Ray Hanley, President and CEO, AFMC

Prescription drug costs are eating up health care budgets – public and private – and driving up premiums. According to the National Academy of State Health Policy (NASHP), 70 percent of Americans take at least one prescription medicine, with total costs exceeding $424 billion annually. There are no restrictions on what American drug makers can charge. The RAND Corporation reports U.S. consumers spend twice as much on drugs as Europeans.

Drug makers say price hikes reflect “clinical value” to patients and potential savings on other costs like hospitalizations. They say increases are needed to pay for researching new drugs. However, Consumer Reports says drug makers spent 13 to 16 percent of revenues on drug development and twice that amount on marketing.   

Well-publicized cases of enormous price increases are driving the political world to demand solutions. Drug makers blame insurance companies for passing on price hikes; insurance companies blame drug makers. Patients vent to their pharmacists who have virtually no control over drug prices. Meanwhile, insurers and their pharmacy benefit managers (PBMs) are collecting hefty volume rebates from manufacturers, pocketing the rebate and returning nothing to the patient. The exceptions started this month when Aetna and UnitedHealthcare pledged to pass on the rebates to patients at the pharmacy counter. 

Paying for prescription drugs falls heavily on individuals, employer health plans and public payers. Medicaid spends billions on outpatient drugs. Medicare pays for almost a third of all retail drugs, while forbidden from negotiating prices with drug makers – something that must change. The taxpayer also bears the cost burden for public employees and prison inmates to treat diseases like Hepatitis C, with cures costing $100,000 per patient.

Taxpayers pay for 38 percent of the basic science of drug development, according to the Journal of the American Medical Association. Drug companies use this research with no constraints on prices for drugs developed, in part, with public funds.

It’s getting harder to substitute expensive name-brand drugs for cheaper generics. Drug makers keep increasing generic prices and keep drugs out of the lower-cost generic market. With slight reformulation, they create a “new” pill or new delivery method and extend the patent for another 20 years. Insulin is almost 100 years old but there is no generic because manufacturers keep changing the formulation and getting new patents.

The NASHP offers three ways to bend our unsustainable prescription-drug cost curve. First, create a public-utility commission model to oversee in-state drug prices, forcing drug makers to justify increases. This would face well-funded opposition from drug makers. Then, permit states to have their own PBMs to negotiate prices and rebates. Powerhouse private PBMs would lobby hard to block state PBMs. Lastly, allow importation of drugs from countries where quality can be assured. This would face strong and well-funded opposition from manufacturers.

None of these options would be easy and could cause major changes to retail dispensing to patients. I think the states, working with physicians and academic institutions, will be the innovators in controlling drug costs. Meanwhile, our premiums and prescription costs will continue to rise.