Why Are Drug Costs So High?

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Austin Frakt of the New York Times recently published a terrific analysis of why drug costs are so high. Here is a summary of his main points.

Frakt reported that U.S. spending on drugs tripled between 1997 and 2007. There was a slowdown from 2007 to 2013 but then drug costs shot up again. American annual spending on prescription drugs was about $1000 per person in 2015 and 16.7% of overall individual healthcare spending.

Americans Take More Drugs – NOT!

A health policy journal study found that Americans use prescription drugs for 12% fewer days per year than their counterparts in other wealthy countries.

Americans Use More Expensive Drugs – NOT!

Americans use a greater proportion of generic drugs, 84%, than most other countries. But drug costs in the U.S. for the SAME drugs are a lot higher than other countries. For many drugs, U.S. drug costs are twice those found in Canada. Britain will pay for new drugs only when their effectiveness is high relative to their prices. German regulators may decline to reimburse a new drug at rates higher than those paid for older therapies, if there are no additional benefits. The U.S. lacks the widespread policies limiting drug costs that other countries have.

What happened in 1997?

  • Sales of costly new hypertension and cancer drugs took off in the 1990s. The number of drugs with sales that topped $1 billion went from six in 1997 to 52 in 2006.
  • Increased advertising to physicians and consumers as regulations on drug ads on TV were relaxed.
  • More rapid FDA approvals fueled by new fees on pharmaceutical manufacturers that began in 1992 helped push more drugs to market.
  • Increased coverage through Medicaid and the Children’s Health Insurance Program added to increased drug spending. Medicare adopted a universal prescription drug benefit in 2006.

What happened in 2007?

  • In 2007, U.S. drug spending growth was the slowest since 1974.
  • There were fewer FDA approvals of blockbuster drugs. There were 35 per year in the late 1990s and early 2000s and 20 per year from 2005-2007.
  • Patents expired on top-selling drugs and spending leveled off as the public turned to generic drugs.

What happened in 2014?

  • The arrival of expensive specialty drugs and biologics with no meaningful competition, spiked drug costs.
  • Coverage expansion due to the Affordable Care Act.

Michelle Mello, a health law scholar at Stanford said, “As in the earlier run-up in drug spending, we’re largely uncritical of the price-value trade-off for drugs in the U.S. Though we pay high prices for some drugs of high value, we also pay high prices for drugs of little value. The U.S. stands virtually alone in this.” Stay tuned for what happens with drug costs in this time of acquisition/mergers between payors and pharmacies. Read Eda Zullo’s blog for information on what  Washington is doing to impact drug pricing.

Interested in a position in the pharmaceutical industry? Contact the Pharmaceutical Practice Area Recruiters at Smith Hanley Associates or visit our job board at jobs.smithhanley.com.

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