Photographer: Andrey Rudakov/Bloomberg (Photographer: Andrey Rudakov/Bloomberg)

Americans spend more on prescription drugs — average costs are about $1,200 per person per year — than anyone else in the world. It’s true that they take a lot of pills. But what really sets the U.S. apart from most other countries is high prices. Cancer drugs in the U.S. routinely cost $10,000 a month. Even prices for old drugs have spiked, as companies have bought up medicines that face no competition and boosted charges. While private insurers and government programs pick up the biggest share of the bill, high drug costs are ultimately passed on to the public through premiums and taxes. More than half of Americans in one poll said that bringing down drug prices should be a top priority of the federal government. President Donald Trump has vowed to do just that.

The Situation

Trump has accused drugmakers of “getting away with murder.” In late January, his administration proposed ending a complex system of drugmaker rebates to middlemen that critics contend help keep list prices high. Announcing the move, Department of Health and Human Services Secretary Alex Azar blasted rebates as “a hidden system of kickbacks.” Trump has declined to put forward two policies that he’d previously backed and that the industry feared most: having the government directly negotiate prices and allowing prescription drugs to be imported. The president’s initiative on rebates came amid rising outrage in the U.S. at drugmakers. Lawmakers have opened probes into how prices are set, and the Justice Department is investigating possible price collusion by more than a dozen companies that make generic drugs. Prescription drug spending in the U.S. surged in 2014 and 2015 after four years of minimal growth due largely to the spread of generic drug use. Specialty drugs (high-cost treatments, mostly for complex conditions) accounted for much of the spike. The current backlash first erupted in 2013 when Gilead Sciences released the groundbreaking hepatitis cure Sovaldi at $84,000 for a 12-week course. The steep price and stampede of patients to get the drug led many insurers to restrict coverage to the sickest patients. With the furor over drug prices rising, the growth in prescription spending slowed again in 2016 and 2017.

The Background

Unlike other nations, the U.S. doesn’t directly regulate medicine prices. In Europe, the second-largest pharmaceutical market after the U.S., governments negotiate directly with drugmakers to limit what their state-funded health systems pay. The U.K.’s National Health Service has refused to pay for some cancer drugs widely used in the U.S. on the grounds that they don’t constitute value for money. In the U.S., drug companies can more or less set whatever price the market will bear. For most outpatient drugs reimbursed through Medicaid, the public health program for the poor, drugmakers must provide rebates to the government. But most medicine costs are paid for by Medicare, the government program for the elderly, or by private insurers. When prescription-drug benefits were added to Medicare under a 2003 law, the pharmaceutical industry successfully lobbied to prohibit the federal government from using its huge purchasing power to negotiate drug prices. Private payers typically rely on third-party pharmacy-benefit managers, such as Cigna Corp.’s Express Scripts unit, to negotiate discounts. Often they make exclusive deals with drugmakers, which limits the choice of drugs patients have. The Trump administration’s proposed rebate restrictions would directly affect Medicare and Medicaid plans, but officials hope it would influence private ones as well. In the U.S., patients directly pay about 14 percent of prescription medicine costs out of their own pockets. In one survey, one in five adults in the U.S. said they failed to complete a prescribed course of medicine because of cost. The figure was one in 10 in Germany, Canada and Australia.

The Argument


Pharmaceutical companies argue that they need robust profits to bankroll the development of medical advances and that restricting prices would harm innovation. They highlight the benefits of medicines such as Sovaldi, which has a cure rate superior to treatments that cost nearly as much. Critics point to the industry’s fat profit margins and say companies exaggerate drug-development costs. Doctors and insurance executives worry that many medicines are rapidly becoming unaffordable. Advocates of greater price regulation argue that it needn’t hamper innovation. They say drugmakers could reduce spending on marketing and cite an analysis that found promotional budgets exceed those for research and development at most big companies. 

To contact the author of this QuickTake: Robert Langreth in New York at rlangreth@bloomberg.net

To contact the editor responsible for this QuickTake: Lisa Beyer at lbeyer3@bloomberg.net

First published Feb. 4, 2016


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