Why do pharmaceutical companies charge so much for drugs? It’s complicated.
When prescription medications are in the news, it’s usually because of a treatment breakthrough or a study warning of worrisome side effects. Lately, however, drug companies have been in the headlines more than their products.
Turing Pharmaceuticals recently bought rights to a decades-old therapy for a dangerous parasitic infection and immediately hiked the price of the drug, Daraprim, 5,455 percent (from $13.50 to $750 a pill). The result was public outrage, politicians demanding federal regulation of drug prices, and Turing being skewered in nightly newscasts. In reaction, the drug company said it will cut back Daraprim’s price, although how much isn’t yet known.
Other pharmaceutical companies jumped into the fray with Michael Hayden, who heads research at Teva, the world's largest generic drug maker, calling Turing’s price hike of Daraprim "inappropriate and shocking behavior that undermines what we're trying to do in the industry."
However, Hayden’s own company has been criticized for raising prices to astronomical levels, too. Teva spiked its branded multiple sclerosis (MS) drug, Copaxone, to over $70,000 a year per patient in recent years, then fought, unsuccessfully, in court to prevent other drug companies for marketing cheaper, similar generic versions of the MS medication.
There are plenty of other examples of prescription drugs with stiff price hikes in recent years. A bottle of the antibiotic doxycycline increased in price over 9,000 percent between 2013 and 2014, for instance. Pharmaceutical manufacturer Mylan’s EpiPen, which automatically injects a measured dose of epinephrine to stop the life-threatening allergic reaction called anaphylaxis, increased 20 percent over the past four years and now costs almost $200 a dose.
Overall, Americans were hit with double-digit price increases for prescription medications in 2014, according to the Truveris National Drug Index. Brand drug prices spiked the most (almost 15 percent). Although generic drugs are intended to keep prescription drug prices low, the price of these medications also shot upwards almost 5 percent last year.
Bottom line: There’s nothing new about many prescription drugs being expensive or pharmaceutical companies making large increases in some drug prices.
But while greed may sometimes play a role, it’s not fair or logical to demonize all pharmaceutical companies as the “bad guys” — after all, prescription drugs and pharmaceutical research save lives. And the ongoing search for new treatments and potential cures for diseases like cancer and Alzheimer’s is costly. To fund it, drug companies often charge hefty prices as long as they can.
“Drug prices are high by design,” said health economist David H. Howard, PhD, associate professor in Emory University’s Department of Health Policy and Management. “The patent system gives companies a temporary monopoly to produce drugs without competition. If we think drug prices are too high, we could always shorten the length of patent protection. However, no one is proposing to do that. I suspect they do not want to acknowledge the tradeoff between affordability and innovation.”
Drug companies spend hefty amounts of their budgets not only on innovative research and testing but also to promote their new drugs directly to doctors who, in turn, will prescribe them, according to a comprehensive analysis of pharmaceutical company spending by the non-profit investigative journalist organization ProPublica. The companies also spend billions marketing their products directly to consumers.
Critics point out the millions of dollars spent to boost sales and create markets for drugs that otherwise might not be big sellers can increase the bottom line of pharmaceutical companies. But the practice of aggressively promoting new drugs may not always be good for patients — or drug prices.
Any new drugs that are true breakthroughs in treating a disease or are much better than existing therapies “sell themselves,” Sidney Wolfe, MD, senior adviser to Public Citizen’s Health Research Group, noted in a New Times article about the ProPublica findings. But the ProPublica’s research found the medications most promoted to doctors by drug companies were typically neither cures nor breakthroughs but newer medications. And in almost all instances, there are older, lesser expensive drugs available to treat the same conditions.
There are a host of other factors that result in how drugs are priced in the U.S. What you pay involves a complicated set of transactions as a medication moves from the pharmaceutical company’s manufacturers, following approval by the Food and Drug Administration (FDA), to your local drug store, according to a report by the Congressional Budget Office (CBO).
The price set for a drug depends in large part on the competition the drug has in the marketplace. As long as a brand-name drug has patent protection and there are no other medications that provide the same benefits, a drug company basically can charge whatever it wants for a unique medication, and pharmacies and health plans can have difficulty negotiating lower prices from drug manufacturers, the CBO report pointed out.
On the other hand, if there are other brand-name drugs that are recognized as substitute therapies for a pricier medication, a health plan can choose to cover one or two lower-priced drugs considered to be treatment options, and the health plan can often negotiate reduced prices (in the form of rebates) from the manufacturers of these allowed drugs.
When cheaper generics arrive on the scene, health plans can opt to cover those medications. A choice of generic drugs also gives chain pharmacies leverage to negotiate wholesale prices by choosing which generic drugs they’ll stock and in what volume — and they often pass the savings along to their customers.
If you need a certain prescription for a health condition and you hear the dramatic news stories about sky high drug hikes, it can certainly be cause for worry. But, in general, Howard thinks the concern over high-priced prescription medications has been over-blown.
“All drugs will eventually face competition from generics, especially now that the FDA has paved the way for generic copies of biologic drugs. Companies’ high profits on branded drugs are temporary,” he said. “There are some drugs with prices that are very large relative to benefits, especially in oncology. However, in many areas of medicine (such as HIV/AIDS and hypertension), the value and benefits of new drugs far exceeds the cost.”
The impact of high drug prices can affect treatments, sometimes with serious results. For example, Howard pointed out, most surgeons will perform an organ transplant only if a patient demonstrates the ability to pay for post-transplant immunosuppressive medications.
For the most part, however, health insurance helps soften the blow of needed but pricey medications.
“Insurance companies’ coverage policies are very liberal. If a drug works, they cover it,” Howard said. “However, depending on the plan, patients may still incur high out-of-pocket costs for covered drugs. Cost is a major reason why patients are non-adherent to medication.”
“In oncology, discussions between patients and doctors about the cost of drugs are uncommon, but the American Society of Clinical Oncology is encouraging doctors to discuss costs,” he pointed out. “In other areas of medicine, doctors’ attention to patients’ costs varies. I suspect many doctors do not consider patients’ ability to pay when prescribing drugs.”
“It would help if doctors considered costs and value when prescribing drugs. Many doctors are too quick to adopt new drugs even if they are not much more effective than older drugs,” Howard said. “If doctors change their behavior, drug companies will react. When several doctors at Memorial Sloan Kettering Cancer Center said they wouldn’t use a new colon cancer drug because of its price, the company slashed the price by 50 percent.”
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October 13, 2015
Christopher Nystuen, MD, MBA