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Market-Based Solutions to Vital Economic Issues
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Jan 12, 2024

Untangling the Complex Web of Prescription Drug Pricing

Taming the rising costs of prescription drugs has been a focus of U.S. healthcare reform for the past decade. High drug prices limit patient access while also contributing to higher overall healthcare costs. Recently, issues of how drug list prices are set, who reaps the benefits, and how those costs are passed on to patients have come under increased scrutiny.

An expert panel at the 13th annual UNC Business of Healthcare Conference discussed the complex factors that lead to rising drug prices in the U.S. and the interventions that could help mitigate – or exacerbate – the problem.

How Are Drugs Priced?

Navigating the complexities of prescription drug pricing in the U.S. is challenging, primarily because it often involves a lack of transparency and understanding. The process is made even more intricate by the fact that third party entities largely determine prices behind closed doors, adding layers of opacity to an already complex system.

Drug pricing works differently in the U.S. than it does in other countries because of the way our health care system is structured. “We have a complex web where the pharmacy and the patient have almost no influence over the price of a drug,” said Frances Nahas, chief strategy officer at RedSail Technologies. “It is hard to understand if you try to apply a traditional retail model to drug pricing.”

Amanda Forys, a partner at Magnolia Market Access, said that costs for pharmaceuticals are still rising because of the way that pricing works behind the scenes. The final patient price for a prescription drug is highly dependent on negotiations between pharmacy benefit managers, or PBMs, and pharmaceutical companies. This price is also influenced by rebates and price concessions. PBMs are incentivized to negotiate higher rebates from pharmaceutical manufacturers, something that tends to drive up the list prices of medications, which then leads to higher out-of-pocket costs for patients.

Why Do Drugs Cost So Much?

All this complexity means that efforts to lower costs can inadvertently end up raising costs or disincentivizing innovation. The Inflation Reduction Act of 2022, for instance, gave Medicare the authority to negotiate prescription drug prices for the first time in history. While the panelists agreed this policy is a move in the right direction, Fauzea Hussain, vice president of public policy at McKesson, pointed out that it will shorten the amount of time a manufacturer has to get the return on investment for a new drug.

Under the Inflation Reduction Act, a pill or tablet medicine can be selected for price setting seven years after FDA approval, with the set price taking effect two years later. This leaves drug manufacturers only nine years after approval to make back their return on investment, much less than 13 to 14 years it usually takes before a generic is released. “So, those launch prices are only going to get higher and higher and higher,” said Hussain. “And until we can align the incentives, we’re going to continue to sort of fix a little bit here, fix a little bit there. But there’s going to be more dramatic consequences, which is higher prices and less access to innovation.”

Although the introduction of biosimilars – medications that are almost identical to an already FDA-approved biologic – would seem like a promising development for lowering drug costs, Forys pointed out that these are basically an expensive type of generic drug. While generics tend to cost 85% less than name-brand drugs, biosimilars tend to be discounted by 40% to 50% compared with the branded products. Meanwhile, contracting for biosimilar drugs has yet to be worked out. These hang-ups have meant that these drugs have not moved the dial as much as some might think, Forys says.

Will Legislation Help?

The panelists agreed there is not a clear-cut path to bring down the cost of prescriptions in the U.S., and they predicted that current bills focused on PBM transparency will likely fall short. Hussain said that the legislation being proposed essentially asks PBMs to be more transparent with plan sponsors on how they are developing formularies and how much they are spending on drugs while also providing clarity into rebate and pricing sessions. Although these bills do include moving from percentage-based PBM fees to flat fees, which is a step in the right direction, they do not adequately address loopholes and will not create significant savings for the patient.

The Federal Trade Commission began an investigation into PBMs and their integration in 2022 that could help identify misaligned incentives and business models that contribute to high prescription costs. This inquiry could provide information that could be acted on to lower drug costs. Forys added that legislation requiring drugmakers to submit health economic information could aid with head-to-head comparisons of similar drugs. This could create a path to pricing drugs based on clinical efficacy.

The intricate landscape of prescription drug pricing in the U.S., shaped by complex negotiations and obscured by third-party interventions, poses a formidable challenge to healthcare reform. While legislative efforts are underway, addressing the root causes of escalating drug costs will require more clarity about the pricing process and innovative policy solutions.

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