Are Drugs Really Overpriced?

TO SOMEONE LISTENING to the many reports on the state of drug prices in this country, the situation sounds like an ominous fairy tale in which at least one character gets eaten by a monster. The drug price tale, though, is less about scaring morals into children and more about understanding commerce — which can be just as frightening in its own way. What seems to be the most common story version goes like this: In one corner is the pharmaceutical industry, a menacing predator with teeth like the Big Bad Wolf’s. In the other are the unsuspecting patients who simply need their prescriptions and have no recourse. There isn’t even a fight. Big pharma crushes consumers by brute strength and unfair pricing.

But is this monster vs. helpless consumer metaphor accurate in all cases? In any? Some say, emphatically, yes. We all know the horror story of Martin Shkreli’s unanticipated decision to raise the price of Daraprim from $13.50 per pill to $750 per pill, literally overnight — a 5,000 percent increase and a financial nightmare for those who depended on the drug.¹ Soon after was the EpiPen scandal, with Mylan Pharmaceuticals suddenly raising its price by a “mere” 400 percent. Allergy sufferers everywhere lamented this budget-breaker and searched for occasionally dangerous alternatives, all while Mylan’s CEO’s salary rose more than 600 percent.^2,3

Based on these and other headline makers, the pharmaceutical industry does appear evil and greedy. But, like all things, one must dig deeper into the complexities to understand more than surface issues. And, there are plenty. So, is this Big Bad Wolf narrative missing something, or is the bad reputation justly deserved? Considering the fact Americans spend an average of $1,100 per person on prescription medications, it’s a topic needing discussion.^4,5

Understanding Drug Pricing

It seems so easy. Consumers simply pay the price the drug manufacturers set, right? Wrong. This isn’t it at all. Nothing is as straightforward as most consumers believe. A quick review of the price system will help set the stage for recall and understanding:

Pharmaceutical companies do not set the drug prices patients will pay. Drug prices are actually determined less by the pharmaceutical industry and more by pharmacy benefit managers (PBMs), organizations providing educational services to help patients, logistics expertise and leverage to negotiate reimbursement rates for medications and patient care services. Their influence on pricing is considerable and unreported. These companies, such as Express Scripts, CVS Caremark and Argus, negotiate with pharmaceutical companies for discounts off the list price. Once a PBM has purchased the drug, it increases the drug’s price and distributes it to pharmacies that have purchased it. Insurance companies come into play at this point. Employers are the biggest providers of health insurance, so chances are your patient’s employer hired a PBM to negotiate rebates from the pharmaceutical companies. Depending on whether similar drugs are available from various other drug manufacturers, a PBM might negotiate a significant rebate and further reduce prices, which further decreases the pharmaceutical company’s net price. This difference in price becomes the PBM’s profit. Some PBMs keep all of the profit, and some rebate employers while retaining only part of it. 6 However, these transactions are not transparent and just what they keep is not disclosed.

Based on how much an employer has agreed to pay for an employee’s pharmaceuticals, and how much rebate its PBM has achieved, drugs are placed on co-pay tiers. The more preferred the drug and tier, the more an employee/consumer will pay out of pocket. This is why patient A might pay much more than patient B, and much less than patient C, and why the same drug might be on different tiers within different insurance companies.

Though we hear about list price most frequently in headlines, that price does not equate to the pharmaceutical company’s profit. Its profit depends on its negotiations with a PBM. And a PBM’s profit rests on its negotiations with insurance companies and drug makers.⁶

Generic Medications and Alleged Patent Abuse The drug-pricing plot thickens when pharmaceutical companies are accused of patent abuse, or using ambiguous intellectual property law to extend their patents, which purportedly keeps cheaper generic drugs from going to market. Regarding patent abuse, among other accusations, FDA Commissioner Scott Gottlieb went so far as to tell drug manufacturers to: “End the shenanigans.”⁷

But, Holly Campbell, deputy vice president of public affairs at Pharmaceutical Research and Manufacturers of America (PhRMA), says patent abuse is not a true factor in high drug prices. “Despite claims from critics,” she explains, “nearly 90 percent of all medicines dispensed in the United States are generic alternatives that cost a fraction of the original brand price. More than $140 billion of brand medicine sales are projected to face generic competition by 2021. Further, the number of generic medicines coming on the marketplace is actually increasing. The FDA [U.S. Food and Drug Administration] approved a record-breaking number — more than 1,000 — generic medicines in 2017. This is evidence that the process is working.”

However, People for Affordable Drugs founder David Mitchell adamantly asserts the process isn’t working, and that it should do much more for patients. “It is very difficult to reform our drug pricing system,” he says, “because the problem with our system is that everybody makes more money when prices go up, except consumers, taxpayers and patients. There’s only one side [to this issue]: The system has to serve patients. If it doesn’t serve patients, what good is it? It’s not as though there are multiple sides. We need a system that serves the needs of patients, not business.”

But the business aspect is crucial to the industry, according to one Biotechnology Innovation Organization (BIO) spokesman, who declined to be identified. “The strong intellectual property rights which innovators and investors rely upon here in America is one of the reasons why America’s biopharmaceutical is the envy of the world, responsible for well over half of all new drugs developed worldwide,” he explains. “Despite the risks of investing in biotechnology, the industry attracts billions of dollars annually in new private investments based on the promise of innovative and patented discoveries, which will only be translated into actual commercial products providing a return on investment after years, sometimes decades, of capital-intensive investment and research efforts.”

Campbell offers further perspective: “It is important to keep in mind that the marketplace for medicines works differently than the rest of the healthcare system. There are no generic hospitals and no generic physicians, but there are affordable generic medicines. This is what enables us to afford new lifesaving treatments.”

Research and Development

For years, drug research and development (R&D) has been said to result in justifiably high drug prices. “Drug development is incredibly complex, risky and costly — a process that takes, on average, 10 to 15 years and over $2 billion, when accounting for the many failures along the way,” says the BIO spokesman. “It’s also important to consider the larger biomedical innovation ecosystem, where 90 percent of drug development programs fail. What’s more, over 90 percent of drug companies report to be unprofitable, and the biopharmaceutical industry ranks 36th (out of 126 industries) in terms of aggregate profitability — behind sectors such as food, retail, auto parts and apparel/footwear — yet we continue to drive the profits we make back into the important research and development process. In fact, the biopharmaceutical industry reinvests more of its revenues back into R&D than any other sector — to the tune of nearly 20 percent. For America to continue to serve as the world leader in biopharmaceutical innovation, revenue from the few successes are needed to reward past investments and to attract new investments to finance future research and development programs for patients in need.”

Economist Avik S. A. Roy, however, has a vastly different perspective: “There is no correlation between drug prices and the cost of innovation. The costliest drugs to develop are those which require large Phase III clinical trials involving tens of thousands of patients. … Such trials can cost several billion dollars per molecule. But, in fact, new drugs in these areas have little pricing power, because doctors have the ability to prescribe effective and inexpensive generics for these conditions. Indeed, the clinical effectiveness of generics makes them the standard of care for first-line therapy for most common metabolic and cardiovascular diseases.

“The cheapest drugs to develop are those which require small clinical trials involving dozens of patients such as drugs for ultra-rare, or ultra-orphan, conditions like Fabry disease and paroxysmal nocturnal hemoglobinuria (PNH). Phase III trials for these conditions, which only affect several thousand people in the United States, run in the tens of millions. But manufacturers of such drugs have generated billions in revenues from them. The pioneer in this area, Genzyme, was acquired by Sanofi-Aventis for over $20 billion in 2011, when it was garnering $4 billion in annual revenue for drugs, including a treatment for Fabry disease. Alexion, the developer of a treatment for PNH, recorded $3 billion in revenue in 2016. Annual revenues in this range exceed those of many drugs which were at least equally innovative but developed for more common disorders.”8

Hospitals’ Role in Price

Lest we believe high drug prices have only to do with the previously mentioned players, hospitals have their own implication. PhRMA’s information resource “Let’s Talk About Cost” reveals hospitals are responsible for, on average, a 500 percent increase in drug prices.^9,10

“Hefty hospital markups for drugs are also to blame for high prices,” said the BIO spokesman. “[Hospitals also] receive more than 250 percent of what they paid to obtain the treatment after negotiations with commercial payers were considered. This might also help explain why hospitals comprise by far the largest share of healthcare spending, at about 30 percent of U.S. healthcare expenditures, or close to $1 trillion annually.”

Insurers themselves are problematic as well. “It’s important to point out,” explains the BIO spokesman, “that while net price and overall spending growth for drugs continue to level, insurers are under scrutiny for the role they play in driving up patient out-of-pocket costs for medicines. For example, lawsuits against UnitedHealth allege that their prescription benefit design can require that patients pay co-pays for more than the actual cost of the drug — with the insurer pocketing the difference. Insurers have also faced criticism for discriminatory formulary design, particularly against patients with high-cost health conditions such as HIV and hepatitis C.”

Possible Solutions

Obviously, consumers suffer when their healthcare expenses exceed their incomes. High drug prices, whether justified or not, hurt consumers who desperately need affordable medications. What can be done to smooth the system intended to help patients?

Campbell says there is no magic wand to lowering drug prices. By getting all players to work together, however, she believes the goal can be achieved. Among her solutions is boosting competition. By bringing to market more generics and brand-name drugs, she believes prices will be driven down and consumer choice increased. She also believes rewarding patients’ improved outcomes and reforming outdated laws that inhibit value-based arrangements for prescription drugs will lower prices, benefiting everyone. Rather than revamping the entire system, though, she wants to keep what works, which includes rejecting policies that hinder functioning markets, lessen innovation or threaten safety or access.

Mitchell firmly believes fixing patent abuse and government-granted monopolies, allowing Medicare to negotiate and requiring much-needed transparency from PBMs will help tremendously.

And, the BIO spokesman agrees with Mitchell, at least in part. He says a lack of transparency from PBMs makes it nearly impossible to determine how much of negotiated savings are passed along to patients or withheld as profits for PBMs or insurers.

“Because PBMs generally refuse to disclose rebate information on a drug-by-drug basis, health plans are unable to determine whether its PBM is favoring the lowest net-cost drug in each therapeutic category, or whether, instead, it makes formulary decisions based upon which drug in a given class will net the PBM a higher rebate. This black box system drives up costs for both patients and insurers,” he explains.

No Magic Wand

No, there certainly is not a magic wand to solve problems in such a complex system. It would seem, however, that with all players working together — drug manufacturers, PBMs, insurers, pharmacies, hospitals, consumers and others — prices can begin to be lowered for the most expensive and least attainable drugs. In any case, consumers must realize that the big, bad pharma price-gouging narrative is only the tip of the iceberg, and often an erroneous one. What lies beneath it is more complicated, more difficult to remedy and much less about the aforementioned list price that is so often, and so wrongly, held responsible for every pricing problem.