Clinical Context

Health care in the United States is the most expensive per capita among all developed nations, yet we do not always realize the return on that considerable investment in terms of broad health outcomes. One of the factors increasing US healthcare costs is the price of prescription drugs. In 2013, the average cost of US prescription drugs per person was $858, whereas the same average cost among 19 other industrialized nations was $400. Even accounting for rebate programs from pharmaceutical companies, drug costs in the United States are 10% to 15% higher than values in Canada, France, and Germany.

In addition, the problem of expensive prescription drugs is growing worse. Net spending on prescription drugs in the United States increased by approximately 20% between 2013 and 2015. Prescription drugs now comprise 17% of all healthcare costs, and this cost affects all Americans, whether or not they actually take prescription drugs. Approximately 40% of the total prescription drug cost in the United States is borne by government entities, driving up the cost of national budget.

How did we get here, and is there a way out? These are the central themes of a thoughtful review by Kesselheim and colleagues, which is summarized in "Study Highlights."

Synopsis and Perspective

The high cost of prescription drugs in the United States has been the focus of much discussion and debate in recent years, as price tags continue a precipitous march upward.

The issue is raised again, this time by researchers from Harvard Medical School in Boston, Massachusetts, in a new review published in the August 23/30 issue of JAMA.^[1] Specifically, Aaron S. Kesselheim, MD, JD, MPH, an associate professor of medicine at Harvard, and colleagues examined the wave of price hikes that have occurred in the past few years.

From 2010 to 2012, the rise in drug cost was more modulated because of expiring patents on many widely used medications, note the authors. However, cost has now begun climbing once again, highlighted by several new and very expensive products that entered the marketplace, as well as steep price increases in older drugs.

Between 2013 and 2015, there was approximately a 20% increase in net spending on prescription drugs, which outpaced "a forecast 11% increase in aggregate health care expenditures," they note.

Currently, the cost of prescription drugs now accounts for an estimated 17% of total healthcare spending, and coverage constitutes 19% of employer-based insurance benefits.

Blame Industry

In their report, the Harvard group places the blame for high drug costs mainly on industry.

The high prices largely arise "from the approach the United States has taken to the granting of government-protected monopolies to drug manufacturers, combined with restriction of price negotiation at a level not observed in other industrialized nations," they write.

In addition, unlike the situation in nearly every other advanced nation, the US healthcare system permits drug manufacturers to set their own price for any given product, they add.

Thus, pharmaceutical manufacturers are able to maintain high prices based on 2 market forces: protection from competition and negotiating power.

With that in mind, Dr Kesselheim and coauthors believe that the most "realistic" short-term strategies that would address escalating costs include the following:

• enforcing more stringent requirements for the award and extension of exclusivity rights,
• enhancing and encouraging competition by ensuring timely availability of generic drugs,
• providing greater opportunities for meaningful price negotiation by government payers, and
• educating all stakeholders about making these choices.

"I think the answer is that we need to imagine policy solutions at multiple different levels," Dr Kesselheim told Medscape Medical News.

"There are things Congress can do, such as promoting public funding of science to encourage future treatment development, investing in comparative effectiveness research, funding for the Federal Trade Commission, and re-examining policies that provide market exclusivity for noninnovative products," he explained. "There are also things that physicians and patients can do, such as talk more about drug costs, look for less expensive evidence-based alternatives, and talk to their legislators."

"I think it's a multipronged issue," Dr Kesselheim added.

Approached for comment, Joshua P. Cohen, PhD, research associate professor at the Tufts Center for the Study of Drug Development, Boston, agreed that there is a lack of national bargaining power in a multiple-payer system, such as the one that exists in the United States, and that state and federal regulations often prohibit payers from fully using their clout when negotiating deals with the drug industry.

"But that said, I think it's inaccurate to state that the drug industry 'sets its own prices,' " he commented. "That may be true for products that are new and in unique therapeutic classes, because in those cases industry has plenty of pricing power," he added. "But most new drugs are not first-in-class or unique. Most have competitors. The industry has to keep that in mind when it starts its pricing negotiations with payers."

Also commenting on the study, Holly Campbell, a spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade organization for the pharmaceutical industry, says that this study "advances a misleading narrative by understating how the competitive marketplace for medicines in the United States helps control costs and provides patients with access to innovative treatments and cures faster than in many parts of the world.

"In the United States, generic utilization rates are nearly 90 percent, competition occurs among brand name medicines and large, powerful purchasers negotiate aggressively," said Campbell. "In fact, Express Scripts, the United States' largest pharmacy benefit manager, now touts that hepatitis C treatment is less expensive here than in western countries thanks to their aggressive negotiation."

Branded and Specialty Products

In their review, Dr Kesselheim and colleagues set out to better understand the factors that have contributed to the most recent price escalation hike and possible policy options that could help curb rapidly increasing costs. They reviewed the literature published in peer-reviewed medical and health policy journals for an 11-year period beginning in 2005.

According to their findings, the primary reason for rising costs is the high price of new branded products that are protected by patents.

Although these products make up only 10% of all prescriptions in the United States, they account for nearly three-quarters (72%) of drug spending.

In the 8-year period between 2008 and 2015, the price tags for the most common branded drugs increased 164%, which was far in excess of the consumer price index of 12%.

In addition, the authors note, the annual cost of a growing number of "specialty drugs," which make up a group of high-cost, generally injectable biologics, exceeds $250,000 per patient.

Although these high-priced products have historically been limited to drugs used to treat rare conditions, new high-cost products used to treat millions of patients have now entered the marketplace. As an example, a growing number of new oncology drugs now exceed $100,000 per course of therapy.^[2]

Increasing Competition

A lack of competition allows for manufacturers to set high prices for brand-name drugs, but the authors note that competition between branded agents generally does not result in lower prices.

The only form of competition that has lowered branded drug prices consistently and substantially comes from the entry of generic drugs into the marketplace, which occurs once a patent expires.

Dr Cohen pointed out that the United States has a healthy generics market with relatively low generics prices. "Hence, the pricing picture is complicated, particularly since close to 90% of scripts are now for generic drugs," Dr Cohen told Medscape Medical News.

The study authors agree that prices of most generic drugs remained reasonably stable between 2008 and 2015, but rising costs of these products are also concerning. The price tags of almost 400 (approximately 2% of the sample investigated) have risen by more than 1000%, the most notorious being the astronomic price hike by Turing Pharmaceuticals of pyrimethamine (Daraprim) in 2015, which saw the price increase by 5500%.^[3]

The costs of several other older drugs have also jumped,^[4] including isoproterenol by 2500%; nitroprusside by 1700%; digoxin by 637%; and, most recently, the epinephrine autoinjector (EpiPen, Mylan) by 400%.

There are also problems that arise with generic entry into the marketplace, the authors point out. Generic entry, for example, can be delayed when a manufacturer is able to extend a patent along with the drug's exclusivity.

Another issue is "pay-for-delay" deals,^[5] in which pharmaceutical manufacturers with patents that are nearing expiration pay companies to delay the introduction of a generic version. Pay for delay has become a particularly contentious issue and has entangled the US Federal Trade Commission in several lawsuits that have made their way all the way to the Supreme Court.

As an example, the tyrosine kinase inhibitor imatinib (Gleevec, Novartis), considered to be one of the most successful targeted agents ever developed, came under scrutiny because of its dramatic increase in cost and patent disputes. In 2014, Novartis settled a case concerning a version of imatinib developed by a subsidiary of the generic manufacturer Sun Pharmaceuticals Industries, which subsequently delayed the entry of a generic version into the marketplace by approximately 7 months.^[5]

Other issues with generics involve application backlogs at the US Food and Drug Administration, which can delay entry. Even after access to the marketplace has been achieved, the number of manufacturers producing a certain drug depends on many factors, such as availability of raw ingredients, mergers within the industry, and the demand for the product.

Uneven Negotiating Power

Drug prices are higher in the United States than in the rest of the industrialized world,^[6] partly because of the lack of standard negotiating power that exists in nations with national healthcare care and/or drug review systems.

Compared with other industrialized nations, per capita spending on prescription drugs in 2013 in the United States was $858 vs an average of $400 for 19 other countries.

The costs of the 20 highest-revenue-grossing drugs were an average of 3-fold higher in the United States than in the United Kingdom, and these disparities between the United States and comparable nations remained even after adjustment for undisclosed discounts, or "rebates," that manufacturers offer to US payers.

In 2010, note the authors, the estimated average postrebate prices for drugs were roughly 10% to 15% higher in the United States than in Canada, France, and Germany.

The US system is a mix of public and private payers that vary greatly in their ability to negotiate lower drug prices.

One example often cited is Medicare, which accounts for almost one-third (29%) of the nation's prescription drug expenditure, but it is prohibited by federal law from negotiating for lower prices. In addition, Medicare is also required to offer coverage to all products in certain therapeutic categories, such as oncology.

Conversely, other government programs are not bound by the same restrictions. Medicaid is entitled to receive a rebate (discount) of at least 23.1% of the average manufacturer price for most branded drugs and has protection against increased prices that exceed the inflation rate.

In the same vein, Dr Kesselheim and his colleagues point out, the Veterans Health Administration, which provides healthcare services for veterans and their dependents, is also entitled to a rebate -- in this case, of at least 24% of the average price -- and also has broad authority to exclude products from its formulary.

In the private sector, negotiating power is far more varied, especially with the advent of prescription benefit management companies, which have become prominent intermediaries that help employers or insurers promote appropriate prescription drug use and decrease its cost.

In some cases, note the authors, they have been able to negotiate prices for certain drugs, but aggressive negotiation still has not become the norm.

However, although European nations and others have greater bargaining power, there may be a tradeoff for that, Holly Campbell from PhRMA pointed out. "Price differences that may exist between the United States and other countries are often achieved through price controls that result in restricted access to medicines and fewer choices for patients," she said.

"For example, new data show patients in Europe wait an average of nearly 2 years longer to get access to cancer medicines compared to patients in the United States," Campbell said. "Even after this wait, patients in Europe still have access to far fewer medicines."

Campbell added that even as more US patients have coverage, many more patients are facing high pharmacy deductibles, rising out-of-pocket costs, and other barriers to care, putting their ability to stay with needed therapy at risk. "Instead of focusing on proposals that will stifle innovation, we need to concentrate on pragmatic solutions, including increasing competition for older medicines, modernizing the drug discovery and development process, removing barriers that limit paying for value and engaging and empowering consumers," she said. "In doing so, we will enhance the private market and address costs holistically."

This work was funded by a grant from the Laura and John Arnold Foundation and the Engelberg Foundation. Dr Kesselheim is a Greenwall Faculty Scholar in Bioethics and is supported by the Harvard Program in Therapeutic Science, discloses receiving grants from the US Food and Drug Administration Office of Generic Drugs and Division of Health Communication, the Laura and John Arnold Foundation, and the Engelberg Foundation. Coauthor Dr Sarpatwari has received support from the Greenwall Foundation and the Robert Wood Johnson Public Health Law Research Program, a grant from the Laura and John Arnold Foundation, and fees for consulting on drug-pricing policies from Leerink Partners. No other relevant financial relationships have been disclosed.

JAMA. 2016;316:858-871.

Review Highlights

• The primary driver of increased prescription drugs in the United States is the cost of branded medications. They comprise only 10% of all drugs prescribed in the United States, but they account for 72% of drug costs.
• However, recent examples such as pyrimethamine, nitroprusside, and digoxin have demonstrated how pharmaceutical companies can also target exclusive production of certain generic drugs to generate astronomic profits.
• Market protections help branded medications gain an advantage in the marketplace. The average period during which generic medications are prohibited from copying new small molecules is 5 to 7 years, and biologic drugs receive 12 years of such protection.
• With use of techniques to game the system, the average market exclusivity for many drugs is actually 12.5 years, and truly novel drugs have an average exclusivity period of 14.5 years.
• The fact that the federal government is hamstrung in negotiating drug prices results in broad increases in the national cost of prescription medications. Medicare accounts for 29% of all US prescription drug expenditures, but federal law prevents Medicare from using its market power to negotiate lower prices. State Medicaid programs are generally required by law to cover all drugs approved by the US Food and Drug Administration, regardless of efficacy, safety, or cost.
• In contrast, the Veterans Health Administration is permitted to negotiate with pharmaceutical companies regarding its drug formulary, and it achieves lower prices compared with other government entities.
• The authors question pharmaceutical companies' typical argument that the high costs of research and development demand high prices for prescription drugs. They note that the majority of transformative drugs in the past 25 years began as projects in academic centers as publicly funded projects. Large pharmaceutical companies invest only 10% to 20% of their revenue in research and development.
• The authors have several ideas about how to curb the high cost of prescription drugs in the United States. They argue for stricter standards for extending the patents of branded drugs, and an end to the payment to generic manufacturers by pharmaceutical companies to delay production of generic versions of branded products ("pay-for-delay").
• The authors also argue for a streamlining of the process to bring generic products to market.
• Medicare negotiates prices for nearly all of its goods and services, save prescription drugs; that should be remedied. Moreover, the Patient-Centered Outcomes Research Institute should be permitted to focus on drug costs in providing recommendations for quality, efficient health care.
• The authors recommend systems that reward clinicians for prescribing the best medication to patients, but they note that programs that penalized clinicians for prescribing expensive medications had the unintended consequence of clinicians discharging patients who required expensive drugs from their practice.
• A halt to direct-to-consumer advertising may also reduce the use of branded prescriptions in practice, but such a ban is unlikely.

Clinical Implications

• The average per capita cost of prescription drugs in the United States is approximately twice that of other developed countries, and the total cost of prescription drugs increased by 20% between 2013 and 2015. Even accounting for rebate programs from pharmaceutical companies, drug costs in the United States are 10% to 15% higher than values in Canada, France, and Germany. Approximately 40% of the total prescription drug cost in the United States is borne by government entities.
• The principal means to reduce prescription drug costs in the United States include stricter standards for extending the patents of branded drugs, more power in negotiating the drug formularies of Medicare and Medicaid, and streamlining the process to bring generic products to market.
• Implications for the Healthcare Team: The current review describes potential major changes to the US healthcare system and regulatory processes that can reduce prescription drug costs, but the stewardship of high-quality and efficient health care begins with individual practitioners and their patients. We should always prescribe the best drug available for each patient, and the drug's cost should be part of this complex calculation.

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