One quick way to start arguing with a politician is to mention prescription drug pricing changes. This issue affects everyone, so I’m going to give you the brief story for how drugs get from the manufacturer to your front door as well as go over the underlying reasons for why they cost a ton.
We’re probably better at tracking drug pricing than remembering to get rid of the trash. For example, if you’re taking blood pressure meds that cost $2 per pill per day now and next year each pill costs $2.10 daily, you might have the difficult choice to prioritize savings versus your health. This potential dilemma is why the Centers for Medicare and Medicaid Services, or CMS, keeps a watch on various drugs they pay for and whether price levels are higher or lower than inflation. Economists, politicians, and other insurance plans often reference these data. The most recent analysis by CMS on this was taken from data spanning 2019 to 2020, right before inflation became severe—CMS’s review back then referenced inflation as 1%. Thankfully, whoever reviewed the data again in February 2022 put both the Part B and Part D drug repricing in context. For those of us who are not yet on Medicare, Part B just refers to medications that are mainly administered in hospitals or medical offices (such as cancer therapies or infusion treatments), while Part D addresses most of the drugs you’d take at home, like diabetes or acne meds. Prices on 50% of the part D covered drugs and 48% of part B drugs rose more than 1% in the study’s period. If we filter down the data to compare the changes against our 2021-2022 inflation, prices for 17% of part D and 18% of part B drugs during the study period rose above 7.5%. Although what I’m going to say next might be hard to believe, drug prices can decrease. Such a phenomenon tends to happen when a pharmaceutical company has an expiring drug patent or if there is serious competition from a product like a biosimilar. For reference, CMS found that 41% of part D and 46% of part B medications had nominal price reductions. That being said, the real magnitude of high-impact drug price changes varies if the pharmaceutical company raises the cost per dose or the cost of the overall medication’s flat lifetime, which, as you may imagine, depends on treatment method. In general, the beginning and midway points of the year are when drug companies make significant pricing decisions. The list price of a therapy stated by any pharma company is a proxy for how much less or more you’re paying later after discounts. Part of the issue is that drugs are still relatively expensive in the US versus our neighbors like Canada and Mexico, even after insurance coverage takes a lot off the top.
Before going into the food chain of drugs, we should know how drugs pop into existence. Because of government orgs like the FDA, pharma companies do time-intensive research to find a potential drug candidate, review its best medium, put it through phase one/two/three trials, and get it reviewed by regulators before market approval. The US government in particular is reasonably strict with drug development and very lax with pricing and marketing controls. I’d argue that lack of both marketing regulation and post-approval drug efficacy review are what set the bar high for prices to begin with. When it comes to a drug for rheumatoid arthritis like Humira, which in 2021 had the most revenue among all drugs not including the Covid vaccines, it’s easy to find efficacy data from the company’s primary studies but not as simple to find rigorous peer-reviewed long-term head-to-head comparisons between Humira and something like Enbrel which is also used for similar conditions. Most pharma groups like to say that high research and development costs are why prices need to be steep. In March 2020, the Journal of the American Medical Association reviewed medication discovery R&D expenses taken from 2009 to 2018 and found the median cost of a new drug, start to finish, is just under $1B. Years and years of work could still lead to a drug’s complete failure. Highly organized trial and error is how the business works. Other factors besides the development itself that raise or lower prices include competition, efficacy and safety. Patents also extend the lifetime of this pseudo-monopolistic pricing, which is why generic drugs for a given condition are less costly than brand-name choices. However, the Covid vaccines or monoclonal antibodies are recent and helpful reminders that we need consistent medical therapy innovation. Hence, pricing is something government and industry should mitigate rather than punish. I’m fully aware that’s easy to say and hard to execute, but all the info we covered so far begins to inform us on how drugs move from the factory to our local pharmacy.
The first stop in a brand-new pill’s journey leaving its manufacturing plant is a wholesaler. These are the first bulk purchasers for the medication where the “average selling price” comes into play. Then pharmacies and hospitals buy from those wholesalers for what is called the “actual acquisition cost” to dispense the drug for patients later at the “cash price” before coverage and benefits. I’ll post a helpful info-graphic from the site US Pharmacist that shows this supply dynamic on my Substack page found at rushinagalla.substack.com. Because the wholesalers are businesses as well, they will sell the bulk drugs at some premium. Of course, when it comes to US healthcare economics, there’s a curveball here. That curveball would be the fact that you, the patient, are not the true end purchaser. This is because most insurance plans use pharmacy benefit managers (PBMs) to negotiate in secret the lowest possible prices. Medicaid and pharmacy benefit managers in a few states do impose price ceilings for certain drugs, but a drug’s price on any given day varies based on who’s paying. The best way to see this logic is by pretending that you mow lawns in a neighborhood. You’re going to charge a different rate for the lawn owners in front of a mansion versus the lawn owners in front of a shack. Pharmaceutical companies also give rebates to benefit managers to win a better placement on an insurance plan’s formulary, regardless of true efficacy. Going any further demands another episode by itself, but the main takeaway I’d like you to have is that drugs get priced as they are currently because they pass though many hands before getting to you and the facts of true effectiveness get shrouded in mystery. Collaboration, rather than division, between government and the private sector as well as innovation with medication data transparency are the next areas to reach common ground on drug prices.
With that done, let’s get away from the bird’s eye view and think about the day-to-day for a moment. After going to the clinic, your doctor whips up the perfect treatment in mind for your medical issue and there’s a particular drug you need to string everything together. At this moment, a strange and way-too-official-sounding obstacle called the prior authorization prevents you from getting past the starting line. Going over why prior authorizations happen and how to deal with them is next week’s theme. Stayed tuned and subscribe to Friendly Neighborhood Patient for more commentary on the medical world. I’ll catch you at the next episode.
