Essay: Cost of Pharmaceuticals

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  • Subject area(s): Health essays
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  • Published on: April 30, 2020
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  • Cost of Pharmaceuticals
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Throughout the years, the United States has experienced a disparity in the prices paid for pharmaceuticals when compared to the rest of the world. In a study conducted in 2011, the United States comprised 45% of pharmaceutical profits while the remaining countries made up the a total of 55% (True cost). The increasing cost of medication in the United States is a burden not only for the patients, but also to insurance providers. Our goal is to have an in-depth analysis of the reasons behind this price increase in order to formulate alternatives that can lead to positive clinical implications and lessened financial burden for all parties involved.

In order to understand the reasoning behind the heightened costs of medication in the United States, an investigation of the laws and procedures around manufacturing medication is imperative. Unlike many other developed nations, the United States is prohibited from having delegated sectors to negotiate drug prices.  Pharmaceutical companies are able to set their own prices with minimal interference from government and private insurance programs. Laws have been established preventing programs such as Medicare and Medicaid from bargaining prescription drug prices despite catering to millions of individuals (JAMA). The inability to negotiate costs of medications has led to the steady increase of the money spent on prescription drugs in the United States. In fact, figure 1 below shows that the per capita spent on prescription medication in the United States was more than double when compared to nineteen other developed nations (JAMA).

Figure 1. Per capita spending on pharmaceuticals 2013.

Although costs have increased, the development of new drugs has seen a decline since the 1990s (True cost). The process of pharmaceutical development is long, costly, and uncertain. According to the Food and Drug Administration, the average cost of developing a new drug is $2.6 billion dollars (FDA). Approximately 50% of developed medications reach screening while a low 5% of medications are approved (FDA). With these risks, pharmaceutical companies have fixated on the promotion of their current drugs as opposed to the release of new medications.
However, pharmaceutical companies have long justified their pricing by defensively arguing that revenue goes towards the research and development of new medication. In a six year review (2011-2017) of thirteen of the large pharmaceutical companies, 17% of total revenue was spent on research and development with a staggering 60% spent on the marketing of their current products (True). Over the years, pharmaceutical companies have been able to allocate their profits towards their gains. After all, the pharmaceutical industry is a lucrative business that have thrived under the laxity of regulations and have figured out ways to further increase profit margins. As these problems have become more apparent, bills such as California’s drug transparency bill of 2017 have been enacted. This bill mandates these companies to provide 60 day warnings of greater than or equal to 16% price increases (Upenn). Although the idea behind this bill is a step towards better regulations, it has yet to be adapted on a national level.

As mentioned previously, the Food and Drug Administration is the sector that awards market exclusivity while the US Patent and Trademark Office is responsible for patent exclusivity. Despite having a specific timeframe for patents, pharmaceutical companies actively seek extensions through many ways. Some of their methodology includes simply applying for and extension and submitting patent applications for non-therapeutic aspects of drugs such as coating and formulation (JAMA). The delay of the patent expiration prevents the release of generic medication. Generic drug manufacturers are direct competitors of brand-name companies; therefore, these larger companies have began to offer financial incentives to delay the release of the generic version of their drugs (JAMA). Apart from affecting the businesses involved, patients are directly impacted by the lack of generic drug options.

In order to formulate viable alternatives to the United States current system, we conducted an in-depth research of the different policies of other countries was conducted. Currently, the United States allows for pharmaceutical companies to control costs while many other governments around the world have chosen to do otherwise. Many countries have established single-payer systems or have chosen universal healthcare coverage. By definition, universal healthcare is a system that ensures that everyone has “coverage for basic health care services and no one is denied care as long as he or she remains legal residents in the given territory” (Torrey). On the other hand, single-payer systems refers to one designated body to be in charge of paying health care claims. Although universal health care coverage can be achieved through single-payer systems, it is not a requirement. Countries that currently have universal coverage include France, Denmark, Australia, Ireland, and Israel. Some countries that have single-payer systems include Norway, Japan, the United Kingdom, Sweden, Canada, Finland, and Spain (Montgomery). Table 1 below depicts several examples of the price differences of drugs in several of the countries mentioned.

Table 1. Average drug prices of drugs in USA, Canada, France, and Germany (2015).

For example, Actimmune is a drug used to prevent skin infections in patients with malignant osteoporosis and chronic granulomatous disease. The cost of this injectable medication is $52,321 for 12 vials in the United States while it is priced at $6,897 in the United Kingdom for the same amount (Nawrat).  The United Kingdom utilized the single-payer system to implement universal coverage for drugs; therefore, costs are negotiated down to what is deemed appropriate and feasible. Similar to the FDA, the European Commision approves drugs but what makes their system different is that they have a separate body called the National Institute for Health and Social Care Excellence (NICE) who is responsible for determining a drug’s cost effectiveness and clinical benefits(Nawrat).

Canada also utilizes a single-payer system for healthcare is therefore in control of the country’s drug prices (Amadeo). Canada established a Patented Medicine Prices Review Board that encourages pharmaceutical companies to suggest a price proposal for their manufactured drugs. This review board then compares the suggested price to various other countries with similar drugs. Approval is made depending on the cost of the drugs in other countries. Despite Canada’s single payer system, the country lacks universal drug coverage but due to their current system, the costs of prescription drugs in Canada remain cheaper than the cost in the United States (Morgan et al).

In addition, Spain is another country that continuously aims to lower drug prices by utilizing reference pricing. Reference pricing is a system in which similar of identical drugs are categorized into a class. This allows for the insurer to pay one price for any of the drugs included within the given class.  However, a pharmaceutical companies in Spain have the option of increasing drug costs thus requiring individuals to pay the difference between insurer costs and pharmaceutical company demands. Despite this, Spain has found that reference pricing often forces pharmaceutical companies to lower prices in order to maintain consumer business. Reference pricing has greatly assisted with cost-effectiveness by selling normally high-priced drugs at a reduced price (Frakt).
Constructing alternatives

It is apparent that the United States has a problem, but what are some solutions to to this crisis?  Unfortunately, there is no simple solution to this complex problem, but in order to move forward, we propose several methods that may incite change in the current system in place.  Historically, pharmaceutical companies dictate pricing with no restrictions from Medicare, Medicaid, or Federal/State governments. The US government (i.e. Medicare, Medicaid, Tricare, etc.) is the largest buyer of prescription drugs in the world, yet they have no say in the pricing of drugs.  Our government also generally issues funds to these pharmaceutical companies for research and development, with substantial investments in the basic science that leads to new drug discoveries. For example, the federal government spent $484 million developing the cancer drug Taxol, which was then taken under agreement with Bristol-Myers Squibb in 1993.  In 10 years, the manufacturer earned $9 billion in revenue and paid the federal government $35 million in royalties (article). Although 75% of new innovative drugs are supported by federal funding, most consumers and payers are unable to afford these medications due to the unreasonable prices. (article) We propose for the United States government to have the ability to establish delegated sectors to negotiate drug prices.  By giving the government some power in dictating cost, this could substantially lower introductory prices, annual costs, and which may reduce out-of-pocket costs for patients. For example, the government may establish a drug’s ceiling price similar to the Federal Ceiling Price program used by the Department of Veteran Affairs. They may also begin use of reference pricing, thus permitting the Department of Health and Human Services to set a benchmark price for clinically comparable drugs that are interchangeable. Though these changes may produce more cost-effective medication, a drawback may be the lack of market diversity. Rather than having one pharmaceutical company dictating the price, the federal government is dictating the price thus creating a lack of competition. Having one body dictate everything may create tensions between pharmaceutical companies and the government; thus, change might not be made at all.
Next, pharmaceutical companies spend a substantial amount of money on marketing rather than research.  At this point, we are unaware of the exact cost breakdown of pharmaceutical company revenue. There is no requirement for documentation to show the difference between profits, money used for marketing, and money used for research.  Often times, marketing costs are categorized into research funds. By enforcing transparency, we may have better insight into the way drug prices are set and can determine whether set prices are justified. For the past 20 years, leading drug companies earned more than 70% of their sales from products they did not develop.  More transparency with prices and clinical outcomes would allow physicians, patients, and payers to understand the true value of a treatment. Ultimately, transparency is about ensuring patients have access to the drugs they need, and creating a sustainable, vibrant, and innovative healthcare system for everyone. However as with our previous proposal, we took into consideration potential drawbacks to having drug pricing transparency.  If we become stricter with the way finances are reported, pharmaceutical companies may in turn resort to increasing drug prices, leading to an additional rise in costs and spending. If manufacturers are required to disclose drug pricing, the process of gathering and disseminating this information may become time intensive and potentially result in less profitability to the manufacturer (ncbi article). A decrease in profitability may cause a decline in innovation and the desire to conduct innovative research.

Furthermore, we will address the practice of obtaining patent extensions to limit generic drug production and reducing pharmaceutical drug competition. Currently, several manufacturers extend their patents for longer periods to significantly increase brand-name drug prices, even when there is no significant improvements to the drug.  (article) These manufacturers often do this annually thus allowing them to develop a dense portfolio of patents who are reliant on their specific product. In turn, this decreases competition, increases profits, and suppresses timely completion by adding patents that may not be novel. (article) A solution to this problem is to alter patent protections to introduce price competition. By eliminating or reforming provisions under the Hatch-Waxman Act, generic drug companies and competitor pharmaceutical companies now have the ability to release a competitive medication sooner, thus lowering the price of the current brand name medication.  By altering current provisions, one could set checks and balances that would require patent applicants to demonstrate significant differences, originality, or additional benefits if they are applying for extension (article). One possible consequence to this method is that by decreasing the patent duration, the pharmaceutical company will have less time to be uncontested and therefore will likely spend less time trying to advance the drug further or improve upon its current formula. Companies will most likely try to profit as much as possible while they are uncontested rather than invest more money to improving the drug since there possibly could be a minimal return on their investment.
Most importantly, we recognize the important role that healthcare providers play in this system. ****

4.Select the evaluation criterion

The high cost of prescription drugs not only negatively affects the clinical world but it causes the economy to suffer as well.  Many Americans today currently have coverage for drugs through Medicare drug benefit and the Patient Protection and Affordable Care Act where more drug expenses have been seen. The private insurers have also increased several aspects of purchasing drugs such as increasing deductibles, increasing co-payments, and even added a payment tier. The payment tier is only for particular specialty drugs where individuals are required to pay co-insurance instead of regular co-payment. All of these implications have helped slow the long-term growth of medical expenses but in doing so we have lost the use of effective medications. Many individuals in American admit to not taking their prescription drugs as they were told to because they simply cannot afford them. In other studies, patients were prescribed a more expensive brand name drug rather than the cheaper generic drug and there was less compliance seen. As a consequence, “Nonadherence due to all causes has been established to contribute to $105 billion unavoidable health care costs annually” (Kesselheim et al).

Another consequence includes the use of coupons to reduce the price for drug costs which may initially seem like a good idea but in the end increases healthcare spending. The use of coupons will most likely leave the insurer choosing the higher priced drug. This has become rather common for the costly brand name drugs even when there’s less expensive generic drug alternatives available.
Within healthcare budgets, many components within often have to be decreased or increased. States with more costly drugs in the Medicare programs often have to reduce other services or increase health care eligibility requirements. For example, there are several states with Medicare programs that have policies that restrict sofosbuvir, an antiviral medication, that include denying coverage for any individual that uses alcohol or drugs (Kesselheim et al).

• Analytic- what are the consequences?
• Evaluative- value judgements about consequences
•Efficiency—maximize satisfaction(utility)
•Equity—maximize equality, fairness, social justice
•Personal freedom—maximize individual choice
•Community—maximize solidarity
•Legality—is it permitted?

5.Project the outcomes

•Develop analytic model(s)
•Develop empirical estimates
•Consider alternative scenarios
•Consider undesirable side effects
•Develop outcomes matrix

6.Confront the trade offs- possible criteria to evaluate alternatives (efficiency, equity, personal freedom, legality)


8.Tell your story

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