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Why Prescription Drug Prices in the US Are So High

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Americans spend more on prescription drugs — average costs are about $1,300 per person per year — than anyone else in the world. It’s true that they take a lot of pills. But what really sets the US apart from most other countries is high prices. The median launch price of a new drug in the US in 2021 was $180,000 for a year’s supply. While drugmakers aren’t hiking prices of existing products quite as aggressively as they did prior to 2019, they still continue to steadily raise list prices around 5% a year, according to 46brooklyn Research, a nonprofit drug pricing research firm. While private insurers and government programs pick up the biggest share of the bill, high drug costs are ultimately passed on to members of the public through the premiums they pay to keep their insurance policies active and the taxes they pay to the government.

The US Congress is weighing a proposal, backed by President Joe Biden, aimed at lowering prices. It would require the government’s Medicare health program for the elderly to negotiate the prices of certain big-ticket medicines with the manufacturers that produce them. The companies have fiercely opposed the policy. Outrage at drugmakers has been building in the US. The backlash first erupted in 2013 when Gilead Sciences released the groundbreaking hepatitis cure Sovaldi at $84,000 for a 12-week course. The steep price and stampede of patients to get the drug led many insurers to restrict coverage to the sickest patients. A probe by a Congressional committee concluded at the end of 2021 that drug companies had raised prices “with abandon,” using anticompetitive strategies and manipulating the patent system and marketing exclusivities granted by regulators to do so.

Unlike other nations, the US doesn’t directly regulate medicine prices. In Europe, the second-largest pharmaceutical market after the US, governments negotiate directly with drugmakers to limit what their state-funded health systems pay. The UK’s National Health Service has refused to pay for some cancer drugs widely used in the US on the grounds that they don’t constitute value for money. In the US, drug companies can more or less set whatever price the market will bear. For most outpatient drugs reimbursed through Medicaid, the public health program for the poor, drugmakers must provide rebates to the government. But most medicine costs are paid for by Medicare or by private insurers. When prescription-drug benefits were added to Medicare under a 2003 law, the pharmaceutical industry successfully lobbied to prohibit the federal government from using its huge purchasing power to negotiate drug prices. Private payers typically rely on third-party pharmacy-benefit managers, such as Cigna Corp.’s Express Scripts unit, to negotiate discounts. Often they make exclusive deals with drugmakers, which limits the choice of drugs patients have. In the US, patients directly pay about 13% of prescription medicine costs out of their own pockets. In one survey, one in five adults in the US said they failed to complete a prescribed course of medicine because of cost. The figure was one in 10 in Germany, Canada and Australia.

Pharmaceutical companies argue that they need robust profits to bankroll the development of medical advances and that restricting prices would harm innovation. They highlight the benefits of medicines such as Sovaldi, which has a higher cure rate to treatments that cost nearly as much. Critics point to the industry’s fat profit margins and say companies exaggerate drug-development costs. Doctors and insurance executives worry that many medicines are becoming unaffordable. Advocates of greater price regulation argue that it needn’t hamper innovation. They say drugmakers could reduce spending on marketing and cite an analysis that found promotional budgets exceed those for research and development at most big companies.

• A Congressional Research Service report explores prescription drug pricing and policies.

• A 2021 report by the US House of Representatives Committee on Oversight and Reform concludes that drug companies have manipulated the patent system and employed anticompetitive strategies to keep prices high.

• Bloomberg News examines the practices of pharmacy-benefit managers in a series of articles.

• Pharmaceutical companies defend drug costs on an industry website.

• A Center for American Progress report advances proposals for addressing high drug prices.

• An article in the Harvard Business Review argues that US consumers are footing the global bill for developing new drugs.

More stories like this are available on bloomberg.com

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