Why are prescription drugs so expensive? It’s complicated
It’s a good question we see consumers asking more and more lately – why are prescription drugs so expensive? I wish this question has a simple answer, but it really doesn’t. A lot of people want to pin it down to corporate greed. But it’s much more than only that.
Why are prescription drugs so expensive?
Prescription drug pricing consists of multiple variables. Prices factor in research and development, marketing, and manufacturing costs, just to name a few. Depending on which pharmacy, discount source, or insurance you use, prices for the exact same drug can vary widely. With this entry, we hope to explain more about why prescription drugs are priced the way they are.
Settle in, because we have a lot to cover on this topic. Here are some of the things we believe are affecting how much you spend at the pharmacy counter.
Pharmaceutical R&D plays a vital role in drug costs
R&D is a vital aspect to the drug making process. It’s also important to the Food & Drug Administration. Companies spend a lot of money making sure the drug they manufacture is safe and effective. They also use these costs for the innovation of more treatments.
Without research and development, the drug your prescription wouldn’t even exist. This is why pharmaceutical companies almost always immediately reference their R&D costs, when challenged with how much a medication costs.
R&D costs don’t necessarily have to be historical, meaning the cost it took to research and develop a drug, from start to finish, isn’t necessarily built into that specific drug’s price. One drug’s price could be factoring in future R&D on another product. It’s tough to pin this down, because each company may have a different R&D strategy.
Risks of introducing new brand prescription drugs to the consumer market
It’s risky for a pharmaceutical company to introduce a new drug into the market. In economics, the pharmaceutical method is called a high-fixed low-cost marginal process. It basically means the cost of a new drug is extremely high and the process is risky, though actually manufacturing the product is actually a low cost, meaning each pill may only cost pennies to make. The cost to manufacture each pill isn’t a true representation of the work put into overall development of the medication.
In 2016, the top 10 pharma companies spent a total of $70.5 billion on research and development. This illustrates how important R&D is to the drug manufacturing process.
Why is R&D important?
Research and development, or R&D, is important for the safety of consumers. It also plays a major role in developing new drugs to combat health issues. Without R&D, drug manufacturers wouldn’t be given the ability to develop the medications we use to specifically treat health issues.
How pharmaceutical advertising costs can affect drug prices
In 2017, consumers saw more pharmaceutical advertising on television than ever before. TV advertising spend increased from $3.11 billion in 2016 to $3.45 billion in 2017, a year-over-year increase of 10%.
Blockbuster drugs, like AbbVie’s Humira, saw spending reach $341 million. AbbVie outspent Pfizer’s TV advertising spend on Lyrica by over $100 million dollars. Let that sink in a bit. One drug saw TV advertising spend reach $341 million in one year. Wow.
Humira is used to treat rheumatoid and psoriatic arthritis. The cost for 1 carton of 2 pens of 40mg/0.8ml is $4,978.46. That cost almost seems impossible, right? Various patents are in place to protect Humira through 2032.
Patients are asking their doctor for high-cost, brand name, drugs
Did you know that 40% of doctors prescribe expensive brand name drugs at the request of patients? This obviously isn’t the only reason consumers see high drug prices though. Advertising shouldn’t directly make you pay more for an expensive brand drug, when a cheaper alternative may be available.
The role Pharmacy Benefit Managers (PBMs) play in drug pricing
Pharmacy benefit managers are essentially the entities that negotiate prices between pharmacies and drug manufacturers, on behalf of marketers, i.e., health insurers and discount plans.
The role they play in pricing depends on how aggressive the marketer wants to get with their costs. If the PBM doesn’t have a solid contract or if the marketer wants a bigger piece of the pie, it’s possible your drug’s price will be higher than through another channel. For example, LowestMed, a drug discount marketer, works with PBMs who keep the consumer’s best interest in mind. We believe in price transparency and aim to pass savings onto the patient.
PBMs have been thrown under the bus quite a bit lately for high drug prices. They’re not always at fault though. Yes, in some cases they negotiate bad contracts and prices are higher than ideal, but there are many PBMs out there putting the customer first. We’re proud to say we work with those putting consumers best interest first.
Setbacks in drug manufacturing, due to unforeseen events
It’s sad to say, but it’s true – a drug manufacturer’s location affects the cost of your medication. Lately, we’ve seen drug prices rise and shortages occur, because of natural disasters, like Hurricane Maria.
When natural disasters occur, the effects can be sweeping. Puerto Rico is home to 50% of the world’s leading pharmaceutical companies. Facilities there manufactures 13 of the top 20 top selling patented drugs. This is just a small glimpse into how disasters can affect drug pricing practically overnight.
Why does Puerto Rico manufacture so many prescription drugs?
Puerto Rico’s Gross Domestic Product share for the pharmaceutical industry is 61%. You’re probably asking yourself why this is so high. It all boils down to the tax benefits of Puerto Rico. Puerto Rico has 100% exemption on dividend distributions and a 100% special deduction for building, machinery, and equipment investments. There’s also a 90% exemption from property and real estate taxes, along with 50% on R&D tax credits. Compare those R&D tax credits with the United States, which is less than 10%. The choice is actually pretty clear. So, in theory, prescription drug prices may cost more if manufacturing takes place in the United States, given the R&D tax credits other countries and territories are offering.
A lack of generic drug competition
This is a major reason why prescription drugs are so expensive, even though generic drugs make up 88% of prescriptions. Generic drugs only account for 28% of total drug costs. Brand drugs make up the rest.
Even if a drug has gone generic, prices can still be more expensive than patients are willing to call affordable. Though, when the first generic of a brand drug exists, the cost is lower than its counterpart. It isn’t until manufacturers introduce more generic competition that prices fall for those drugs. Take for example Lipitor and Atorvastatin Calcium. When the patent expired for Lipitor, Ranbaxy Laboratories gained approval to produce tablets in various forms. It wasn’t until other manufacturers entered the market that prices for Atorvastatin Calcium dropped significantly.
Brand name vs generic – why are the prices so different?
Basically, generic drugs cost less, because the R&D and marketing for the drug has already been done by the original manufacturer. Also, when a drug goes generic, competition for that specific drug rises. This, in turn, drives down costs.
Manufacturers are spending extreme amounts of money on research and development for the brand drugs they manufacture. R&D discovers what active and inactive ingredients are necessary, as well as the effectiveness of the medications, and what side effects and interactions may exist. This, along with how much the brand manufacture spends marketing the drug, and other costs, make a brand drug’s price more expensive than a generic version.
Generics aren’t available right away, due to patent protection. Most drugs have a patent protection of around 20 years. After the patent expires, generic manufacturers can apply for FDA approval of their version of the drug.
What the FDA is doing to increase generic drug competition
The FDA is focusing on making it easier for generic drug manufacturers to develop complex drugs, like the EpiPen. They feel this creates more competition and ultimately lower prices. The FDA will use past experience to help give direction to generic drug manufacturers.
EpiPen’s effect on drug pricing
EpiPen was the subject of a congressional hearing in 2016. The reason? EpiPen maker, Mylan Pharmaceuticals, gradually raised prices for EpiPen overtime.
In 2007, the price for two EpiPens cost around $100. Five years later, the cost increased to about $218. In 2014, two EpiPens cost around $350 and in 2015 patients had to spend $460 to get two EpiPens. After nearly a decade of seeing prices increase, mass public outcry was the result, after Mylan Pharmaceuticals raised the price of two EpiPens to $608.
This public outcry took place, following the final price increase. EpiPen became the subject of news stories across the United States. Here’s the kicker though, EpiPen’s patent had been expired, yet no true generic was approved and available to consumers. Here’s where Mylan Pharmaceuticals reacted. When being questioned by Congress, representatives from Mylan said they would introduce a generic version of EpiPen. It happened practically overnight. This cut the cost of EpiPen in half.
So, why wasn’t this done earlier? That’s a good question. I think we all know the answer to it – Mylan Pharmaceuticals wasn’t getting any pushback from the consumer, which is why they kept raising the price of the lifesaving drug.
This example proves that drug manufacturers have the ability to gradually raise prices over time, until public outcry occurs.
Lack of value-based pricing
Drug manufacturers aren’t really held accountable fiscally, for how well their medications perform. To better illustrate this concept, Medicare recently implemented a value-based payment for hospitals. Reimbursements were based on how well the hospital performed on a set of three measures that include process of care, patient satisfaction, and mortality. Medicare penalizes hospitals for excessive readmissions for patients who entered the hospital with pneumonia, heart failure, or a heart attack.
This same concept could be implemented for prescription drugs. Manufacturers would essentially be held more accountable financially, for the effectiveness of their drugs and the satisfaction of patients.
Lack of consumer awareness around Rx price variations
If you’ve followed us at all, you know that shopping around for the lowest price on your prescription is a must. If you aren’t searching for the lowest price, and getting coupons, we highly recommend it. It’s because prescription drug prices vary not only by which pharmacy you shop at, but also by which discount source or health insurance is used. You can read more about why prices vary above, in the section titled “The role Pharmacy Benefit Managers (PBMs) play in drug pricing.”
When consumers become complacent with their medication’s price, like what happened with EpiPen, prices tend to stay high or even increase. There are definitely ways to save outside health insurance and the cash price – think drug price transparency and coupon apps, like LowestMed.
Consumers’ lack of demand for cheaper alternatives
Let’s revisit the EpiPen example again. Its patent was expired. Mylan Pharmaceuticals continued manufacturing the more expensive brand drug, until public outcry reached a critical mass and a cheaper alternative was demanded. After Mylan was held accountable, they introduced a generic version of the EpiPen practically overnight. How many other drug manufacturers have this capability?
There’s that old adage – the squeaky wheel gets the grease. We highlight this here, when mentioning negotiating prices with your pharmacist. You can always challenge your pharmacist on the cost of your medication. It’s possible they will look into if they can get you a cheaper price on your medication.
Never become complacent, when it comes to the price of your prescription. Companies, like LowestMed, are constantly exploring new pricing sources that will keep medication costs as low as possible.
Final thoughts on what factors make up medication prices
Plain and simple – if you drew a pie chart focusing on what is involved in making up prescription drug prices, there would be a lot of pieces to that pie. Everything from advertising to R&D costs, along with generic drug availability and setbacks in drug manufacturing, play a role in what makes up your prescription drug’s price.