In early May 2018, President Trump gave a speech outlining his administration’s plan to combat pharmaceutical pricing. In his remarks, the president promised action that will spur immediate impact on drug prices. Whether these changes have the effect promised, it’s clear something in the industry needs to change.
A 2017 government investigation found the amount Americans spend on prescription drugs has almost doubled since the 1990s. In fact, the U.S. spends more money on prescription medications than any other country. The average American spends $1,112 on pharmaceutical drugs. This number is 44 percent higher than the next highest spenders, Canada.
Not only are Americans spending a lot on prescriptions, but these drugs are getting more expensive too. According to GoodRx, list prices rose 6 percent over the past 12 months. So, why are these drugs so expensive? Moreover, what does this new plan propose to solve the problem?
Why is Rx Spend so High?
One of the first reasons drug prices continue to climb in this country is because of the lengthy process of creating a generic version of a drug. There are patent protections on new medications that typically last 20 years. And one generic alternative doesn’t create price competition.
A recent study in the Journal of Health Affairs found there typically needs to be multiple generic options for one drug before it gets cheaper. So, there could wind up being an even longer gap between the first drug of its kind, and enough generic versions being released before the price significantly lowers.
Another big reason behind soring Rx prices is drug rebate programs. According to CNN, insurers often receive significant discounts for expensive, brand-name drugs from the manufacturer. The cuts are typically negotiated by pharmacy benefit managers. These managers then keep part of the rebate and pass the rest to insurers.
Manufacturers, using this convoluted system, have been able to raise list prices. Which, in turn, increases the amount of money insurers and pharmacy benefit managers collect from rebates. Essentially, the system gives these parties no incentive to keep prices lower. And all the incentive to keep raising prices.
The third reason behind soaring pharmaceutical prices is a myth. But it is a powerful myth that’s been disseminated throughout the country and is now commonly accepted as truth, thus making it worthy of discussion. Domestic drug companies blame the expense of modern drugs on the high cost of making them and getting approval from the US Food and Drug Administration.
Dr. Jerry Avorn, a professor of medicine at Harvard Medical School, is working to eliminate this myth. In a 2015 study he co-authored, Dr. Avorn found over a few dozen ground-breaking drugs were based on research done by federally funded academic researchers.
The research wasn’t done by the highly compensated scientists working for giant pharmaceutical companies, as the myth would have you believe. The work was done by government-backed researchers. According to Avorn, making drugs affordable wouldn’t destroy innovation.
What’s the Plan?
The president’s new plan, called American Patients First, details there are four major challenges in the American drug market. These challenges are:
- High list prices for drugs
- Seniors and government programs overpaying for medications due to a lack of the latest negotiation tools
- High and rising out-of-pocket costs for consumers
- Foreign governments free-riding off American investment in innovation
To address these challenges, the plan identifies four key strategies for reform. These strategies are to improve competition, negotiate better, incentivize lower list prices, and lower out-of-pocket costs. Secretary of Health and Human Services, Alex Azar, said the plan includes more than 50 moves his agency has or will put into action.
More specifically both Trump and Azar mentioned ending the drug industry’s gag orders of pharmacists. These gag orders prevent pharmacists from discussing cheaper options with consumers. Allowing pharmacists to talk about more affordable options could be an easy way to reduce a patient’s out-of-pocket costs.
Generic-drug approvals are also a target of the administration’s proposal. FDA chief Scott Gottlieb said speeding up generic-drug approvals a priority to give patients more low-cost options. Similarly, he also wants to limit the ability of both brand-name and generic firms to block potential competition.
The final possible action the government may take is to negotiate Medicare drug prices directly. Many health policy experts believe the federal government could use its weight to negotiate significantly lower prices for the greater than 57 million Americans currently in Medicare. Although, it’s worth noting this action is being lobbied against by both drug companies and Republican party members.
Americans have the world’s highest drug costs. These costs, in turn, drive up the cost of healthcare in this country and increase both insurance costs and out-of-pocket spend for U.S. consumers. The American Patients First plan may not solve all these issues, but it’s a start.
Still, as an employer, there are separate actions you can take to affect the drug prices for your employees. For more on these strategies, contact an Olson Group advisor today.