FEBRUARY 27, 2017

Deregulation would increase competition and make drugs cheaper, according to Devon Herrick at the National Center for Policy Analysis

The tab for prescription drugs in the United States is rising, and the primary reason some patients experience high drug bills is due to the cost of a few drugs whose prices have escalated to outrageous levels.

Drug makers are and should be free to establish whatever price they believe the market will bear. Depending on the number of competitors, some drugs have significant pricing power. Drug prices can become outrageous, however, when only one, two, or three patented drugs exist within a given therapeutic class.

To a significant degree, the regulatory regime at the U.S. Food and Drug Administration (FDA) exacerbates and sometimes even creates the overpricing problems. One way to rein in high drug prices is to inject more competition into the drug market.

A Few Pricey Apples …

Not all drug prices are outrageous. A handful of overpriced drugs have given the industry a bad name. Deflazacort, a generic drug sold in Europe for decades, is an old steroid only recently approved by FDA as an “orphan drug.” Orphan drugs treat rare diseases; deflazacort treats Duchenne muscular dystrophy.

Whereas the yearly price of deflazacort is something like $1,200 abroad, the price in the United States is about $89,000 (perhaps $54,000 after rebates). As a result of the process Marathon Pharmaceuticals used in applying for FDA approval of Emflaza (deflazacort), Marathon will get seven years of exclusive marketing rights to sell a drug developed years earlier by another company.

A similar generic steroid, prednisone, is already available in the United States for as little as $50 per year. It is slightly less well-tolerated by patients, so Marathon is hoping insurers will pay a $54,000 annual premium for the newly approved product.

Another recent example of an old drug selling for pricey sums is Mylan’s EpiPen, the price of which increased by approximately 450 percent over a 10-year period. The EpiPen administers a dose of generic epinephrine worth less than $1.

Although the current EpiPen auto-injector design is under patent protection, generic auto-injectors for diabetics sell for $30 to $40 retail. Simple logic suggests an epinephrine auto-injector should cost no more than $31 to $41. Yet, EpiPens are sold only in twin packs at a price of just over $600 a pair. This kind of pricing power is a product mostly of FDA regulations that make it difficult and costly to bring competing products to market.

The direct payers of 84 percent of all prescription drugs are insurers, employers, and drug plans. Most Americans belong to a drug plan that manages benefits on their behalf. Patients themselves pay for only about 16 percent of their drug costs out of pocket. Just over 2 percent of prescriptions require copays of $70 or above. That’s the good news. The bad news is perhaps 1 percent of drugs come with a price tag that amounts to a small fortune.

Generic Nation

Americans take a lot of low-cost generic drugs, accounting for about 88 percent of prescriptions filled. Generic drugs are inexpensive because they are no longer protected by patents, enabling manufacturers to compete on price.

Drugs still under patent protection, however, can sometimes be very expensive, especially recently approved drugs and biologics derived from living material. Traditional brand-name drugs constitute 11 percent of drug scripts and 39 percent of drug expenditures. The remaining 1 percent of prescriptions are for specialty drugs and account for more than one-third of drug spending.

Stated another way, nearly 75 percent of all drug spending is on a mere 12 percent of the drugs Americans take. Many of these are the overpriced drugs that give the rest a bad name. Your drug bills are low if you’re among the 88 percent taking a generic drug. But if you’re part of the 12 percent taking a branded product, you may be paying a lot.

Monkey in the Middle?

Rising insurance deductibles have made it more difficult for drug makers to disguise high prices by passing them on to insurers and health plans. In response to increasing public scrutiny, some drug companies began claiming high drug prices are due to “the middleman.”

The term “middleman,” however, does not apply to the drug supply chain the way it has historically in consumer markets.

Pharmaceutical benefit managers (PBMs) are not middlemen in the traditional sense. They are drug plan administrators. Insurers and employers hire PBMs to manage drug benefits and adjudicate drug claims for plan members. With multiple clients, large national PBMs possess far more bargaining power than individual firms and thus can reduce the prices paid. PBMs’ bargaining power occasionally makes them unpopular with pharmacy owners and drug makers.

Solution: Competition and Deregulation

Manufacturers of costly drugs would face numerous competitors if bringing new products to market did not cost $1 billion or more on average. More competition would make it harder for drug makers to maintain high prices.

President Donald Trump and members of Congress have announced plans to tackle high drug prices. Less regulation is the way to achieve that goal. 

Devon M. Herrick, Ph.D. ([email protected]) is a health economist and senior fellow at the National Center for Policy Analysis.

Internet Info:

Devon Herrick, “Who Is Responsible for Rising Drug Costs?” Issue BriefNo. 205, National Center for Policy Analysis, February 2017: https://www.heartland.org/publications-resources/publications/who-is-responsible-for-rising-drug-costs

Michael McGrady, “EpiPen Manufacturer Faces Backlash over Steep Price Increase,” Health Care News, The Heartland Institute, December 22, 2016: https://www.heartland.org/news-opinion/news/epipen-manufacturer-faces-backlash-over-steep-price-increase

Michael T. Hamilton, “FDA Hiring Freeze No Problem for Trump’s Nominees,” Consumer Power Report, The Heartland Institute, February 1, 2017: https://www.heartland.org/news-opinion/news/fda-hiring-freeze-no-problem-for-trumps-nominees

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