U.S. Drug Prices, Why Are they so High?

Drug Prices in The United States

Nearly one in four Americans who take prescription drugs say they struggle to afford the medication they need. A recent report from RAND Corporation found that US prescription drug prices are 256% higher than other countries; averaging the prices seen in 32 other countries (Light & Caplan, 2018). The ratio of sales to volume weight is significantly higher in the US. Zolgensma, a drug that treats spinal muscular atrophy, is the most expensive drug in the U.S. It has an estimated annual cost of $2,125,000. Unbranded generics account for approximately 12% of prescription drug spending at manufacturer prices (Walker, 2015). The branded drugs make up 11% of the US prescription volume and 82% of expenditure. Therefore, brand drugs are the primary driver of the higher prescription drug prices in the country. These prices, in fact, have been exponentially increasing for a while.

Why Are Drug Prices so High In United States?

The simple explanation of this excessive drug prices is monopoly pricing. By using the patent protection and FDA marketing exclusivity, the government gives pharmaceutical companies a monopoly on brand-name drugs. Monopolies are the highest risk factors for excessive prices.

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It is very difficult to note the actual out-of-pocket cost to consumers for a prescription because of the consumer rebates and price adjustments to insurers. Thus, the true cost of these prescription drugs is difficult to determine (Berman & Thomas, 2017). These prices are engrossed in a web of price adjustments and middle managers from the gross price to the actual price that the consumer pays. Patients’ out-of-pocket costs continue to grow while net costs to insurers keep declining, meaning that the insured patients are bearing a disproportionate share of the costs relative to the terms of their insurance agreements (Bollyky & Kesselheim, 2017). Clearly, the health insurance system in the US is so unique to any other developed country.

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Another reason for the higher prices in the country is because the government does not set ceiling prices in the US as other countries do. Also, there are marketing exclusivity periods for patented innovator drugs. There is a group of middlemen known as Pharmacy Benefit Managers (PBMs) that negotiates prices with pharmaceutical companies for inclusivity of health insurance coverage lists (Berman & Thomas, 2017). These groups often promote implementation of direct discounts or rebates that lead to higher prices to the consumer. This results in a war of internal pricing where manufactures are given incentives to increase list prices while increasing discounts to keep PBMs happy.

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Has The Government Done Anything To Lower Drug Prices?

In mid Sep 2020, the Trump administration signed an executive order to lower prescription drugs by “putting America first.” A Most Favored Nation strategy to drug pricing creates a trading opportunity among states making originally bilateral agreements multilateral (Bollyky & Kesselheim, 2017). The implication of this is that the drugs covered under the most favored nation pricing scheme will be expanded. This initiative will allow Medicare to use the lower prices of the other developed countries than paying higher for the same drugs.  Also, Trump announced the end of the Unapproved Drugs Initiative program that was responsible for major shortages of vital medicines (Light & Caplan, 2018).

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This implies that the drug prices may be five times less expensive than before if the Biden administration implements this policy. The true cost of a drug depends on who’s paying, and everyone involved is pushing costs up. There should be fundamental rebate reforms to fix both the cost-shifting problems in the US and develop a more open and reliable net price. Medicare should be allowed to negotiate drug prices in order to help drive costs down and end the monopoly in pricing. Also, it is important for every citizen to have health coverage to benefit from negotiated pricing.

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