Expert Commentary

Drug prices: Why prescription medicines remain unaffordable for many Americans

This explainer, in addition to providing an initial overview, addresses five aspects of the debate about the high costs of prescription medicines.

drug prices
Dave Goehring

There may be few issues that unite Americans ahead of the 2020 election as do their concerns about the cost of prescription drugs.

A clear majority — 75% — of respondents to a July survey said the cost of prescription medicines would be among the factors likely to influence their votes this year, according to a report from Gallup and the nonprofit West Health. Gallup reported on results from 1,007 interviews conducted with adults between July 1 and July 24.

In fact, 5% of this group surveyed cited the cost of prescription medicines as the most important factor, with another 30% saying the cost of medicine was among the most important issues influencing their votes. Another 40% report described the cost of medicine as an issue of “mid-range” importance. Only 24% classified this as being among the least or among the least important issues likely to affect their votes.

For journalists covering health care in the context of the election, it’s important to have a handle on the state of pharmaceutical prices in the United States. This explainer, in addition to providing an initial overview, will address five aspects of the debate about the high costs of medicines.

  1. What are the 2020 presidential candidates saying they will do to lower drug prices?
  2. Why doesn’t Medicare, the biggest purchaser of drugs, directly negotiate on drug prices?
  3. What’s the deal with rebates and discounts?
  4. What is the “distinctly American” phenomenon of specialty drugs?
  5. How much does it cost to develop a new medicine anyway?

Americans spend far more per capita, on medicines than their counterparts in other wealthy nations, according to the Organization for Economic Cooperation and Development. OECD is a group that studies the factors that promote the development and maintenance of middle-class  nations such as access to education and health care.

In 2018, spending on medicines, including over-the-counter drugs, per capita in the United States was $1,229, more than a third higher than the next country in this OCED survey, Switzerland, with spending per capita of $894. In Germany and Canada, the spending on medicines per capita was $884 and $865 respectively, with the OECD having reported all of this spending in U.S. dollars.

And people in the United States are far more likely than their counterparts to forgo medicine due to concern about cost, according to a paper published in August 2020 in Health Affairs, “Compared With Other Countries, Women In The US Are More Likely Than Men To Forgo Medicines Because Of Cost.”

In this paper, Jamie R. Daw, an assistant professor in health policy and management at Columbia University’s Mailman School of Public Health, and Michael R. Law, director of the Centre for Health Services and Policy Research at the University of British Columbia, report on their analysis of international surveys done by the nonprofit Commonwealth Fund. For this work, Daw and Law analyzed data from based on three rounds (2014, 2016, and 2017) of the Commonwealth Fund’s International Health Policy Survey, with these surveys having had a total of 24,724 respondents ages 18-64 and 42,911 respondents age 65 and older.

Among survey respondents in the United States who were between ages 18 to 64, 19.6% of respondents reported having not taken medicine as directed due to concern about cost, Daw and Law write. That was more than double the 9.4% for Canada, the country with the next highest rate of what the researchers called “self-reported cost-related nonadherence to prescription medicines.” The rate of this nonadherence in the United Kingdom and Germany was less than 3.0%, write Daw and Law.

The same holds true for people age 65 and older, even with Medicare offering a prescription drug plan, known as Part D, for senior citizens. Of respondents from the United States, 11.3% reported skipping prescription drugs due to concerns about costs. Canada had the next highest rate of people who skipped doses of medicines, 4.7%

Recent news stories and papers published in medical journals tell of cases where people have forgone critical medicines such as cancer drugs and insulin due to cost. Liz Szabo of Kaiser Health News, for example, has repeatedly examined the consequences for patients of costly new cancer medicines, including a 2018 story on a South Dakota woman who was weighing whether to continue taking a cancer drug that would cost her nearly $17,000 a month in out-of -pocket cost.

People with diabetes lack a sufficient amount of insulin, a kind of chemical messenger produced in the pancreas gland of mammals. Insulin helps escort sugar into cells, giving them needed energy. Insulin has been often cited in the debate on the costs of medicines. Last year, Kasia Lipska, an associate professor at the Yale School of Medicine, and colleagues reported in JAMA Internal Medicine on the struggles of people with diabetes to buy insulin. In their research letter, titled “Cost-Related Insulin Underuse Among Patients With Diabetes,” they write about 199 people with diabetes who were surveyed at the Yale Diabetes Center in New Haven, Conn. Some 59 of those 199 reported rationing their insulin due to its cost. The majority of those in this survey — 147 — were age 64 or younger.

Lipska presented these results before a 2019 House panel examining the high cost of drugs. She told them a vial of a certain brand of insulin, Lantus, may cost $200 at a Connecticut pharmacy, with the price jumping to almost $300 if the insulin is packaged as a prefilled pen.

Yet, commercial sales of insulin dates to the 1920s when scientists figured out how to make a medicine for people with diabetes by extracting insulin from animal pancreases.

Drugmakers then figured out how to engineer bacteria cells to produce insulin, allowing for the 1982 introduction of a biotech version of the medicine. By the 1990s, scientists modified biotech insulin to allow for faster absorption, earlier peak of action, and shorter duration of action. The first of these revamped insulins, Eli Lilly & Co.’s Humalog, reached the market in the United States in 1996 with a cost of about $21 a vial, Lipska told the House Energy & Commerce Committee’s panel on oversight and investigations.

“Since then, there’s been no innovation to improve Humalog. It is the same exact insulin hormone,” Lipska said in her testimony. “The only thing that’s changed is the price: it now costs over $250 a vial.”


1. What are the 2020 presidential candidates saying they will do to lower drug prices?

Both President Donald Trump, a Republican, and former Vice President Joe Biden, a Democrat, have highlighted insulin costs in their discussions of the need to lower drug prices.

In a January interview with the New York Times editorial board, Biden noted the widespread discontent among Americans about sticker shock often experienced at pharmacies. He spoke of a need for the federal government to act to make medicines more affordable.

“This is a place where I find, whether you’re Republican or Democrat, you think you’re getting screwed on drug prices. And you are, in terms of everything from insulin to inhalers and a whole range of other things,” Biden said. “So, again, can I guarantee that it gets done? No, but I can tell you what, if anybody can get it done, I can, and I think there’s a consensus for it.”

The Trump administration this year took a step that could help many older Americans get cheaper insulin in 2021 through Medicare Part D plans. The Centers for Medicare and Medicaid Services (CMS) will run a test, known as a model, through which Part D plans can offer to cover their customers monthly insulin supply for a copay of no more than $35.

About one in every three people enrolled in Medicare has diabetes, with more than 3.3 million of them using one or more of the common forms of insulin, according to CMS. In 2018, for example, more than 1 million people enrolled in Medicare used Sanofi’s Lantus Solostar insulin, according to CMS’ website for tracking the program’s spending on drugs.

The expected launch of the voluntary $35-a-month copay for insulin may help some older Americans, but there are limits to this plan even for customers of Part D plans, write Juliette Cubanski, Tricia Neuman, Sarah True and Anthony Damico in a June 2020 brief from the nonprofit Kaiser Family Foundation. The 2021 offer does not apply to all enrollees in Part D nor will it cover all insulin products, write Cubanski, Neuman and True, all of KFF, and Damico, an independent consultant.

“The new model also does not address underlying list price increases for insulin or affordability concerns for people who are uninsured or covered by other sources of coverage,” they write.

In July and September, Trump announced a series of plans regarding pharmaceutical prices with some of his most sweeping proposals appearing unlikely to take effect quickly, if ever, due to political obstacles. These include an effort to tie prices in the United States to those paid in other wealthy nations.

Another Trump suggestion directed community health centers to share with their patients the savings they receive on insulin through a federal drug discount program, known as 340B. He included this in a July statement. In September, the Department of Health and Human Services put forward a notice of proposed rulemaking regarding the community health centers.

But the community health centers already have a good reputation for sharing these savings and they only represent a small portion of insulin providers, Jon Greenberg wrote in an Aug. 3 examination of Trump’s claims for the nonprofit Poynter Institute’s fact-checking organization PolitiFact.

PolitiFact  deemed Trump’s statements about his plans to lower drug pricing to be  “mostly false.” In his July 25 tweets,  Trump claimed that his actions would lead to the biggest “price reductions in history, by far!”

“Nothing like this has ever (happened) for our citizens, especially our Seniors. REMEMBER YOUR FAVORITE PRESIDENT!” Trump added.

The hitch was that Trump’s July statements, presented to the public under the executive orders, were merely directed for federal agencies to take action on his plans. These statements themselves didn’t change any policies.

“If words matter, Trump’s manner of talking about the future as if it were already in the past clearly runs afoul of the facts,” writes Jon Greenberg in the Aug. 3, 2020 PolitiFact article.

Trump’s July and September statements on drugs were released as executive orders, a term that may make these statements from the White House appear to the public have more political heft than they actually do. The executive orders in these cases make no changes in federal policy in and of themselves. They simply outline Trump’s goals and direct the Department of Health and Human Services to take action in the future.

“It’s the administration telling itself to do something,” KFF’s Neuman says. “It’s like talking out loud.”

So far in the Trump administration, the most concrete steps taken to address the costs of medicines are the voluntary $35 Part D insulin copay set to start next year and his 2018 enactment of bipartisan congressional legislation that ended gag orders on pharmacists, Neuman says.

Earlier pharmacists had complained to lawmakers about rules that prevented them from helping their customers get the best deals on medicines. By 2018, more than 20 states had enacted such laws, the lobbying group for older Americans, AARP said, citing the National Conference of State Legislatures.

“For all of the conversation that there’s been about drug pricing, there’s remarkably little that’s happened” during the Trump administration, Neuman says.

As seen below, Neuman created a timeline of key proposals discussed by Trump that have not yet materialized.

trump drug plan
Used with permission of the Kaiser Family Foundation

There are areas of overlap between Trump’s proposals and ideas backed by Biden.

On his campaign website, Biden has suggested using a model called “external reference pricing” — Biden’s website links to a research article on the topic in Health Affairs, Using External Reference Pricing in Medicare Part D to Reduce Drug Price Differentials With Other Countries.”

Under this model, the price for certain more innovative medicines would be pegged to those seen in other nations. In cases of newly introduced medicines, the Biden plan calls for use of an evaluation by an independent board. The result would be what he calls “a reasonable price” paid by the top purchaser of medicines, the Medicare program, as well as by the government-run insurer he intends to create, known as a public option. Private insurers that sell plans in state and federal exchanges would use the same price, he said.

Trump also has endorsed the idea of using other nations’ prices as a benchmark to lower those paid in the United States, but has not yet taken formal action on this.

Over a year ago, CMS finished a draft plan for an international pricing index model that would apply to Medicare’s Part B drug purchase, but it has never been released to the public in full detail. Instead, the draft has been lingering under review at the Office of Management and Budget (OMB). OMB’s  website for tracking the status of proposed federal rules says the draft has been under review since June 20, 2019. OMB does a last check on proposed rules and regulations before they are released. Below is a screenshot of the OMB dashboard listing for an international pricing model for Part B drugs.

Part B

In many cases, proposed rules will later be withdrawn if they encounter serious political opposition. The Obama administration, for example, in 2016 withdrew a proposed rule for changing how Medicare Part B pays for medicines. It was intended to reduce financial incentives for doctors to prescribe more expensive therapies. In July 2019, Trump withdrew a proposed rule that would have ended a widespread practice in which drugmakers give rebates to insurance middlemen in Part D.

In his September statements on drug prices, Trump emphasized his drive to peg prices in the United States to those paid in other nations. He expanded on his original plan of using this international pricing model for Part B drugs and included the larger portion of Medicare spending, the Part D plans, in his outline. In this outline, the Trump administration described what it called a “most-favored-nation price.” Adjusting for volume and differences in national gross domestic product, this would be the lowest price for a medicine that the drug manufacturer sells in a member country of the Organisation for Economic Co-operation and Development (OECD) that has a comparable per-capita gross domestic product.

Trump also on Sept. 24 floated the idea of issuing $200 discount drug cards to about 33 million people enrolled in Medicare. The White House then declined the following day to explain where it would find the funds or legal authority for this program

The drugmakers’ lobbying group, the Pharmaceutical Research and Manufacturers of America (PhRMA), quickly objected to Trump’s outline. Drugmakers have long contended that bids to reduce their profits would crimp the flow of new drugs to market. PhRMA pointed to the percentage of money spent on medicines that flows to middlemen in the supply chain, known as pharmacy benefit managers.

“The focus of any reforms must be on lowering costs for patients, ensuring patients’ access to medicines, addressing the misaligned incentives in the pharmaceutical supply chain and protecting the critical work being done to end COVID-19,”  PhRMA CEO Stephen J. Ubl said in a Sept. 13 statement. “Unfortunately, instead of pursuing these reforms the White House has doubled down on a reckless attack on the very companies working around the clock to beat COVID-19.”

Drugmakers have been among the biggest political spenders for years, according to the nonprofit Center for Responsive Politics’ website, which tracks campaign contributions and lobbying.

Still, there appears to be growing bipartisan interest in the idea of using foreign prices as a benchmark to drive down pharmacy costs in the United States. A Republican Pennsylvania lawmaker, state Sen. Tom Killion this month introduced a bill that would tie prescription drug prices for his constituents to the much lower prices charged to Canadian consumers. He said his proposal is based on model legislation unveiled in August by the nonpartisan National Academy for State Health Policy (NASHP).

The plan is to make insurers’ payments for medicines similar to those for other health services, where insurers — whether government or private — set rates, said Trish Riley, executive director of NASHP, in a statement.

“States can’t wait for long promised federal action. This law would bring immediate savings on the most costly drugs,” Riley said.

The immediate backers of Killion’s bill include a Democrat, Sen. Timothy Keaney, and four Republicans.

In December 2019, two House Republicans — Rep. Brian Fitzpatrick of Pennsylvania and Rep. Jaime Herrera Beutler of Washington State — joined the chamber’s Democrats in passing, 230-192, a bill that also would use foreign prices as benchmarks to drive down the cost of medicines in the United States.

The bill, known as  the Elijah E. Cummings Lower Drug Costs Now Act, or  (HR 3), calls for using prices paid for drugs in Australia, Canada, France, Germany, Japan, and the United Kingdom as a benchmark for those in the United States. The bill would have Medicare initially negotiate about its payments for at least 25 brand-name drugs each year, with this target doubling to 50 within a few years.

After Trump issued his statement on Sept. 13 about seeking an international pricing framework to drive down pharmacy costs in the United States, the chairman of the House Ways and Means Committee, Richard E. Neal, urged the president to embrace the Democratic plan.

“This empty executive order is just another smoke and mirrors charade from the White House, not a real solution to make medicines affordable,” Neal said. If Trump “seriously wanted to lower drug prices and ensure Americans do not pay more for prescriptions than people in other countries, he would support H.R. 3, legislation the House passed last year that would achieve those very goals.”

2. Why doesn’t Medicare, the biggest U.S. purchaser of drugs, directly negotiate on drug prices?

Congress has taken different approaches in designing the terms under which the two largest federal health programs, Medicaid and Medicare, buy drugs.

Medicaid is a program run by states with federal contributions and oversight. It covers people with low incomes and disabilities. Almost 67 million people were enrolled in Medicaid as of May 2020, including about 29 million children. In 1990 Congress decided that drugmakers who want to have their products covered by Medicaid must give rebates to the government. The initial rebate is equal to 23.1% of the average manufacturer price (AMP) for most drugs, or the AMP minus the best price provided to most other private-sector payers, whichever is greater. An additional rebate kicks in when prices rise faster than general inflation.

In 2017, Medicaid spent about $64.0 billion on prescription drugs, excluding ones given in hospitals. To this, the pharmaceutical industry returned $34.9 billion in rebates, bringing net drug spending to $29.1 billion, according to the Medicaid and CHIP Payment and Access Commission.

There’s no similar simple formula for seeking discounts for drugs covered by Medicare.

For many years, Medicare didn’t cover prescriptions dispensed at pharmacies.  Medicare  began as a program that covered largely hospital care  (Part A) and services provided by physicians (Part B). Many cancer drugs and medicines for rheumatoid arthritis are administered in doctors’ offices. To pay for these, Medicare has long applied a premium meant to cover the cost of stocking and administration to what’s considered an average price for these medicines, known as Part B drugs. Spending on Part B drugs rose by 9% in 2018 to $35 billion, according to the July 2020 data book for the Medicare Payment Advisory Commission.

In 2003, Congress added a pharmacy benefit to Medicare, known as Part D, which may spend about $106 billion this year, according to the most recent report from the Medicare board of trustees.  Congress outsourced negotiations for Part D drug prices to insurers. Medicare pays insurers such as UnitedHealth and Kaiser Permanente to manage the Part D benefit. Insurers also are playing a larger role in managing Medicare through the program’s expanding Part C, or so-called Medicare Advantage plans. About 37% of the 61 million people enrolled in Medicare last year enrolled in Advantage plans, which administer their Medicare Part A (hospital care) and Part B (physician services). In some cases, Advantage plans manage all four parts of the Medicare benefit.

Private insurers have not had as much success as has had Medicaid with rebates, write Edwin Park, a research professor at the Georgetown University Center for Children and Families, and Andrea Noda, director of health care at the nonprofit Arnold Ventures, in an April 2020 article in Health Affairs, “Alternative Drug Purchasing Arrangements Do Not Justify Raising The Prices Medicaid Pays For Brand Drugs.”

In 2015, the average rebate paid by manufacturers to Medicaid on brand-name drugs was 66.9% of retail prices, compared to rebates of only 28.9% of retail prices provided to Medicare Part D plans, Park and Noda write, citing the nonpartisan Congressional Budget Office.

And there’s been debate how what happens with the rebates given to Part D plans.

Trump in July again backed the idea of shifting the savings from rebates more directly to the prices that consumers pay at pharmacy counters. He issued an executive order that in theory would revive the effort abandoned last year, although as of late September no further action had been announced on this.

Even with Part D coverage, people with serious medical conditions can face high pharmacy costs. That’s due in part to the design of Medicare’s pharmacy benefit. Congress created a gap in coverage — known as the donut hole — to try to encourage consumers to buy cheaper drugs when available, such as using a generic version of a medicine instead of a branded one.

The donut hole for 2020 opened when consumers and their Part D plans spent $4,020 on medicines. Consumers then may have to pay as much as 25% of the cost of a medicine unless their total pharmacy costs for the year reaches the threshold for what’s called catastrophic coverage, set at $6,350 for out-of-pocket expenses in 2020.

Under catastrophic coverage, people who do not qualify for a low-income subsidy typically pay 5% of each drug’s price, according to a 2017 report from the Office of the Inspector General at the Department of Health and Human Services. These costs are on top of the out-of-pocket costs they face before entering catastrophic coverage.

“From 2010 to 2015, beneficiaries’ out-of-pocket costs for high-price drugs in catastrophic coverage increased 47 percent,” the staff of the Office of the Inspector General write. “In 2015, beneficiaries paid an average of $257 a month for each high-price drug in catastrophic coverage, up from $175 in 2010.”

Trump’s July executive order regarding rebates cited this report.

“Medicare patients, whose cost sharing is typically based on list prices, pay more than they should for drugs while the middlemen collect large `rebate’ checks,” the order said. “These rebates are the functional equivalent of kickbacks, and erode savings that could otherwise go to the Medicare patients taking those drugs.

The trade group America’s Health Insurance Plans argues a shift in rebates would raise premiums, which are the monthly bills for coverage, citing a report done by CMS’ actuaries. The relatively slow growth of Part D premiums has been a point of pride for backers of the program. The average basic premium for Medicare Part D prescription drug plans will rise by 50 cents from $30 in 2020 to $30.50 in 2021.

The structure of Part D has created a system where consumers as a group get a benefit, but at a higher cost to people who need costly medicines, especially those for which large rebates are given, according to Steven M. Lieberman and Paul B. Ginsburg, both of the Brookings Institution, and Erin Trish of the University of Southern California’s Leonard D. Schaeffer Center for Health Policy and Economics. Ginsburg is chair in health policy studies at the Brookings Institution and directs the USC-Brookings Schaeffer Initiative for Health Policy.

The “fact that Part D beneficiaries tend to prefer plans with low premiums creates a strong incentive for [pharmacy benefit managers] to favor drugs with large rebates, since those rebates enable Part D plans to reduce premiums,” the three write in a Health Affairs article titled “Sharing Drug Rebates With Medicare Part D Patients: Why And How.”

“Thus, instead of creating incentives for plans and their PBMs to prefer drugs with the lowest net cost, the current system instead favors drugs with high rebates,” Lieberman, Ginsburg and Trish write. “In turn, this creates a system of incentives that can lead to higher drug spending overall.”

Even people with federally subsidized Medicare Part D drug coverage struggle to keep up with pharmacy costs. In 2019, Colette Dejong, chief resident in the Department of Medicine at the University of California, San Francisco, and colleagues published a report in JAMA Cardiology that found the cost of a new heart drug, sacubitril/valsartan, might put it out of reach of people enrolled in Medicare’s Part D pharmacy plans.

Marketed as Entresto, Novartis AG’s sacubitril/valsartan in 2018 was the first new drug to show mortality benefit for heart failure with reduced ejection fraction in more than a decade, Dejong and her colleagues write in their research letter, “Assessment of National Coverage and Out-of-Pocket Costs for Sacubitril/Valsartan Under Medicare Part D.

The drug received expedited U.S. Food and Drug Administration approval in 2015 and a spot in the American Heart Association/American College of Cardiology/Heart Failure Society of America’s guideline in 2016.

But for people enrolled in Medicare Part D plans, the annual out-of-pocket costs related to sacubitril/valsartan would be about $1,632, Dejong and colleagues write. This could discourage use of the medicine. Novartis, maker of Entresto, says the list price for this medicine for people with prescription drug coverage is $544.75 a month, which runs to $6,537 a year.

“Since more than 80% of deaths from heart failure occur in people older than 65 years, we examined Medicare Part D plans nationwide to explore whether high cost sharing or a lack of coverage could be barriers to the adoption of sacubitril/valsartan,” Dejong and colleagues write.

In a research letter that appeared in JAMA Internal Medicine on Sept. 14, 2020,  “Out-of-Pocket Costs for Novel Guideline-Directed Diabetes Therapies Under Medicare Part D,”  Dejong and colleagues look at how expensive newer diabetes pills can be for people enrolled in Part D. People with Type 2 diabetes, the kind also known as adult onset, often begin their medical treatment with an older generic drug, metformin.

In the past, the American Diabetes Association (ADA) recommended physicians add other predominantly inexpensive generic drugs as a second-line of therapy for those who needed more help in controlling their blood-sugar levels.

The ADA recently shifted its recommendations and endorsed several “costly, predominantly brand-name drugs,” as preferred second-line medications for people with diabetes and an established or increased risk for atherosclerotic cardiovascular disease, heart failure, or chronic kidney disease, Dejong and her colleagues write.

Dejong and her colleagues say physicians should consider the extra cost of these newer diabetes pills when treating patients. Using the newer medicines could increase yearly out-of-pocket costs by threefold to eightfold for people with diabetes, from less than $360 to $1200 or up to $2000, they write.

“Because higher copayments lead to poorer adherence and worse health outcomes, clinicians should discuss affordability with patients when changing diabetes regimens,” they write.

The academic researchers also included a policy prescription in their paper. Dejong and her colleagues argue for a switch to allow Medicare to take the place of its network of insurers and directly hammer out deals with drugmakers on the costs of medicines. This is an idea that has had the staunch support of Democratic presidential nominee Biden and at least at times, President Trump.

“As out-of-pocket costs for a single diabetes drug can approach the proposed $2000 cap, broader cost containment efforts should be considered, such as allowing Medicare to negotiate prices with pharmaceutical manufacturers,” they write.

There is a largely partisan split about allowing direct Medicare negotiations, with Democrats backing it and Republicans generally opposed.

“Other developed countries negotiate with the pharmaceutical companies, and prices in those countries are four or five or ten times less for the exact same drugs,” said Rep. Frank Pallone Jr., the New Jersey Democrat who is chairman of the House Energy and Commerce Committee,  in a December 2019 floor speech. “This simply isn’t fair, and the American people are rightfully fed up. It is time that we finally level the playing field and empower the federal government to negotiate a better deal.”

The federal government sets prices for medical services, working in consultation with industry groups. But taking this approach with medicines could result in shortages, said Sen. John Cornyn, a Texas Republican. He said the federal government’s clout would make this bargaining akin to negotiating “with a gun to one’s head.”

“It is not a normal give-and-take negotiation,” Cornyn said in a July 2019 speech on the Senate floor. “Ultimately, what happens with price controls is it creates scarcity because, at some point, the manufacturer or the producer of that  commodity will say: I am not going to produce that at that controlled price by the government.”

3. What’s the deal with rebates and discounts?

There’s widespread frustration among lawmakers and policy analysts about the lack of clarity about the role of middlemen in the supply chain for medicines. Known as pharmacy benefit managers (PBMs), these businesses describe the aim of their business as making drugs more affordable for consumers. Insurers like Cigna and UnitedHealth operate some of the nation’s largest PBMs, as does pharmacy giant CVS Health, which also owns insurer Aetna.

“They will tell you their mission is to lower drug costs,” said Rep. Earl L. “Buddy” Carter, a Georgia Republican, a pharmacist and a critic of PBMs, in a speech on the House floor last year. “My question to you would be: How is that working out?”

Pharmaceutical executives have said PBMs benefit from a system that encourages high list prices for drugs. PBMs then offer rebates to these inflated prices, with insurers using these funds to lower premiums, Merck Chief Executive Kenneth Frazier told the Senate Finance Committee last year. But people who face serious illnesses and need costly drugs sometimes purchased medicines at list price, effectively subsidized customers in better health, Frazier said.

“In this way, our insurance system is broken,” Frazier said. “We urge you to support action to make sure that all patients benefit from the discounts we make available.”

Frazier said Merck’s average net price for its medicines declined in 2017 by almost 2%, with the discounts given to insurers and PBMs falling more than 45% lower than the list price.

“Despite these very large discounts, patients do not see a commensurate benefit,” Frazier said. “In fact, patient out-of-pocket costs continue to rise, and patients are being asked to shoulder more of their drug costs than other health care services.”

But both drugmakers and PBMs have done well financially in recent years, while attempting to shift responsibility for high cost of medicines in the United States, said Sen. Tina Smith, a Minnesota Democrat, in a floor speech on May 15, 2019.

“‘We aren’t the problem,’ say the drug companies. ‘It is the PBMs. It is the insurers. It is everybody else but us.’ I would argue that everyone has a role to play,” Smith said. “Lots of companies profit from high drug prices all along the supply chain. That needs to be fixed, and all of these players need to be held accountable.”

Merck had a profit of $9.8 billion last year from sales of $46.8 billion, according to its annual filing with the Securities and Exchange Commission (SEC). Pfizer Inc., one of the world’s largest drugmakers, reported profit last year of almost $16.3 billion from almost $51.8 billion in revenue. About 46%  of its revenue is derived from sales in the United States, where medicines cost far more than they do in many other rich nations. (SEC filings should be a go-to source for journalists reporting on the pharmaceutical industry. The companies outline possible pitfalls with their experimental medicines, along with quarterly updates on profit and revenue. The SEC offers an introduction to its forms here.)

One of the largest PBMs, Express Scripts, reported a profit of $4.5 billion in 2017 with annual revenue of about $100 billion, the largest financial year completed before it was purchased by insurer Cigna Corp. The largest PBMs now are owned by insurers, which do not break out the financial profits of these businesses. Cigna reported that its health services business, which includes its PBMs, earned about $5 billion in profit last year with revenue of $96 million.

In arguing for their members’ contributions to consumers, the trade group for PBMs, the Pharmaceutical Care Management Association has said the industry only keeps a small portion — about 6% — of money spent on prescription drugs.

PBMs first emerged in the 1980s, offering services to insurers such as processing pharmacy claims and implementing drug identification cards, electronic records, drug formularies, and online processing, write Trevor J Royce of the University of North Carolina at Chapel Hill and colleagues in a May 2020 article in the JCO Oncology Practice, “Impact of Pharmacy Benefit Managers on Oncology Practices and Patients.”

“PBMs have consolidated significantly in the past decade,” they write. “The three largest PBM companies—Express Scripts, OptumRX, and CVS Caremark—process 85% of all prescription claims and administer drug benefits for > 266 million Americans in public and private insurance plans.”

Payments for PBM services are partially pegged to the size of the rebates they negotiate from drugs’ original list price. Critics contend this gives PBMs an incentive to drive up the list prices, write Elizabeth Seeley, an adjunct lecturer at the Harvard T.H. Chan School of Public Health, and Aaron S. Kesselheim, a professor at Harvard Medical School, in a 2019 brief prepared for the nonprofit Commonwealth Fund.

“Patients may bear these high prices if their cost-sharing is based on a percentage of the list price or if they are among the 25 percent of Americans who have high-deductible health plans,” write Seeley and Kesselheim. “In the commercial market, 39 percent of employers reported plans having a deductible that includes the pharmacy benefit.”

4. What is the “distinctly American” phenomenon of specialty drugs?

Kesselheim also has written on what he terms “Specialty Drugs — A Distinctly American Phenomenon.” That’s the title of a 2020 paper in the New England Journal of Medicine Kesselheim authored with Huseyin Naci, an associate professor of health policy at the London School of Economics.

In this Perspective article, Kesselheim and Naci look at how the “specialty” designation morphed from its origin in the 1970s. It then referred to a need for extra steps for preparation and delivery of new injectable and infusion products.

“Today, various stakeholders in the pharmaceutical supply chain assign the specialty label to drugs on the basis of a combination of several unrelated factors, such as whether a drug treats a rare condition, requires special handling, or needs postmarketing risk-management plans,” write Naci and Kesselheim.

“But the single most common feature of specialty drugs is high cost,” they write.

The biggest single purchaser of prescription drugs in the United States, Medicare’s Part D pharmacy program, for example, has classified as specialty drugs those with monthly costs exceeding $670. Medicare has allowed the insurers who manage Part D plans to charge higher copays for these medicines, with a maximum out-of-pocket contribution of as much as 33%.

A person in a Part D plan taking a multiple sclerosis drug, for example, might have had out-of-pocket spending of $6,894 in 2019, Naci and Kesselheim write. Private insurers also have used this tactic to shift costs for expensive medicines to consumers, they write.

“Labeling all expensive drugs as specialty drugs and placing them on the highest cost-sharing tiers in plan formularies is an approach taken only by the U.S. health care system,” Naci and Kesselheim write. “The specialty-drug label has become a blunt instrument for imposing financial obligations and administrative barriers on patients in response to the very high prices set for new drugs by manufacturers.”

5. How much does it cost to bring a new drug to market anyway?  

The median cost for a medicine developed in recent years was $985 million, according to a study published in JAMA in March 2020, “Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009-2018.”

“Rising drug prices have attracted public debate in the United States and abroad on fairness of drug pricing and revenues,” write the study’s authors: Olivier J. Wouters of the London School of Economics; Martin McKee of the London School of Hygiene and Tropical Medicine; and Jeroen Luyten of Leuven Institute for Healthcare Policy, KU Leuven, Belgium. “Central to this debate is the scale of research and development investment by biopharmaceutical companies that is required to bring new medicines to market.”

In an accompanying editorial, “Affording Medicines for Today’s Patients and Sustaining Innovation for Tomorrow,” Merck CEO Frazier observes that Wouters and colleagues had focused on only smaller companies. Their analysis thus excluded most products developed by pharmaceutical giants, which usually report research expenses in aggregate form and not product-by-product. The result is a look at the cost of developing what Frazier terms “niche drugs” that don’t reflect the “broader population of drugs approved by the US Food and Drug Administration.”

“Specifically, the study sample has a higher proportion of orphan drugs and drugs that received accelerated approvals, and those characteristics often reduce clinical development costs, compared with costs associated with large-scale and long-term outcome studies of primary care or neurodegenerative disease treatments or studies of drugs with multiple indications,” Frazier writes.

Wouters and colleagues focused on data accessible for smaller firms, looking for details on medicines approved between 2014 and 2018. They relied on SEC filings in their work, as had an earlier study from Vinay Prasad, who then was at the Oregon Health and Science University, and Sham Mailankody of Memorial Sloan Kettering Cancer Center in New York. Their work, titled “Research and Development Spending to Bring a Single Cancer Drug to Market and Revenues After Approval,” appeared in JAMA Internal Medicine  in November 2017.

In this article, Prasad and Mailankody say they examined the finances of companies that developed 10 cancer drugs. They found the median cost of developing a single cancer drug was $648.0 million, but the median total revenue after approval for such a drug was $1.658.4 million, or close to $1.66 billion.

The estimated development cost from Prasad and Mailankody is far lower than one widely cited in arguments against allowing the federal government to negotiate the prices of drugs, writes veteran journalist Merrill Goozner in a comment accompanying their 2017 JAMA Internal Medicine article.

In his comment, titled A Much-Needed Corrective on Drug Development Costs, Goozner recalls how a $2.6 billion estimate entered the popular debate on drug prices. At a 2014 press conference, Joseph DiMasi of the Tufts Center for the Study of Drug Development announced an estimate of $2.6 billion as the cost of developing new medicines.  This combined what he described as average out-of-pocket cost of $1.4 billion, plus what he classified as time costs, or expected returns that investors forego while a drug is in development, of $1.2 billion.

Other researchers complained about the secrecy surrounding that estimate, as it relied on industry-supplied data that the authors refuse to make public, Goozner writes.

“Over the years, none of the critiques have had much political impact,” Goozner writes. “Most politicians from both political parties accept the Tufts study’s basic premise because it provides them with a rationale for failing to enact countermeasures, which could include giving Medicare the right to negotiate prices, allowing drug importation or establishing reference pricing or value-based pricing schemes.”

Both DiMasi and the team of Prasad and Mailankody factored into their estimates the cost of failure, acknowledging the near certainty of setbacks in drug development. But the notable difference in their estimates may reflect a difference in the approaches taken by the large drugmakers who supplied DiMasi’s team with their data and the smaller biotechs whose finances Prasad and Mailankody examined.

“The Tufts study’s focus on the research and development costs of large drug companies, which still spend a substantial portion of their research and development budgets on developing me-too drugs or marketing-oriented seeding trials, ignores the substantial shift in the source of important medical breakthroughs that has taken place during the past quarter century,” Goozner writes.

“Current pharmaceutical industry pricing policies are unrelated to the cost of research and development,” Goozner concludes. “Policymakers can safely take steps to rein in drug prices without fear of jeopardizing innovation.”

For more on health care policy issues, see our roundups of research on the expanding role of Medicaid and surprise medical bills.

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