The high cost of prescription medications is driving American families into bankruptcy. And it doesn’t look like there is any relief in sight. The average person in the U.S. is prescribed 12 prescription medications each year. Those 65 and older fill, on average, 27-29 prescriptions annually.
In 2019, retail prescription drug spending climbed by 5.7% to $369.7 billion according to the Centers for Medicare and Medicaid Services (CMS). In January 2021, GoodRx reported that 832 drugs had an average price increase of 4.5%.
Americans had an average per capita healthcare spend of $11,172 in 2018. As a result, they collectively borrowed $88 billion, skipped necessary medical treatment, and cut back on their household expenses just to pay for basic medical care.
Unfortunately, strategies that work for other major purchases, such as shopping around, have not proven to be effective in finding affordable medical care; 69% of adults surveyed said that when they tried to shop around, the process was rated as somewhat or very difficult.
Drug pricing needs to be more transparent so Americans can comparison shop just like they do for other consumer goods and services.
After exploring why an unregulated, patent-protected pharmaceutical market with a supply chain that governs its own supply and demand keeps prescription drug prices exorbitantly high, we’ll look at how you can fight back against high prices and get your prescription medications as affordably as possible.
The Reasons Prescription Drugs Are Outrageously Expensive In The U.S.
Prescription pricing is a complicated issue, as there is a conflict between personal and societal goals. Society may want to keep drug prices under control, but families are prepared to put themselves at great financial risk to pay for a potentially life-saving prescription for a loved one.
When people’s lives are at stake, it’s difficult to conduct a thorough risk versus benefits analysis. Unlike goods and services that are not potentially life-saving, traditional economic forces do not limit prescription drug prices. People are not willing to forego medications simply because the cost is too high, nor should they be forced to do so.
Drug prices in the United States are 2.56 times higher than in any other industrialized country overall, and 3.44 times higher for brand name drugs, due to the following factors:
- Pharmaceutical companies get up to 20 years of patent and exclusivity protection to market their products without competition.
- Unlike other industrialized countries, the U.S. government does not impose price controls. The FDA controls how drugs are produced but have no power to regulate pricing.
- Doctors are frequently uninformed about prescription prices and consumer costs, which means they do not always prescribe the most cost-effective medication to treat a given condition. Unfortunately, doctors choose your medication but don’t pay for it and you pay for your medication with no say in choosing it.
- While a lack of transparency in drug pricing is a problem, the sheer number of prescriptions Americans fill is also a problem, resulting in an estimated $200 billion in unnecessary and improper medication use each year.
- Specialty medications and biologics continue to drive the high cost of prescription medications.
- Pharmacy benefit managers use rebates to negotiate drug prices and reduce costs for insurance companies, employers, and government agencies, but consumer interests are not represented.
- Lobbyists for pharmaceutical companies and other political maneuvering block attempts to import drugs from other countries.
- Medicare Part D has its hands tied by the non-interference clause and cannot negotiate with drug manufacturers. Private insurers also feel the effects of this policy.
Pharmaceutical Companies Get Up To 20 Years To Market Their Products With Zero Competition
Patents and drug exclusivity protection, sometimes lasting up to 20 years or more, give drug manufacturers time to market their products without competition.
The premise behind patents is that pharmaceutical companies need time to sell their products without competition in order to recoup their innovation and research expenses.
The problem is that drug manufacturers take advantage of these protections and extend them for as long as possible. Drug pricing can only decrease in a free and competitive market.
How Patents and Exclusivity Protection Protect High Prescription Prices
The patent and trademark office can grant patents at any stage of the drug development process and provide 20 years of protection. It is also possible for a single drug to amass a slew of patents and exclusivity protections, making them untouchable to competitors for decades.
Market exclusivity refers to the FDA’s ability to grant exclusive marketing rights following drug approval. Exclusivity is the primary factor that allows drug manufacturers to set their prices so high. With no competition, there is no incentive to lower drug prices.
The goal of market exclusivity is to encourage drug innovation by shielding a new drug from generic competition for a set period of time. Under current law, FDA-approved chemically based drug manufacturers have the right to sell their products without competition for five to seven years. The more complex biologic drugs are protected for 12 years.
Tactics Drug Companies use to Extend their Patent Protection
As patent protection expires, companies use a variety of business and legal strategies to retain price protections.
Some of these practices include:
- Evergreening: filing for new patents on secondary drug features to extend their patent beyond 20 years. Seventy-eight percent of drugs for which new patents are filed with the FDA are already on the market. Almost 40% of all drugs have added patents to create market barriers to competition. Over 70% of the top 100 best-selling drugs have had their patent extended once, and nearly 50% have had it extended more than once.
AstraZeneca received a second patent for Omeprazole (Prilosec), a different form (isomer) of its drug, despite the fact that there was no evidence of a clinical difference. Thus, Nexium was born. It sold for $4 per pill, a 600% markup over over-the-counter omeprazole. Consequently, the Pennsylvania Employees Benefit Trust Fund filed a class-action lawsuit against AstraZeneca for unfair and deceptive trade practices.
- Product hopping: shifting consumer attention away from a product whose patent is about to expire and toward one that is not by making minor changes to the medication that make it not equivalent to any generic competition. The change can be as inconsequential as switching from a tablet to a capsule. Sometimes, the older product is taken off the market. Drug obsolescence is a strategy for maintaining a pipeline of new drugs that have been granted exclusivity.
- Patent thickets: applying for multiple patents on the same product to prevent generics from entering the market. Enbrel, a medication developed in 1992 to treat inflammatory conditions such as rheumatoid arthritis, carries over 100 patents valid through 2029. The drug costs nearly $70,000 per year. Patent extensions for Humira, Enbrel, Keytruda, Revlimid, and Imbruvica, five of the top 10 best-selling drugs in the U.S. have led to over $500 billion in additional net sales.
- Pay for delay settlements: when the company producing the brand-name drug pays generic manufacturers to stay out of the market.
Paragraph IV of the Hatch-Waxman Act grants the first generic drug manufacturer 180 days of generic market exclusivity after they show a brand-name manufacturer’s patent is invalid. Brand manufacturers can then counter-sue. When they counter-sue, they are granted an additional 30 months of exclusivity.
One brand-name drug manufacturer and a single generic firm could agree to launch the generic months or even years into the future. This strategy would block any other generic manufacturer from entering the market. All it takes is for the brand-name drug manufacturer to pay off the generic manufacturer, a so-called reverse payment.
Drug Manufacturers Have Complete Control Over Prescription Drug Prices
The Food and Drug Administration regulates the drug development process, but has no control over pricing. Outside of the U.S., governments negotiate drug prices with pharmaceutical companies.
Foreign governments weigh the added value of new drugs before deciding whether they are even worth bringing to market. If they determine a drug is more effective than anything else on the market, they will set a price their health insurance companies will pay.
In the U.S., pharmaceutical companies determine their own prices and they bring any drug that is deemed safe and effective to market. This strategy leads to more medication options for consumers and a higher profit for investors, but at a much higher cost for consumers.
When Gleevec, an anti-leukemia drug, was released in 2001, it cost $4,540 per month of treatment. After 15 years on the market, it cost $8,500 per month in the United States, $4,500 per month in Germany, and $3,300 per month in France.
While innovation may have a price, there is no economic or rational reason a drug that is 20 years old should cost double in the U.S.
Prescription Prices Are Not Readily Available To Doctors At The Point Of Care
Another reason consumer costs for prescriptions are high is that prescribers prefer to use medications they are most familiar with, even when lower-cost alternatives are available.
As an example, when researchers sent a questionnaire to 137 randomly selected physicians in Ohio, they found that physicians were motivated to consider prices when prescribing. However, they lacked the necessary information to price prescriptions and frequently made inaccurate assumptions.
According to another study, only 31% of physician estimates of drug costs were within 20-25% of the true drug cost. The median estimate deviated from the true cost by 243%.
Prescription pricing in the U.S. is complicated and constantly changing. However, changes may be coming that will make prescription pricing more transparent and accessible. By January 1, 2021, each Part D plan must implement one or more Real Time Benefit Tools (RTBT) that are capable of integrating with at least one of your doctor’s ePrescribing or electronic health record (EHR) systems.
Another new Medicare rule requires companies that offer Medicare Part D prescription drug plans to offer enrollees real-time pricing information starting on January 1, 2023. This change will empower seniors with the information they need to compare out-of-pocket costs for various prescription drugs.
As an example of the potential benefits of price transparency, prescribers who used CVS Health’s real-time pharmacy benefit information saved patients an average of $130 for each prescription they switched to a lower-cost option. According to the company, prescribers moved patients to a clinically suitable alternative 40% of the time. As these results show, pricing transparency can have a major impact on patient prescription prices.
Over-prescribing Is Also A Problem
Americans are said to have a love affair with prescription medications. Over half of Americans regularly take prescription medication. Those who take prescription medications take an average of four drugs.
The higher cost is not the only concern with polypharmacy (taking five or more medications). Taking more prescription medications is associated with increased side effects, dangerous drug interactions, non-adherence to treatment plans, and cognitive and physical decline. Prescribing inappropriate medication to older adults is associated with increased hospitalizations and costs each patient more than $450 per year.
Each year, adverse drug reactions account for:
- Over 3.5 million physician office visits
- An estimated 1 million emergency department visits
- Approximately 125,000 hospital admissions
A combination of the culture in America, an increasingly harried healthcare system, and direct-to-consumer marketing has led to the perception that a prescription medication is the best way to address most health concerns.
Specialty Drugs And Biologics Drive Higher Prescription Prices
The pharmaceutical industry is shifting its focus to specialty drugs and biologics. Specialty drugs usually require special handling, ongoing monitoring, and administration in a healthcare setting. These medications are used to treat cancer, rheumatoid arthritis, HIV, and multiple sclerosis, along with a range of other conditions.
For some chronic conditions, a year of treatment with a specialty drug can exceed $100,000. The average monthly cost of a specialty drug is $4,500. Specialty drugs account for about 17% of an average employer’s overall pharmacy costs and are expected to increase to between 21% and 24% over the next three years.
The decreasing costs associated with blockbuster drugs coming off patent have masked the skyrocketing costs of specialty drugs, keeping overall pharmacy cost increases to about 5% per year. But the savings are only temporary, according to Dr. Randy Vogenberg, at the Institute for Integrated Healthcare.
Rebates are another way for pharma companies to protect their markets while keeping prices high
Drug manufacturers set the list price (wholesale acquisition cost). They sell their products to wholesalers who set an average wholesale price (AWP) which is the WAC plus around 20%. Wholesalers then distribute the drugs to pharmacies that set the usual and customary prices.
If you have insurance, pharmacies charge you a copay and your insurance company covers the rest. Other pricing options include a cash price, a discounted price with coupons, a co-insurance price or free with a manufacturer coupon.
Pharmacy benefit managers (PBMs) mediate the process. Their goal is to drive down drug prices for large employers, insurance companies, and government agencies, so they negotiate with pharmaceutical companies for rebates.
To understand how this process works, it is important to know the roles of the six key stakeholders in the pharmaceutical drug supply chain.
- Pharmaceutical manufacturer: Develops, produces, and markets the drug
- Wholesaler: Acts as a go between the pharmaceutical manufacturer and the pharmacy
- Pharmacy: Dispenses prescriptions
- Pharmacy benefit manager: Intermediary between the pharmacy and the health insurer who develops and maintains formularies and negotiates rebates and discounts
- Health insurer: Private or Medicare Part D plans that provide insurance to patients
- Patient: purchases the prescriptions
Brand manufacturers pay rebates to pharmacy benefit managers who negotiate prescription drug prices and formulary placement with pharmaceutical companies on behalf of health insurers, companies, and government agencies.
The pharmaceutical company is willing to pay rebates to get moved to a better tier on the formulary. Formularies are lists of prescription medications that categorize them as preferred or non-preferred. Typically, formularies are divided into tiers. Each tier represents a different level of copay or coinsurance. Tiers determine how much you pay and how much the insurance company pays.
Pharmaceutical companies want to be on the tier with the lowest copay cost to patients to increase sales. As in any market, rebates are designed to shift purchasing volume toward that drug by refunding part of the purchase price to the buyer. By moving to a lower tier, it is possible for brand-name medications to have a cheaper copay than generics.
Rebates are paid after a patient fills a prescription for a medication. The final price the health plan pays is considered a trade secret. The secrecy behind rebates makes price transparency impossible.
Rebates affect patients in two ways. Rebates determine whether a brand-name drug is available on the formulary. And rebates keep patient out-of-pocket costs high because coinsurance costs are based on the pre-rebate cost of the drug.
Rebates provide incentives to health insurers and pharmacy benefit managers to place high-price brand name prescriptions on formularies as preferred medications, which means you, the consumer, pay higher coinsurance.
Rebates on brand-name drugs lower insurer costs and, therefore, premiums, but not patient out-of-pocket costs. You pay the same copay and a higher coinsurance (the percentage you pay after you have met the deductible). None of the savings trickle down to you, the consumer.
Private insurers are not the only ones involved in manipulating drug prices for consumers using rebates. The safe-harbor provision allows rebates to be paid through Medicare Part D without violating federal anti-kickback laws. Until this provision is removed, fair competition between manufacturers and price transparency is impossible.
No, You Cannot Legally Import Drugs Into The U.S.
Just as frustrating, it is illegal to buy and import prescription drugs from foreign countries, even Canada, where you could purchase prescription medications at half the cost.
The FDA’s reasoning for not allowing private citizens to import prescription drugs is that a drug produced and marketed in a foreign country may not be approved for use and sale in the U.S. In addition, it may be counterfeit and unsafe.
Section 804 of the Food, Drug, and Cosmetics Act states that drugs can be imported from Canada by drug wholesalers or American pharmacists if they pose no additional risk to the public’s health and safety and result in a significant reduction in cost to the American consumer.
This final rule is the subject of a lawsuit filed by Pharmaceutical Research and Manufacturers of America and other parties.
Recently, the FDA passed a final rule that makes it legal for pharmaceutical companies to import their own drugs to bypass existing contracts with insurers or pharmacy benefit managers that prohibit the drug manufacturer from lowering its prices. So essentially, it is legal for pharmaceutical companies to import drugs to compete against themselves!
Medicare Part D Plans Have No Negotiating Power For Drugs In Six Protected Classes
While the Affordable Care Act has increased access to medications, drug prices have skyrocketed. If payers such as Medicare could negotiate lower prices, it would help offset the exorbitant drug prices protected by exclusivity and patent protection.
The Centers for Medicare and Medicaid Services (CMS) established six protected classes of medications for which all 996 Medicare Part D plans must cover. Of the drugs in these classes, 143 are brand-name.
- Anticonvulsants (anti-seizure medications)
- Antineoplastics (anticancer medications)
- Antiretrovirals (commonly used for treating HIV/AIDS)
The reasoning here was that regardless of the cost, American citizens enrolled in Medicare Part D who need prescriptions in any of these six classes would have access.
This requirement does not consider how effective the drug is. Medicare and other government programs cannot refuse to cover these medications. If they could, there might be some pressure to bring down drug costs.
Medicaid drug prices are mandated by law to be at the lower end of the discounted price range or the lowest price that a payer can negotiate. However, this is not the case for Medicare Part D. The non-interference clause prohibits the Health and Human Services (HHS) Secretary from negotiating with pharmaceutical companies on drug prices. Instead, prescription drug plans negotiate with manufacturers and then compete for enrollees. This means that the government can have no direct role in negotiating or setting drug prices for Medicare Part D.
This policy may change if H.R. 3 (the Elijah E. Cummings Lower Drug Costs Now Act) is passed. If this law passes, the government could negotiate prices for at least 24 single-source brand name drugs in 2024 and 50 in 2025 and beyond. These drugs would be selected from the 125 drugs with the highest net Medicare Part D spending.
Actuaries predict that this law would save Medicare Part D enrollees $117 billion between 2020 and 2029. Since H.R. 3 would also apply to those with private insurance, they would save an estimated $54 billion between 2020 and 2029.
It Doesn’t Have To Be This Way; The Department Of Veterans Affairs Can Negotiate
The Department of Veterans Affairs, unlike Medicare, negotiates directly with drug manufacturers on drug prices. As a result, it pays on average between 56% and 63% of the prices paid under Medicare Part D.
In 2016, California Proposition 61 proposed a referendum prohibiting state agencies from paying more for prescription drugs than the U.S. Department of Veterans Affairs. Over $128.28 million was raised in support and opposition to the referendum. Opponents of the bill raised $109.1 million—the top ten donors were pharmaceutical companies or their supporters.
As you can see, it is very difficult for any law that supports regulating drug prices to get any traction before lobbyists stall its progress or it is blocked by lawsuits.
Changes May Be Coming
In November 2020, the U.S. Department of Health and Human Services (HHS) of the Inspector General released a final rule stating that Medicare Part D prescription drug plan sponsors and their pharmacy benefit managers are no longer protected from liability under the discount safe harbor, which makes it possible for rebates to be paid under Medicare Part D.
This rule was slated to take effect on January 1, 2022, but has been delayed until at least January 1, 2023, due to a lawsuit filed by The Pharmaceutical Care Management Association.
A new safe harbor rule allows discounts to be passed directly from manufacturers to patients at the point of sale. The new rule is expected to reduce prescription costs for consumers, increase price transparency, and create incentives for manufacturers to lower prices.
The prescription market is not like a consumer market, where demand falls when the price increases too much. Patients cannot defer buying prescriptions until the price of medications falls.
Tactics such as evergreening, packet thickets, pay-for-delay settlements, and product-hopping protect brand-name manufacturers from normal market forces that control pricing. In addition, behind-the-scenes strategies such as rebates and jockeying to be on a preferred tier of a formulary make price transparency impossible.
Until pharmaceutical companies are forced to compete in an open market, like other manufacturers, they have no incentive to control prices and no government agency has the power to make them do so.
How You Can Fight Back Against the High Costs of Prescription Drugs
You may feel powerless against the drug manufacturers and their pricing strategies. But you are not. There are several avenues for you to explore to lower your drug costs. Of course, there is the well-known advice to always shop around for a lower price and buy generic when possible. But there are also medication discount cards, patient assistance programs (PAPs), nonprofits, and manufacturer coupons. These strategies often make it cheaper to get your prescriptions filled without using your insurance benefits.
As options increase for consumers to self-pay for prescriptions, it can feel a little overwhelming. We are here to help you navigate the consumer side of prescription pricing.
Always Shop Around for Lower Prices
Imagine you need a prescription medication filled. You met with your physician, discussed your medical diagnosis and treatment options, and decided on a generic medication from your insurance drug formulary. You are at the pharmacy. Suppose the pharmacist knows it would be cheaper for you to purchase your medication without using your insurance, but they cannot provide this helpful, cost-saving advice.
A gag clause prevents many pharmacists from informing customers when there are less expensive options available. Some pharmacists are gagged by their contracts with pharmacy benefit managers (PBMs). PBMs manage the drug component of your health insurance plan. They determine how much you pay out-of-pocket for your prescription copay. Sometimes, this cost is higher than if you purchased the drug without insurance. It would be helpful for you to know when this is the case.
Most states are attempting to ban gag clauses to increase transparency in drug pricing. In the meantime, it is essential to be a savvy shopper and know how you can decrease your prescription costs.
Generic drugs must meet the same quality and performance standards as brand-name drugs. They must have the same active ingredient, strength, dosage form, and administration route as the brand-name prescription.
Generic drugs may differ from brand names in size, shape, and color but must prove to the U.S. FDA that the drug is bioequivalent to the brand-name drug. The generic drug manufacturer must also provide relevant clinical data as well as assurance that their manufacturing facilities adhere to good manufacturing practices.
When the market is opened to generic manufacturers, the average prescription price drops between 38% and 48% for physician-administered drugs and by 25% for oral medications.
For example, the price of Lipitor, a cholesterol-lowering statin, has fallen by 95 % since it became generic in 2011.
There has been a trend toward an increasing generic drug share of the market. Brand-name drugs have dropped from 39.9% of all prescriptions dispensed in the United States in 2005 to 9.8% in 2019. This is a trend in the right direction!
Both supply and demand factors may play a role in this trend. On the supply side, several blockbuster drugs have gone off-patent. On the demand side, expanded access to prescription drug coverage through changes in Medicare coverage and the Affordable Care Act have increased the total number of prescriptions filled. In addition, private payers have structured formularies into tiers to encourage the use of generics by offering them at lower copays.
Medication Discount Cards
Companies, such as GoodRx, offer prescription discount cards that often provide lower medication prices at local pharmacies than you can get using your insurance. They achieve these lower prices by negotiating with a network of PBMs and pharmacy owners to purchase medications in bulk.
Prescription discount cards can help you save money on prescription drugs, but they are not insurance. The discount cards can be used whether or not you have insurance.
The company offering the prescription discount card may receive a referral fee from the pharmacy and charge a monthly membership fee. The pharmacies benefit from increased traffic in their stores and increased sales to consumers who might not otherwise fill their prescriptions. The downside for pharmacies is that they must accept the lower price. Ultimately, the consumer often gets much lower prescription prices, sometimes up to 80% off the retail price of their medication.
Most medication discount cards are free to use. The drawback—there are numerous programs in place, and the discounts are constantly changing. Finding the best prices takes time and effort.
- Choose your medication savings program
- Choose your local pharmacy with the lowest price
- Show your savings card when picking up your prescription
- Get the discounted rate
Who can benefit from using a medication discount card? Anyone who:
- Does not have insurance
- Has not met their insurance deductible
- Has a prescribed medication that is not covered by their insurance
- Has a high copay
- Is in the Medicare Part D donut hole
The only disadvantage of using medication discount cards is that prescription costs do not count toward your plan deductible.
Who is not eligible to use medication discount cards?
Using pharmacy discount cards when using Medicare Part D coverage is prohibited by a federal anti-kickback statute. According to the law, customers may not be given coupons or discounts for any items or services covered by the federal healthcare program.
Medication discount cards, on the other hand, can be used as long as they are not used in conjunction with Medicare Part D or Medicaid.
Patient Financial Assistance Programs
Patient Assistance Programs (PAPs) are programs offered by pharmaceutical companies to provide free or discounted medications to patients who cannot afford them. Each program has its own set of eligibility requirements. These criteria may include:
- proof of citizenship
- proof that if you have insurance, it does not cover your medication
- income level
- number of family members in the household
- medical need
Many programs require a doctor’s input into the application. Unfortunately, the application process is frequently overly complicated, but there is help available if you need it.
Nonprofit programs are charitable organizations that can assist with prescription costs. There are usually eligibility requirements, such as meeting diagnostic and treatment criteria and being under an income cap. These programs may consider your living and medical expenses when determining your eligibility.
Manufacturers issue manufacturer-sponsored prescription drug coupons to defray the cost of specific brand-name prescription medications. These coupons can be used to reduce your copay if you have insurance or if you do not have insurance to decrease your medication costs until you reach the manufacturer’s specified maximum out-of-pocket savings.
Over time, you may also have developed prescription savings strategies such as pill splitting, using mail-order prescription sources, or asking your physician to write for 90 day or even 365 days of prescription at once.
If you are prescribed a medication, ask if there are any generics available, check the prices on multiple strengths, and ask your doctor if there are any other dosing options.
These strategies do not work for all prescriptions but keep a running list of possible ways to maximize your savings.
According to the Centers for Medicare and Medicaid Services (CMS), national health spending is expected to increase at an annual rate of 5.4% between 2019 and 2028, reaching $6.2 trillion by 2028. This figure, however, does not take into account the additional healthcare burden imposed by COVID-19.
Patents, exclusivity rights, the inability of government health plans to negotiate costs or limit the drugs available through their plans, and pharmaceutical companies’ assertion that high costs are necessary to fund drug research and development all contribute to higher drug prices.
As an informed consumer you can play an active role in lowering your prescription costs. Prescription discount cards, manufacturer coupons, patient assistance programs, price comparison tools, and checking prices in big box stores can all help you significantly reduce your prescription drug costs.