Pain at the Pharmacy: 9 Reasons Why Prescription Drugs are so Expensive
Employers must have a sound strategy to combat rising costs
You’ve heard the grim statistic – Americans pay more for healthcare than any other nation but receive less treatment and poorer outcomes. Spending on drugs and medication makes up a large portion of these costs. According to The Peter G. Peterson Foundation, U.S. healthcare spending averages $12,500 per person. By comparison, countries such as Canada, Austria, and France only pay about one-third as much1.
The Congressional Budget Office has calculated that the share of US healthcare spending on prescription drugs has risen from 5% of the total in 1980 to almost 10% in 2018. Both the number of prescriptions written and their overall costs have increased.
But why do drugs cost so much? Among the reasons:
1. The cost of drug research and development (R&D) is massive
This factor is the primary driver of the high cost of drugs. The process of turning raw materials – whether natural or synthetic – into drugs safe for consumption is extremely costly. The National Academy of Sciences revealed that it costs anywhere between hundreds of millions of dollars to $2 billion to bring a drug to the market2. Also, consider that nearly 9 out of every 10 drugs developed never make it past clinical trials3. The price of a prescription drug includes all the research and development costs of failed drugs, plus the cost to manufacture your prescription drug, plus a layer of profit for the drug company. Add all of these things together and you face a whopping price tag.
2. A lack of market competition and drug-specific monopolies
In the prescription drug industry, a single company often has a monopoly on the rights to a drug. Thanks to patent exclusivity, they get to produce, distribute, and sell it without any competition.
Also, since drugs are necessities and not luxury goods (despite some drugs being priced as high as luxury goods), drugmakers can set prices that they know people – and insurers - will have no choice but to pay.
3. “Pay for delay” agreements
Generic alternatives help to decrease the costs of drugs. When the patent exclusivity of a drug expires, other companies can develop generic drugs – ones that function the same but aren’t branded.
To stall this, pharmaceutical companies who own the patents to the drug may engage their competitors in “pay for delay” agreements, whereby they pay their competitors to delay producing and launching generic versions.
As a result, a single drug company may continue to hold a significant market share of a drug well after expiration of patent exclusivity.
4. Patent evergreening
Going back to patent exclusivity, drugmakers sometimes engage in "evergreening” to extend their exclusive rights to a drug. There are a few ways they can do this, such as repurposing or altering the drug.
For example, if the medication was formerly distributed in pill form, pharmaceutical companies may revamp the drug by turning it into a powder. They rename the drug and apply for new patents, giving them extended rights to expiring patents.
5. Lobbying from Big Pharma
The power of pharmaceutical companies is massive, with the lobbying group for the pharmaceutical industry spending about $27.5 million on lobbying activities in 2018 alone4. They’ve managed to achieve this through a vicious cycle of leveraging money to secure power to continuously grow financially. It’s a loop that leads to more profits for drugmakers and the intermediaries involved.
As prescription drug costs rise at a rate of 2 to 3 times that of inflation, Congress has responded with bills to curtail costs2. But given the mammoth lobbying machine of big pharma, the likelihood of successful legislative reform is dubious, at best.
6. Drugs don’t have price regulations
The U.S. Food and Drug Administration (FDA) regulates how new drugs are tested, marketed, and released on the market. What they don’t regulate (and control) are prescription drug prices and enforceable mechanisms for value-based pricing5. That role goes to drug companies who very clearly have an interest to price drugs as high as possible.
7. There is no price ceiling on drugs
According to a report by Healthline, the U.S. government does not set ceiling prices like in other countries6. Because of this, the price for an annual supply of certain drugs can cost as much as a single-family home.
8. The cost of marketing and advertising drugs
Did you know that in many pharmaceutical companies, the cost of marketing and advertising can go as high as – if not even higher than – a drug’s R&D costs8? Marketing and advertising drugs is a hot business, especially between drug companies and healthcare professionals, to influence the medical choices of patients.
9. A lack of transparency in the chain, with intermediaries that complicate the whole process
Intermediaries such as insurance companies and Pharmacy Benefit Managers (PBMs) play a key role in getting drugs from the makers to the payers – but they can also contribute to the expense of drugs. It’s a complicated multi-player system where many entities are each taking a margin, and the employers and individuals who pay for healthcare plans suffer the brunt of the cost.
The maddening reality for employer-sponsored health plans (and consumers) is these particular factors are largely beyond their control, and absent widespread reform within the industry, costs will continue to climb. However, there are strategies and resources for employers that very effectively help employers to manage the costs. Contact ParetoHealth to learn more.References
- 1 Peter G Peterson Foundation (2022) Why Are Americans Paying More For Healthcare?. Retrieved July 8, 2022, from https://www.pgpf.org/blog/2022/02/why-are-americans-paying-more-for-healthcare
- 2 National Academy of Sciences (2022) Why Do Drugs Cost So Much? Retrieved 8 July, 2022, from https://thesciencebehindit.org/why-do-drugs-cost-so-much/
- 3 Congressional Budget Office (2021) Research And Development In The Pharmaceutical Industry. Retrieved 8 July, 2022, from https://www.cbo.gov/publication/57126
- 4 Scutti, S. (2019) Big Pharma spends record millions on lobbying amid pressure to lower drug prices. CNN. Retrieved 7 July, 2022, from https://edition.cnn.com/2019/01/23/health/phrma-lobbying-costs-bn/index.html
- 5 Rajkumar S.V. (2020) The high cost of prescription drugs: causes and solutions. Blood Cancer Journal. Retrieved 8 July, 2022, from https://www.nature.com/articles/s41408-020-0338-x
- 6 Curley, C. (2021) Prescription Drug Prices in the U.S. Are Twice as High: Here’s Why. Healthline. Retrieved 8 July, 2022, from https://www.healthline.com/health-news/prescription-drug-prices-in-the-u-s-are-twice-as-high-heres-why
- 7 NPR, Kodjak A. (2019) Prescription Drug Costs Driven by Manufacturer Price Hikes, Not Innovation. NPR. Retrieved 7 July, 2022, from https://www.npr.org/sections/health-shots/2019/01/07/682986630/prescription-drug-costs-driven-by-manufacturer-price-hikes-not-innovation
- 8 Emanuel, E.J. (2019) Big Pharma’s Go-To Defense of Soaring Drug Prices Doesn’t Add Up. The Atlantic. Retrieved 7 July, 2022, from https://www.theatlantic.com/health/archive/2019/03/drug-prices-high-cost-research-and-development/585253/