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It’s no surprise that healthcare costs in the US are out of control and pharmaceutical companies are at the center of the debate. Medication costs continue to rise, often for no apparent reason. Why is medication so expensive in America?
Remember the Pharma Bro, Martin Shkreli, who jacked up the price of the life-saving drug pyrimethamine (Daraprim) by 5,000%? He went to jail, right? He did, but it wasn’t for price gouging.
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Why is Medication So Expensive in the US
Americans pay 2-3x more for their medications and it’s not just because of higher incomes. Unlike many other countries, the United States does not regulate drug prices. This lack of regulation allows pharmaceutical companies to charge whatever they want for their products. And because the barrier of entry is so high, drug manufacturers don’t feel a lot of pressure from competition.
But, hey, it’s expensive to create a new drug, test it, and market it. Some estimates suggest that it takes $2 billion to bring a new drug to market. But that doesn’t tell the whole story–sources suggest that advertising costs for US drug companies are higher than what is spent in R&D.
Direct-to-consumer advertising is pretty unique to the US. You’ve seen the commercials, “Talk to your doctor to see if blank is right for you!” That’s just unheard of in the rest of the world. Shouldn’t my doctor already know what’s best for me?
Believe it or not, doctors and PAs want to make their patients happy. It’s a primary reason inappropriate antibiotic use is so high–patients demand it. The opiate crisis in America is another example. Sure, pharmaceutical companies put profits before patients, but when a patient complains of pain you can’t exactly disagree with them.
The US market accounts for almost three-quarters of global pharma profits. Americans are effectively subsidizing the cost for everyone else. But then again, the US healthcare system is a complex, admin-heavy disaster. Drugs aren’t the only place Americans offload their hard-earned cash–the US spends twice as much in administrative costs as the next highest country.
Rampant Inflation of Drug Prices
New drugs vs rising prices. Most drug price increases occur in January. The Department of Health and Human Services found that between 2021 and 2022 drug prices rose from 2-500%, with an average increase of 31%, despite an 8% inflation rate.
Are Generic Medications the Answer?
Much of our argument up to this point pertains to newer, brand-name drugs. But did you know that 80% of prescriptions in the US are for generic medications? So what gives? Enter the ultimate middleman–the PBM or pharmacy benefit manager.
Pharmacy benefit managers are companies that negotiate drug prices on behalf of insurance companies and employers. While PBMs were initially created to help manage drug costs and improve access to medications, they’ve become problematic and are finally entering the crosshairs of lawmakers.
Consumers expect things to cost less with health insurance, even generics. But oftentimes, it’s more expensive to pay with your insurance. For this reason, drug discount sites like GoodRx and Singlecare have sprung up.
According to their website, Singlecare, for example, “works directly with pharmacies to negotiate up to 80% off prescription prices. We pass these savings onto our members, free of charge.” You’ll also find on their homepage the following line, “Yes, we often beat the price of an insurance copay. It’s always worth checking.”
Well, how do these coupon sites make money then? Ads. While PBMs go after a cut of your insurance dollars, sites like GoodRx make money selling ad space and through referral fees. They may also have a membership program or provide telehealth services.
Allowing Medicare to Negotiate Drug Prices
Another reason medication costs have exploded in the US is that Medicare, by law, cannot negotiate drug prices while major health systems in other countries can. Why can’t Medicare throw its weight around a little? Because Congress won’t let them. Yes, it’s illegal thanks to the “non-interference” clause.
The pharmaceutical industry obviously doesn’t want to deal directly with Medicare. And they can afford lobbyists to get what they want. Pharma ad campaigns claim that drug price negotiation would “restrict access to medicines” and that patients will be “stuck with whatever medicines the government they can have.”
That sounds a like a scare tactic. Medicare sets prices for everything else. Physicians through the American Medical Association set the reimbursement values for the CPT codes that clinicians submit to payers. CPT stands for Current Procedural Terminology—Medicare then rubber stamps these rates.
Once a year, Medicare publishes its Physician Fee Schedule. Though physicians essentially determine the value of a particular service, Medicare has the authority to accept, reject or modify the code value. Why does this matter? Because other payers like the Blue Cross/Blue Shield follow Medicare’s lead.
Medicare is gaining some negotiating power thanks to the 2022 Inflation Reduction Act but this is limited to just 10 drugs to start with.
Are Generics as Good as Brand Name Drugs?
I always write for generic drugs when I can. Most clinical guidelines incorporate older, generic medications because they’ve been around long enough to have the data. I’ve never once worried that a generic drug would not work as well as its name-brand counterpart. I have noticed, however, that some patients can tell a difference between one generic manufacturer and another.
But the truth is that better and better drugs are coming to market. Some of the best diabetic medications, for example, include GLP1s and SGLT2 inhibitors–neither of which have generic equivalents and won’t for a decade or more.
Sure, there are generic meds to control blood sugars but they’re not as effective and have more side effects than their newer branded competitors.
The VA vs PBMs
The Veteran’s Administration health system negotiates drug prices and as a result, they get better prices but have a pretty limited selection. You can decide if that’s actually allowing politicians to determine the meds you can and can’t have.
But don’t think that PBMs don’t limit your options, too. Just about everyone has had the experience of leaving the doctor’s office and getting to the pharmacy only to find out that the treatment your doctor ordered has been denied by the insurance company.
Are Drug Patents Good or Bad?
Drug patents are a form of intellectual property protection that allows pharmaceutical companies to have exclusive rights to manufacture and sell a specific drug for a limited period of time. The FDA has set this limit at 20 years.
A common misconception is that the patent begins only after the drug becomes available to patients. But the patent is usually filed soon after discovery. Clinical trials and final approval can take years which means that a drug has roughly 10 years on the market to make a profit.
Patents are intended to incentivize drug innovation by giving pharmaceutical companies a temporary monopoly on a new drug, which enables them to recoup their investment in research and development.
But sometimes drug patents are exploited. Pharmaceutical companies often extend their patent by making minor changes to existing drugs. This results in longer periods of exclusivity and high prices.
Should the Government Get Involved in Drug Prices?
With the recent change in US law allowing Medicare to start negotiating a small number of medications, a recent proposal has been capping the price of certain life-sustaining meds like insulin.
However, price caps can have unintended consequences. Pharmaceutical companies may respond to price caps by reducing the quality of their products or cutting back on research and development. Price caps can also lead to shortages, as companies may choose to reduce production in response to the lower prices.
Additionally, price caps can stifle competition, as competing companies may be less likely to enter markets where prices are artificially suppressed. For-profit enterprises will always find ways to circumvent price caps with new pricing strategies.
How Can We Lower the Cost of Prescriptions Drugs in the US?
While it may be an overly simplistic answer, we need more competition. Competition ensures that any business stays competitive with quality products at fair prices. So how can we improve competition in the pharmaceutical industry? One option is to fast-track FDA approval for drugs with existing competition.
Another model 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.
Bureaucracy is Killing Patients and Healthcare Providers
At the risk of a major digression, we need to address something. Yes, medication is pretty expensive in America but it’s not the only disease plaguing our system.
With burnout rates on the rise, we need to be clear about some of the culprits and among all the bureaucratic nonsense that clogs our healthcare system and inflates prices, prior authorizations top the list. There are several reasons why doctors and PAs loathe the prior authorization process:
- Time-consuming: The prior authorization process is time-consuming. It requires healthcare providers or their staff to fill out lengthy forms and submit detailed documentation to the insurance company which is often still denied on claims of “insufficient information”.
- Delayed Treatment: Prior authorization results in delays in treatment as the insurance company may take days or even weeks to approve or deny a request. This can be especially problematic for high-risk patients who require timely treatment.
- Complex Requirements: Insurance companies often have complex and changing requirements for prior authorization, making it difficult for healthcare providers to keep up with the latest guidelines and requirements. Payers want to save money and hide behind outdated or incomplete scientific data.
- Interference with Clinical Judgment: Prior authorization interferes with clinical judgment and communicates a lack of trust and faith in the doctor. Healthcare providers may feel pressured to prescribe medications or treatments likely to be approved by insurance companies rather than what is best for the patient. It’s demoralizing to have something you recommended be deemed “not medically necessary”.
- Increased Costs: Not only do doctors have to employ staff to submit the authorizations but insurers have to employ people to review them. Why can’t the healthcare provider’s prescription be a sufficient justification?
I’m not sure our ailing healthcare system can be saved–it needs a complete overhaul.