Why Prescription Drug Prices are So High

A July 2017 study published by The Commonwealth Fund provides excellent insights into why prescription drug prices are so high.  This article highlights some of its observations and possible solutions.

Introductory prices for new brand-name drugs have reached unprecedented levels over the past decade.  One study found that oral anticancer drugs introduced in 2014 were six times more expensive at launch, when adjusted for inflation, than drugs introduced in 2010 ($11,325 and $1,869 per month, respectively) However, it is not only anticancer drugs that are being launched with high price tags. Recently, several drugs have been introduced to treat psoriasis. Stelara was the first to enter the psoriasis market in 2009, at a cost of nearly $46,000 per year. Then a comparator drug, Cosentyx, was launched in 2015 at the same price   In 2016, a direct competitor to Cosentyx was approved, called Taltz. The launch price for Taltz was set at more than $50,000 per year.

New brand-name drugs are granted patent and market exclusivity protections to give drug manufacturers time to recoup the costs of developing new treatments and cures and to receive a return on investment. During this period of market protection, brand-name drug manufacturers have total discretion in setting their introductory prices and annual increases. The only price competition that can occur is limited and comes from clinically comparable brand-name drugs, also known as comparator drugs. In 2014, 33 new brand-name drugs were launched in the U.S., and only eight had a direct price competitor at launch.

Many manufacturers are using patent protection and market-exclusivity protections to significantly increase some brand-name drug prices annually, even when there have been no significant improvements to the drug. Between 2014 and 2015, retail prices for 268 brand name prescription drugs widely used by older Americans rose by an average of 15.5 percent, 130 times the rate of general inflation.  Upward price swings on specialty pharmaceuticals used to treat complex conditions are often even higher. For example, first-generation disease modifying treatments for multiple sclerosis, originally costing $8,000 to $11,000, now cost about $60,000 per year. Prices of top-selling drugs for multiple sclerosis, Copaxone and Avonex, have seen significant increases. Copaxone’s price doubled, or nearly doubled, between 2010 and 2014.

Some manufacturers develop new drugs by leveraging federally funded research and discoveries. Through the National Institutes of Health (NIH) and other agencies, the federal government funds a large portion of pharmaceutical research and development, with substantial investments in the basic science and translational research that leads to new drug discoveries, as well as late-stage development. The government typically awards grants to researchers at academic medical centers and other institutions, and some projects are conducted by federally employed scientists. New discoveries are commonly licensed to drug manufacturers for additional development and testing, as well as marketing and commercialization. Drug manufacturers still benefit from market-exclusivity protections in these situations: they can introduce these new drugs, developed primarily with federal funds, at high launch prices even when spared considerable research and development costs.

For example, the federal government spent $484 million developing the cancer drug Taxol, which was then marketed under an agreement with Bristol-Myers Squibb starting in 1993. In 10 years, the manufacturer earned $9 billion in revenue and paid the federal government $35 million in royalties.

Nearly half of basic research is funded through federal government investments, with roughly 75 percent of new innovative drugs supported by federal funding.  This system of public investment has raised concerns that the economies of developing drugs with government grants are not being passed on to consumers and payers—and that needed medications are not being made accessible to all patients for a reasonable price.

Xtandi, a prostate cancer drug, is an example of how U.S. patients are not benefiting from federal drug development funding. The University of California, Los Angeles, discovered Xtandi and was granted three patents. These patents would not have been possible without funding provided by the NIH and the Department of Defense. Eventually, the three patents were licensed to a private manufacturer, Medivation, which pursued and was granted FDA approval. Today, the average U.S. wholesale price of Xtandi is more than $129,000 a year. Other developed countries pay no more than half this price.

Actions That Would Have Direct Impact on Launch Prices and Annual Increases

  1. Alter patent protections and market exclusivities to introduce price competition, with the goal of reducing patented brand-name drug prices.
  2. Require reasonable pricing of patented brand-name drugs when there are federally funded investments in the development of these drugs, so that the public benefits from any tax dollars devoted to drug research
  3. Alter how federal and state government programs purchase patented brand-name drugs for the purpose of lowering prices and increasing access for patients.
  4. Alter how government programs purchase patented brand-name drugs with the purpose of tying purchases to improved clinical value or health outcomes.

For more information read H. Waxman, B. Corr, K. Martin et al., Getting to the Root of High Prescription Drug Prices, The Commonwealth Fund, July 2017.

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