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In the Nation's Interest

Top Healthcare Stories for 2016: Drug Prices

by COURTNEY BAIRD January 26, 2016

A recent survey by the Kaiser Family Foundation and New York Times found that 20 percent of working-age Americans, who have health insurance, reported having problems paying their medical bills over the last year. This comes as no surprise, as out-of-pocket spending on medical care has skyrocketed over the past 50 years. This group reported a wide range of consequences from their medical bills, including:

  • Delaying vacations or major household purchases (77%);
  • Spending less on food, clothing and basic household items (75%);
  • Using up most or all their savings (63%);
  • Taking an extra job or working more hours (42%);
  • Increasing their credit card debt (38%);
  • Borrowing money from family or friends (37%);
  • Changing their living situation (14%);
  • Seeking the aid of a charity (11%).

Similarly, NerdWallet recently found that medical bills are the number one cause of personal bankruptcy in the United States.

With such serious consequences plaguing even some Americans with health insurance, cost and access to care have become a leading health concern for many Americans in 2015.  Seventy-Seven percent of Americans say healthcare policy is one of the most important issues determining their vote in the 2016 election. With such pervasive concern, we can expect the candidates to focus even more on healthcare costs as we approach the election. Over the next few weeks, I’ll be writing on the big healthcare issues that are likely to be important in 2016. First up: drug prices.

Source: KFF/Peterson Foundation health spending explorer

The Issue:

When it comes to health care costs, polls continue to show that high drug prices are a leading concern among Americans. The Centers for Medicare and Medicaid Services (CMS) estimated that prescription drug spending increased by 12.6% in 2014 and 7.6% in 2015, and experts project that growth in spending will remain well above inflation over the next decade.  To put things in perspective, the United States already spends twice as much per capita on pharmaceuticals than the OECD average. Part of the recent increase is due to expensive new drugs for hepatitis C, which cost about $1,000 per pill and typically $84,000-$95,000 for a patient’s total treatment (though even at that price, studies show that they are more cost-effective than the prior alternative treatments, given that older medications produced debilitating side effects, required longer treatment and were not always successful). Other expensive drugs have also come on the market for cancer, multiple sclerosis and autoimmune disorders. Simultaneously, fewer older brand-name drugs went generic recently. The increase in drug spending is also due to greater prescription drug use by people with new (or more extensive) coverage due to the Affordable Care Act. Finally, some experts and politicians argue that pharmaceutical companies have been too aggressive in raising prices. While Americans generally appreciate market mechanisms for their efficient allocation of resources, some are questioning the magnitude of these price increases. Many Americans view the healthcare market differently than markets in other goods, because they are uncomfortable with the idea of someone dying because they couldn’t afford a life saving drug. 

Some of this criticism may be an overreaction to particular instances of price hikes that have received much media attention. Last September, Turing Pharmaceuticals acquired a 62-year-old drug that has been the mainstay for treating a life-threatening parasitic infection that affects AIDS and cancer patients. Overnight, Turing increased the price of the drug from $13.50 to $750 per pill, or 5,000%.(1)  This drug was not a new product of expensive research, but rather an old drug without substitutes that could not be produced by other companies. Some called it “pharmaceutical arbitrage.” Although this is potentially a huge problem, it is not the industry norm.  The chart below compares the consumer price index (CPI) for prescription drugs versus the overall CPI.

Source: BLS

As the chart shows, the prescription drug CPI has increased faster than the total CPI, but not to an extent indicating across-the-board price surges – especially given the rapid pace of innovation and introduction of new and beneficial drugs. Still, it raises the questions: Are these price levels affordable? Are they optimal for both the physical and financial health of our nation?

The Political Commentary:

In October, the Kaiser Family Foundation released a new poll in which 77% of people surveyed, regardless of political affiliation, reported that drug prices were their top health concern. In December the Senate Special Committee on Aging held a hearing to investigate the dramatic increase in drug prices, especially for older, off-patent drugs. The Senate will continue to hold hearings this year. Candidates on both sides of the aisle have expressed concern about rising drug costs, though Republicans and Democrats have pressed different ideas for reform.

Democratic candidates have made lowering drug prices a central part of their campaigns and have proposed very detailed measures, including:

  • Ban the practice of brand-name drug makers paying potential competitors to keep lower-priced generic substitutes off the market;
  • Lower barriers to the importation of lower-cost drugs from other countries;
  • Authorize the Department of Health and Human Services to negotiate drug prices with pharmaceutical companies to bring down costs for Medicare and Medicaid;
  • Eliminate tax deductions for direct-to-consumer advertising by drug companies and then use the tax revenue to simplify and make permanent the tax credit for research and development;
  • Cap the amount insurance companies can require their members to pay out-of-pocket for drug expenses.

Only a few of the Republican candidates have offered detailed proposals. Some of their ideas are:

  • Change the Food and Drug Administration’s (FDA's) regulatory approach to get new drugs approved more quickly;
  • Speed FDA approval for drugs that have been approved in other countries;
  • Modernize the FDA’s approval process so that it is in line with current medical knowledge;
  • Enhance a partnership between the National Institutes of Health, the FDA and biopharma companies focused on developing treatments for Type 2 diabetes, Alzheimer's, rheumatoid arthritis, and lupus.

CED believes that it is legitimate for new drugs to be protected by patents for a period of time, because strong financial incentives are necessary for companies to invest in costly research and development. This incentive for innovation has undoubtedly led to the creation of many lifesaving drugs. At the same time, it is important for Americans to be able to afford their medications without severe financial hardship. We believe that lower drug prices can best be achieved through competition among insurance plans serving value-conscious consumers, which would also make health care in general more broadly cost-effective.  We look forward to seeing more proposals from both sides of the aisle as we move closer to the election.

Tune in next week as we dive into another healthcare issue that will likely heat up this year: the impending mergers of major health insurance companies.

(1) There has also been media attention around recent steep price increases by other pharmaceutical companies, including Valeant Pharmaceuticals, Retrophin, Inc., and Rodelis Therapeutics