Why are US drug prices so high? What should a presidential policy to lower drug costs include?

October 29, 2020
Contact: Laura Bailey baileylm@umich.edu

FACULTY Q&A

The high price of prescription drugs is an important issue for voters, and in the past 50 years, Congress and the president have made little headway in restraining costs.

John Clark

John Clark

John Clark, clinical associate professor at the College of Pharmacy and director of pharmacy services at Michigan Medicine, and Amy Thompson, clinical associate professor at the College of Pharmacy and director of ambulatory clinical pharmacy practices at Michigan Medicine, discuss why drug prices are high in the United States relative to other countries, and what can be done to lower them.

Amy Thompson

Amy Thompson

We hear a lot about high retail drug prices. Are high prices also a problem for inpatient drugs?

Clark: Yes, an enormous problem, risking solvency of health systems. When drug companies decide pricing, they need to consider the value of the products in terms of the increased health provided to patients. Most times, the patient’s health is only marginally improved at an incredible cost.

President Trump has issued several executive orders to lower drug prices. Has this helped?

Thompson: At this point, it is too soon to tell. The bulk of the executive orders are aimed to impact Medicare programs only, so it will likely not impact private plans. One of the orders would force rebates typically paid to plans to be passed on to beneficiaries, and there is concern that this would then drive up health plan premiums. The Health and Human Services secretary has been charged with implementing this EO while not increasing federal spending, so I think it will be some time before we can see how this will roll out.

Another EO aimed at lowering the costs of insulin and epinephrine will have a direct impact on federally qualified health centers who provide care to underserved areas. This EO will make insulin and epinephrine costs cheaper for low-income individuals. The definition of low-income will determine the impact of this EO. Attempting to mitigate costs on a drug by drug strategy, such as insulin and epinephrine only, will likely create confusion and administrative costs.

If a presidential candidate were serious about lowering drug prices, what would that policy look like?

Thompson: A policy focusing on transparency across the board will help impact drug costs. Currently, there is nontransparency contracting in place, typically at the manufacturer and pharmacy benefit manager level, which prohibits sharing of pricing and negotiating. In October, the Supreme Court began to hear arguments in the Rutledge v. Pharmaceutical Care Management Association case, which stems from a 2015 law in Arkansas that prohibited pharmacy benefit managers from reimbursing local pharmacies at a lower rate than what the pharmacies pay to fill prescriptions.

Additionally, shifting to a model that holds manufacturers accountable for negotiating to a fair price, for example with the government for Medicare Part D medications, would be important. One model proposed includes competitive licensing, which would allow another manufacturer to bring a generic or biosimilar agent to market before patent expiration, while paying a royalty to the patent holder. This could potentially give more bargaining power.

The president would need to work with Congress to develop strategies where costs are in line with the value the medication provides, rather than arbitrarily set. Congress and the president would need to work with pharma to come to an agreement that limits returns and requires reinvestment. Consideration of executive pay in pharma would also be an opportunity. CEO pay continues to increase as do health care costs, and there is a continued push for more disclosure from the major pharma and biotech firms.

What are the main reasons drugs are so much more expensive for consumers and hospitals in the U.S.?

Clark: There are many economic factors at work that lead the U.S. to pay two-to-six times more for prescription drugs than other countries. Unfortunately, drug pricing is not very straightforward and there are numerous players involved: manufacturers, wholesalers, insurers, pharmacy benefit managers and pharmacies.

In addition to lack of transparency, the majority of manufacturers spend about the same on marketing and research. Elimination of direct-to-consumer marketing (allowed only in Australia and the U.S.) or reducing health professional marketing could have a significant impact on drug costs.

Also, much of the research and innovation costs for the world are absorbed by the U.S. market. If research and development costs were spread to more of a global market, U.S. drug costs may decrease, and other markets may have increased costs to balance.

High U.S. prices could also result, in part, from this reliance on research and development innovation from the U.S. market. For instance, there is a high reliance on the U.S. research infrastructure for preclinical and clinical trials, which may raise medication costs in the U.S. Due to system complexity and so many intertwined economic factors, we may not be able to know for sure.

The U.S. could consider additional price regulations like many smaller nations have done, but the concern is innovation may be stifled due to the huge impact a U.S. market cost shift could have on the global market. If future profits are expected to drop, investment in future innovation may decrease, so one solution might be to restrict some drug costs or profits and study the effect closely to determine next steps.

Thompson: High drug costs are not the product of one issue, it’s a complex issue that will take time to change. High medication costs are rarely, if ever, due to the pharmacy or pharmacist making money. Medication pricing is a complex system of corporate finances and entities in the beginning and middle of the supply chain gaining wealth.