Think drug prices are high? Just wait.

For decades the pharmaceutical industry has used the same tattered and phony excuses to justify exorbitant drug prices that keep increasing at many times beyond the cost of living. The excuses may have lost their persuasiveness but the price increases will gouge American consumers and taxpayers even more deeply.

Pharma has tried to justify its unconscionable prices by pointing to the burdensome research costs it must bear to develop new therapies. As part of its whitewash campaign, the industry pays its confederates at Tufts University every year to update some eye-popping expense costs for each new drug. The figures are blatantly misleading because each year’s amount is an allocated cost, rather than the actual, out-of-pocket payment any company spends to develop an approved drug.

Even there, the figures are deceptive because they include promotional costs, such as wining and dining influential investigators. Nine states, including Pennsylvania, have introduced transparency legislation to find out how much each pharma company actually spent to develop its medications, but the industry fiercely resists such openness and honesty.

Another tired chestnut from pharma is the claim that high prices are necessary for generating the outsize profits needed for attracting capital to an inherently high-risk business such as pharma. That too is rubbish. A 2011 report by Canada’s Patented Medicine Prices Review Board found that U.S. drug prices are at least twice as high as those of any other country but U.S. pharma companies spend less on R&D here than they do in other countries with strict price regulation. 

Canada’s Carleton University found in 2015 that among the 31 countries belonging to the Organization for Economic Cooperation and Development (OECD), there is no connection between higher pricing on drugs in a country and the amount of drug research conducted there. 

If anything, the authors believe that price controls would lead pharma companies to develop and launch more groundbreaking drugs. The fact that the U.S. pays more than twice the average price of all other OECD countries for the same drugs does not lead to increased investment in research. 

The Carleton researchers argue that the U.S.’s uncontrolled pricing and patent protection even encourage pharma companies to avoid groundbreaking research and, instead, invest their money in marketing, buying drugs from other companies, and buying other companies. As a result of allowing drug companies to charge whatever the captive American market will bear, "80 percent of new patented drugs" provide no significant benefits "compared with existing alternatives." Since the pharma companies can charge whatever they want for such me-too products, the U.S. system incentivizes them to "develop non-innovative and less risky 'me-too' drugs instead of new, innovative medicines for unmet needs." 

This dysfunctional U.S. system for developing and pricing drugs has existed for a long time, so why are prices likely to get even more unconscionable? 

The reason is that pharma companies have been trying to avoid the price constraints of private payers – insurers and pharmacy benefit managers – by developing new drugs for specialized populations in categories such as oncology and autoimmune diseases. In those classes, the buy-and-bill system pays oncologists and rheumatologists windfall margins and the PBMs don’t get to restrict formularies. 

As the drugmakers are now trying to develop specialty products for more limited populations, they feel they must charge enormously higher prices to generate the colossal revenues to which they feel entitled. 

The blockbuster drugs of the 1990s were primary care drugs for common medical conditions such as blood pressure, cholesterol, and heartburn. They typically cost patients and their payers $1,000 to $2,000 per patient per year. By contrast, medications for oncology and autoimmune conditions such as rheumatoid arthritis and multiple sclerosis fetch between $70,000 and $150,000 per patient per year. 

Even more distressing, almost one-third of all the new molecular entities approved by the FDA during 2016 were orphan drugs, that is, medications for conditions that affect approximately 5,000 or fewer people in the U.S. every year. For example, Biogen in Massachusetts obtained FDA approval for Spinraza to treat spinal muscular atrophy. The company disclosed it would charge $750,000 per patient for the first year and $375,000 per year thereafter.

Such pricing by itself is apt to induce illness.


Read more from the Check Up blog »