Prescription Drug Basics

Soaring prices for drugs are driving healthcare costs, making care unaffordable for many and forcing sacrifices for families and taxpayers. Connecticut residents spend more on prescription drugs than other Americans. Drug companies are very profitable, more than other industries. In addition, an industry of middlemen also jack up drug prices. Drug companies increase their profits with advertising and direct payments to physicians. Drug companies spend more on advertising than they do developing new drugs.

US per person prescription drug spending is about twice as high as for residents of comparable countries. Unlike other countries, US insurers negotiate drug prices with companies. But the companies can demand high prices, through patent protections and other business and market strategies that create monopolies. The FDA assesses new drugs for safety and effectiveness but cannot consider price in their reviews.  

There is substantial evidence that drug prices are far higher than needed to recover research costs. in addition, drug development is heavily subsidized by the federal government in multiple ways. There are concerns that the profit motive is keeping drug companies from developing truly innovative drugs that could improve health for millions in favor of more lucrative “safe bets.” Drug companies make substantial donations to influential federal and state lawmakers. They spend even more donating to non-profit groups that should be representing the interests of patients who pay the high prices.

Recent legislation allows Medicare to begin negotiating prices for some drugs with pharmaceutical companies. Negotiated prices will begin in 2026 with the number of negotiated drugs rising over time.

Prescription Drug Deeper Dive

Prescription drugs offer incredible potential to heal and save lives. New gene therapies have the potential to cure diseases with few, very expensive, treatment options. While prescription drug costs have risen, some can help prevent more costly care such as inpatient hospital admissions or emergency room visits. But too many costly new drugs have little evidence that they are effective and are not worth their prices. Prescription drug prices in the US average 2.56 times the prices paid for the same drugs in 32 other countries.

Drug costs are rising, driving total healthcare spending

Prescription drug prices are driving up healthcare costs that are squeezing family, employer, and government budgets —  displacing other healthcare spending and other important priorities. Due to high costs, 23% of Connecticut residents cut pills in half, skipped medication doses, or didn’t fill a prescription in 2022. More than five million Medicare beneficiaries struggle to afford medications; Black and Latino seniors are up to twice as likely to report difficulty paying for drugs.

In 2014, Connecticut spent 15% of our total healthcare costs on prescriptions. Connecticut residents’ per capita drug spending was the second highest in the nation and the gap is growing.

US prescription drug spending for all Americans grew by 32% from 2012 to 2018. It is expected to continue growing through 2028. Drug spending is driven by higher drug prices, not increasing use of drugs. Between 2014 and 2018, total per person spending on drugs rose 26% for people with employer-sponsored insurance, while utilization rose only 4%.

Drug companies are very profitable. From 2000 to 2018, thirty-five large drug companies’ profits averaged 13.8% of revenue. This is far higher than other industries where profits for 357 large, non-pharma companies averaged 7.7%. An analysis found that drug companies could lose $1 trillion in sales, without reducing research and development spending, and still be the most profitable industry. Pharma notes that, in 2020, just half of drug spending went to the companies that developed, researched, and manufactured drugs. The rest was spent on insurers, middlemen like Pharmacy Benefit Managers (PBMs), providers, and others. Pharma also notes that in 2021, drug companies paid $236 billion in rebates, discounts, and other payments, some of which was not passed on to consumers.

Drug companies increase their profits with advertising and direct payments to physicians. Most countries prohibit direct-to-consumer advertising by drug companies. In 1997 when the US removed a similar restriction, drug spending increased substantially. Drug companies spent $6.46 billion on advertising drugs to consumers in 2018. In 2013 ,nine out of the top ten drug companies spent more on advertising than on research and development of new drugs. In addition, drug companies spend about $2 billion in payments to about half of all US physicians. The payments include free meals, luxury travel, and consulting fees. There is good evidence that these payments influence the medications that physicians prescribe.

Drug prices don’t always match their value

Too many new drugs are priced well beyond the value of their benefits to our health. For example, researchers estimate that Medicare paid $2.9 billion between 2009 and 2015 for a dry-eye drug with little evidence that it works.

The controversy over Aduhelm, Biogen’s new Alzheimer’s treatment, demonstrates the problem. Alzheimer’s patients are desperate for an effective treatment. But with limited effectiveness and serious safety risks, the drug was severely overpriced. Many insurers and Medicare decided not to cover it, or only in very limited circumstances, and many hospitals refuse to treat patients with the drug.

Another example, Trodelvy, an oncology drug made by Gilead, costs $16,000 for a 21-day treatment cycle. The company says the drug reduces the risk of death by 49%. However,  the medication only extended median survival from 4.9 months to 11.8 months. An analysis of the 90 cancer drugs approved by the FDA in the last century found that the average survival gain is just 73 days.

In the US, the nonprofit Institute for Clinical and Economic Review is an influential source providing policymakers and other payers with expert, independent information on effectiveness and fair prices for drugs and other treatments. ICER’s assessments frequently suggest significantly lower prices for treatments that do not provide much added benefit, while supporting higher prices for treatments that do, maintaining strong financial incentives for innovative new treatments.

ICER’s research is used by clinicians, federal agencies, insurers, and state policymakers to set reasonable drug prices. ICER’s reports include evidence-based calculations of prices for new drugs that accurately reflect expected improvement in long-term patient outcomes, while also highlighting price levels that might be unaffordable for the entire health care system. ICER relies on scientific studies combined with patient input in developing their reports.

Annually, ICER reports on significant drug price increases in drug prices that are not supported by either new research on clinical benefit to patients or increases costs to manufacture. ICER’s 2022 report found seven drugs with unsupported price increases caused $805 million in higher drug spending. ICER’s first analysis of fair access policies led six national insurers to change restrictive policies making treatments more available to patients.

Drugs cost less in other countries

A 2021 analysis found that prescription drug prices in the US average 2.56 times the prices paid for the same drugs in 32 other countries. US per person prescription drug spending is about twice as high as for residents of comparable countries. Among the developed countries studied, the US accounted for 58% of spending, but only 24% of total drugs sold.  

Americans pay for these higher prices in both our direct out-of-pocket costs, such as copays and deductibles, and hidden in our insurance premiums and our taxes for government coverage program such as Medicare and Medicaid. US drug out-of-pocket costs are 86% higher than other developed countries and insurance/government health program costs are 107% higher.

The US is unique among developed countries because we negotiate drug prices and do not base prices on the effectiveness of medications in improving health. Other developed countries evaluate medications’ relative effectiveness in improving health compared to lower-priced current treatments, and set prices accordingly. However, US drug prices in commercial insurance plans are set by the market. Companies can use monopoly power to keep new drug prices high for years. Covering extremely expensive drugs with limited value is driving up US healthcare costs, keeping effective medications from American patients who need them, and sacrifices other valuable healthcare services.

What is government’s role in regulating drugs in the US?

The federal Food and Drug Administration assesses the safety and effectiveness of new drugs before they can be sold in the US. A team of FDA physicians, scientists, and statisticians evaluate the evidence from the manufacturer about the new drug, weighing risks and benefits. The FDA cannot consider the costs of drugs in their process. In making decisions, the FDA often consults with Advisory Committees of outside, independent experts, including consumer and patient representatives. Anyone can apply to join an Advisory Committee.

FDA approved drugs can benefit from patent and market exclusivity protections that prohibit other companies from copying and selling the new drug for an average of twelve years. After these protections end, other companies can compete with the original company by copying and selling the drugs as generics or biosimilar medications at substantially lower prices. Patents and market exclusivity were designed to promote innovation by allowing drug companies to charge higher prices to recover their costs of developing drugs.

Concerns have been raised that drug companies are using FDA and patent processes to extend their monopolies to keep drug prices high, harming patient access to medications, and raising total healthcare costs by billions of dollars. Strategies include

• patent evergreening — patenting clinically irrelevant features of the drug to extend the patent protection
• product hopping – switching patients to a similar, new drug with a longer patent or exclusivity period
• patent thickets – overlapping patents on a drug to deter competition with litigation costs
• pay-for-delay – paying a generic or biosimilar company to delay producing a competitive product at a lower cost

In 2022, Congress passed historic legislation allowing the Medicare program to negotiate drug prices with pharmaceutical companies. Negotiation only applies to some drugs and only those that are seven to ten years since their FDA approval. 

Medicare is moving ahead with a thoughtful process to negotiate drug prices. In August 2023, the first ten drugs were chosen. The drugs were selected based on Medicare Part D’s highest spending medications that have been on the market at least nine to thirteen years and have no generic version. They include treatments for diabetes, cancer, blood clots, heart failure, and rheumatoid arthritis. This is complicated stuff, balancing access to drugs and lowering costs, with fair incentives for drug companies to continue to innovate and find new cures. Medicare is hiring 90 new economists, data scientists, and pharmacists for the project and expect to start negotiations with drug makers in February. The new prices will be effective in 2026. In the future, the number of negotiated drugs will rise by another 15 to 20 drugs each year.

The Congressional Budget Office estimates that price negotiations will save Medicare $3.7 billion next year and over $98 billion by 2031. Negotiated drug prices should be down 8% by 2031, increasing member access to those medications. It’s estimated that Medicare members will save an average of $400 in out of pocket costs annually.

Pharma argues that price negotiation will harm innovation, but experts predict about a 1% drop in new drugs. Pharma also argues that negotiation is another term for price controls and that most of the benefits will go to government rather than patients. However, experts point out that it is a negotiation and that taxpayers will benefit if prices are lower. Drug companies and others have filed lawsuits claiming the negotiation process is unconstitutional. The suits have already passed one hurdle in court.

Costs to develop new drugs

Insulin was discovered and patented a hundred years ago by Frederick Banting and colleagues at the University of Toronto. The discovery meant that diabetes was no longer a death sentence. They sold the patent for $1 because they wanted insulin to be available to anyone who needs it. Unfortunately, insulin is now so costly that one in four patients has to ration doses, endangering their lives. Diabetes was Connecticut’s seventh-leading cause of death in 2017. Even though it was discovered a century ago and all research and development costs have been covered, the three companies that control the market are using patent abuses  to keep prices high.

It is a long process to develop new drugs. For every 5,000 promising new drugs, on average just one is eventually approved by the FDA to treat Americans. It can take up to 15 years to move that one drug through the full development process. It is estimated that, including failed drugs, companies spend $1 to $2 billion to develop each new drug. Pharma notes this as one of the reasons that drug prices are so high.

However, most researchers estimate that drug companies more than recover those development costs when drugs go to market. In 2015, companies with the twenty top-selling drugs generated revenues almost twice (176%) their development costs from just the US market. Another analysis found that from 2016 to 2020, just Medicare payments for the ten most costly drugs more than covered drug companies’ reports of their research and development costs. For example, during that time, Medicare paid $27.2 billion for Eliquis, a blood thinner to treat irregular heartbeats, which is more than ten times the industry’s reported costs of development.

The federal government also provides substantial supports and subsidies to drug company  for research and development costs. Federal payments of $22 billion to drug companies to develop COVID-19 vaccines are only the most recent example. The federal government is the largest funder of basic biomedical research, which forms the basis of much drug development. Funding from the National Institutes of Health (NIH) alone was $41 billion in 2020. Development of every drug approved by the FDA from 2010 and 2016 was based on NIH-funded research. On top of direct subsidies, the federal government grants substantial tax breaks to drug companies on their research and development spending. The federal government also grants patents and exclusive marketing rights to newly approved drugs, allowing them to charge prices that more than recoup those costs. Medicare, Medicaid, and other government coverage programs support drug development by driving demand for drugs. In 2019, the federal government paid for 40% of total US prescription drug spending.

It’s been argued that pressure to make big profits and the expense of research and development combined with high failure rates of potential drugs inhibit innovation. The imperative to make very high profits keeps drug companies from researching new “wonder drugs” that could have made a meaningful difference for the health of millions, such as new antibiotics and vaccines. The concern is that the pressure for profits drives drug companies to prioritize “safe bets” with their research budgets, to develop drugs that are more likely to be successful and profitable.

The role of Pharmacy Benefit Managers, PBMs

Drug companies blame Pharmacy Benefit Managers (PBMs) for increasing drug prices. PBMs are large companies that manage prescription drug costs for insurers, Medicare Part D plans, employers, and others. The concept is that combining their market power allows the PBMs to negotiate better prices for all. PBMs keep costs down by developing formularies, lists of covered drugs, securing rebates from drug companies, and by contracting directly with pharmacies.

PBMs have lowered prescription drug costs for payers, but they remain controversial. Because PBMs are often paid based on the rebates they can secure from drug companies, they have an incentive to allow drug companies to raise list prices but also increase rebates. Rebate savings aren’t shared with consumers, so patients pay more. PBMs also profit through “spread pricing’, charging insurers and government programs higher prices for drugs than they pay to drug companies, keeping the difference.

Why hasn’t Congress moved to control drug prices?

Despite years of complaints from businesses and voters, Congress and states have made little progress in lowering prescription drug prices. There are several reasons including direct lobbying by Pharma, donations to Congressional and state political candidate campaigns, and payments to nonprofit patient advocacy organizations.

Drug companies spend more on lobbying Congress than any other industry. In 2021, pharmaceutical and health services companies spent over $356 million lobbying at the federal level.

Drug companies support Congressional and state candidates with industry-friendly positions. In the first half of 2021, drug companies donated $1.6 million to Congressional candidates, targeting members of committees that oversee the pharmaceutical industry. In 2020, drug companies supported 2,400 state legislative campaigns.

In addition, drug companies make payments to non-profit patient groups. In 2015, pharmaceutical companies paid non-profit patient advocacy groups $116 million; that is more than they spent lobbying Congress that year. A 2017 study found that 83% of patient advocacy organizations receive payments from drug companies. At least 39% received over $1 million.  Over a third (36%) appointed an industry representative to their Board of Directors, with influence on nonprofits’ advocacy agendas. Companies directly finance patients to lobby Congress for their cause through some patient groups. Serious concerns have been raised about the conflict of interest – that groups are less likely to advocate for lower drug costs for their own members to keep industry payments coming.

How do Medicare and Medicaid set drug prices?

In 2022, Congress passed historic legislation allowing the Medicare program to negotiate drug prices with pharmaceutical companies. Negotiation only applies to some drugs and only those that are seven to ten years since their FDA approval. 

Medicare is moving ahead with a thoughtful process to negotiate drug prices. In August 2023, the first ten drugs were chosen. The drugs were selected based on Medicare Part D’s highest spending medications that have been on the market at least nine to thirteen years and have no generic version. They include treatments for diabetes, cancer, blood clots, heart failure, and rheumatoid arthritis. This is complicated stuff, balancing access to drugs and lowering costs, with fair incentives for drug companies to continue to innovate and find new cures. Medicare is hiring 90 new economists, data scientists, and pharmacists for the project and expect to start negotiations with drug makers in February. The new prices will be effective in 2026. In the future, the number of negotiated drugs will rise by another 15 to 20 drugs each year.

The Congressional Budget Office estimates that price negotiations will save Medicare $3.7 billion next year and over $98 billion by 2031. Negotiated drug prices should be down 8% by 2031, increasing member access to those medications. It’s estimated that Medicare members will save an average of $400 in out of pocket costs annually.

Pharma argues that price negotiation will harm innovation, but experts predict about a 1% drop in new drugs. Pharma also argues that negotiation is another term for price controls and that most of the benefits will go to government rather than patients. However, experts point out that it is a negotiation and that taxpayers will benefit if prices are lower. Drug companies and others have filed lawsuits claiming the negotiation process is unconstitutional. The suits have already passed one hurdle in court.

State Medicaid programs pay lower prices for drugs because they have special but complex protections in federal law. Under the law, Medicaid programs pay the “best price” offered to any other payer for each drug, with a few exceptions, and at least 23.1% off the list price on new drugs, 13% off generics and a supplemental discount if prices rise faster than general US inflation. However, Medicaid must cover all drugs with few exceptions. Recently, there have been changes to widen “best price” definitions to promote value-based pricing arrangements that may improve access to new but costly treatments, but these provisions may also increase Medicaid’s drug costs.

Trends

• CMS is planning how to negotiate Medicare drug prices
  • Calls for Congress to
    • Close loopholes to make generics more available
    • Make drug companies justify high price increases
    • Set prices for drugs that have little or no competition based on prices in other high-income countries
  • Calls for PBM reforms include more transparency in contracts, requiring they pass on rebate savings to insurers or patients, and banning spread pricing
  •  In the absence of federal progress on drug pricing, states have taken the lead considering, and in some cases passing, policies to lower drug costs including
    • Creation of Prescription Drug Affordability Boards – Boards of independent experts appointed by government to identify extreme drug prices and increases, with varying levels of power to reduce them
    • Taxing excessive drug company price increases – Governor Lamont proposed this in the 2021 and 2020 legislative sessions, but it did not pass
    • Using Canadian drug prices as a reference that prices cannot exceed in the state
    • Importing drugs from Canada
  • The drug industry’s proposals to make prices more affordable for consumers include capping and reducing patient out-of-pocket costs, insurers covering more drugs earlier in the approval process, PBMs sharing savings with patients at the pharmacy counter, and increasing incentives for drug companies to develop innovative drugs.
    • These initiatives would only lower direct out-of-pocket costs for the patients using the drugs. It would not lower the total costs of drugs. Insurance premiums and taxes, paid by consumers and employers, could rise under these provisions.

Updated 11/20/2023