Why do prescriptions cost so much?

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Why do prescriptions cost so much?


Americans are spending far more on drugs than people in other countries.

Why do prescriptions cost so much?

It isn’t that we are using more prescription medications. In many cases, we are just paying more for the exact same drug sold in other countries.

Drug prices up

This is pretty routine. Every January drug companies raise their prices and then around July there will be another round of price increases.

This January is no different. There have already been over 600 price hikes.

• The average increase is running around 5%. Not quite as steep as previous years.

For the first time, there were also huge price decreases this January. These were for insulins and inhalers. They are seeing around a 70% reduction in price.

♦ A big factor in these price cuts is the American Rescue Plan that the Biden administration passed in 2021. The rescue plan was mostly a COVID-era stimulus bill, but it also included a part that affects Medicaid.

Prior to that law, drugmakers had to pay penalties for increasing prices faster than inflation, but there was a cap on those penalties.

• The American Rescue Plan lifted the cap in 2024.

Now, drugmakers would have to pay much larger penalties for raising prices faster than inflation. They could actually owe more in penalties than the value of the drugs. So drug makers are cutting prices or taking older medicines off the market.

♦ In 2022, the Biden administration passed the Inflation Reduction Act. This act includes a new requirement for manufacturers to pay rebates for drugs in Medicare Part D whose price increases exceed inflation, beginning January 2023.

• The Inflation Reduction Act will not deter large price increases for non-Medicare people. These people have to rely upon their health plan to negotiate a fair price, if that is even possible.

• The industry always tries to claim that drug prices have been relatively flat. That is a bit lame since increases have been well above the rate of inflation. They also like to point the finger toward the middlemen.

• The insurance industry takes a different position. The trade group America's Health Insurance Plans (AHIP) says "prices are out of control" and Big Pharma continues to raise the costs for all Americans.

In 2019, at least 50 pieces of legislation were introduced in the Senate and the House to try to control prescription drug prices.

Some would help get generic drugs to market faster. Others would have legalized the importing of drugs from Canada.

Not a single one has been signed into law.

♦ A rule change in September of 2020 from the Trump administration was issued to create two new pathways for the importation of some drugs from Canada. After the rule was finalized, PhRMA and other parties filed a lawsuit challenging the rule.

In May of 2021, the Biden administration sought to dismiss the lawsuit. The federal court has yet to respond. Click the link to jump ahead.

How are drug prices decided?

Medicaid has controls

Pharmacy gag clauses

Odd laws in America inflate prices

Government funding doesn't help everyone

What if the government regulated prices?

Investors demand profits

People don't realize there is a crisis

Why have generic prices skyrocketed?

Shifting more costs to the consumer

How are drug prices decided?

In America, pharmaceutical companies can pretty much set their own prices. They can sell any drug the Food and Drug Administration (FDA) approves as safe, even if their new drug is no better than an existing drug.

August 7th, 2018
♦ Insurance companies receive new powers to decide Medicare Advantage drugs.

Federal health officials told insurers that they could substitute a less expensive Part B drug to treat a medical condition the FDA has not approved it for, if the insurance company can document that it is safe and effective.

Canada and most European countries regulate the price of drugs to try to keep them from become unaffordable for their citizens. This is especially important where few drugs may be available to treat chronic health conditions.

November 26th, 2019
♦ The Trump administration decided they would reduce out-of-pocket costs for Medicare beneficiaries by cutting the number of prescription drugs available.

The plan was to reduce the number of prescription drugs available to people with cancer, AIDS, depression, schizophrenia and other expensive conditions.

Many people who were taking an expensive anti-cancer drug that was no longer covered by insurance undoubtedly disagreed.

• The Centers for Medicare and Medicaid (CMS) plans to experiment with setting drug prices for many drugs administered by doctors through Medicare Part B program.

♦ This would be for drugs administered in a doctor’s office or medical facility, not a prescription filled at your local drugstore. Prescriptions are covered under Medicare Part D.

♦ Most countries have a government agency that decides if a drug is priced appropriately. Many of these countries also offer some form of nationalized health insurance. Negotiating drug prices is critical to controlling their healthcare costs.

The agencies are tasked with making the decision as to whether the new drug is worth bringing to market. Many new drugs these days are just tweaking older drugs to maintain patent protections and to keep prices inflated. These government agencies must decide if there are any improvements or new risks compared to the old drug.

Pharmaceutical companies have to show what their research costs were and what the actual manufacturing costs are so that a reasonable price can be determined.

• In America, these points are considered corporate secrets.

Medicaid has controls

Medicaid does not negotiate like Medicare Part D sponsors but it does have some strong price controls in place already.

♦ In order for a drug to be covered by Medicaid, manufacturers must join a national rebate program. In addition, manufactures must agree to a pricing agreement administered by the Health Resources and Services Administration and a master agreement with the Secretary of Veterans Affairs.

The Congressional Budget Office (CBO) found in a 2014 review that because of these price controls Medicaid’s average price for drugs was between 27% and 38% lower than what sponsors of Part D coverage were able to offer.

The CBO found that Part D sponsors were able to negotiate an average rebate of 15% off brand-name drug retail prices while Medicaid’s average rebate for the same drugs was 54%.

The CBO concluded that, if Medicaid’s statutory rebates were implemented for Medicare Part D beneficiaries federal costs would be reduced substantially.

♦ Lack of transparency through the prescription drug pricing process, both in general and specifically within Medicaid, has led to several proposed federal and state proposals that aim to provide accurate and public information on drug pricing.

Pharmacy gag clauses

Pharmacy benefits managers (PBMs), the middlemen who administer drug programs on behalf of insurance companies, often have “gag” clauses that prevent pharmacists from telling customers if a prescription would be cheaper if they paid cash rather than using their health insurance plan.

• Most people taking expensive medications have already taken it upon themselves to look for the cheapest way to get their medicine. Manufacturer coupons and prescription discount coupons from places like GoodRx are just two options people are using.

♦ October 2018, President Trump signed two bills to eliminate gag clauses. One to cover Medicare and Medicaid and one to cover group and individual health plans. The bills were talked up on the campaign trail but they had no major impact on people’s drug costs.

The Trump administration shied-away from any earth-shaking policy changes.

Odd laws in America inflate prices

In America, some odd federal laws are on the books that strongly favor pharmaceutical companies and lead to higher prices.

♦ One law requires Medicare to cover nearly all drugs that the FDA approves. So even if the new drug costs more and is not an improvement over an older drug, Medicare must cover the new drug.

This guarantees a market for the new drug but this also raises Medicare costs.

August 7th (2018) — CMS rule change will allow Medicare Advantage plans to discourage new but similar drugs by requiring step therapy be followed. This took effect on January 1, 2019 for Part B medications.

♦ By far the oddest federal law is one that prohibits Medicare from negotiating drug prices or making decisions about which drugs to cover.

♦ The Medicare Modernization Act of 2003 established Medicare Part D prescription drug benefits.

• The federal government does not provide drug benefits directly. Coverage is provided through private plans. These private plans compete for business based on costs and coverage.

Under Part D, private plan sponsors negotiate drug prices with pharmaceutical companies, prescription benefit managers and pharmacy chains. The plan sponsor decides formularies and sets up their own reviews and cost controls (often referred to as rationing schemes).

• Advocates argue that the federal government is in a stronger position to negotiate drugs prices than private plans. A recent poll finds that 92 percent of Americans think the government should be allowed to negotiate prices for Medicare beneficiaries.

→ The law would need to be changed to allow the federal government to be involved in negotiating prices. Republicans in Congress have historically been opposed to this. There will also be strong resistance from the pharmaceutical industry.

♦ August 2022, President Biden signed the Inflation Reduction Act which includes giving Medicare some negotiating powers. Not immediately but over the coming years. Not a single Republican in the Senator would support this.

♦ President Trump talked a lot about his desire to bring drug prices down. But the re-negotiated NAFTA agreement his administration passed has a clause in it that grants pharmaceutical companies protection — for 10 years — from cheaper biological drugs. Biological drugs are a class of super expensive drugs made from living cells.

Democrats in Congress raised a ruckus over this handout. But we are stuck with it for years to come.

• The Obama administration negotiated 8 years protection for biologicals from bio-similar drugs in the Trans-Pacific Partnership (TPP) trade agreement. President Trump dumped the TPP soon after taking office.

Government funding doesn't help everyone

The U.S. government through the National Institutes of Health (NIH) spends most of its $45 billion dollar budget on medical research, with a good portion going to the development of new drug treatments. Where does the money go?

♦ A lot of the money does not end up benefiting Americans but instead improves the profits of pharmaceutical companies and major universities.

• Prior to 1980, the federal government owned the rights to any discoveries made using federal money. In 1980, pharmaceutical companies successfully lobbied Congress to amend patent law to permit companies and universities to have title (ownership) of any discoveries. This patent law change is referred to as the Bayh-Dole Act after senators Birch Bayh of Indiana and Bob Dole of Kansas.

The drug Sofosbuvir is a good example of how the system works. It is a very effective treatment for Hepatitis C, which was developed with funding from the NIH.

Sofosbuvir was approved for use in the U.S. in 2013. As of 2016, a 12-week course of treatment costs about $84,000 in the United States, $53,000 in the United Kingdom, $45,000 in Canada, and $483 in India. The prices vary by country because Gilead Sciences, who owns the rights to the drug, is required to negotiate pricing in other countries.

Cure rates range from 30 to 97% depending on the type of Hepatitis C virus involved. Many Americans cannot afford to take this medicine even though our government helped fund its development.

Most people should be disturbed by this but it doesn’t make the news.

On March 14th, 2018
Knowledge Ecology International (KEI), a nonprofit organization, asked the Secretary of the Department of Health and Human Services (HHS) to investigate a failure to report NIH funding in U.S. Patent No. 7,964,580. This is the patent for Sofosbuvir. If it is found there was a failure to disclose NIH funding in the patent, KEI has further requested that the government take ownership of the patent. Should this happen it would be a major win for patients.

The Trump administration sidelined this action.

What would happen if the U.S. government regulated prices?

If the U.S. had an oversight agency similar to what European countries have then prices would certainly come down.

It would likely result in health insurance premiums rising less drastically, lower out-of-pocket expenses for consumers and lower Medicare and Medicaid expenses.

So why don’t we do this?

Someone would need to make hard choices as to what drugs to allow to come to market instead of relying on pharmaceutical companies. Drug companies would need to show their costs so a reasonable price could be set. Multiple players marketing prescription drugs would cry when they see their profit margins shrink.

♦ It is not a far-fetched idea to dream of having a government agency negotiate a reasonable price. The Veterans Health Administration (VHA) already negotiates drug prices. It pays 80 percent less for brand-name drugs than Medicare Part D pays.

• The VHA also limits the number of drugs that are covered, which is a point of contention.

♦ Medicaid already has some price controls

The Centers for Medicare & Medicaid Services (CMS) could easily incorporate some of what the VHA has learned in negotiating prices. But a clause in the Medicare Modernization Act of 2003 prevents the government from negotiating with drug companies over Medicare Part D drugs.

♦ The Inflation Reduction Act of 2022 takes a shot at this clause. CMS will get permission to stat negotiating prices for some drugs.  Nothing dramatic and not immediate but at least it is something.

♦ Pharmaceutical companies make a lot of profits right now. Of course, they will fight to keep them. That means a lot of money directed toward lobbying government officials to keep the status quo.

The pharmaceutical industry spent more than $372 million on its federal lobbying activities in 2022. They spent at least another $32 million on state lobbying. Not all states report this type of lobbying.

♦ We need help now. One out of four Americans has trouble paying for their prescription medicines already.  The situation is even worse for life-saving drugs where the sky is the limit for pricing.

Investors demand profits

Investors like pharmaceutical companies because they make a lot of profit and that profit gets shared with investors. If prices are controlled by the government, profits go down and investors look for other profit generators.

♦ Pharmaceutical companies argue that without reliable profits investing in research would be reduced. It is very expensive and takes many years to bring a new drug to market. This argument is a bit foggy.

The truth is that 9 out of 10 big pharmaceutical companies spend more on marketing than on research.

• An estimated 70% of new drugs are not any better than existing medications. The main focus seems to be to maintain patent protection and a monopoly on a particular treatment.

A huge chunk of money is spent on researching things that are not essential. Treatments for obesity, hair loss, infertility and anti-aging. Things that wealthy consumers will pay a lot of money for.

♦ Less money goes toward the development of new antibiotics which are desperately needed simply because such a drug is usually taken for a few days or until the infection is cured and then the consumer has no need to buy any more.

Costly research on life-saving drugs and niche diseases have the greatest potential for excessive profits. A lot of that research qualifies for government funding.

People don't realize

Many people don’t realize there is a crisis until it strikes them or a close relative.

♦ People in good health or with good health insurance often don’t realize the high cost of prescriptions. It isn’t until someone close to them needs an expensive antibiotic or develops a serious illness that requires a specialty drug with an out of this world sticker price that they understand something is very wrong.

The news likes to report on scandals like the recent pricing of EpiPen for $600. Less famous brands don’t make the news even though most brand-name prescription drugs have increased nearly 50% since 2013.

♦ Fortunately, the vast majority of American are taking generic drugs. Generics make up the majority of prescriptions that treat common conditions like blood pressure, high cholesterol, pain, diabetes and depression. More than 3 billion prescriptions are written for generics every year.

Why have generic prices skyrocketed?

A number of factors have caused the price of generics to increase. Some is because ingredient supplies are getting squeezed as more overseas markets gain access to these drugs. Mostly, it is demand together with a desire for greater profits.

♦ In some ways, Obamacare has also contributed to increased costs.

Prior to the Affordable Care Act (ACA) most insurance plans covered the majority of the cost for generic prescriptions. You might pay a small copay of $5 or $10.

The ACA requires insurers to cover many more essential benefits, including prescriptions.

• In a trade-off for accepting everyone regardless of health condition the ACA gives insurers considerable leeway in designing plans. Shifting more of the cost for prescriptions to the consumer is one unfortunate outcome.

To improve their bottom line, insurers have adopted more restrictive rationing of medications than in the past. Approved drug lists called formularies have become shorter. Prior authorization and step therapy (requiring a cheaper drug be tried first) now is the norm.

♦ August 7th, 2018
CMS announced changes to Medicare Advantage plans. These types of Medicare plans will now be allowed to incorporate step therapy into their prescription benefits.

This change was touted as a way to lower prescription drug prices when it actually does nothing to get drug companies to lower prices.

Medicare Advantage members can now be forced to use the least expensive medications first, even if their doctor knows it may be less effective for them.

CMS's statement gives the impression that drug prices will be negotiated down but they are careful to not refer to prices at the local pharmacy.

Those prices cannot be negotiated by CMS unless Congress changes the law. The Medicare Advantage sponsor (Aetna, Humana, BCBS, etc.) would be the only ones that can negotiate prices.

Shifting more costs to the consumer

Tiered pricing has been greatly expanded to the point that some plans are absurdly complicated. There is now multiple tier pricing even for generics. And preferred network pharmacies over a regular network pharmacy.

♦ Insurance plans now have some really high deductibles. This is dangerous because insurers have quietly shifted more common expenses like prescriptions toward the deductible.

The standard prescription copay is being replaced by a percentage coinsurance if you are lucky. But in most cases, the cost goes directly to the deductible.

• Without the insurer picking up a portion of the prescription costs until after the deductible is met, consumers are getting hit with some really high drug costs even for generic drugs.

In the past, insurers might have shown the list price of the generic drug but you paid only a small copay. The insurance companies never actually pay the list price. They work with middle men called pharmacy benefit managers who negotiate pricing schemes involving discounts and rebates.

• The average consumer has no one to negotiate for them. We can only shop pharmacies for the best prices or take the chance with online drugstores.

Take for example two popular cholesterol medications, Lipitor and Crestor. Both have gone generic. Both should be much cheaper now. But no, not for everyone.

Many prescription plans now list the generic versions as non-preferred generics subject to prior authorization in many cases and with copays rivaling brand-name drugs.

People with plans that shift the costs toward their deductible are finding these two generics are not such a good deal when they get assessed the list price for them. Something the 30 million Americans without any health insurance have known for a long time.

♦ Lipitor’s generic is called Atorvastatin and Crestor’s generic is called Rosuvastatin. The cash price for a 30-day supply of 10-mg Atorvastatin runs around $35 and 10-mg Rosuvastatin is about $75.

► Don’t lose hope! There is a way to get Crestor generic version for under $20 at Walmart. Check out the article Prescription Discount Cards.

Looking ahead

America is aging. Every year, more Americans are diagnosed with a chronic condition. Many of these conditions can never be cured. But they can be treated and bring some sense of normalcy to people’s lives.

The consensus is growing that something must be done to rein in drug prices. People should not be forced to choose between paying for their medicines and paying for food or rent.

The moral conscience of America is being tested.

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