The US Drug Pricing Controversy: 8 Things to Know Before You Debate

The rising cost of prescription drugs is a highly emotional topic that has genuinely impacted millions of Americans who struggle to afford needed medications. I sympathize with this pain, and I am fully behind taking steps to address this issue. No one should experience financial hardship that prevents them from taking their medication. Period.

With that said, the emotions of this topic can often cloud the debate around what actions we should take as a country. This unproductive rhetoric can lead us to the wrong solution, and potentially one that makes the prescription drug debacle even worse for Americans. So, before you engage this topic, I wanted to share 8 key things to know that will help you understand the challenges we face.

The Facts

Let’s set the stage with a few key facts about prescription drug spending in the US:

  • The US spent $425B on prescription medications in 2016, a 40% rise since 2006

  • Drugs constitute 10% of health spending in the US

  • The top selling drugs are 50% - 180% more expensive in the US than in other countries

  • 1 in 4 people say they have difficulty paying for their medication

  • Branded drug prices have increased 57% while generic prices have dropped 37% since 2014

  • High growth of specialty drugs and precision medicines are also major contributors

  • While Patient Out of Pocket Costs are rising, insurers are footing a much larger proportion of the bill


8 Things to Know About the Prescription Drug Debate

1. Not all Drug Companies are Alike

The detestable face of Martin Shkreli is unfortunately the first thing people associate with drug companies. He is the worst. With that said, it is wrong to assume that all companies follow the same level of predatory practices, although they all cross the line from time to time. 

For example, Valeant (actually a Canadian company) grew its business by acquiring over 100 smaller companies, and (often) raising the prices of their drugs. Although times have changed for the drugmaker, Valeant also spent a miniscule proportion on R&D each year during this time period. On the other hand, AstraZeneca led the industry with 28% of sales spent on developing new drugs.

The Takeaway: Demonizing the “Pharma” industry based on it’s worst players takes away from the innovation generated through some of it’s best. Do your research and call out individual practices and organizations. 

2. The Inconvenient Truth: Innovation vs. Pricing Trade Off

Lower prices in the US will lead to foregone investment in some new therapies. This economic reality is unavoidable. Profits are the main determinant of whether or not a drug gets made - hence the reason there are far fewer available treatments for diseases mainly prevalent in poorer countries. Profits are also the reason that so many lifesaving drugs exist today. This article provides a nice deep dive into this tradeoff:

The Takeaway: "It is time to start focusing on balancing access to pharmaceuticals today with access to new drugs in the future. Patients with conditions that are treatable by existing drugs have the relative luxury of being able to negotiate prices. That same luxury isn’t afforded to those suffering from conditions without existing treatments.” (article above)

3. The US CRUSHES Other Countries in Pharmaceutical Innovation

High prices in the US have allowed us to become the world leader in pharmaceutical innovation. Other countries, while still delivering some new therapies each year, pale in comparison to our output of new chemical entities. This may seem obvious given the trade off discussed above, but it is important to see what will change should we lower prices inorganically. 

The Takeaway: The impact to pharma innovation from lower prices is real and significant. 

4. Prices of US Drugs in Foreign Country are Pure Price Discrimination

Price discrimination, in many cases, can be a good thing. It means that more consumers have access to a good or service, and this is certainly the case for pharmaceuticals. Other countries have stricter regulations, different insurance systems, and populations with lower incomes that would make it unprofitable to charge the exorbitant prices they do in the US. Given that the majority of the profits come from the US, allowing the US to import drugs at foreign prices would either (1) reduce their availability elsewhere or (2) reduce the likelihood the drug gets made in the first place. Again, our high prices subsidize the rest of the world’s innovation. This is the harsh truth of the economics.

The Takeaway: Drug companies will always charge the price that earns them the greatest profit - period. They are not cutting these countries a break. A good article from the WSJ on this topic.

5. Generic Competition is the Best Path to Price Reduction

Competition is the best way to lower prices in almost every scenario. However, major pharmaceutical companies have been engaging in various tactics to prevent generic competitors for branded drugs from getting to market. In addition, the ability to create “biosimilar” medicines for some of the most expensive “biologic” drugs and get them approved has been challenging. Without the proper mechanisms for the rapid approval and manufacture of generic medications, prices will continue to skyrocket. 

The Takeaway: Competition is the best way to lower prices, but shady tactics in the pharma industry (and in Congress) are roadblocks to the generic pipeline

6. Precision Medicines Are Not Overpriced

The periodicals are often scattered with headlines talking about the next “1.8M per dose” drug. While this seems excessive, the economics say differently. These “precision medicines” are often designed to treat an incredibly specific, tiny population of people. However, the cost of developing these drugs is also significantly more expensive. As a result, to earn similar profits, the prices must be high. Without these high prices, it is likely the investment would not be worth it in private industry.

The Takeaway: Precision medicines will always be justifiably expensive treatments. We need to find a new way to pay for them outside traditional insurance mechanisms. 

7. Patent Gaming is a Massive Problem

Patenting a small change in how a drug is made or in the delivery mechanism to patients has been a common method by which pharmaceutical companies extend the patent protection of a therapy. In some cases, the old drugs are even taken off the market so the patient has no choice but to u the higher priced version under a new patent. This is complete and utter bullshit. While patent protection is necessary to ensure a positive NPV for new drug development, the current system is way too susceptible to gaming and needs to be modified. In addition, outdated legislations like the Orphan Drug Act that further enable this kind of behavior must be reformed.

The Takeaway: Patent gaming is the worst thing that all pharmaceutical companies do and it has no benefit to patients. We need to focus on this reform ASAP.

8. Government Funded Drug Discovery is Comparatively Low Cost

The cost of initial drug discovery, often funded by taxpayer dollars through the NIH and DARPA, is tiny compared the cost to take a drug through clinical trials and the approval process. There is a reason that the gap between discovery and trial funding is considered the “valley of death.” Without massive investments from pharmaceutical companies, these drugs would not get into the hands of the patients that need them. In order to encourage these investments, the therapies need to have a positive NPV. Again, economics is real.

The Takeaway: Yes, our tax money pays for a lot of drug discovery. $30B in NIH funding went to R&D in 2015 as compared to $150B in private funding.  5x as much!