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What Makes Prescription Drug Prices so High in America

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Take the example of a doctor’s appointment. After the appointment, the doctor writes a prescription for you.

The doctor prescribed Humira, an injection used to treat arthritis and psoriasis. Humira is a very popular drug right now. Humira prescriptions generated $14 billion in revenue worldwide in 2015, which is roughly the size of Jamaica’s economy.

Let’s say that you have a doctor’s appointment in England. Humira prescriptions there typically cost $1,362. A Swiss doctor will charge you around $822 for the drug.

The average cost of a Humira prescription in the US, however, is $2,669 on average

Why does this happen? Humira’s price in the US is higher than in other countries. Why is that?

Whatever country Humira is sold in, whether it is Switzerland, the United States, or anywhere else in the world, it is the same medication. In the United States, the regulatory system around the pharmaceutical industry makes Humira different.

Several new prescription drugs enter the US market unregulated and unnegotiated. Pharmaceutical companies will negotiate fair prices with government agencies in other countries. In the majority of cases, these agencies determine whether new drugs are better than their predecessors even before they reach the market. For the purpose of determining drugs’ risks and benefits, reams of data will be analyzed.

All drugs that have been proven safe can be marketed in America, and drugmakers are allowed to set their own prices. One can easily see the problems created by this, such as high copays at pharmacies as well as people who cannot afford life-saving medications. If we lowered drug prices, we would be making a sacrifice. Investors would be less interested in pharmaceuticals if profits fell. In the event of a decrease in drug investments, there would be less research to develop new and innovative therapies.

Craig Garthwaite, a professor at the Kellogg School of Management who studies drug prices, gave me an analogy that helped make this clearer. An investor must choose between investing $10 million in a social media app or finding a cure for pancreatic cancer.

“As you decrease the potential profits I’m going to make from pancreatic cures, I’m going to shift more of my investment over to apps or just keep the money in the bank and earn the money I make there,” Garthwaite suggests

Drug prices in the United States are so high at the moment that investing in pharmaceuticals could generate tons of profits – but most Americans can’t afford them.

An example would be the discovery of a new drug by a pharmaceutical executive. Suppose you wish to introduce it into Australia’s market. Or the Canadian market. Perhaps even the British market.

To begin, it is necessary to arrange meetings with the agencies responsible for making decisions about drug pricing and coverage.

This regulatory agency looks for two things: if the country wants your drug and, if so, how much they are willing to pay. Pricing a drug higher often depends on whether it is an improvement over what is already available.

Let’s say you want to sell your drug in Australia. An application must be submitted to the Pharmaceutical Benefits Advisory Committee if your drug is more effective than what is currently on the market.

In the end, the committee will recommend to the national healthcare system whether or not the drug should be purchased – and if it should be purchased, what price it should be paid by the national health care system.

A majority of the cancer drugs reviewed by Australia’s Pharmaceutical Benefits Advisory Committee in the last decade have been rejected because their benefits do not appear to be justified.

If you succeed – and Australia deems your drug worth covering – you will have to determine whether the price offered by the committee is high enough. If so, congratulations! Now you’re on the Australian market.

The price of drugs in other countries is regulated because they see them as public goods.

In countries like Australia, Canada, and Britain, other things consumers buy, like computers or clothing, are not regulated. Still, they have joined dozens of other countries that regulate drug prices to ensure that all citizens have access to affordable medical treatment. In terms of treating medicine, there is a distinct difference since some people simply cannot live without it.

No doubt, the decision has trade-offs. When drugs are not deemed cost-effective, a country like Australia will often refuse to pay for them so that they can make negotiations with drug manufacturers more effective. Regulators need to be able to say no to drugs they do not think are safe and effective. These agencies deny approval to certain drugs sold in the United States – and there are usually protests when they do so.

The fact that there are more drugs on the American market does not mean all patients have access to them. Aaron Kesselheim, Harvard Medical School associate professor, says it is “impossible for patients to receive a full range of products.” “If the drugs are so expensive that you can’t afford them, that’s functionally the same thing as not even having them on the market.”

Even if we are getting better treatment, it doesn’t mean it’s better. A country’s regulatory agency might reject a drug if they do not consider the price it wants to charge justified by its benefits. Our country has access to these drugs – which means we get expensive drugs with limited benefits, but those drugs could be very effective in marketing.

A drug incident involving Zaltrap occurred in 2012. The drug costs about $11,000 a month – twice as much as its competitors – and doctors do not see any additional benefits.

“In most industries, something that offers no advantage of its competitors and yet sells for twice the price would never even get on the market,” Sloan-Kettering oncologist Peter Bach wrote in an op-ed for The New York Times. “But that is not how things work for drugs. The Food and Drug Administration approves drugs if they are shown to be ‘safe and effective.’ It does not consider what the relative costs might be.”

Why don’t you regulate drug prices? Check out what the US does.

The United States does not have government panels that negotiate drug prices. Every state has a variety of insurance options. Individual states negotiate the price of drugs with the drug companies. Because health plans in the US are fragmented, they are not as powerful in negotiating discounts.

Australians buy drugs in bulk, just like at Costco, while Americans get tiny bottles from the pharmacy. They pay more than Americans.

“You could say that American health care providers and pharmaceuticals are essentially taking advantage of the American public because they have such a fragmented system,” explains Tom Sackville, president of the International Federation of Health Plans. “The system is so divided, and it’s easy to conquer.”

One of the largest health insurance plans in the United States is Medicare, which covers about 55 million Americans over 65 years of age. The federal government specifically prohibits Medicare from negotiating drug prices or deciding which drugs it will cover. Medicare covers most drugs that are approved by the Food and Drug Administration. Medicare has to cover drugs that are not an improvement over current treatments as long as the FDA deems them safe for human consumption.

Medicare will buy drugs as long as they are safe, so long as they are not dangerous. Jamie Love, the director of Knowledge Ecology International and an expert in drug pricing, says “the sky’s the limit” when it comes to Medicare drug prices.

The cost of prescription drugs is one of the largest expenses Americans face

Prescription drugs are responsible for $858 spent per American on this system. Three times more than the Dutch and twice as much as Australians.

American consumers aren’t buying as many drugs as they used to. However, they are buying more of the ones that are available.

Americans don’t take a disproportionate amount of prescription drugs. Non-prescription medications cost less than prescription medications; the only difference is that prescription medications cost more.

There are almost always higher drug prices in the United States than in other countries.

What would happen if the United States regulated drug prices?

Reducing prescription drug expenditures would be one benefit. It might be possible for the United States to secure comparable discounts to European countries if it set up an agency to negotiate drug prices on behalf of its 319 million residents.

There would not be such a rapid increase in health insurance premiums – they may even decrease.

It would be necessary to make trade-offs. The likelihood is that we will have to sacrifice some of the drugs that our insurance plans cover. When deciding what price was appropriate, the board would have to be able to reject drugs that didn’t make the cut.

There is a government agency that negotiates drug prices called the Veteran’s Health Administration. Drug prices are usually 40 per cent lower than Medicare prices with this agency. However, the agency covers fewer items than Medicare.

The New York Times reports that some older veterans enrol in Medicare drug plans in order to cover drugs not covered by the VA. However, VA doctors say patients can still get the medications they need.

Economic research also suggests that price regulation of drugs might lead to a lack of innovation

Investors are motivated by economic incentives. They will devote more money to developing these types of drugs whenever they see a market willing to pay a lot for them.

Think about what a venture capitalist would do when faced with the decision to invest in a biotech company or a social media company.

She will choose the type of business she wants to start according to her interests – and how much profit she expects to make.

Clinical trials will be conducted more frequently when the government mandates the coverage of a new type of medication.

MIT economist Amy Finkelstein is a good example. Medicare’s millions of beneficiaries were offered flu vaccines following the implementation of her study. After the flu vaccine usage was guaranteed to increase, there was a 2.5-fold increase in clinical trials for new flu vaccines.

The number of research dollars dedicated to drugs taken by the elderly increased after Medicare began covering prescription drugs in 2005.

Drug research around the world is subsidized by the United States’ high drug prices today. Those efforts have resulted in the development of better and more effective prescriptions – and so have other countries.

At present, the United States pays quite high prices for drug research in the rest of the world. By not doing that, we would spend fewer dollars on pharmaceutical research, and we would not create new drugs for Americans.

In terms of drug pricing, we are faced with a dilemma: should we trade off some access for some innovation?

Every policy decision comes with trade-offs, including the regulation of drug prices. Regulation of drug prices would reduce the cost of medications in the United States. The result would be more Americans having access to drugs but more restrictions on the research on new drugs.

It is possible that fewer biotech companies will startup or that fewer companies will decide that a new drug is worth launching.

Perhaps we’d all be okay with sacrificing some innovation to make medication more affordable and more accessible to those who need it.

We must ask ourselves a difficult question: Do we want to lower the price of hepatitis C’s cure, which hit the market for $84,000 – knowing that price controls may lead to less investment in other cures in the future?

“If you have hepatitis C today, you probably want to be able to buy the drug at a lower price,” Garthwaite says. “Most people with pancreatic cancer today would like to see more money put into the research and development pipeline to cure the disease.”

Furthermore, he adds, “This isn’t an easy question to answer: how much innovation we’re comfortable paying for – or the idea that we might be spending too much on innovation.”

In light of America’s extraordinarily high drug prices and one in four Americans reporting trouble paying for their prescriptions, we need to have this conversation.

Do you agree that we should pay higher drug prices to promote more innovation? Is it reasonable to make our drugs more accessible to people of all income levels if we give up some of that innovation?

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Glossary

Glossary

Industry Glossary

A

An organization, made up of a network of healthcare providers that coordinate patient care and provide the full range of healthcare services for patients. Accumulation Period: A specified period during which a covered employee must accumulate eligible expenses to meet the plan’s deductible amount.
The percentage of benefit costs the health insurer expects to pay toward a health plan.  It is based on an average for a population or area, and may not necessarily reflect actual cost sharing
Maximum amount on which payment is based for covered health care services. This may be called “eligible expense,” “payment allowance” or “negotiated rate.” If your provider charges more than the allowed amount, you may have to pay the difference. (See Balance Billing.)
A request for your health insurer or plan to review a decision or a grievance again.

B

When a provider bills you for the difference between the provider’s charge and the allowed amount. For example, if the provider’s charge is $100 and the allowed amount is $70, the provider may bill you for the remaining $30. A preferred provider may not balance bill you for covered services.

C

 A corporate benefits plan where employees are permitted to choose among two or more benefits that consist of cash and certain qualified benefits. Cafeteria plans are also called flexible benefit plans, Flex plans or Section 125.
A plan on a calendar year runs from January 1 – December 31. Items like deductible, maximum out-of-pocket expense, etc. will reset every January 1.
Provision in major medical plans to avoid two deductibles applied to covered medical expenses when expenses are incurred toward the end of one calendar year and sickness or injury continues into the next year.
A health plan with limited benefits, a high deductible, and a generally lower premium.  Available to persons under 30, it provides coverage for unforeseen and expensive illness or injuries.
Consolidated Omnibus Budget Reconciliation Act of 1985. COBRA permits eligible employees and beneficiaries to continue their health coverage for a period of time after it would normally terminate. The continuation of coverage requires the individual to pay a premium.  COBRA applies to groups of 20 or more people.
Your share of the costs of a covered health care service, calculated as a percent (for example, 20%) of the allowed amount for the service. You pay co-insurance plus any deductibles you owe. For example, if the health insurance or plan’s allowed amount for an office visit is $100 and you’ve met your deductible, your co-insurance payment of 20% would be $20. The health insurance or plan pays the rest of the allowed amount.
A plan on a contract year (also called benefit year) runs for any 12-month period within the year. Items like deductible, maximum out-of-pocket expense, etc. will reset at the plan’s renewal date. For example, ABC Company renews on July 1 every year. The deductible would start July 1 and end on June 30. The deductible would reset every July 1 for ABC Company members.
A process if an individual has two group health plans, the amount payable is divided between the plans so that the combined coverage amounts to, but does not exceed, 100 percent of the charges.
A fixed amount (for example, $15) you pay for a covered health care service, usually when you receive the service. The amount can vary by the type of covered health care service.
Stands for Current Procedural Terminology code and was designed by the American Medical Association as a method to communicate, by a five-digit number, specific medical care, and services. The numbering system covers the majority of recognized medical services a physician can provide and be reimbursed. The CPT code is used to report services on the claim form.

D

For persons with chronic conditions (diabetes, COPD, etc.) it is the coordination of care for the entire disease treatment process, including patient education, inpatient and outpatient care, preventive care, and acute care.
The amount you owe for health care services your health insurance or plan covers before your health insurance or plan begins to pay. For example, if your deductible is $1000, your plan won’t pay anything until you’ve met your $1000 deductible for covered health care services subject to the deductible. The deductible may not apply to all services.
Equipment and supplies ordered by a health care provider for everyday or extended use. Coverage for DME may include: oxygen equipment, wheelchairs, crutches or blood testing strips for diabetics.

E

Employers with 51 or more employees must offer affordable coverage to its full-time employees or pay a penalty.
An illness, injury, symptom or condition so serious that a reasonable person would seek care right away to avoid severe harm.
A set of 10 benefits including ambulatory patient services, emergency services, maternity and newborn care, hospitalization, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services, laboratory services, pediatric services, and preventive care that must be included in a qualified health plan (QHP) for individuals and small groups.
General term for the online marketplace all states are required to have for individuals and small businesses. They serve as an Expedia or Orbitz for the health insurance market, where private insurers can offer health plans.  See also Health Insurance Marketplace and Small Business Health Options Program.

F

A list of prescription drugs covered by a prescription drug plan offering prescription drug benefits. Also called a drug list.
A tax-advantaged financial account that can be set up through a cafeteria plan of an employer that allows an employee to set aside a portion of earnings to pay for qualified medical expenses as established in the cafeteria plan. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes.

G

A complaint that you communicate to your health insurer or plan.
A tax-advantaged financial account that can be set up through a cafeteria plan of an employer that allows an employee to set aside a portion of earnings to pay for qualified medical expenses as established in the cafeteria plan. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes.

H

 A tax-advantaged medical savings account available to taxpayers enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit.
A tax-advantaged financial account that can be set up through a cafeteria plan of an employer that allows an employee to set aside a portion of earnings to pay for qualified medical expenses as established in the cafeteria plan. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes.
Services to provide comfort and support for persons in the last stages of a terminal illness and their families.
Care in a hospital that requires admission as an inpatient and usually requires an overnight stay. An overnight stay for observation could be outpatient care.
Care in a hospital that usually doesn’t require an overnight stay.

I

The percent (for example, 20%) you pay of the allowed amount for covered health care services to providers who contract with your health insurance or plan. In-network co-insurance usually costs you less than out-of-network co-insurance.

M

Health care services or supplies needed to prevent, diagnose or treat an illness, injury, condition, disease or its symptoms and that meet accepted standards of medicine.
Program administered by the state’s Department of Medical Assistance Services (DMAS) under The Centers for Medicare and Medicaid Services (CMS). Payments are made for approved healthcare services provided by hospitals, health agencies, and private practitioners for welfare recipients or persons whose income does not exceed maximum limits. Funds are derived on a state-federal shared basis.
A term used to describe the supplies and services provided to diagnose and treat a medical condition in accordance with the standards of good medical practice and the medical community.
Program administered by the state’s Department of Medical Assistance Services (DMAS) under The Centers for Medicare and Medicaid Services (CMS). Payments are made for approved healthcare services provided by hospitals, health agencies, and private practitioners for welfare recipients or persons whose income does not exceed maximum limits. Funds are derived on a state-federal shared basis.
The federally financed hospital insurance system (part A) and supplementary medical insurance (Part B) for the aged created by the 1965 amendment to the Social Security Act.
A person eligible to receive, or receiving, benefits from an HMO or insurance policy. Includes both those who have enrolled or “subscribed,” and their eligible dependents.

N

The facilities, providers and suppliers your health insurer or plan has contracted with to provide health care services.
A provider who doesn’t have a contract with your health insurer or plan to provide services to you. You’ll pay more to see a non-preferred provider. Check your policy to see if you can go to all providers who have contracted with your health insurance or plan, or if your health insurance or plan has a “tiered” network and you must pay extra to see some providers.

O

The period (usually once a year) during which subscribers in a health plan may have an opportunity to select an alternative plan being offered to them; or a period when uninsured employees and their dependents may obtain coverage.
The percent (for example, 40%) you pay of the allowed amount for covered health care services to providers who do not contract with your health insurance or plan. Out- of-network co-insurance usually costs you more than in- network co-insurance.
The most you pay during a policy period (usually a year) before your health insurance or plan begins to pay 100% of the allowed amount. This limit never includes your premium, balance-billed charges or health care your health insurance or plan doesn’t cover. Some health insurance or plans don’t count all of your co-payments, deductibles, co-insurance payments, out-of-network payments or other expenses toward this limit.

P

A law with a series of statues that go into effect beginning March 23, 2010 aimed at increasing access to affordable healthcare for most Americans.  Health insurers, healthcare facilities, physicians, individuals, small and large businesses, Medicare, and Medicaid are all impacted by the law.
A health condition (except pregnancy) that was diagnosed and/or treated within six months prior to enrolling in a health plan.
A benefit your employer, union or other group sponsor provides to you to pay for your health care services.
A decision by your health insurer or plan that a health care service, treatment plan, prescription drug or durable medical equipment is medically necessary. Sometimes called prior authorization, prior approval or precertification. Your health insurance or plan may require preauthorization for certain services before you receive them, except in an emergency. Preauthorization isn’t a promise your health insurance or plan will cover the cost.
A provider who has a contract with your health insurer or plan to provide services to you at a discount. Check your policy to see if you can see all preferred providers or if your health insurance or plan has a “tiered” network and you must pay extra to see some providers. Your health insurance or plan may have preferred providers who are also “participating” providers. Participating providers also contract with your health insurer or plan, but the discount may not be as great, and you may have to pay more.
The amount that must be paid for your health insurance or plan. You and/or your employer usually pay it monthly, quarterly or yearly.
The amount paid for a medical service in a geographic area based on what providers in the area usually charge for the same or similar medical service. The UCR amount sometimes is used to determine the allowed amount.

R

Insurance obtained by a carrier from another company to protect itself against part or all the losses incurred in the process of honoring the claims of members or policyholders. Also referred to as “stop loss” insurance. The coverage may apply to an individual claim or to all claims during a specified period for an individual enrollee.
A financial arrangement that spreads the risk of utilization and cost among the participants generally the insurer, the hospitals, and the physicians. The pool may insure against unusually high utilization and costs. The pool may also provide incentives for controlling utilization and costs.
Deductibles paid under a previous plan that are applied to the deductibles of the current plan.

S

A completely non-insured or self-funded plan is one in which no insurance company or insurance plan collect premiums and assumes financial risk.  Employer groups use self-funded plans where they collect premiums from employees and pay the claims, but contract with an insurer to provide the administrative services.
The portion of the Exchange dedicated to small businesses with 2-50 employees. Businesses with 51-100 employees will be eligible to participate in the SHOP beginning January 1, 2016.

T

An organization that administers healthcare benefits, mostly for self-insured employers. Services may include claims review and claims processing.

U

The maximum amount an insurer will consider eligible for reimbursement under group health insurance plans. Charges are generally based on customary fees paid to providers with similar training and experience in a given geographic area.

V

Voluntary worksite benefits are one of the best ways to attract and retain high-quality employees in a competitive labor market. These are solutions that help employees in numerous ways, with very little (and in many cases zero) cost to the employer.

There are several types of voluntary worksite benefits than employers can offer, these include:

  • Accident insurance
  • Cancer insurance
  • Critical illness insurance
  • Hospital indemnity
  • Identity theft insurance
  • Legal services
  • Pet insurance
  • Retail discounts
  • Concierge services