Why Do Prescription Drug Costs Continue to Rise?
More importantly, what can YOU do about it for your business and employees in 2023?
It feels like everything in our country is more expensive these days. With the rising costs of gas and groceries alone, many Americans are questioning how they can afford to live.
Unfortunately, if you are one of the six in ten Americans that report taking at least one prescription drug, you are also debating three important questions right now:
Am I going to get my prescription filled this month?
Do I need to ration my medication?
What if I skip my medication to buy food for my family?
40% say their insurer declined to cover a prescription at least once in the past year.
In a recent poll, about 20% of respondents said they are currently paying more than $100 a month out of pocket for their prescriptions, with 40% of those surveyed said their insurer had declined to cover a prescription at least once in the past year. Nearly one in four Americans taking prescription drugs say it’s difficult to afford their medications and a current Kaiser Family Foundation report showed that 29% of Americans failed to take their medications as prescribed because of the cost.
The report also stated that about 19% of people said that they did not fill their prescription at all and 12% said they cut their pills in half or skipped a dose. A similar study found that about a third of Americans admitted they have skipped filling a prescription at least once because of the cost.
The reason why it is so significant that the cost of medications keeps going up is that the inability to purchase expensive prescriptions can have serious health consequences.
According to research from the Centers for Disease Control, there are about 125,000 deaths per year in the U.S. due to medication non-adherence. Not filling recommended medications to treat chronic diseases can lead to an increase in overall healthcare spending. The CDC estimates that Americans spend an extra $300 billion a year on more expensive treatment plans as medical conditions worsen vs. adhering to an originally prescribed maintenance medication.
For those that need to take medications, increasing costs are nothing new. According to reports, the average list price (the amount the drug manufacturers originally set) for brand and generic medications has increased by 33.6% since 2014. On January 1, 2022, drug companies raised prices on 460 different drugs, and more increases followed throughout the month. On average, these prices jumped 5%, which is unfortunately in line with recent trends.
As shocking as these statistics are, what may be even more startling is what we find when we dig deeper into the causes of such an accelerated surge in price and how the options to reverse this trend already exist. Before we get to the solutions though, it is important to understand how we got here in the first place.
It’s not hard for us to imagine scientific researchers with their protective gear and goggles carefully dropping sensitive ingredients into an array of tubes, working on the next great medical breakthrough.
Regarding the costs associated with this type of research, drug manufacturers like to say they are different than almost any other industry because they need to spend more money on research and development. What they are really saying is that higher drug prices are required to fund expensive research projects to generate a new medicine. This explanation is common among industry officials and for many Americans, it can seem reasonable and persuasive. But, appealing to high research costs to justify high drug prices is often misleading.
Of all the companies in the world, the one that invests the most in research and development is not a drug company. It’s Amazon. The online retailer spends over $50 billion a year on R&D, despite being well-known for both low prices and low profits. In fact, Amazon’s operating margin routinely comes in under 5 percent. Among the 25 worldwide companies that spend over $5 billion a year - ten are pharmaceutical manufacturers who reported an average operating margin close to 20%!
There is no denying that it costs money to conduct tests. There is a lot of time and energy involved with the entire process from start to finish, but the argument that higher prices are necessary for R&D just doesn’t add up. In 2021, the R&D budget as a percentage of revenue for the 3 manufacturers with the highest R&D budgets were only 23%, 16% and 17%, respectively. In other words, drug companies have an abundance of profit leftover after what is spent on research and development.
So, the next obvious question is what are they doing with the rest of the money?
The Pricing Process You Don't See
If you have recently watched television, you know that part of the answer to where the extra money is going can be found in marketing and advertising. The U.S. and New Zealand are currently the only countries in the world that allow for direct-to-consumer advertising of prescription drugs. In every other country, it is illegal.
According to an analysis published by America's Health Insurance Plans (AHIP), seven of the ten largest drugmakers by revenue in 2020 spent more money on existing drugs than on researching and developing new drugs. The inquiry used annual reports and other financial filings to compare money spent on research and development to money spent on selling, general and administrative costs. They found that selling and marketing expenses exceeded research and development costs by $36 billion, or 37 percent, for the group.
For example, GlaxoSmithKline spent $15 billion on sales and marketing in 2020 compared to $7 billion on research and development. Bayer spent $18 billion on sales and marketing compared to $8 billion for research and development and Johnson & Johnson spent $22 billion on sales and marketing, compared to $12 billion on research and development.
If there is little correlation to R&D and drug prices, could there be another reason why drug manufacturers continue raising the cost?
Could the answer simply be, because they can?
The Impact of Pharmacy Benefit Managers (PBMs)
It is likely that you have never heard the term Pharmacy Benefit Manager, but it is an organization that holds a lot of power within our country. Today’s “big three” PBMs – Express Scripts, CVS Caremark, and OptumRx, owned by UnitedHealth Group (all of which are Fortune 100 companies) – control over 70 percent of the market, covering roughly 180 million prescription drug customers.
According to a report by the Progressive Policy Institute (PPI), PBMs originally developed in the late 1960s and early 1970s when the number of drugs reaching the market was becoming harder for health plans to manage. Fast forward and they have molded into a prime example of the law of unforeseen consequences.
PBMs function as intermediaries between those administering health plans and drug companies. They collaborate with drug makers to determine drug formularies, which is a list of drugs covered by a health plan.
A drug formulary combines drugs into categories based on the classification of the drug and people then pay a copay of $5, $50, $100, or more, depending on the drug and its tier. A typical formulary will have generic, preferred brand, non-preferred brand, and specialty medications with the lowest tiers being the least expensive.
In exchange for a preferred tier on a health plan’s formulary, PBM’s negotiate discounts off the list price. This encourages drug manufacturers to set artificially high list prices and offer steeper rebates rather than offer the lowest possible price. These discounts, also known as “rebates,” are passed along to the client, after the PBM takes a beneficial cut for themselves.
This means that the larger the gap between the list price and the discount, the more the PBM makes.
The current model gives the PBMs a tremendous amount of negotiating power against both drug manufacturers and pharmacies. If drug manufacturers don’t want to provide a discount, the PBM could simply list their drugs as “off formulary” and not cover the medication under a patient’s plan. Additionally, if pharmacies protest the model and try to demand a greater share of the sales price from the PBM, the PBM can just use another pharmacy – likely one they already own.
Lack of transparency
The PPI also highlighted that the lack of clarity within how a PBM operates greatly benefits the PBMs. Basically, most formularies, list prices, discounts, and profits are hidden from public scrutiny under “proprietary information” clauses. For example, one contract allowed a PBM “full authority to determine whether a drug is brand or generic” and that the PBM could “pocket the difference between a brand-drug discount and a generic drug discount.”
Consumers’ copays can cost more than the drug itself – and the PBMs can pocket the difference because they process the claims.
Reports from the Schaeffer Center also outlined how consumers’ copays can cost more than the drug itself – and that the PBMs can pocket the difference because they process the claims. This practice, known as clawbacks, involved almost a quarter of all filled pharmacy prescriptions in 2013 amounting to millions in overpayments.
For example, a drug’s initial cost could be $5 but the health plan could charge a $10 copay for the prescription. Because PBMs often have a “gag” clause that prohibits pharmacists from telling a patient when their prescription would be cheaper if paid outside of the plan, the individual purchasing the medication will never know how much money they have “overpaid.”
The unintended consequences of PBMs are indicative of a larger, systemic issue that needs to be solved within our healthcare system. In other words, we need more simplicity, and we need more transparent options. Imagine a format where all PBMs earn a flat administrative fee on each prescription, with all rebates and discounts fully disclosed and with no hidden spreads - that would be a great place to start.
Thankfully, there are PBMs that operate with a commitment to transparency and fair costs. A transparent PBM operates on a “pass-through” model and costs are based on actual costs instead of spread pricing, rebate holding, and clawbacks. This means that the PBM commits to passing through all discounts and rebates. Under this model, the PBM only earns revenue through a clear administrative fee charged to the carrier. That fee is often charged per prescription and as a result, the health plan can better understand and predict its health costs and the patient filling a prescription can trust that the drug is priced appropriately.
Instead of withholding data from end-users, transparent PBMs share data to empower decision-making. Costs inevitably decrease when pharmacies, health care plans, and patients alike can clearly understand their options regarding prescription drugs. According to HealthPayerIntelligence, when people have information that is accurate and available, they often opt for a lower-cost medication, saving on average $130 per prescription.
While traditional PBMs have historically dominated the market, transparent PBMs are on the rise. And, the good news? THEY WORK.
We recently had a call with one of our clients and the HR team let us know that an employee’s spouse reached out to them in tears after receiving her medication through our program. She couldn't stop thanking them for putting this pharmacy solution in place. The spouse had not filled the medication for the past 2 months due to the cost, so getting it for free was a huge life-changing success for her. Her husband even claimed that he told the owner that he was going to kiss him the next time he saw him!
In an economy that is seeing price increases across the board, no one should ever have to question if they can afford their medication. Understanding your Rx options is an easy first step that can go a long way towards saving everyone involved a lot of time, money, and stress.