The United States has no formal drug pricing policy, preferring to leave pricing open to market competition. In theory, those competitors should be willing to compete on price, but the market reality is very different.
DRUG PRICES: MARKET PRICING OR PRICE GOUGING? • Drugmakers persist in raising prices far beyond the rate of inflation
The United States has no formal drug pricing policy, preferring to leave pricing open to market competition. In theory, those competitors should be willing to compete on price, but the market reality is very different. January 2019 saw price increases on over 250 prescription drugs in direct opposition to demands from President Donald Trump to hold prices level in anticipation of a national plan to lower drug prices in what has become the world’s most expensive pharmaceutical drug market.
When challenged over these price increases, pharmaceutical CEOs point to the increasing costs of developing new drug treatments that can be targeted at the genetic profile of individual patients. However, the economic reality tells a slightly different story.
Data recorded by the U.S. Drug Accountability Office tracked an increase in prescription pharmaceutical sales from $500 billion in 2005 to $700 billion in 2015, with a corresponding increase in profits of about 18 percent over the same decade. In contrast, worldwide research and development (R&D) spending over the same period increased from $82 billion to only $89 billion.
To further undermine the “targeted treatment” argument, while most of the cost increases were attributable to new treatments, the largest price increases were placed on established brand-name drugs–around 9 percent per year.
One drug in particular–insulin–has come under increased scrutiny in recent years as pricing has increased far beyond market averages. In 2014, for example, the price of Lantus, an insulin product made by Sanofi, rose by 49 percent. According to research by the Health Care Cost Initiative, the market price of insulin doubled between 2012 and 2016, without any change in the drug’s composition or efficacy.
In 2018, the Attorney General of Minnesota filed a federal lawsuit against the makers of insulin–Eli Lilly, Sanofi, and Novo Nordisk–in response to media coverage of the death of a young diabetes patient who was forced to ration his insulin medication far below the recommended dosage due to rising costs.
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Growing consumer awareness of this issue is leading to increased demand for an explanation as to why drug prices are allowed to continue to rise beyond the rate of inflation. Industry analysts point to three key factors that directly impact the leverage that pharmaceutical companies appear to have over the Pharmacy Benefit Managers (PBMs) that work for the insurance companies:
1. Mergers & Acquisitions
In recent years pharmaceutical companies have achieved higher profits by buying competitors (and their respective drug portfolios) rather than investing in R&D (see Valeant Pharmaceuticals in Chapter 5). The broader the range of drug products they have in their portfolio, the more leverage they have over PBMs and the higher those drug prices can be.
2. No Competition
When there are only three makers of insulin, the potential for a price war is greatly reduced, especially if those companies choose to file a joint lawsuit to halt the development of generic alternatives to their patent-protected drugs.
3. Lack of Transparency
In the absence of a federal drug policy, pharmaceutical companies are allowed to get very creative with pricing models, including rebates, discounts, and limited social programs–“if you cannot afford drug X, company Y may be able to help.” With no formal requirement to disclose drug costs, offering rebates from higher prices allows pharmaceutical companies to achieve a higher revenue target by lowering those rebates without technically raising the list prices in the future.
A resolution for high drug prices still appears to be based on discussion rather than action. Medicaid is still unable to negotiate drug prices, and any congressional attempts to tackle the issue face immediate and aggressive responses from the pharmaceutical industry lobbyists. It remains to be seen whether consumer demands for transparency and accountability will be sufficient to force the government into action.
QUESTIONS
1. Why doesn’t the United States have a formal drug policy?
2. Why would pharmaceutical companies choose to raise prices in direct contradiction to the President’s request to hold them level?
3. Is there a conflict of interest in the relationship between pharmaceutical companies and the PBMs? Why or why not?
4. Which of the three key factors supporting high drug prices is the least ethical? Explain your reasoning and propose a practical solution.
5. Should other states follow the example of Minnesota and start to challenge the drug companies in court? Why or why not?
6. Do you think consumers will be able to bring about change on this issue? Why or why not?
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