs and skyrocketing health care costs,” available online at: nwhn.org/rx-for-change-hepatitis-drugs-and-skyrocketing-health-care-costs.
  • AARP has a wealth of resources on its website (aarp.org), as well as its ongoing Rx Price Watch reports that track price changes for widely used prescription drugs: www.aarp.org/rxpricewatch
  • Campaign for Sustainable Drug Pricing is a nonprofit that hopes to start a dialogue around high-cost medications and find a better approach to prescription drug pricing: csrxp.org
  • Consumer's Union (publisher of Consumer Reports) offers a Health Care Value Hub, with includes "easy explainers," and resources for advocates; the organization is also sponsoring discussions about possible reform efforts: healthcarevaluehub.orgThe Medicare program provides information and links to patient assistance programs that can help patients who cannot afford their medications: www.medicare.gov/pharmaceutical-assistance-program
  • NeedyMeds is a nonprofit that maintains a website of free information on programs that help people who cannot afford their medications and healthcare costs: needymeds.org

References

1. A. Pollack, “Drug Goes From $13.50 a Tablet to $750, Overnight,” New York Times, September 20, 2015.

2. J. Beck, “The Drug With a 5,000 Percent Markup,” The Atlantic, September 22, 2015.

3. S. Allen, “Martin Shkreli is Big Pharma’s Biggest A**hole,” The Daily Beast, September 21, 2015.

4. P.R. La Monica, “Twitter Blows up over Martin Shkreli’s Arrest, CNN Money, December 18, 2015.

5. J. Russell, “How 2015 Became the Year of Prescription Drug Price Outrage,” Chicago Tribune, December 24, 2015.

6. S.W. Schondelmeyer and L. Purvis, “Rx Price Watch Reports,” AARP Public Policy Institute, 2004-2015.

7. M. Herper, “’60 Minutes Just Attacked High Drug Prices. Here’s What You Should Know,” Forbes, October 5, 2014.

8. D.H. Howard, P.B. Bach, E.R. Berndt, and R.M. Conti "Pricing in the Market for Anticancer Drugs." Journal of Economic Perspectives, 29(1): 139-62.

9. P.B. Bach, L.B. Saltz, and R.E. Wittes, “In Cancer Care, Cost Matters,” New York Times, October 14, 2012.

10. A. Pollack, “Drug Prices Soar, Prompting Calls for Justification,” New York Times, July 23, 2015.

11. K.A. Schulman, S. Balu, and S.D. Reed, “Specialty Pharmaceuticals for Hyperlipidemia—Impact on Insurance Premiums,” New England Journal of Medicine, 373(17): 1591-93.

12. G. Stettin, Super Spending: U.S. Trends in High-Cost Medication Use, Express Scripts, May 2015.

13. Medco, 2011 Drug Trend Report: Healthcare 2020, 2011.

14. E. Carpenter, Avalere: Pressures Mounting for Medicare Drug Benefit, Market for Medicare Advantage Plans Appears Stable in 2016, September 28, 2015.

15. Avalere, Despite Lower Than Expected Premiums, Exchange Consumers Will Face High Cost-Sharing Before the Out-of-Pocket Cap, October 1, 2013.

16. S.B. Streeter, L. Schwartzberg, N. Husain, M. Johnsrud, “Patient and Plan Characteristics Affecting Abandonment of Oral Oncolytic Prescriptions,” Journal of Oncology Practice, 7(3S): 46s-51s.

17. A.O. Iuga and M.J. McGuire, “Adherence and Health Care Costs,” Risk Management and Healthcare Policy,” 7: 35-44.

18. http://accessbettercoverage.org/

19. B. Hirschler, “Exclusive—Transatlantic Divide: How U.S. Pays Three Times More for Drugs,” Reuters, October 12, 2015.

20. D.W. Light and J. Lexchin, “Foreign Free Riders and the High Price of U.S. Medicines,” BMJ, 331(7522): 958-960.

21. H. Kantarjian, D. Steensma, J.R. Sanjuan, A. Elshaug, “High Cancer Drug Prices in the United States: Reasons and Proposed Solutions,” Journal of Oncology Practice, 10(4): e208-e211.

22. P. VanderVeer, “Who is Pushing for Price Controls? The Answer May Surprise You,” The Catalyst, August 24, 2015.

23. Hogan Lovells International LLP, EU Pricing & Reimbursement, November 2014.