Getting Beyond Sound Bytes on Drug Costs

St Louis, Missouri

As the 2018 mid-term elections approach, health care is front and center in the political attack ads that dominate the airwaves. Candidates here in Missouri are attacking pharmaceutical manufacturers with “using the law to advance their greed”.  Everyone seems to agree that drug prices are too high, and must be brought down. “Pharma Bro” and convicted felon Martin Shkreli has been made the poster boy for bad behavior by drug makers.

In the rush to judgement and political haymaking, however, some points are omitted, such as the fact that nearly 90% of prescriptions written in the US today are for generics. Or, that America leads the world in the percent of RXs written for generics. That should be great news. As Avik Roy, Forbes opinion editor, healthcare expert, and leader of the magazine’s The Apothecary, has pointed out, “for the tens of millions of Americans suffering from chronic conditions like high cholesterol, high blood pressure, and diabetes, the availability of inexpensive generic drugs has been a boon to public health, and a potential substantial savings in costs related to hospitalization.” Keep that point in mind. For all the complaints of medication costs, few consider the number of hospitalizations, lost days of work, and serious medical events prevented by the availabilty of prescription medications. The following analysis appeared in Health Affairs in 2011,  and chronicles the impact of medication in compliant patients in improving health outcomes and reducing overall spending:

First, Which Drugs Are We Talking About?

So, the first thing we need to do is define terms, which is easier said than done. Is the debate about ALL prescription drugs, just brand-name drugs still under patent protection, or novel medications that either treat relatively rare conditions or represent an entirely new class of treatments? Does it include pharmaceutical products that also incorporate a device to actually deliver the medication?

Overall, Generics Aren’t Overpriced

Generic drug manufacturers estimate that overall, generic drug prices have declined about 11% per year. While that’s great news for consumers, it could lead to future shortages of some popular medications if drugmakers cease production rather than lose money on every pill. It could also lead to quality control issues if smaller, independent manufacturers jump into those markets on a shoestring budget and try to profit by cutting corners. Do we really want to include all generics in the debate, or just the few that present exceptions to the rule?

Orphan Drugs

Very few people understand the challenges in developing so-called, “orphan drugs” that treat serious, often devastating conditions affecting relatively small numbers of people. Development costs can’t be recovered easily because the limited number of patients is insufficient to realize economies of scale. Manufacturers charge higher prices in an attempt to allay the often staggering sums needed to develop and properly test drugs for a relatively small pool of patients. Even recruiting enough participants into clinical trials can be a significant challenge to gaining the participant-based evidence required to gain FDA approval. Still, the alternative is to allow individuals with less common afflictions to suffer a reduced quality and even quantity of life.

Branded Medications

Branded medications, meaning those that still enjoy patent protection, face their own challenges. Besides the need to recoup the cost of research and development, branded drug prices are also influenced by the supply chain that moves them from manufacturer to pharmacy. Middlemen, who receive discounts and rebates from manufacturers, do not always pass those savings onto consumers, Instead, they base the amount the patient  is responsible for on the drug’s list price, not the discount price after incentives. Some in the pipeline even encourage manufacturers to set a high list price so that middlemen can claim they’ve negotiated huge savings for consumers. According to the Pharmaceutical Manufacturers Association (Phrma), spending on new medications in 2017 grew by just 0.6%, but cost-shifting, and higher deductibles, certainly raise out-of-pocket costs for consumers. When we talk about drug costs, let’s make sure we differentiate between price increases that come directly from drug manufacturers, and the mere shifting of a greater share of a medication’s cost from insuers and employers to patients.

Medications Incorporating a Delivery Device

When it comes to medications accompanied by a delivery device, nothing has been as vilified as the EpiPen, a proven life-saver to individuals suffering severe allergic reaction. Critics note the dirt-cheap cost of the incorporated medicine, epinephrine, as reason enough to sanction the manufacturer, but even so, it’s not all cut and dried. There was competition in the class of drugs, but one manufacturer suspended production due to problems with consistent delivery of medication. Another potential competitor saw its application for a generic equivalent rejected by the FDA. FDA approval for devices requires units work as intended each and every time, protecting patients, but raising deveopment costs enough to discourage other potential manufacturers. Over the years, EpiPen has been improved to make its use during an emergency a true one-hand operation, making it the product of choice for families, individuals, and schools. While it’s undoubtedly true that a vial of epinephrine, a needle, and syringe could be kept on hand for very low cost, the ease of use and ability to carry the device anywhere weighs heavily in EpiPen’s favor. For an in-depth look at the issue, the link below is provided.

Epipen, the Story Behind the Story

Other Factors

Where you get your medication can also determine the cost. If you need your medication infused at a hospital, for say, cancer treatment,  the hospital may charge you or your insurer up to two and one-half times what the hospital paid for your medication. That steep mark-up may help pay for other departments at the hospital, but it also contributes to excess costs for patients and insurers.

The Center for Medicare & Medicaid Services (CMS) established a hospital-based charity program, 340B, to provide susceptible patient populations with low cost medication. Unfortunately, CMS investigators have found that many hospitals participating in the program are pocketing the savings from manufacturers  and charging patients and insurers much higher prices in violation of the spirit and intent of the program.

It’s quite possible that even demographics and medical advances contribute to the issue. A recent study by United Health Group reports that 86% of health care costs in the United States are for the treatment of chronic and complex conditions.  The US, like many other advanced countries, has a rapidly growing population of elderly citizens, who are not about to be confined to rocking chairs when there are treatments and procedures available to give them a better quality of life. That dramatic change in the number of illnesses and conditions that can today be treated effectively affects the entire population, not just seniors. Medical breakthroughs are providing treatment options that would have been unavailable just a decade or two ago, and people are taking advantage of them. That includes highly effective, highly successful treatments for serious conditions like Hepatitis C, with cure rates approaching 90-95%. The accompanying $70,000 estimate for a course of treatment seems outrageous, at least until you consider the long-term cost and disability connected with the disease over a patient’s lifetime.


Consider that in 1945, the president and Commander-in-Chief of the United States, embroiled in the most massive conflict the world had ever seen, suddenly died of a massive cerebral hemorrhage.  Doctors had been aware of Franklin D Roosevelt’s sky-high blood pressure for some years, but had no truly effective treatment, not even a simple diuretic. Today, modern medicine allows patients suffering with everything from heart failure to COPD to live better, longer, more productive lives. In some ways, we are victims of our own success.

Ironically, Medicare Part D, which covers prescription drugs for seniors and is administered by private companies, stands out as a program that actually comes in under budget each year. That suggests that costs can be held down with the right combination of market competition and effective government oversight. Competition and market discipline can be enhanced by reforming both the pipeline from manufacturers to patients, and by putting consumers back in charge of the health care checkbook.

People need to know the true cost of their medicines in order to judge their value, so the system needs to be more transparent. That means disclosure of discounts and rebates provided by manufacturers to middlemen and insurers.  For competitive forces to work, the supply chain must be more open to public scrutiny, perhaps even allowing manufacturers to deliver medications directly to patients, not funnel them through a third party.  Reforming health insurance to allow consumers themselves to control more of  their health care dollars would force manufacturers, insurers, and other middlemen to compete for each individual’s business, and put the ultimate consumer at the center of every discussion, and every decision.

Reimbursements to doctors and hospitals should be uniform regardless where the medication is delivered, and manufacturer discounts intended to help disadvantaged patients should not be pocketed by hospital administrators. Accountability should be a major goal of regulators. CMS can certainly swing a big stick here, as can private insurers.

Pharmaceutical companies have indicated their willingness to agree to results-based contracting, where breakthrough medications would be reimbursed based on the results delivered to the patient. This type of reimbursement would also help ensure patients get the right treatment the first time, rather than being forced to attempt treatment with a cheaper, less effective regimen, first.

The share of spending on health care attributable to medications in the US is in line with Canada, France, Germany, and Italy, but those countries control costs by restricting access via price controls. We can avoid that scenario in America if we let the market work as it should, employ government as a watchdog against subterfuge and financial sleight-of-hand by members of the drug pipeline, and put consumers back in control of their health care dollars.

Copyright 2018                Kyle Policy Partners