Drug Prices: How High is Too High?

Americans believe drug prices are too high – and they want the government to do something. A Kaiser Family Foundation poll found that 73% of people feel that drug prices are unreasonable. They place the blame squarely on the drug companies who set the prices, putting pressure on Congress and the President to consider actions to rein them in.

New breakthrough drugs are commanding astronomical prices. Sovaldi, a novel hepatitis C cure, costs $80,000 for a 12-week course of treatment. Drugs to treat cystic fibrosis such as Kalydeco cost more than $300,000 a year. New cancer drugs are routinely priced over $100,000 a year, and as more cancer drugs are prescribed in combination, the annual bill for pharmaceuticals could reach $300,000 per patient.

Praluent, a novel injectable cholesterol drug, gained FDA approval on July 24. Makers Sanofi and Regeneron have announced its price tag at $14,000 per year. Praluent would be prescribed to patients who have genetically inherited abnormally high LDL cholesterol as well as those with a history of heart attack, chest pain and related conditions. While most high-cost drugs are indicated for a narrow set of patients, Praluent could be prescribed to as many as 10 million Americans. The big questions now become how much discounting CMS and insurers will demand and how pricing dynamics will change when Amgen releases a competitive product in the coming weeks.

Expensive drugs are not new. Pharma products prepared for rare use cases, often categorized under the banner of “orphan drugs,” are routinely approved at high prices in part because they have low sales volume potential. The companies bringing them to market justify their high prices as necessary to recoup investments across a smaller customer base.

What is novel about Sovaldi and now Praluent is that they are not orphan nor are they oncology drugs. The market for hepatitis C, for example, includes an estimated 3.2 million people with the disease in the United States alone. Gilead, which makes Sovaldi and Harvoni, claims that its $1,000-per-pill price is justified by its efficacy in treating the disease (in fairness – the products have been proven highly effective).

The rising prices of new cancer drugs are particularly concerning as they have increased up to tenfold over a span of 15 years in the U.S., according to a Mayo Clinic journal editorial. Oncologists have expressed their concern over the lack of regulations to restrain costs and the resulting financial burden this has placed on patients.

It turns out that it’s not just new drugs that are getting pricier. Older prescription drugs continue to get more expensive. Drugs for multiple sclerosis now average $60,000 a year compared to $8,000-$11,000 in the 1990s, according to Oregon Health and Science University. Novartis’ game changing cancer drug, Gleevac, was priced at $30,000 for a course of treatment in 2001 and now costs over $76,000.

Generics Getting More Expensive, Too

Generic drug prices are also soaring. Generics are nearly identical to their branded counterparts but cost much less as they have an abbreviated and less costly approval process. Consolidation is one reason generic drug prices are increasing at such high rates. When a branded drug loses patent exclusivity, several generic makers move in to produce the drug and compete with each other on price. With recent acquisitions and mergers among generic drug makers, fewer companies are competing to produce lower-cost generic drugs.

Consolidation has raised anti-competitive concerns from the FTC. A recent case concerns the H.P. Acthar Gel drug for seizures in young children and multiple sclerosis. The FDA approved the drug in 1952, and after being bought by Questcor (now Mallinckrodt) in 2001, its price tag increased from $40 per vial to $700 per vial, according to the New York Times. In 2007, the price was further increased to $23,000 per vial. Novartis sought to introduce a lower-cost competing drug, Synacthen Depot, into the market. But in 2013, Questcor bought the rights to the drug, prompting the FTC to investigate what has become one of the world’s most expensive drugs. Consolidation aside, pharmaceutical companies generally insist that they need to charge high prices to recoup research and development costs. New drugs can cost hundreds of thousands of dollars to develop without a guarantee of return. Many drugs fail in costly late stage clinical trials. However, it appears that there is not a rational basis for drug prices. Rather, prices are set according to what the market will bear.

What Should be Done?

A new poll by the Kaiser Family Foundation found that 87% of the people surveyed want Medicare to negotiate for lower drug prices. The broad support for action is bipartisan. While Republicans are often hesitant in supporting government intervention, a whopping 84% of Republican-leaning respondents to the KFF survey backed the government negotiating drug prices.

But can this happen?

Today, the answer is “No.” The Medicare Prescription Drug Improvement and Modernization Act of 2003, which established prescription drug coverage for Medicare beneficiaries, prohibited the government from negotiating drug prices. The legislation included a “non-interference clause” that bans the secretary of Health and Human Services from intervening in negotiation between drug makers, pharmacies and Part D plans. This clause was created to prevent the government from imposing price controls.

Attempts by Democrats to allow the Secretary of HHS to directly negotiate Medicare Part D prices (including discounts and rebates) with pharmaceutical manufacturers have been blocked. Republicans in Congress are ardent supporters of free markets and believe that competition between private plans is the best way to lower drug costs. Republicans also fear that involving the government in drug pricing would become a slippery slope toward federal price controls. Members of Congress cannot set drug prices; pricing is a market issue. The high drug pricing problem of late has been settled by payers and PBMs. In late 2014, for instance, several major PBMs struck deals on Hepatitis C drugs.

Even though it appears that many Republican constituents support the government earning authority over drug prices, it would probably take a leadership change in Congress (from Republican to Democratic control) for this to happen. A Hillary presidency could also take aim at pharmaceutical companies, igniting more public pressure for Congress to act.

Drugs: A Factor in the 2016 Election

Drug pricing will likely re-emerge in the spotlight as the 2016 Presidential race heats up. It will be hard for candidates to ignore public opinion polls that show Americans are concerned about the affordability of their prescription drugs. Hillary Clinton, the Democratic front-runner, advocated for government negotiation of Part D drugs as Senator. Clinton also supported reimportation of prescription drugs during her time in the Senate.

Reimportation would allow consumers to purchase less expensive drugs from other countries if the drug was originally produced in the US. It is currently illegal to import prescription drugs into the US from other countries. Reimportation legislation has been blocked by the Food and Drug Administration and political allies of the pharmaceutical companies citing safety concerns, mainly worries of counterfeit drugs entering the US.

Other policies Democratic candidates may resuscitate from the past include extending Medicaid rebates to Medicare Part D, placing price controls on drugs that are developed using NIH research, and reforming patent law to make it harder to prolong drug exclusivity. Candidates may also call for breakthrough or other expedited approval pathways contingent on “reasonable” pricing. Members of Congress have called for the pharmaceutical industry to disclose more of its research, development, and manufacturing costs in order to justify rising price tags, and states have begun to introduce legislation supporting disclosure.

It is less clear how Republican candidates will handle rising drug costs. Republicans have typically backed pharmaceutical companies when they are in the crosshairs. With public sentiment going against drug companies it will be more difficult for Republicans to come to their aid.

Insurers Take Aim

Alternative pricing models for prescription drugs may become the next avenue insurers and lawmakers use to lower drug costs. There is mounting pressure to tie drug prices with how well they work in patients and their overall value to the health care system. According to the Kaiser survey 58% of people say that health insurance companies should only pay for expensive new drugs if it has been proven more effective than existing treatments. Currently there is no price difference between medications that improves survival rates and those that do not.

The Institute for Clinical and Economic Review received a $5.2 million grant to find benchmark prices for up to 20 drugs over 2 years. The Institute issued a report that examined the value of Gilead Sciences hepatitis C medicine and plans to release a report on cholesterol lowering drugs known as PCSK9 inhibitors this fall. This data could provide ammunition to insurance companies and lawmakers as they grapple with the cost of prescription drugs.

Impact on Federal Health Spending

Earlier this month, Medicare’s board of trustees forecasted that expensive new medications will contribute to a sharp increase in the program’s prescription-drug spending over the next decade, raising annual growth to 9.7% between 2015 and 2024, from 6.5% in the prior eight years. If the tenor of news headlines becomes “Drug Costs Bust the Federal Budget” then many pharmaceutical companies could soon be in search of a new formulary for themselves.

Ipsita Smolinski is Managing Director for Capitol Street, a healthcare research and consulting firm in Washington, DC.


Update: A previous version of this post incorrectly stated AHIP’s position on allowing the federal government to negotiate Medicare drug prices. The insurance lobby is opposed to striking the “non-interference” clause in Medicare. An earlier version also incorrectly identified the drug Kalydeco. It is an “orphan” drug. We regret the errors. 


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