Why Are Drug Prices Increasing?

This is not a simple question to answer because of the many facets of the healthcare and pharmaceutical industry but let us give it a shot.

To begin, we must note the two types of drugs: branded and generic.

Brand-named medication is the first of its kind and gets to “brand the name.” For example, everyone knows the product Tylenol. Tylenol was the first product to contain the ingredient acetaminophen, and because Johnson & Johnson had to invest a lot of money to develop the product, they earned protection when Tylenol was first launched through a patent on the development of acetaminophen.

Now, since Johnson & Johnson no longer have a patent on acetaminophen, other companies can create acetaminophen and use it in their products, with one example being Dayquil Cold & Flu, which is manufactured by Proctor & Gamble, a competitor of Johnson & Johnson.

During the time a company has a patent on a drug, other companies cannot replicate or create generic counterparts. These patents can last for up to 20-years, depending on whether the investor pays the maintenance fees, and sometimes, the licenses can be extended.

For example, instead of letting a drug lose its patent, companies will reformulate the drug or develop a new way it can be administered. Creating an extended-release version of a drug is a common way a company will reformulate a product, and often companies will make medicine available in shot form, which is a new way a drug can be administered; other methods include nasal sprays and dissolvable tablets.

Also, there are other loopholes companies use, such as lobbying, being able to hold patents for 27-years if the treatment is for a disease less than 200,000 people have, or transferring the license to a Native American tribe, but in general, these rules apply to most drugs [1].

For a company to begin developing a generic version, the FDA states, “To obtain FDA approval, generic drug makers must prove that their product performs in the same way and is as safe and effective as the brand-name drug. Therefore, health care professionals and consumers can be assured that FDA-approved generic drugs have met the same strict standards as their brand-name counterparts” [2].

The predominant reason generic drugs are cheaper is these manufacturers did not have to fund years of research and clinical trials to develop the drug initially – the formula was already created for them, and since they can produce the medication at a much lower cost, it means they can sell the drug at a lower cost and still make a profit. Therefore, when several companies make the same generic drug, the competition drives prices down further and further.

Yet, that still does not change the truth that branded drugs are costly, especially when the company still holds the original patent. As noted by the Generic Pharmaceutical Association, even though branded medications consist of 10% of prescriptions in the United States, they account for nearly 75% of prescription drug spending [3], and these trends do not show any signs of slowing.

A January 2019 study published in Health Affairs attempts to explain why these drug prices are increasing [4]. The study found that the cost of branded prescription medication rose more than 9% every year from 2008 to 2016, with the annual cost of injectable drugs rising 15% every year in the same period. What is interesting is that these drugs are not entering the market at high prices. Instead, their prices are being risen year-over-year.

To illustrate this effect, Lantus, a type of insulin made by Sanofi, rose 49% in price in 2014 alone, according to the University of Pittsburgh [5], even though this product first launched in the United States in 2000 [6].

In an interview with NPR, Gerard Anderson, a professor of health policy and management at Johns Hopkins University, gave a unique perspective on this topic.

Anderson said price increases benefit not only the drug manufactures but also insurers who make more money through rebates on higher-priced drugs [7].

Anderson continued to say since research and development (R&D) spending is only about 17% of total expenditures in large drug companies and since once a drug is released there is little R&D spending, there is no way for drug companies to justify these price increases [7].

The socialized aspects of our healthcare system are not helping either. Since brand-name drugs account for around 75% of all prescription drug spending, patients are forced to endure higher pharmacy costs, higher premiums, and higher deductibles, which results in taxpayers being forced to foot the bill as these increased prices drive up Medicare and Medicaid spending.

So, who is benefitting from these increasing costs? Well, it seems like there are two groups of companies: the middlemen involved and drug companies. First, insurance companies are benefitting from the rebates they receive. In 2016, insurance companies received $89 billion in rebates [10].

These rebates are also offered to organizations called pharmacy benefit managers (PBMs). These PBMs negotiate with pharmacies and insurance companies to develop better coverage terms, which often results in lower prices for brand-name drugs.

While this makes the medication slightly cheaper for the patient, the middlemen, including the PBMs and insurance companies, keep a portion of the rebate. So, instead of the manufacturer selling the brand name drug for a lower price, a middleman exists to skim the discount off the top.

Second, the pharmaceutical companies themselves are benefitting from these price increases because they have a monopoly on the product, and the patient is forced to pay the bill.

Since according to the FDA, generic drug prices are 80-85% less than their brand-names counterparts, having more generic drugs seems to be the logical answer [8].

Another perspective is the industry is coordinating these price increases. A study published May 31, 2019, entitled “Trends in Prices of Popular Brand-Name Prescription Drugs in the United States” offers a thought-provoking viewpoint [9].

The researchers found that net prices rose by a median of 76%, from January to December 2017, and most drugs in the study rose in price once or twice a year.

Nathan Wineinger, Ph.D., the lead author of the study and director of biostatistics at Scripps Research Translational Institute and assistant professor in Scripps Research’s Department of Integrative Structural and Computational Biology, stated, “By looking at price data for the most popular brand-name drugs, we found striking and consistent price increases occurring at regular intervals, regardless of competition in the marketplace” [9].

Several other scientists also noted this paradox, with the team lead, Eric Topol, stating, “It is especially concerning to see drugs in the same class having increases that appear to be coordinated” [9].

Because there are a lot of dynamic relationships happening in this industry, it is tough to pinpoint precisely what is causing drug prices to increase, but greed plays a role.

If you do not take any prescription medication, Congratulations! You are a minority in the United States, and you do not have to deal with any of this drama.

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[1] https://www.drugpatentwatch.com/blog/how-long-do-drug-patents-last/

[2] https://www.fda.gov/consumers/consumer-updates/generic-drugs-undergo-rigorous-fda-scrutiny

[3] https://www.ncbi.nlm.nih.gov/books/NBK493090/

[4] https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2018.05147

[5] https://www.pittwire.pitt.edu/news/rising-drug-prices-linked-older-products-not-just-newer-better-medications

[6] https://www.drugs.com/monograph/insulin-glargine.html

[7] https://www.npr.org/sections/health-shots/2019/01/07/682986630/prescription-drug-costs-driven-by-manufacturer-price-hikes-not-innovation


[9] https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2734804

[10] https://altarum.org/sites/default/files/Altarum-Prescription-Drug-Rebate-Report_April-2018.pdf