Is There a Cure for High Drug Prices?

The practice of raising drug prices on new—and old—medications is common and widespread. From a nationally representative telephone poll conducted by Consumer Reports Best Buy Drugs in March, we learned that three in 10 Americans (about 32 million people) were hit with price hikes within the previous 12 months, costing them an average of $63 more for a drug they routinely take—and a few paid $500 or more. We also found price increases on everything from longtime generics used to treat common conditions such as diabetes, high blood pressure, and high cholesterol to new treatments for diseases such as hepatitis C. Our poll shows that when people were hit with higher drug costs, they were more likely to take unhealthy measures such as skipping doctor appointments, tests, or procedures, or not filling their prescriptions or taking them as directed.

Take the case of Marlene Condon, a nature writer living in Crozet, Va. Two years ago she paid about $32 for 180 tablets of hydroxychloroquine (a generic available for almost two decades) to treat her rheumatoid arthritis. When the drug’s price more than doubled to $75, Condon says she was annoyed but paid the bill anyway. Then, last September, the price of her drug skyrocketed, costing her $500 out of pocket. Condon panicked and did what thousands of Americans do under those circumstances: She stopped taking the drug. Her arthritis pain grew much worse. Walking and doing simple household chores such as washing the dishes became almost impossible.

Our analysis suggests that high prices for generic and brand-name drugs stem in part from a battle over profit between mammoth industries—big pharma and insurance companies—with consumers caught in the middle. On the one hand, pharmaceutical companies blame insurance companies for passing along high costs to consumers. And insurance companies point to very high-priced drugs for which there are few or no alternatives, which ultimately affects how much insurance coverage people receive and how much they must pay out of their pockets.

“Even as more patients have health insurance coverage, many more are facing high pharmacy deductibles and rising out-of-pocket costs, and other barriers to care, putting their ability to stay on needed therapy at risk,” says Holly Campbell, a representative at PhRMA, an industry association that represents pharmaceutical manufacturers.

“If there’s one treatment and there’s no alternative and no competition, then that’s where the challenge is,” says Matt Eyles, executive vice president of policy and regulatory affairs at America’s Health Insurance Plans (AHIP), a national trade organization for the insurance industry.

The first step in attempting to correct prices for the consumer good is to understand and acknowledge how we got to this moment. Here, a closer look at the reasons drug costs are ballooning:

Nothing protected Condon from the price increases she experienced. That’s because for Medicare and commercial health plans, no government body—including the Federal Trade Commission, the Food and Drug Administration, and the Centers for Medicare & Medicaid Services—has rules or laws that dictate or restrict the price a pharmaceutical company can set for a drug. And in most cases, there’s nothing that restricts how much a company can raise that price. Here’s an example: Last year, on the same day that Valeant Pharmaceuticals purchased the rights to lifesaving heart drug Isuprel (isoproterenol) and blood pressure medication Nitropress (nitroprusside), the company jacked up the prices. A single dose of Isuprel rose from $180 to $1,472, and Nitropress went from $215 to $1,346. The company also purchased Cuprimine (penicillamine)—a drug used to treat Wilson’s disease, a rare genetic disorder—and upped its price from $8.88 to $262 per capsule. In all three cases, the drugs had no generic equivalents available, so Valeant was able to corner the market with a built-in base of customers.

“Valeant raised the price of these drugs after an analysis of their actual value,” says company representative Laurie Little.

These huge increases have drawn congressional attention because the U.S. government is the largest purchaser of drugs in the country for programs including Medicare and Medicaid, as well as for veterans and the military. Spending more money on drugs because of price increases can mean more taxpayer dollars are used than originally budgeted—something Congress must manage. Last fall, Sens. Susan Collins, R-Maine, and Claire McCaskill, D-Mo., launched a large-scale investigation into sudden and aggressive price increases by four drugmakers, including Turing and Valeant, requesting that the companies turn over documentation to justify the hikes. And earlier this year, Rep. Cummings held a similar congressional hearing, releasing reams of internal memos to the public that detailed the profit goals that companies like Turing were trying to reach by setting the price hikes.

Stephen Lederer, a spokesman for Turing, said the company’s pricing for Daraprim “reflected its clinical value.” He notes that the company also funded access programs so that a person’s insurance co-pays would amount to $10 and provided the drug free to certain disadvantaged patients.

Price manipulations aren’t limited to small pharmaceutical firms: Major firms raked in an additional $25.6 billion (gross) in 2015 simply by raising prices on their brand-name drugs, according to a recent report by the IMS. The firm estimates that figure to grow to $155 billion over the next five years.

How do drug companies explain high prices and price hikes? Says Campbell on behalf of PhRMA: “There are many factors that go into a price of a medicine.” Those include the drug’s “clinical merits”­—how well it works, Campbell notes, and whether it reduces other healthcare costs, for example, such as reducing the need for surgery or other types of medical care.

Insurance companies exist, in theory, to protect people from unexpected high costs of healthcare. You pay a monthly premium that goes into large “pool.” The idea is that should you need to draw from that pool to pay for a healthcare expense, it’s there for you. In the case of drugs, insurance companies often work with firms called pharmacy benefit managers, or PBMs, that further pool consumers together to negotiate large-volume discounts from drug companies. The idea is that those discounts will ultimately save you money.

The only way left for insurers to provide coverage for a drug but maintain their profit margins is to reduce how much insurance coverage—and thus protection from high prices—they offer to a consumer. That can happen in at least one of four ways: by raising your deductible; by increasing monthly premiums; by increasing your co-pay by putting drugs into more expensive “tiers”; or by making you pay “co-insurance,” where you pay a percentage of the medication’s cost; usually one-third or more.

“The dramatic increase in prescription drug costs is definitely contributing to a move” to higher insurance deductibles and greater cost sharing with consumers, says Eyles from AHIP, the insurance industry trade organization.

Ten years ago, less than 10 percent of employees with health insurance were enrolled in a plan with a deductible of $1,000 or more. Today, almost half (46 percent) of Americans have those plans, according to research by the Kaiser Family Foundation, a nonprofit organization focused on national health concerns.

Eyles says that insurers have limited leverage with drugmakers, especially when it comes to new and expensive drugs. “There’s not a lot we can do other than say we won’t cover it, and that’s an extreme most plans want to avoid.”

But that’s exactly what has happened. For its 2016 formulary—the list of drugs covered—Express Scripts, the largest PBM in the U.S., dropped coverage of 80 drugs, including insulins such as Novolin and NovoLog for people with type 1 diabetes, and instead offering coverage for Humulin and Humalog. The company noted in its announcement about the change that it “only exclude[s] medications from our formulary when clinically equivalent alternatives are already covered on our formulary, and only then when those exclusions would result in significant cost savings for our clients and patients.”

Reinventing old medications is a tactic called evergreening—where companies change or tweak the formula of a drug by, say, combining two older drugs to form a “new” pill. Or they create an extended-release version, or change the delivery method—for example, instead of a tablet or an injectable, the new version is inhaled. When that happens, the federal government may grant the drug company a new patent, which could be worth up to 20 years of protection for its drug, meaning it may not have any generic drug competitors. That can translate to greater revenue for a pharmaceutical company and higher costs for the consumer.

One example is the diabetes drug insulin. The drug is almost 100 years old, and yet no generic version is available in the U.S. That’s because drug companies keep changing its formulation and getting new patents for it. Thomas Woodard, 73, of Greensboro, N.C., takes a newer form of insulin called Toujeo. Instead of taking multiple daily injections, he gives himself a single daily injection from a pen that lasts about a week. (To be sure, injecting less frequently is more convenient.) Woodard pays about $85 per month for the drug, but there’s a problem: When Woodard fills his prescription, the pharmacy and his insurance company will permit him only three pens, which don’t entirely cover him for the month, and he can’t afford another set of three pens. (They come in a box of three, and pharmacies can’t break them up.) So he deals with it another way. “I get to the end of the month, and I just cut back on the number of units I take,” Woodard says. That’s not a good idea for a person with diabetes like Woodard, whose blood glucose level needs to remain fairly consistent. “Drug companies keep coming out with new insulins, which work better, but the price keeps going up,” he says.*

Last year 30 products that were reformulations of old drugs hit the market, according to another recent report by the IMS. Says George Slover, senior policy counsel for Consumers Union, the advocacy arm of Consumer Reports: “Evergreening keeps drug prices high for consumers because it makes it harder for lower-cost generic alternatives to enter the market and give consumers a choice.”

Marlene Condon’s experience with her medication’s skyrocketing price is not an isolated event. Overall, prices of generics increased by almost 9 percent between November 2013 and November 2014, according to a 2015 report by Elsevier, a company that supplies information on drug pricing. Some prices remained stable or even dropped. But the cost of certain drugs went up—way up—when they should have stayed the same or even gone down.

“It’s those huge price hikes in everyday drugs that are having the greatest impact on consumers,” says Riley of the ACP. “Patients who have been taking generics for years are suddenly finding that their medication is unaffordable.” In Marlene Condon’s case, it’s clear what made her generic arthritis drug, hydroxychloroquine, so expensive. First, some background: At least six companies are approved by the FDA to create generic copies of the drug Condon takes, including three of the biggest in the U.S.: Mylan, Sandoz, and Teva. In theory, having so many companies that make the same drug should increase competition and bring the price down. And that’s exactly what happened for more than two decades.

But in recent years, several companies have stopped making older generic drugs such as hydroxychloroquine altogether because they said they couldn’t make enough profit selling them. For example, Teva, the largest generic drugmaker, told us it stopped making the arthritis drug in 2012 because of “profitability challenges.” Another company, West-Ward, ceased production of the drug in 2014.

When fewer companies make a drug, a new problem is created: If there are any hiccups with getting the drug’s “raw” ingredients, it can affect the entire supply in the U.S. That’s what happened with hydroxychloroquine, according to a representative from Sandoz, a pharmaceutical firm still making the drug. In 2014, a company that supplies the raw ingredient for the drug failed an FDA inspection and temporarily stopped making it—and soon there was a shortage. The two drugmakers that were able to still get the raw material then upped the price.

Condon’s arthritis drug is still expensive, and now she finds discount drug coupons online that cut the cost to less than $300. But it’s still a hardship.

What can protect us from sudden price hikes on old drugs? Apparently not the FDA. An agency spokesman, Christopher Kelly, told us the “FDA doesn’t have a way to control what a company ultimately decides to charge under our present authorities.” Kelly notes that the FDA pays particular attention to new generic drug applications from companies that would prevent shortages of medically necessary drugs. But “the pricing and decisions that companies make regarding pricing is an area currently outside FDA purview, and we have no enforcement capability in this area,” Kelly notes.

The rise of super-expensive, so-called specialty drugs is a new threat. Examples include the hepatitis C medications Sovaldi ($84,000 for a 12-week course of treatment) and Harvoni (up to $95,000) that usually target small groups of patients with less common conditions. But their astronomical prices are driving up overall costs for the healthcare system.

Currently, specialty drugs account for less than 1 percent of prescriptions in the U.S. but represent about one-third of total drug spending by consumers, employers, and the government, which all purchase medications, according to a recent report by the Congressional Research Service. And as drug companies invest heavily in those highly profitable products, the IMS estimates that by 2020 very expensive drugs are likely to constitute an even bigger chunk of drug spending.

More than half of the 56 medications approved by the FDA in 2015 were specialty drugs. And more than 900 biologic drugs are currently under development, according to PhRMA. “We’re all excited about these new technologies, but it’s not at all clear how we as a society are going to pay for it,” says Kevin Schulman, M.D., a professor of medicine and business administration at Duke University, where he is also director of the Center for Clinical and Genetic Economics and an associate director of the Duke Clinical Research Institute.

One thing is clear: Consumers’ costs will rise. Most Medicare prescription plans require patients to pay one-third or more of the costs of specialty drugs. And consumers still face higher insurance premiums and deductibles, says Eyles of AHIP. “The dramatic growth in this part of the marketplace is unsustainable,” he says. “Health plans just can’t absorb those costs indefinitely without making adjustments to premiums and benefits.”

Unfortunately, we can’t always count on competition among drugmakers to drive down prices, says Riggs from Johns Hopkins. Many specialty drugs are biologics, medications that start out as a living organism derived from animals or humans, or from microorganisms, such as bacteria or yeast. That makes them much more difficult to copy than conventional drugs.

To date, the FDA has approved only two “biosimilar” drugs, essentially versions of already existing biologics. Even as those drugs trickle onto the market, Riggs says he’s skeptical that biosimilar drugs would substantially lower prices; estimates predict price reductions between 20 and 40 percent, compared with about 80 percent for traditional generics.

The most obvious help pharmaceutical makers can provide is to charge less—or at least slow the pace of price increases. There is a precedent: Rising drug prices in the 1990s led to public outcry and congressional hearings. And fearing price controls, nine drug companies, led by Merck, made a pledge to keep price increases at or below increases in inflation.

“Pharma has a right to make a profit,” says Riley of the ACP, but it also has a “moral obligation” to be transparent about its pricing because it benefits greatly from government-funded research. “The American taxpayer has been providing the venture capital to fund their products,” he says. “The public deserves to realize a return on that investment in the form of medications they can afford.” But pharma­ceutical industry representatives think the focus on price alone is misguided and threatens “to squander our opportunity to usher in the next wave of medical progress,” says Campbell at PhRMA.

States are starting to fight back. This past June, Vermont passed the first legislation in the U.S. that requires drug companies to justify high costs and price increases, and to calculate the financial effect on insurance premiums with a select set of drugs. California is currently considering a similar bill.

You are outraged by rising drug costs, and we’ve listened. Because we do not accept money from the pharmaceutical industry, we can call it like it is. If a drug is too risky or a poor value, we are not afraid to say so. We want your voice to be heard by industry and government. We are advocating for a range of evidence-based solutions for lowering consumers’ out-of-pocket costs, ensuring access to essential medicines, and getting better value for our country’s prescription-drug spending—without sacrificing safety or effectiveness. See ConsumerReports.org/drugprices for more.