The Drug Pricing Conundrum Explained

The Drug Pricing Conundrum Explained
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Of all the health policy issues that have been discussed in recent months, few have triggered as much interest as the pricing of prescription drugs. To complicate the discussion, there are a number of misconceptions surrounding the issue of how cures are priced; and, unfortunately, too little attention paid to the role that a competitive marketplace plays in driving down the cost of these cures over time. 

Few Americans are familiar with the process of how prescription drugs are priced, and the role that some lesser-known parts of the health care economy play in lowering costs for consumers. For example, health plans and payers (such as employers) generally work with pharmacy benefit managers (PBMs) to negotiate discounts from the manufacturer list price for drugs. Together, they arrive at discounted pricing that is passed onto insured consumers in the form of lower drug costs or moderated premium increases. While the work of these entities happens behind the scenes and may not be well understood, we know from real-world examples that the benefit of their efforts is profound. 

Lower costs for beneficiaries in Medicare Part D, the program’s prescription drug benefit, is a prominent example of this dynamic. Part D has held down the cost of drugs to beneficiaries and maintained extraordinarily high satisfaction rates. In fact, it may be the only program overseen by the federal government that has come in substantially under-budget from original cost projections -- current spend is roughly 45 percent lower than the initial 10-year forecast. Market competition has played a pivotal role in producing these savings. 

The average daily cost of medications used by Part D beneficiaries in the top ten therapeutic areas is expected to decline to 47 cents per day by next year, a two-thirds decrease since the inception of the program. 

It’s important to note that competition in the prescription drug marketplace is different than, in say, the marketplace for microwave ovens or flat-screen televisions. In those worlds, there exists competition between products that do more or less exactly the same thing. Consumers then make an informed choice about what combination of price and functionality best meets their needs. 

However, in pharmaceuticals, a new product may be the only product in its class for some period of time. This is a feature in this marketplace, not a glitch. The discovering company has a short period of time in which to make whatever profits it can from the product before it faces competition or, ultimately, its innovation becomes part of the public domain. Take the case of Sovaldi, Gilead Sciences Inc.’s cure for Hepatitis C. When it was first offered, the drug was priced at $84,000 per treatment cycle – but, within a year, thanks to competition and negotiations conducted by PBMs and health plans, prices plunged by 50 percent. This made the drug cheaper in the United States than in some government-run systems around the world. 

Another form of competition in the pharmaceutical marketplace is between variations of the same product. Unlike microwaves and TVs, previous versions and iterations of a product can still be quite useful. Lipitor, Prozac, and Prilosec – some of the best-selling pharmaceutical products in history – are now available for anyone to make and sell in generic form. Once those drugs lose their patents, insurers and PBMs rapidly move patients from the more expensive brand name drug to the cheaper (but equally effective) generic. This transition is so rapid that most brand name drugs lose 75 percent of their sales within three months of when a generic drug comes to the marketplace. This expeditious migration to generic drugs is one of the key reasons why Part D beneficiaries are seeing the average cost of the most popular therapies and cures come down over time. 

A final type of competition that is alive and well in the pharmaceutical marketplace exists between payers and drug makers. Drug manufacturers bring a therapy to market and payers want to ensure that therapy is both affordable and directed toward those who need it. 

Take the recent introduction of PCSK9 cholesterol lowering drugs. These are revolutionary products targeted at patients who have not responded to other forms of therapy. Many pundits predicted that these drugs would strain budgets in the same way that Sovaldi did when it first came on the market. The reality has been quite different. In fact, the uptake of these drugs has been quite slow, primarily because payers are insisting that doctors demonstrate patient need for a medicine before they will pay for it. 

Finally, overall trends in drug expenditures are good evidence that the marketplace is working to help control costs. While the last few years have seen some short-term spikes in drug expenditures, pharmaceutical cost growth has now come back in line with cost growth in other parts of the health care economy. 

Although there continues to be significant discussion of drug pricing (particularly during this season of political campaigns), the reality is that employers, PBMs, and health plans are working to ensure a competitive marketplace and hold down costs for consumers. At the same time, the U.S. continues to be a center for pharmaceutical innovation and a foremost source of new cures that improve human quality of life and longevity. While some are calling for additional regulatory or legislative action to deal with drug costs, this only threatens innovation while interfering with a marketplace that is already holding down costs and ensuring broad access to the therapies and cures that Americans need.

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