Ben White is a staff writer for Brief Policy Perspectives and a first-year MPP student.

The Rising Costs of Prescription Drugs

Drug prices in the U.S. have skyrocketed over the past decade at a rate more than three times greater than inflation. On average, Americans pay nearly four times as much for prescription drugs than in similar countries. In some cases, the cost was over 60 times as much for the same drug. The price for a bottle of Humalog, a commonly prescribed form of insulin, has risen by over 1200% since the drug entered the market in 1996. The inability to pay these rising prices has forced many Americans to begin rationing their prescription drugs, sometimes resulting in tragic and deadly outcomes.

For many years, U.S. drug manufacturers have argued that the high cost of drugs is due to the high costs associated with innovation. However, recent studies have shown that this is not the case. The increasing drug prices Americans face are not a result of research and development costs or new, more expensive drugs entering the market, but rather annual price hikes on existing drugs. Moreover, a recent study showed that every single new drug approved by the FDA between 2010 and 2016 received taxpayer funding in the form of National Institute of Health (NIH) grants to assist with research and development costs.

Government Protected Monopolies and Never-Ending Patents

The United States relies on a free market system for drug pricing which has essentially allowed drug prices to be set at whatever the market can bear. Not only does the U.S. not have any regulatory policies in place to help negotiate fair drug pricing, but current law actually prohibits Medicare from engaging directly in drug price negotiations. In a free market economy, competition should determine product pricing. In the U.S., patent and exclusivity laws prevent competitors and generics from entering the market for decades after the creation of a new drug.

New drugs on the market receive a 20-year patent on the formula to prevent the creation of generic drugs, and depending on the type of drug, it can also receive exclusivity benefits of up to seven years that prevent competitor drugs from entering the market. In addition to these existing protections against competition, many pharmaceutical manufacturers take advantage of evergreening, a process where minor modifications are made to existing drug formulas near the end of a patent term so they may be re-patented and marketed as a “new” therapy despite rarely offering increased therapeutic benefits. These exclusivity benefits and never-ending patents essentially equate to government-protected monopoly rights for pharmaceutical companies.

Alternative Pricing Models Around the Globe

The reason for astounding price differences between the US and other nations is that, unlike many other drug-developing countries, the US government does not directly regulate drug prices. Across the globe, various approaches are utilized to help other nations set fair drug prices, many of these involve reference pricing, value-based pricing, or a combination of the two.

In other countries, internal or external reference pricing is used to set benchmark prices for drugs. Using external reference pricing, the price of a pharmaceutical product is compared across similar countries and used to set a benchmark or reference price. A similar method called internal reference pricing compares the prices of individual drugs to similar drugs in the same market to establish a benchmark price.  Value-based drug pricing refers to a system where producers and purchasers negotiate on the fair price of a drug based on how well the drug performs in real patients. In many cases, rebates are mandated if the drugs fail. The theory behind value-based pricing is that by including patient outcomes as a measure in pricing, companies can more accurately assess the true value of a drug. 

Legislative Solutions

Over the last decade, as rising drug prices have become an increasing concern to the American public and policymakers, several legislative efforts have attempted to make headway in addressing the issue.

In September, President Trump signed an executive order that would allow Medicare to engage in external reference pricing. Though many herald this as a big win in the fight against runaway drug prices, this Executive Order will likely involve a long uphill battle including many challenges in court before the government can implement any aspect of it.

At the State level, many have enacted laws similar to California’s Drug Transparency law, which compels pharmaceutical companies to report price increases on prescription drugs 90 days prior to the price change taking effect. Broad analysis of these laws show that overall, they lack effectiveness as most States lack the ability to enforce violations.

In addition to reducing maximum out of pocket expenses for drugs by Americans receiving Medicare benefits, The Elijah E. Cummings Lower Drug Costs Now Act would enable Medicare to negotiate drug prices with manufacturers. Additionally, this bill would increase drug-pricing transparency by mandating advance reporting of price increases and would impose penalties to drug-makers who increased prices at a rate greater than inflation. This bill passed in the House of Representatives in December 2019 but has not yet surfaced on the Senate floor.

Drug Pricing and COVID

Unfortunately for the millions of Americans facing COVID-19 infections, despite an unprecedented global pandemic, there are no special protections in place to negotiate fair drug pricing of treatments or therapies related to COVID-19. One advocacy group has released data showing that since the beginning pandemic, prices have increased on 245 drugs, including 61 drugs directly related to COVID-19 treatment. Gilead’s Remdesivir is priced at $520 per dose, or more than $3,000 for a full course of treatment, despite a taxpayer investment of almost $100 Million to help develop the drug. On a brighter note, according to the CDC, “Vaccine doses purchased with U.S. taxpayer dollars will be given to the American people at no cost,” however, patients may still be responsible for administrative fees associated with vaccine distribution. 

Moving Forward

Policymakers on both sides of the aisle now consider runaway prescription drug prices a key issue. Recent history clearly demonstrates that without direct intervention, drug prices will continue to climb and the American people will continue to bear the heavy burden of price hikes. International examples have shown that experts can establish drug pricing models to enable the fair pricing of drugs for both consumers and manufacturers. American policymakers would do well to consider introducing reference and value-based pricing models into our systems to ensure that all Americans can afford to access the health care they need.