Common sense in the drug pricing debate

High drug prices are largely blamed on the pharmaceutical companies, but before we can have a common sense debate we need to look at overall health care costs.  In 2013 the U.S. spent 17.1% of its total GDP on healthcare, 50% more than the second highest spending country, France (11.6%). In 2014, the U.S. spent $2.6 trillion (a 5.0% increase from 2013) on personal health care expenditures, in 2015 the U.S. spent $3.2 trillion, which is about 17.8%. Prescription drugs account for only $.10-$.12 of every healthcare dollar spent. Even if all prescription drugs were free our healthcare costs would still be increasing.

So why is healthcare in the US so expensive?

The real difference between the American health care system and systems abroad is pricing.  Specialists, nurses and primary care doctors all earn significantly more in the U.S. compared to other countries. General physicians in America made an average of $218,173 in 2016 which was double the average of generalists in the other countries, where pay ranged from $86,607 in Sweden to $154,126 in Germany.

Administrative costs, meanwhile, accounted for 8 percent of the GDP in the U.S. For the other countries, they ranged from 1 percent to 3 percent . Health care professionals in America also reported a higher level of “administrative burden.” A survey showed that a significant portion of doctors call the time they lose to issues surrounding insurance claims and reporting clinical data a major problem.

If we are to have an open and honest debate about healthcare costs, we also have to look at ourselves.  Americans’ own habits that are driving health care costs in the United States.

According to the CDC eighty-six percent of the nation’s $2.7 trillion annual health care expenditures are for people with chronic and mental health conditions. These costs can be reduced. The total estimated cost of diagnosed diabetes in 2012 was $245 billion, including $176 billion in direct medical costs and $69 billion in decreased productivity . Decreased productivity includes costs associated with people being absent from work, being less productive while at work, or not being able to work at all because of diabetes.

In addition:

Then there is the argument that PBM’s are costing us all a lot of money.  In 2015, Express Scripts, the largest PBM-only company in the U.S., reported a profit of more than $660 million, from sales exceeding $25 billion.

From their inception, PBMs were able to negotiate prices through both upfront discounts and rebates following sales. PBMs created formularies—lists of preferred drugs—and insisted on certain discounts off the manufacturer’s price of a medication in order to have it included on the formulary. PBM’s lack transparency and they wield a lot of power. The more powerful a PBM is, the greater discount they can demand—and the fact that three PBMs control the vast majority of the market makes these three companies very powerful.

PBMs make more money from paying closer to the list price and receiving a rebate rather than an upfront discount. The higher the price of the drug, the higher the PBM fee at the pharmacy. So they don’t have an incentive to drive upfront prices down as much as they can. They are taking fees based on the list price, but the net price that the PBM is paying for the drug is much lower than that because of rebates.

In addition, pharmaceutical companies now anticipate steep discounts and rebates when they set their list prices. As a result, they set list prices higher so that the eventual negotiated price will be as high as possible.  A PBM could also steer patients to lower co-pay drugs, even though the overall cost is higher because the PBM makes more money.

But doesn’t pharma need high prices for drug development and innovation?

According to HBR “it’s not unexpected that merging companies reduce their R&D spending following a merger. That may be due to the cost savings of pooling efforts and combining their labs. Research has shown that pharma mergers reduce innovation . But what’s suprising and troubling is that new evidence shows that the merging companies’ competitors also spend less on R&D after the merger. Hence, industry competition and innovation become less dynamic overall.

The debate on the development costs of new drugs is still vibrant.  Some suggest it could be as high as $2.5 billion and take 5-10 years, but we can’t ignore the fact that drug companies are investing in areas that produce the greatest return as well as taking a slice of the pie for new therapies. According to the Financial Times “the world’s 12 biggest drug companies are making a return of just 3.2 per cent on their research and development spending in 2017 — down from 10.1 per cent in 2010, according to Deloitte’s annual survey of pharma R&D investment”.

Pharma R&D Through 2022

Statistical modeling in clinical trials has the potential to lower R&D costs substantially and companies that are using modeling have reduced costs of drug development.  A revealing academic study shows, big pharmaceutical companies have spent more on share buybacks and dividends in a recent 10-year period than they did on research and development.

The paper’s five authors concluded that from 2006 through 2015, the 18 drug companies in the Standard & Poor’s 500 index spent a combined $516 billion on buybacks and dividends. This exceeded by 11 percent the companies’ research and development spending of $465 billion during these years. Two examples are Gilead Sciences, which spent $27 billion on buybacks versus $17 billion on research, and Biogen Idec, which repurchased $14.6 billion in stock and spent $13.8 billion on research and development.

The key cause of high drug prices, restricted access to medicines and stifled innovation, is a social disease called ‘maximizing shareholder value, ’” the study’s authors concluded. Indeed pharma CEO’s have made Wall Street their number one customer at the expense of patients.

So what’s the bottom line?

The joke within the pharma industry has been “how can we charge so much for this drug?” with the answer “because we can”.  It’s hard to generate sympathy for drug prices when insulin drug prices have gone up so much that there is a group on Twitter called Insulin For All with posts like these..

Is drug pricing is complicated, but at the root of it all is the motivation for profit and shareholder return. The bigger problem is that the costs of our healthcare are going to continue to go up and pharma CEO’s want their cut of this money.

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