Big Pharma (Part 1): A Bitter Pill to Swallow

By Lori Swanson

September 19th, 2017

One in ten Americans is prescribed a medication that is not financially accessible to the patient.

No wonder. Per-capita spending on prescription drugs in the United States ($856) is more than double the average of the next 19 industrialized nations ($400).[1] Big Pharma claims that research and development is the source of this rocket burn.

But if this were the case, why have four of the most popular drugs more than doubled in cost over the past five years? Wouldn’t research costs already be baked into the price?

The price of insulin, used to treat diabetes, has more than tripled between 2002 and 2013.[2]   Humira, a drug used to treat rheumatoid arthritis, had a retail cost of $1,550 for two doses in 2009. Today, it has a retail cost of $4,537 for two doses in the United States.[3] By comparison, the drug costs $2,726 for two doses in Canada.[4] A two-pack of EpiPens, used for allergic reactions, is now over $600, up from a little more than $100 in 2007.[5] The annual cost of Lipitor, an anti-cholesterol medication, rose from $1,290 in 2006 to $2,140 in 2012.[6]

On average, the U.S. prices for the world’s top 20 selling medications are three times higher than in Great Britain.[7]

The price hikes on many generics have also been steep. For example, erythromycin in 500-mg tablets had three increases of more than 100%, ranging from 24 cents per tablet in 2010 to $8.96 per tablet in 2015.[8] Methazolamide, a glaucoma drug, increased 454% from 33 cents per tablet in 2010 to $1.85 in 2011. By 2015, the drug’s price was $5.47. This is an increase of 1,538% over five years.[9] The antibiotic doxycycline hyclate jumped from $20 for 500 capsules in October of 2013 to a staggering $1,849 in April of 2014.[10] The antibiotic tetracycline soared from 6 cents for a pill in 2013 to $4.60 per pill in 2015, a 1,000% increase in two years.[11]

For many years, people with health insurance were one step removed from these price increases. Health insurers, through pharmaceutical benefit managers (PBMs), negotiated a price with the drug manufacturers and, depending on the terms, designated the medication as a “preferred” product on a formulary.[12] At the same time, pharmacies negotiated with drug manufacturers and insurance companies to be part of the covered network of the insurer, in many cases agreeing to charge a lower price for medications on the formulary.

The discounts and rebates negotiated by insurers through this process can be significant—up to 80% off from the list price. [13]

Today, however, as many as 40 percent of people with health insurance are covered under high-deductible plans. Even though they have insurance, they must pay for their drugs out-of-pocket until they hit their high deductible. Every drug company contacted by Bloomberg News last fall said that when patients in high-deductible plans pay for drugs out of pocket, drug companies pay the rebates to the insurer or pharmacy benefit manager, not the patient. In other words, high-deductible plans don’t give the benefit of rebates negotiated by insurers to their patients.

Similarly, the uninsured are charged a “sticker” (list) price for medications, a price not paid by insurers or the government. They too don’t get the benefits of the discounts. Because of this price disparity, the uninsured, who do not have access to health insurance (in many cases due to its cost), go without necessary medications, incurring more medical costs.

Real reform of this mess should be initiated by Congress. For instance, a law should be enacted that gives the federal government the authority to negotiate the price of medications for Medicare patients.   At least one research paper determined allowing Medicare to negotiate prices could save over $16 billion per year.[14]

While meaningful reform requires Congress to act, there are steps the state of Minnesota can take to address the prescription drug disgrace.

For instance, the states of Oregon and Washington created a program where all residents—including those covered by high-deductible plans and the uninsured—benefit from discounts and rebates negotiated by government purchasers.[15] The two states use their purchasing clout to negotiate with the pharmaceutical industry for better prices for drugs in prisons, schools, state nursing homes, and other public facilities.[16]   The two states then permit their individual residents to join these state purchasing pools so that the public also gets to share in the states’ negotiating clout.[17]

Oregon’s drug discount program provides an average discount of 50% off list prices for brand name drugs and up to 80% discounts for generics. In Washington, enrollees save on average about 60% off a drug’s sticker price, or $43 per prescription. In Oregon over 296,000 people participate. In Washington over 230,000 participate.

Minnesota should implement a similar program.

Since 1985, the state of Minnesota has administered a purchasing pool called the Minnesota Multistate Contracting Alliance for Pharmacy (MMCAP). This pool combines the purchasing power of 5,000 separate facilities from 49 state governments (such as higher education facilities, hospitals, prisons, first responders, and the like) to buy more than $1 billion per year in medical supplies, including medications, influenza vaccines, dental supplies, and drug testing equipment.[18] Counties, cities and school districts are also members.

The state should combine the efficiency of MMCAP with the drug discount programs available to the people of Washington and Oregon so that Minnesota residents can receive discounts off their prescription drugs like the HMOs and insurance companies do.

The proposal is simple.

The proposal doesn’t require a new infrastructure.

The proposal doesn’t require a big financial budget.

While this action will not address the full scope of the pharmaceutical problem, we shouldn’t just do nothing while we wait for the federal government to step up to the plate.

Let’s do it.