Clinical Review & Education

JAMA | Special Communication

The High Cost of Prescription Drugs in the United States

Origins and Prospects for Reform
Aaron S. Kesselheim, MD, JD, MPH; Jerry Avorn, MD; Ameet Sarpatwari, JD, PhD

Author Video Interview and

IMPORTANCE The increasing cost of prescription drugs in the United States has become a Author Audio Interview and
JAMA Report Video
source of concern for patients, prescribers, payers, and policy makers.
CME Quiz at
OBJECTIVES To review the origins and effects of high drug prices in the US market and to jamanetworkcme.com
consider policy options that could contain the cost of prescription drugs.

EVIDENCE We reviewed the peer-reviewed medical and health policy literature from January
2005 to July 2016 for articles addressing the sources of drug prices in the United States, the
justifications and consequences of high prices, and possible solutions.

FINDINGS Per capita prescription drug spending in the United States exceeds that in all other
countries, largely driven by brand-name drug prices that have been increasing in recent years
at rates far beyond the consumer price index. In 2013, per capita spending on prescription
drugs was $858 compared with an average of $400 for 19 other industrialized nations. In the
United States, prescription medications now comprise an estimated 17% of overall personal
health care services. The most important factor that allows manufacturers to set high drug
prices is market exclusivity, protected by monopoly rights awarded upon Food and Drug
Administration approval and by patents. The availability of generic drugs after this exclusivity
period is the main means of reducing prices in the United States, but access to them may be
delayed by numerous business and legal strategies. The primary counterweight against
excessive pricing during market exclusivity is the negotiating power of the payer, which is
currently constrained by several factors, including the requirement that most government
drug payment plans cover nearly all products. Another key contributor to drug spending is
physician prescribing choices when comparable alternatives are available at different costs.
Although prices are often justified by the high cost of drug development, there is no evidence
of an association between research and development costs and prices; rather, prescription
drugs are priced in the United States primarily on the basis of what the market will bear.

CONCLUSIONS AND RELEVANCE High drug prices are the result of the approach the United
States has taken to granting government-protected monopolies to drug manufacturers,
combined with coverage requirements imposed on government-funded drug benefits. The
most realistic short-term strategies to address high prices include enforcing more stringent
requirements for the award and extension of exclusivity rights; enhancing competition by
ensuring timely generic drug availability; providing greater opportunities for meaningful price
negotiation by governmental payers; generating more evidence about comparative Author Affiliations: Program On
Regulation, Therapeutics, And Law
cost-effectiveness of therapeutic alternatives; and more effectively educating patients, (PORTAL), Division of
prescribers, payers, and policy makers about these choices. Pharmacoepidemiology and
Pharmacoeconomics, Department of
Medicine, Brigham and Women’s
Hospital and Harvard Medical School,
Boston, Massachusetts.
Corresponding Author: Aaron S.
Kesselheim, MD, JD, MPH, Program
On Regulation, Therapeutics, And
Law (PORTAL), Division of
Pharmacoepidemiology and
Pharmacoeconomics, Department of
Medicine, Brigham and Women’s
Hospital and Harvard Medical School,
1620 Tremont St, Ste 3030,
Boston, MA 02120 (akesselheim
JAMA. 2016;316(8):858-871. doi:10.1001/jama.2016.11237 @partners.org).

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 The High Cost of Prescription Drugs in the United States Special Communication Clinical Review & Education

T
he increasing cost of prescription drugs in the United States to a different payer. In 2014, state Medicaid programs spent an es-
has become a source of growing concern for patients, pre- timated $1.1 billion (after discounts) on sofosbuvir,14 usually with no
scribers, payers, and policy makers. After relatively mod- additions to their budgets.
est growth after the expiration of patents on many widely used medi- It is therefore important to understand what factors have con-
cations from 2010 to 2012, medication expenditures have begun to tributed to recent medication price increases to lay the foundation
increase again, punctuated by several high-profile examples of very for considering options to ensure that prescription drug expendi-
costly new agents and sharp increases in the prices of some older tures are commensurate with their value, affordable within health
ones.1 Between 2013 and 2015, net spending on prescription drugs budgets, and equitable for all parties involved in these complex trans-
increased approximately 20% in the United States,2 outpacing a fore- actions. We examined the origins and effect of drug prices in the US
cast 11% increase in aggregate health care expenditures.3 Prescrip- market and considered available policy options related to these pay-
tion medications now comprise an estimated 17% of total health care ments. To do so, we reviewed literature published in peer-
costs,4 and prescription medication coverage constitutes 19% of em- reviewed medical and health policy journals from January 2005 to
ployer-based insurance benefits.5 Since the advent of the Medi- July 2016, searching for rigorous empirical articles addressing the
care drug benefit in 2006, government entities have paid for ap-
proximately 40% of the nation’s total retail prescription drug Figure 1. Per Capita Spending on Prescription Pharmaceuticals
expenditure.6 Certain expensive drug products are important clini-
cal breakthroughs and may even be relatively cost-effective; oth- United States
ers are merely costly, with prices that are difficult to justify in rela- Canada
tion to their actual contributions to patient outcomes. Japan

The United States has long spent more on prescription medi- Germany

cations than other countries.7 In 2013, per capita spending on pre- Switzerland
Belgium
scription drugs was $858 compared with an average of $400 for 19
France
advanced industrialized nations (Figure 1).8 List prices for the top
Austria
20 highest-revenue-grossing drugs were on average 3 times greater
Australia
in the United States than the United Kingdom.9 These disparities are
Finland
reduced but remain substantial even after accounting for undis-
Slovenia
closed discounts (“rebates”) that manufacturers offer to US pay-
Luxembourg
ers. In 2010, estimated average postrebate prices for medications
Spain
were 10% to 15% higher in the United States than in Canada, France, Korea
and Germany (Table 1).11 Sweden
In addition to their contribution to health care spending, in- Iceland
creasing drug costs have important clinical implications. Because Czech Republic
cost-containment efforts require patients to pay higher co- Estonia
payments for their medications, such increases can reduce the af- Denmark
fordability of prescribed regimens and thus patient adherence, lead- Poland
ing to negative health outcomes.12 However, some costly drugs may
0 100 200 300 400 500 600 700 800 900 1000
offer reasonable value. For example, sofosbuvir (Sovaldi) was found Expenditures on Prescription Drugs, US $
to be a cost-effective treatment of hepatitis C infection even at its
2013 launch price of $84 000 per 12-week course in certain pa- Data are derived from the Organisation for Economic Cooperation and
tient populations when viewed from a patient’s lifetime horizon and Development (OECD), reflect expenditures in 2013 (or the nearest year), and
include all countries for which values were reported. Data used with permission
a societal perspective.13 Payers must pay for this treatment up-
from OECD, Health at a Glance 2015: OECD Indicators, 2015.8
front, though, with health care benefits often accruing decades later

Table 1. Examples of Country-Specific Average Drug Prices for Top-Selling Drugs in 2015

Monthly Price, US $
United States
Nondis- Estimated
counted Discounted
Drug Price Price Canada France Germany
Adalimumab (Humira), 40 mg biweekly 3430.82 2504.50 1164.32 981.79 1749.26
Fluticasone/salmeterol (Advair), 250 μg, 309.60 154.80 74.12 34.52 37.71
50 μg daily
Insulin glargine (Lantus), 50 insulin 372.75 186.38 67.00 46.60 60.90
units daily
Rosuvastatin (Crestor), 10 mg daily 216.00 86.40 32.10 19.80 40.50
Sitagliptin (Januvia), 100 mg daily 330.60 168.61 68.10 35.40 39.00
Sofosbuvir (Sovaldi), 400 mg daily 30 000.00 17 700.00 14 943.30 16 088.40 17 093.70
Trastuzumab (Herceptin), 5593.47 4754.45 2527.97 3185.87 Source: Bloomberg Business report
450 mg every 3 wk and SSR Health.10

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 Clinical Review & Education Special Communication The High Cost of Prescription Drugs in the United States

determinants of drug prices in the United States, the justifications lions of individuals in the United States also now have high costs.
and consequences of these prices, and possible policy options. For example, many new oncology drugs enter the market at a price
exceeding $100 000 per course of therapy.20 Even the average price
of insulin has increased 300% from 2002 to 2013.21
Although brand-name drugs account for the greatest increase
Brand-Name vs Generic Drugs
in prescription drug expenditures, another area that has captured
The primary reason for increasing drug spending is the high price of the attention of the public and of policy makers has been the sharp
branded products protected by market exclusivity provisions granted increase in the costs of some older generic drugs. In 2015, Turing
by the US Patent and Trademark Office and the Food and Drug Ad- Pharmaceuticals raised the price of pyrimethamine (Daraprim), a
ministration (FDA) (Table 2). Although brand-name drugs com- 63-year-old treatment for toxoplasmosis, by 5500%, from $13.50
prise only 10% of all dispensed prescriptions in the United States, to $750 a pill.22 The company was able to set the high price despite
they account for 72% of drug spending.15 Between 2008 and 2015, the absence of any patent protection because no other competing
prices for the most commonly used brand-name drugs increased manufacturer was licensed to market the drug in the United States.
164%, far in excess of the consumer price index (12%).16,17 The an- Significant increases in the prices of other older drugs include iso-
nual cost of a growing number of “specialty drugs”—high-cost, proterenol (2500%), nitroprusside (1700%), and digoxin (637%).
often injectable biologic medications such as eculizumab (Soliris), Even though the prices of most generic drug products have re-
pralatrexate (Folotyn), and elosulfase alfa (Vimizim)—exceeds mained stable between 2008 and 2015, those of almost 400
$250 000 per patient. (approximately 2% of the sample investigated) increased by more
Such high prices have historically been limited to brand-name than 1000%.23
drugs that treat rare conditions. For example, the price of alglucer-
ase (Cerezyme), a treatment for Gaucher disease, was $150 000 per
patient per year when the drug was launched in 1991 (it is now
Sources of High Drug Prices in the United States
$300 000)18,19; the price of ivacaftor (Kalydeco), indicated for a small
subset of patients with cystic fibrosis, is likewise currently approxi- Drug prices are higher in the United States than in the rest of the in-
mately $300 000 per patient per year. Both drugs are generally re- dustrialized world because, unlike that in nearly every other ad-
ceived for life. However, drugs that treat conditions affecting mil- vanced nation, the US health care system allows manufacturers to
set their own price for a given product.11 In contrast, in countries with
Table 2. Key Terminology and Examples of Therapeutic Products
national health insurance systems, a delegated body negotiates drug
prices or rejects coverage of products if the price demanded by the
Term Definition Examples manufacturer is excessive in light of the benefit provided (Table 3);
Brand-name A medication usually sold by the original Nexium,
drug sponsor of the application for regulatory Crestor, manufacturers may then decide to offer the drug at a lower price.24
approval Prilosec In England and Wales, for example, the National Institute for Health
Generic A version of a brand-name small-molecule Omeprazole, and Care Excellence considers whether a new drug passes a cost-
drug drug manufactured by a different supplier. simvastatin
Generic drugs can be certified as bioequivalent utility threshold—usually between £20 000 and £30 000 ($25 000-
by the FDA and substituted for brand-name $40 000) per quality-adjusted life-year added—before recommend-
drugs by a pharmacist.
ing it for coverage by the National Health Service.25 Although prices
Biologic An often protein-based therapeutic product Filgrastim,
drug that is distinguished by its molecular epoetin alfa can vary widely around the world26 and have also increased faster
complexity than member states’ gross domestic products in recent years in
Specialty A drug designated by a payer for special Sovaldi,
drug attention, often because of its high price, but Praluent,
Europe,27 US drug prices per capita still substantially outpace those
also potentially because of the need for Soliris in other settings.10
distinctive handling or particular patient
monitoring Drug companies’ ability to maintain high prices in the United
States is based on 2 market forces: protection from competition and
Abbreviation: FDA, Food and Drug Administration.
negotiating power.

Table 3. Approaches to Drug Pricing in Selected Countries

Australia Canada Germany United Kingdom

National Pharmaceutical Benefits Patented Medicines Prices Canadian Agency for Federal Joint Committee or National Institute for
organization Advisory Committee Review Board Drugs and Technology Institute for Quality and Health and Clinical
in Healthcare Efficiency in Healthcare Excellence
Remit Public payers All payers Public payers except All insurers National Health Service
in Quebec (noncancer
drugs)
Review Comparative effectiveness, Therapeutic innovation; Comparative Comparative benefit Clinical effectiveness
criteria safety, and comparative pricing with effectiveness, safety, and cost-effectiveness
cost-effectiveness; respect to France, Germany, and cost-effectiveness;
projected usage and Italy, Sweden, United patient experiences
overall costs to the health Kingdom, and United States
care system
Decision Coverage (yes, no, limited) Price reductions or rebates Coverage Price setting after first year Coverage
on the market
Binding Yes Yes No Yes Yes

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 The High Cost of Prescription Drugs in the United States Special Communication Clinical Review & Education

Competition in the Pharmaceutical Marketplace remove many patients with good drug coverage from considering
The most important factor that allows manufacturers to set high drug the price of the medications they “purchase.”
prices for brand-name drugs is market exclusivity,28 which arises from The only form of competition that consistently and substan-
2 forms of legal protection against competition. Together, these fac- tially decreases prescription drug prices occurs with the availability
tors generate government-granted monopoly rights for a defined of generic drugs, which emerge after the monopoly period ends. With
period. Initial regulatory exclusivity is awarded at FDA approval. New FDA approval, these products can be substituted for bioequivalent
small-molecule drug products automatically earn a guaranteed pe- brand-name drugs by the pharmacist under state drug product se-
riod of 5 to 7 years before a generic competitor can be sold,29 and lection laws. In states with less restrictive drug product selection laws,
new biologic drugs are protected from competition for 12 years.30 generic products comprise up to 90% of a drug’s sales within a year
The second type of market protection is patent-related exclusivity after full generic entry.48 Drug prices decline to approximately
because manufacturers can receive patents lasting 20 years or more 55% of brand-name drug prices with 2 generic manufacturers
for their inventions.31 The US Patent and Trademark Office issues this making the product, 33% with 5 manufacturers, and 13% with 15
intellectual property right—originally written into the US Constitu- manufacturers.49 In 2012, the US Government Accountability Of-
tion to encourage innovation—for inventions that are “novel,” “use- fice estimated that generic drugs accounted for approximately 86%
ful,” and “non-obvious.”32 of all filled prescriptions and saved the US health care system $1 tril-
Although regulatory exclusivities often set a lower-bound du- lion during the previous decade.50
ration for market exclusivity, the actual length of such exclusivity is Entry of generic drugs into the market, however, is often de-
most commonly dictated by patent time. Because initial patents pro- layed. For pharmaceutical manufacturers, “product life-cycle man-
tecting the active ingredient are usually obtained when a drug is first agement” involves preventing generic competition and maintain-
synthesized, and the clinical trial and FDA review process usually ing high prices by extending a drug’s market exclusivity. This can be
takes on average 6 to 8 years, only half of the patent period may be achieved by obtaining additional patents on other aspects of a drug,
left by the drug approval date.33 However, a company can apply to including its coating, salt moiety, formulation,51 and method of
have this period extended by up to 5 years to account for the time administration.52,53 In an example of this strategy, the manufac-
spent during regulatory review and half the time in clinical trials (“pat- turer of the proton-pump inhibitor omeprazole (Prilosec) received
ent term restoration”), to a maximum of 14 years.34 In addition, spon- an additional patent on the drug’s S-isomer, despite the absence of
sors can also earn 6 more months of market exclusivity by testing any compelling pharmacologic difference. This led to the creation
their products in children,35 an incentive earned by more than 200 of esomeprazole (Nexium) as a newly branded product that was sold
drugs since legislation created the pediatric exclusivity program in for $4 a pill, a 600% markup over the over-the-counter version of
1997.36 Overall, the median length of postapproval market exclu- omeprazole.54
sivity is 12.5 years for widely used drugs (interquartile range, 8.5- Because permissive US Patent and Trademark Office stan-
14.8 years) and 14.5 years for highly innovative, first-in-class drugs dards for novelty or usefulness make it relatively easy to patent
(interquartile range, 13.3-15.8 years).37,38 many nontherapeutic aspects of a drug, companies can strategi-
During that exclusivity period, the availability of treatment al- cally patent small changes and try to influence prescribers and
ternatives might be expected to exert pressure to reduce the price patients to transition from one linked product to the next, some-
of a drug.39 For example, approximately a year after Gilead intro- times discontinuing production of older versions of the drug. For
duced sofosbuvir, AbbVie received approval for a 4-drug, direct- their part, generic manufacturers have engaged in litigation with
acting, antiviral regimen that achieved similar clinical response rates brand-name manufacturers that could lead to the patents being
against the hepatitis C virus, leading some payers to negotiate invalidated, but these suits are frequently settled.55 Historically,
sofosbuvir discounts of more than 40%.40 brand-name manufacturers have offered substantial financial
In practice, however, competition between 2 or more brand- inducements as part of these settlements to generic manufactur-
name manufacturers selling drugs in the same class does not usu- ers to delay or even abort generic introduction.48 Settlements
ally result in substantial price reductions.41 For example, of the 8 involving large cash transfers are called “pay for delay”; for
cholesterol-lowering statins that the FDA has approved, 2 have example, in a patent challenge case related to the antibiotic cipro-
until recently remained patented: rosuvastatin (Crestor) and floxacin (Cipro), the potential generic manufacturer received
pitavastatin (Livalo). Despite the similar performance of these upfront and quarterly payments totaling $398 million as part of
drugs in decreasing low-density lipoprotein cholesterol to other the settlement and agreed to wait until patent expiration to mar-
off-patent statins, 42 the price of rosuvastatin increased 91% ket its product.56
between 2007 and 2012, from $112 to $214 per prescription.43 Other factors affect the availability of generic versions of
During the same time, the price of the comparably effective ator- brand-name products.57 Application backlogs at the FDA Office of
vastatin decreased from $127 to $26 per prescription owing to the Generic Drugs have meant delays of 3-4 years before a generic
expiration of its patent protection in 2011.44 Similar effects have manufacturer can receive approval to make a drug not protected
been observed for other drug classes.45 by any patents. After the 2012 FDA Safety and Innovation Act
One factor that undermines competition among treatment al- required user fees to be paid by generic drug manufacturers for
ternatives is the separate roles of patients, prescribers, and payers: such review, the FDA now reports being able to provide an initial
physicians write prescriptions, pharmacists sell medications, and pa- response in approximately 15 months.58 Some innovator compa-
tients or their insurers pay for them.46 This separation has tradition- nies have refused to provide the samples of their products needed
ally insulated physicians from knowing about drug prices or consid- for the potential generic manufacturers to conduct bioequivalence
ering those prices in their clinical decision making47 and can similarly studies, slowing or blocking the process.59 Direct competition

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 Clinical Review & Education Special Communication The High Cost of Prescription Drugs in the United States

among biologic drugs has been rare because no pathway existed Several features of the US marketplace constrain the ability
to facilitate entry of competing products. In 2010, the Biologics of public and private payers to negotiate lower drug prices. Medi-
Price Competition and Innovation Act created the framework care, for example, accounts for 29% of the nation’s prescription
for such an expedited pathway for so-called follow-on biologics, drug expenditure,72 but federal law prevents it from leveraging its
versions of originator biologic drugs made by different considerable purchasing power to secure lower drug prices while
manufacturers,60 but has led to only 2 follow-on biologic approv- requiring it to provide broad coverage, including all products in
als in the last 5 years. some therapeutic categories, such as oncology. Based in part on
Once generic access to the market has been achieved, the considerable lobbying and arguments that government negotiat-
number of generic manufacturers for a particular small-molecule ing power could decrease revenues for the pharmaceutical
(nonbiologic) product depends on a variety of factors, including the industry,73 Congress included a provision in the law that created
availability of raw ingredients, mergers in the industry, and the rela- the Medicare drug benefit program, prohibiting the Centers for
tive attractiveness of a particular market. In the case of pyrimeth- Medicare & Medicaid Services from negotiating drug prices or
amine, the small number of patients with toxoplasmosis in the from interfering with negotiations between individual Part D ven-
United States did not attract other potential generic competitors, dors and drug companies.74 This made prescription drugs under
leaving Turing with a monopoly that it was able to exploit with a Part D one of the few aspects of health care for which Centers for
50-fold price increase. Medicare & Medicaid Services does not negotiate or set prices.
Notwithstanding high generic drug use rates, problems at the Similarly, state Medicaid programs are generally required by law
state level can diminish the capacity of generic drugs to help con- to cover all FDA-approved drugs, even if a particular medication has
tain costs. Thirty states have drug product selection laws that al- alternatives that are safer, are more effective, or offer greater eco-
low but do not require pharmacists to perform generic substitu- nomic value. However, Medicaid is also entitled to receive a rebate
tion; in 26 states, pharmacists must secure patient consent before of at least 23.1% of the average manufacturer price for most branded
substituting a generic version of the same molecule.61 The latter ob- medications and is protected from price increases exceeding
ligation was estimated to have cost Medicaid $19.8 million in 2006 inflation.75,76 In contrast, the Veterans Health Administration, which
for simvastatin (Zocor) alone.62 In addition, all states allow physi- provides health care for veterans and their dependents,77 is en-
cians to issue dispense-as-written prescriptions that pharmacists can- titled to a rebate of at least 24% of the average price and also has
not substitute with a generic product, further contributing to hun- broad authority to exclude products from its formulary. As a result,
dreds of millions of dollars in spending on branded drugs for which particularly for drugs for which formulary alternatives are avail-
generic versions are available.63 able, it achieves additional discounts below what the Medicare drug
Even well-intentioned government policies can inadvertently program and state Medicaid plans pay.78-81
reduce generic competition. In attempting to require formal ap- Similar issues affect the private sector. In the 1990s, prescription
proval of drugs predating the modern new drug review process ini- benefit management companies became prominent intermediaries
tiated in the 1960s, the FDA made it possible for some companies whose role would be to help employers or insurers promote appropri-
to assert market exclusivity and demand high prices for once- ate prescription drug use and decrease its cost. There have been some
inexpensive old drugs, including colchicine, which underwent a recent isolated examples in which pharmacy benefit managers have
5000% price increase.64 Similarly, a government-mandated switch done so for specific drugs (most prominently for drugs treating hepa-
to chlorofluorocarbon-free inhalers for patients with asthma led to titis C or the pro-protein convertase subtilisin/kexin type 9 inhibitors
new, far costlier patented chlorofluorocarbon-free spray formula- to reduce cholesterol levels).82 However, aggressive price negotiation
tions, even though the constituent medications had been off pat- is not the norm. This is not surprising because part of pharmacy ben-
ent for a long time.65,66 efit managers’ annual fees are based on a given payer’s spending on
drugs.Althoughthedetailsofsuchpaymentsarerarelydisclosed,when
The Role of Public and Private Payers oneofthelargestpharmacybenefitmanagersbecameapubliclytraded
During a drug’s market exclusivity period, the primary counter- entity, it was obliged to disclose its business model, much of which de-
weight against excessive pricing is the negotiating power of the pended on payments from drug makers for shifting market share to
payer. Among public payers, Medicare covers approximately 40 their products from others in its class.83
million adults, most aged 65 years and older, for outpatient (Part Even large, self-insured employers have avoided aggressive at-
D) and inpatient (Part B) drug costs.67 Medicaid, the federal- and tempts to negotiate prices directly with drug suppliers or to curtail
state-funded health insurance program for low-income individu- their formularies to avoid paying for prescriptions that are less cost-
als, covers prescription drug costs for another 72 million effective. A common reason for this reluctance is that because phar-
Americans.68 Other public payers include the Veterans Health macy benefits have traditionally comprised less than 15% of health
Administration, the Department of Defense health care system, care budgets, the organizational concern that could be caused by
state prison systems, and the federal employee health benefits denying payment to an employee or retiree for a particular drug was
program. In contrast, private payers provide insurance coverage seen as overwhelming the modest savings that could be realized.
to 177 million persons in the United States.69 This is often accom- This may change as drug prices increase, particularly for widely used
plished through 3 large pharmaceutical benefits management products, and as drug spending consumes a greater share of health
companies: Express Scripts, Caremark, and UnitedHealthcare.70 budgets. As illustrated in Figure 2, the beginnings of such a trend
Approximately 29 million Americans have no public or private appear present for retail spending on drugs (excluding hospital- or
prescription drug coverage—a rate far higher than in nearly all physician-administered products) for all major payers except the Vet-
other industrialized countries.71 erans Health Administration.

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 The High Cost of Prescription Drugs in the United States Special Communication Clinical Review & Education

cade. Given the evidence of the central role played by publicly funded
Justifications for High Drug Prices research in generating discoveries that lead to new therapeutic ap-
proaches, this is one obvious area of potential intervention to ad-
The pharmaceutical industry has maintained that high drug prices dress concerns about threats to innovation in drug discovery.
reflect the research and development costs a company incurred to Thus, there is little evidence of an association between re-
develop the drug, are necessary to pay for future research costs to search and development costs and drug prices93; rather, prescrip-
develop new drugs, or both. It is true that industry often makes ex- tion drugs are priced in the United States primarily on the basis of
pensive investments in drug development and commercialization, what the market will bear. This explanation also helps to account for
particularly through late-stage clinical trials, which can be costly.84 several high-profile case studies, including high-priced new branded
These assertions have been used to justify high prices on the grounds products94 and exorbitantly priced generic drugs described above.95
that if drug prices are constrained, the pipeline of new medications In preparation for recent hearings on this topic, the US House Com-
will be adversely affected. Some economic analyses favored by the mittee on Oversight and Government Reform subpoenaed internal
pharmaceutical industry contend that it costs $2.6 billion to de- correspondence from Turing and Valeant Pharmaceuticals, which had
velop a new drug that makes it to market.85 However, the rigor of sharply increased the prices of older drugs the companies had ac-
this widely cited number has been disputed.86,87 quired. The investigation revealed, for example, that Turing re-
A number of factors weigh against these rationales for high drug ceived “no pushback from payors” when it increased “Chenodal price
prices. First, important innovation that leads to new drug products 5x... [Thiola] price 21x... [and Daraprim] price 43x.”96 Similarly,
is often performed in academic institutions and supported by in- Gilead spent $11 billion to purchase sofosbuvir from Pharmasset, a
vestment from public sources such as the National Institutes of
Health. A recent analysis of the most transformative drugs of the last Figure 2. Payer-Specific Retail Spending on Prescription Drugs Over Time
25 years found that more than half of the 26 products or product in the United States
classes identified had their origins in publicly funded research in such
nonprofit centers.88 Other analyses have highlighted the impor- % Total Health Care Spending for a Given Payer 16

tance of small companies, many funded by venture capital.89,90 14

Private insurance
These biotech startups frequently take early-stage drug develop-
12
ment research that may have its origins in academic laboratories and Medicare
10 Total
continue it until the product and the company can be acquired by a
large manufacturer, as occurred with sofosbuvir. 8 Department of Veterans
Affairs
Arguments in defense of maintaining high drug prices to pro-
6
tect the strength of the drug industry misstate its vulnerability. The Medicaid
biotechnology and pharmaceutical sectors have for years been 4
Department of Defense
among the very best-performing sectors in the US economy. The pro- 2
portion of revenue of large pharmaceutical companies that is in-
0
vested in research and development is just 10% to 20% (Table 4); 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
if only innovative product development is considered, that propor- Year

tion is considerably lower.91 The contention that high prescription

Data are derived from the Henry J. Kaiser Family Foundation and National
drug spending in the United States is required to spur domestic in- Health Expenditure Accounts, official estimates of payer- and category-specific
novation has not been borne out in several analyses.92 A more rel- health care expenditures in the United States, published annually by the
evant policy opportunity would be to address the stringency of con- Centers for Medicare & Medicaid Services. Values incorporate estimated
gressional funding for the National Institutes of Health, such that its rebates. The reduction for Medicaid in 2006 reflects the adoption of much of
these costs by the Medicare drug benefit program.
budget has barely kept up with inflation for most of the last de-

Table 4. Sales and Research and Development Expenditures of the 10 Largest Pharmaceutical Companies
in 2014a

$ (in Millions) Research and

a
Sources: List secured from IMS
Research and Development, Health. Sales and research and
Ranking Company Total Sales Development % Total Sales expenditure data compiled from
1 Novartis 57 996 9943 17 company annual reports and 10-K
2 Pfizer 49 605 8393 17 filings with the Securities and
Exchange Commission.
3 Sanofi 41 114 5873 14 b
IMS Health List–ranked companies
4 Roche 48 039 10 015 21 specifically by pharmaceutical sales.
5 Merck 42 237 7180 17 However, because not all companies
reported both sales and research
6 Johnson & Johnsonb 74 331 8494 11
and development costs specifically
7 AstraZeneca 26 095 5579 21 for pharmaceuticals, aggregate
8 GlaxoSmithKline 35 825 5372 15 sales and research and
developments costs were used.
9 Tevac 20 272 1488 7
c
Teva principally manufactures
10 Gilead 24 474 2854 12
generic drugs.

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 Clinical Review & Education Special Communication The High Cost of Prescription Drugs in the United States

availability of new medications. But providing them with large in-

Box. Possible Strategies to Limit the Effects of High Drug Prices centives to do the opposite is counterproductive.

Federal
Patenting: Limit secondary patents for trivial changes of a
patented molecule (eg, heightening patenting standards to Clinical Consequences of High Drug Prices
require showing enhanced safety or effectiveness over previously
patented version of the molecule) The high cost of prescription drugs in the United States has clinical
as well as economic consequences.100,101 Even though more Ameri-
Anticompetitive strategies: Aggressively police anticompetitive
business practices (eg, pay for delay, product hopping) cans have drug coverage as a result of the Medicare drug benefit
plan and the Patient Protection and Affordable Care Act, cost-
Price negotiation: Enable Medicare to negotiate drug prices for
individual Part D plans and to exclude coverage for expensive containment strategies in recent years have shifted an increasing
products that add limited clinical benefit; experiment with share of drug expenses to patients.102 Private insurers have in-
value-based drug pricing and rational prescribing reimbursement creased deductibles103 and most co-payments, and added a new
models for Medicare payment tier for certain specialty drugs in which patients must pay
Addressing extraordinary shortage or pricing problems: Invoke coinsurance—often between 20% and 33% of the total drug price—
“march-in” rights or government royalty-free license rights on rather than a simple co-payment.104 Although such cost-shifting
excessively costly products that were developed in large part with measures have helped “bend the cost curve” for employers and pay-
government funding
ers, they can reduce use of effective medications.105,106 Almost a
Generic drug policies: Allocate greater resources at the FDA for quarter of 648 respondents to a 2015 poll reported that they or an-
reviewing generic drug applications to facilitate competition; in
other family member did not fill a prescription in the last year be-
the event of a shortage of manufacturers, accelerate review of
cause of cost.107 In other studies, patients who were prescribed a
drug applications and authorize temporary drug importation from
well-regulated pharmaceutical markets; mandate brand-name costly branded product rather than a more affordable generic
drug sample sharing with generic manufacturers alternative were found to adhere to their regimen less well than those
Follow-on biologic policies: Allocate greater resources to the receiving a similar generic drug 12 and to have worse health
FDA for reviewing follow-on biologic applications; promulgate outcomes.108 Nonadherence due to all causes has been estimated
product-specific guidance on demonstrating interchangeability; to contribute to $105 billion in avoidable health care costs annually.109
conduct rigorous postapproval surveillance of follow-on biologics In some cases, manufacturers have attempted to circumvent
to ensure the safety and effectiveness of these products higher co-payments by providing patients with coupons that reim-
State burse their out-of-pocket expenses.110 Coupons can be useful for pa-
Drug product selection laws: Convert permissive generic tients with no other option, but they leave the insurer obliged to pay
substitution policies to mandatory substitution policies; eliminate the much larger amount of each prescription’s costs, thereby in-
patient consent requirements for generic substitution; limit creasing health care spending. This approach has become com-
“carve-outs” that make it more difficult to substitute in certain
mon for branded drugs that have comparable but much less expen-
clinical categories (eg, antiepileptics, follow-on biologics)
sive alternatives.111
Price negotiation: Test value-based drug pricing and rational
Faced with fixed health care budgets, states with higher drug
prescribing reimbursement models for Medicaid
costs for their Medicaid programs have had to reduce other ser-
Health Care Organizations vices or increase health care eligibility requirements.112 Several state
Price negotiation: Develop value-based formularies and Medicaid programs, for example, have imposed nonevidence-
co-payment plans that encourage patients to make better
based policies to restrict sofosbuvir, including denying coverage to
choices but do not penalize them and hamper adherence
users of alcohol or other drugs.113,114
Information dissemination: Initiate academic detailing programs
to market the best comparative evidence to prescribers and
policy makers
Possible Solutions
Various approaches have been proposed to mitigate the effects of
small biotechnology firm that developed the drug, based in part increasing drug prices in the United States while still providing an
on federally funded research led by an investigator at Emory adequate return on investment and maintaining incentives for mean-
University.97 Gilead recouped almost all of this cost in the first year ingful innovation by pharmaceutical and biotechnology companies
that sofosbuvir was on the market, recording sales of $10.3 billion (Box).115,116 These approaches include improving the competitive-
in 2014.98 In December 2015, the US Senate Committee on Fi- ness of the marketplace, enhancing government involvement in ne-
nance released a detailed report based on its access to internal com- gotiating pharmaceutical prices, and providing more guidance for
pany documents on Gilead’s strategies to maximize the prices it could physicians and consumers in making medication use decisions.
charge for both that drug and its planned successor, which the com-
pany also owned.99 In the current system for drug payment in the Improving Competition
United States, few options exist to counter this approach. One possible strategy to contain drug costs would be better over-
Companies should of course be rewarded fairly for the re- sight of approaches used by manufacturers to extend market ex-
search innovations they make that help generate new drug prod- clusivity. For example, changes in how the US Patent and Trade-
ucts and for their costly trial work that facilitates the assessment and mark Office interprets novelty and non-obviousness when issuing

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 The High Cost of Prescription Drugs in the United States Special Communication Clinical Review & Education

patents could help avoid new secondary patents based on clini- drug.133 Reciprocal recognition of generic products already ap-
cally irrelevant changes to active drug products. In recent years, a proved by other stringent regulatory agencies (such as the Euro-
series of Supreme Court decisions have forced the US Patent and pean Medicines Agency) could make many well-manufactured medi-
Trademark Office and federal courts to reconsider their previous per- cations available to the US market even before the current FDA
missive approach to the patentability of DNA sequences,117 combi- approval backlog is fully addressed.
nation products,118 diagnostic tests,119 and business methods.120 Re- At the state level, laws permitting substitution of clinically simi-
examination of whether patents should be awarded to drug isomers lar drugs within the same class (ie, therapeutic as opposed to ge-
or crystal structures should follow in cases in which there is no evi- neric substitution) in carefully selected circumstances could also be
dence of any clinical difference in drug effect. In India, current policy an effective means of providing patients with the same clinical ben-
requires that a company proposing to patent a modification to a pre- efit at lower cost. For example, given data on the interchangeabil-
viously patented molecule show enhanced effectiveness.121 ity of different proton-pump inhibitors or different versions of the
Better enforcement of existing laws and policies could also help same steroid cream, therapeutic substitution could allow patients
contain drug costs. In 2013, the Supreme Court ruled that so-called prescribed a brand-name drug to receive a therapeutically equiva-
pay-for-delay settlements with generic manufacturers could con- lent generic drug in its place even if no exact generic equivalent is
stitute an antitrust violation.122 Nonetheless, numerous noncash- yet available.134
based settlements remain legal.123 In one controversial case, For- In the increasingly important area of biologic products, which
est Laboratories introduced an extended-release version of its account for a growing proportion of drug expenditures, enhanced
Alzheimer disease drug memantine (Namenda) shortly before the competition from clinically equivalent follow-on biologic products
end of the market exclusivity period for the original product, which could help reduce prices for originator biologic products that lack
it then attempted to discontinue.124 This “product hop” would have patents or other market exclusivities.135,136 Price reductions caused
forced patients receiving the original drug to switch to the extended- by follow-on biologics are unlikely to reach the same levels as ge-
release product before competition from generic products oc- neric small-molecule drugs because the former are costlier to manu-
curred. Litigation filed by the New York Attorney General helped un- facture, and fewer companies have the capacity to develop them.
dermine the strategy, averting an estimated $6 billion dollars in Because most follow-on biologics will not be completely identical
increased Medicare drug spending.125 Stronger government over- to the originator biologic, these products may also require greater
sight of antitrust or inappropriate business practices intended to stifle investment in communication to encourage use by physicians when
competition can avert similar episodes. Greater rigor in this area could appropriate. Nonetheless, meaningful price reductions are still pos-
actually increase important innovation because it would require sible. The first follow-on biologic introduced into the US market in
manufacturers to earn revenue from new medications that offer a September 2015, a biosimilar version of the colony-stimulating fac-
clinical advantage, rather than from simply extending patent pro- tor filgrastim (Neupogen), offered a 15% discount on the origina-
tection on existing products. tor’s price.137 In the European Union, in which 21 follow-on biolog-
Another approach to reduce costs would be to decrease indus- ics are available,138 the median price savings for biosimilar epoetin
try expenses. Reviews have pointed to the increasing expendi- alfa (Epogen) is 35%, ranging from 6% to 79%, depending on the
tures for drug research and development, with the suggestion that country and its price-negotiating power.139 Further follow-on bio-
steps be taken to make companies’ investments more efficient.126 logic approvals can be facilitated with greater guidance from the FDA
A second area of spending that could be limited is in drug promo- about what levels of similarity will be required to obtain approval via
tion, particularly related to direct-to-consumer advertising,127 which the new Biologics Price Competition and Innovation Act pathway.
is permitted only in the United States and New Zealand among high- A strong postmarket safety surveillance system could assess safety
income nations.128,129 However, recent expansions of manufactur- and effectiveness continually, particularly related to the possibility
ers’ commercial speech rights under the First Amendment dim the that patients will switch among different approved follow-on bio-
prospects of legislative restrictions in this area and in fact could lead logic products.
to an increase in promotional spending on marketing of products for
non–FDA-approved (“off-label”) indications.130 Government Efforts to Reduce Drug Prices
Increased attention to the generic drug marketplace is like- In theory, the most effective way for a government to reduce drug
wise needed.131 Legislation recently proposed in Congress would for- prices would be for it to set them for the entire marketplace, as cen-
bid brand-name manufacturers from refusing to share samples of tral governments do in countries such as Sweden,140 or to engage
their products with generic drug manufacturers for necessary bio- in international reference pricing and set prices at levels similar to
equivalence studies.132 Dedication of greater resources to the Of- those of other countries. Taking such a step in the United States
fice of Generic Drugs in the first renewal of generic drug user fees would have major marketplace ramifications and is not at present
expected in 2017 could further reduce application review times. In politically feasible, in part because of the power of the pharmaceu-
addition to addressing its backlog, the FDA has established an “ex- tical lobby in Washington, DC.141 Nonetheless, the US government
press lane” for potential first generics that facilitates their prompt can still take steps to help control excessive drug prices142,143 by re-
authorization.58 To extend this progress, the FDA could be autho- assessing some existing unusual and overly permissive policies.
rized to accelerate its review of new generic products and tempo- First, although the likelihood of legislative change is slim in the
rarily authorize large-scale imports from Canada, Europe, and other current political environment, Congress could authorize Medicare
well-regulated pharmaceutical markets when the number of ge- to negotiate the prices of drugs paid for by Medicare Part D plans,
neric suppliers of a drug decreases below a critical level; this is cur- as it does for nearly all other goods and services. Such a change
rently permitted when the FDA identifies a shortage of a particular would require reorganization of the Medicare drug benefit, which

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 Clinical Review & Education Special Communication The High Cost of Prescription Drugs in the United States

is currently managed through decentralized Part D plan adminis- tein cholesterol–lowering outcomes did not reach the levels ob-
trators. Greater savings would be possible if Medicare and Medic- served in clinical trials of these drugs.163 It is too soon to know
aid had greater latitude in making clinically appropriate formulary whether these pilot programs will have meaningful effects.164
choices, similar to the leverage the Veterans Health Administration In addition, pathways currently exist for the US government to
drug program has. Medicare price reductions are likely to have intervene when prices for essential medicines are considered to be
effects on drug pricing in private markets, which tend to follow unreasonably high. One federal law allows the government to use
Centers for Medicare & Medicaid Services–set prices in other patented products in exchange for reasonable and entire
health services. The extent of such effects should be monitored to compensation,165 similar to the government’s eminent domain rights
ensure that such choices are clinically reasonable and that prices in regard to land. If applied to high-cost essential medicines, this law’s
for certain essential products do not decrease too far, as has invocation would allow the government to make a needed drug avail-
occurred in some parts of the generic drug marketplace, leading to able widely at close to the cost of production while still providing
shortages. Centers for Medicare & Medicaid Services recently manufacturers with adequate revenues tied to their amount of in-
announced its intention to test various approaches to reducing vestment and risk of failure.166 Another possibility is for the gov-
prescription drug spending within the Medicare Part B program, ernment to more actively invoke its royalty-free license or patent
which covers drugs administered in outpatient clinics or physi- “march-in rights” for high-cost prescription drug products that were
cians’ offices, such as altering payment levels according to developed in part with governmental funding under the Bayh-Dole
the effectiveness for the purposes for which drugs are used Act.167 However, the US government has never implemented these
(indication-specific pricing)144 or reimbursing drugs offering com- existing rights and only once even indicated that it might do so—
parable benefits at the level of the less costly agent (reference when the government sought to stockpile ciprofloxacin amid con-
pricing).145-147 This approach would also accomplish much toward cern over widespread weaponized use of anthrax shortly after the
reducing the large economic incentives provided through gener- September 11, 2001, terrorist attacks. The manufacturer of cipro-
ous markups that encourage prescribers to use the costliest drugs. floxacin, Bayer, reportedly increased the drug’s price during this
Asecondwaythegovernmentcouldhelpreduceprescriptiondrug added demand, and the government’s threat to use the patented
prices is by helping to generate and disseminate better information product anyway secured a 50% discount.168 Opportunities to in-
about the comparative clinical and economic value of drugs. In the voke march-in rights to address the unavailability or unaffordabil-
United Kingdom, Germany, Australia, Canada, and several other coun- ity of other drugs have been declined by National Institutes of Health;
tries, government-funded technology assessment activities provide this option is also available only for drugs that have a clear link to
support for comparative effectiveness studies and evaluate new prod- federal funding on all of their FDA-listed patents.169
ucts in light of comparative cost-effectiveness analysis.148 The infor-
mation thus generated could be used by government and private pay- Physician- and Patient-Level Solutions
ers to help them respond to company-set prices, make determinations Action by both physicians and patients can also play a role in con-
about formulary rules and exclusions, and educate physicians and pa- taining excessive drug expenditures. Many physicians do not
tients about the value of medication choices.149 know the cost of the drugs that they prescribe47 and do not dis-
The Patient-Centered Outcomes Research Institute had been cuss drug costs with patients.170 Other practices such as writing
expected to serve in this role. It was hailed at its inception as a ve- dispense-as-written prescriptions to avoid generic drugs or using
hicle to promote robust comparative effectiveness research, but Con- free samples of branded products left by pharmaceutical sales
gress precluded it from considering drug costs as a central focus of representatives also increase demand for costly products. More
its work,150,151 shifting instead to patient engagement and decision education about drug costs and value-based prescribing could be
aids. The institute’s reauthorization in 2019 will provide another op- integrated into physicians’ initial and continuing education; such
portunity to revisit its mission.152 information can also be provided through electronic medical rec-
In the meantime, patients, physicians, and payers can turn to non- ord point-of-care reminders.
governmental organizations, such as the Institute for Clinical and Eco- Academic detailing is an approach in which evidence-based in-
nomic Review,153 The Medical Letter,154 the Independent Drug Infor- formation on appropriate prescribing is brought to physicians in their
mation Service,155 Oregon’s Drug Effectiveness Review Project,156 and offices by specially trained noncommercial outreach educators, usu-
Consumer Reports Best Buy Drugs,157 which provide information on ally pharmacists or nurses.171 This approach has been found to be
value-based choices for select medications.158-160 Other institutions, effective in reducing suboptimal medication choices in a review of
such as the American Society of Clinical Oncology and the Memorial more than 60 randomized controlled trials172 and is currently in place
Sloan Kettering Cancer Center, have organized approaches to estab- in several states and large health care systems.173
lishvalueframeworksforcancercare.161,162 Thedatageneratedbythese Another potential model to engage more physicians in consid-
groups can support lower drug prices by helping payers organize their ering the costs and value of the drugs they prescribe would be to
formulariesandnegotiateappropriaterebates,aswellasguideprescrib- integrate drug costs into their payment models.174,175 The costs of
ers and patients toward more appropriate drug-use decisions. prescription drugs are now largely separated from the costs of other
Pharmaceutical manufacturers have also experimented with health services. However, emerging health care systems such as ac-
performance-based pricing programs, such as offering reimburse- countable care organizations can provide an opportunity to link
ments for patients who do not respond to a particular drug therapy. health services costs and drug costs so that physicians can be re-
For example, the manufacturers of the pro-protein convertase sub- warded for prescribing drugs optimally. Such programs ought to fo-
tilisin/kexin type 9 inhibitor cholesterol-lowering drugs recently cus exclusively on the quality of prescribing, not merely its cost; ear-
agreed to reimburse at least 1 private payer if low-density lipopro- lier experiments penalizing physicians for expensive prescribing

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 The High Cost of Prescription Drugs in the United States Special Communication Clinical Review & Education

served merely to discourage their caring for patients with poten- approach the United States has taken to the granting of
tially costly diseases, such as cancer and AIDS. government-protected monopolies to drug manufacturers, com-
Some market-oriented advocates of patient-level solutions have bined with restriction of price negotiation at a level not observed
argued for shifting more of the costs of drugs to patients to make in other industrialized nations. Opportunities to address these
them more active consumers and ensure that they avoid drugs that problems include paying greater attention to potentially unjusti-
do not provide adequate value. However, cost shifting can be highly fied granting and extension of patent exclusivity, enhancing com-
problematic because patients often have insufficient information petition by ensuring timely generic drug availability, providing
about the value of drugs to inform their decisions; such ap- greater opportunities for price negotiation by governmental pay-
proaches also discriminate against sicker and poorer patients.176 In ers, generating more evidence about comparative cost-
contrast, programs that reduce patients’ economic exposure to co- effectiveness of therapeutic alternatives, and actively educating
payments have been shown to improve adherence177 and even pa- physicians and patients about such choices to promote more
tient outcomes.178 Effective interventions will require greater at- value-based decision making. There is little evidence that such
tention to the clinical and ethical issues involved. policies would hamper innovation, and they could even drive the
development of more valuable new therapies rather than reward-
ing the persistence of older ones. Medications are the most com-
mon health care intervention and can have a major benefit on the
Conclusions
health of individuals, as well as of populations, but unnecessarily
High drug prices are the result of the increasing cost and complex- high prices limit the ability of patients and health care systems to
ity of drug development but also arise in large part from the benefit fully from these vital products.

ARTICLE INFORMATION /articles/drugmakers-pricing-power-remains 11. Kanavos P, Ferrario A, Vandoros S, Anderson GF.

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