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Here’s How to Lower Prescription Drug Prices

Problems that lawmakers and companies should tackle to reduce medicine costs

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For years, even decades, everyone from patients to presidents has been complaining about the spiraling prices of prescription drugs. Yet little has been done to change that. Perhaps the time has finally arrived.

In May 2017, the AARP Bulletin ran an extended report on why drugs cost as much as they do. While the U.S. health care system is incredibly complex, the answer boiled down to something simple: In a world of strong patent laws and limited regulation of pricing, for-profit pharmaceutical companies have extraordinary power to charge what they want for the medicines they offer.

Little has changed. Drug prices continue to rise far faster than the rate of inflation. The average annual cost of a brand-name drug has more than tripled in the past decade, jumping from $1,868 in 2006 to $6,798 in 2017, according to the AARP Public Policy Institute. Older adults now take an average of 4.5 medications each month, which can add up to a total retail cost of more than $30,000 a year for brand-name drugs.

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What's different is that prices have gotten so far out of control that Democrats and Republicans have found something to agree on. That's made consumer advocates hopeful that something may soon be done about these skyrocketing costs. In Congress, several bipartisan bills have been introduced to attack the problem. And last May, the Trump administration unveiled a blueprint for tackling high drug prices that contains many commonsense strategies endorsed by AARP.

The solution won't be simple. “Because our health care system is very fragmented, there is no one silver bullet for this problem,” says Leigh Purvis, director of health services research for the AARP Public Policy Institute.

But AARP believes that a combination of tactics can bring drug prices under control. These include giving the federal government the ability to negotiate when buying drugs, legalizing the safe importation of drugs sold at lower prices in other countries and capping patients’ out-of-pocket costs.

A final approach is to change patent rules that allow manufacturers of brand-name pharmaceuticals to freeze out competition from generic alternatives that could lower prices. “Drug companies are incredibly innovative in finding ways to strengthen their monopolies,” says Purvis.

To help in the fight to lower prescription drug costs, AARP has launched Stop Rx Greed, a national campaign to persuade federal and state lawmakers to take action on the issue. The campaign includes lobbying efforts, consumer-information programs and the release of new research about drug prices.

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Read on to learn more about the different factors behind high drug prices and what can be done about them.

The problem: Negotiating from weakness

One reason the U.S. has the highest prescriptions drug costs in the world is that we're the only industrialized nation whose government doesn't bargain with drugmakers over pricing. The 2003 law that created Medicare Part D outpatient drug coverage shares some of the blame; Medicare, which includes both Part D and Part B (provider-administered) prescription drugs, accounts for 30 percent of drug spending in the U.S. Medicare Part D plans, which now cover about 44 million adults, are required to provide nearly all drugs in six certain classes of medications, such as antidepressants and anticancer drugs, and at least two drugs, if available, in all other treatment categories. These requirements can limit Part D plans’ ability to negotiate with pharmaceutical companies. More important, individual Part D plans don't have nearly the same clout that Medicare would if it negotiated with drug companies on behalf of all beneficiaries.

In contrast, Australia, Japan and most European nations have some form of a national health program with drug review boards that negotiate with manufacturers. They analyze whether a new drug is more effective than its previous incarnations, or simply a slightly modified version. They're often able to negotiate significant discounts because they can walk away if companies won't cooperate. So Humira, which treats autoimmune diseases like psoriasis, Crohn's disease and rheumatoid arthritis — and is the top-selling pharmaceutical in the world — fetched $3,431 per month in the U.S. in 2015, but cost just $982 in France. The asthma medication Advair carried a monthly $310 price tag here, while it cost just $38 in Germany. The list goes on and on.

The solutions: Giving Medicare the ability to negotiate with drugmakers is the best way to attack high drug prices. What would also help: allowing Part D plans more flexibility in creating their lists of covered drugs, or formularies; arbitrating disputes between manufacturers and insurers; and using a drug's price in other countries to help set its price here. “Using their price as the basis for value increases [Medicare's] negotiating ability,” says Ameet Sarpatwari, assistant director of the Program on Regulation, Therapeutics and Law at Brigham and Women's Hospital in Boston. “After all, drugmakers are still making a profit on their sales abroad."

The problem: Failure to import

If prices for the drugs we use in the U.S. are so much lower elsewhere, why not import those pharmaceuticals? Canada is often mentioned as an obvious supplier; prescription drugs, as measured by per-person retail spending, cost 33 percent less there than in the U.S., according to a 2017 report by the Commonwealth Fund. And individuals here have been getting drugs from Canada for years. But large-scale commercial importation of medications, through online pharmacies or by cross-border purchases, is still illegal.

The solution: Proposed legislation would let patients buy lower-priced medicines from Canadian pharmacies for personal use. Critics say this would open the door to harmful counterfeits. But there are ways to institute safeguards. The Food and Drug Administration (FDA) has already safely imported drugs to address critical shortages. And more than 40 percent of drugs, both brand-name and generic, are made overseas.

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The problem: Endless patents

To encourage innovation and allow pharmaceutical companies to recoup their expenses, the federal government grants 20-year patents on new drugs that give companies the exclusive right to market the medication. Because it takes years to get the drug to market, manufacturers end up with a monopoly lasting about 14 years, on average. At that point, theoretically, generic drugmakers can begin selling competing versions.

Substituting generics for brand-name drugs can cut costs dramatically. In 2012, the U.S. Government Accountability Office estimated that generics had saved the U.S. health care system $1 trillion during the previous decade.

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But drug companies do all they can to retain their monopolies. For example, they can “evergreen” their patents, usually by repurposing or reformulating medications. These strategies, such as changing dosage schedules, don't necessarily make the drug any better. They can, however, add as many as 20 years or more to their monopoly periods. These tweaks effectively prevent less expensive generics from entering the market.

"Even a minor tweak may be enough to get you past the Patent and Trademark Office,” says Robin Feldman, author of Drugs, Money & Secret Handshakes and a professor at UC Hastings College of the Law in San Francisco. “Conceivably, you can string these out over and over again, and no one asks whether we're getting any value for our money."

In a 2018 analysis, Feldman and her colleagues found that of the roughly 100 best-selling drugs, more than 70 percent extended their protection at least once. For example, Lyrica, used to treat nerve pain, had its monopoly extended from 2009 to 2018 with 16 additions. The cholesterol drug Crestor's monopoly was lengthened from 2008 to 2022 by piling on 32 additions. “These are not outliers,” says Feldman. “This is business as usual."

The solution: There is some talk in Congress about attacking the practice of evergreening, Purvis says. “But doing a complete patent reform would be very complicated and a very heavy weapon,” she says. “In the meantime, there are smaller efforts that are nibbling around the edges to get at the abuses."

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The problem: The mysterious middle

A number of different parties stand between Americans at the pharmacy counter and the companies that make their drugs. The drugs themselves go from manufacturer to wholesaler to pharmacy. The money takes a more complicated route. At one end, people and their health plans pay into the system; at the other end, the manufacturer gets paid. In between, there's a confusing flow of money among various parties, including pharmacies, wholesalers and other entities called pharmacy benefit managers (PBMs), which administer drug benefits on behalf of insurers and negotiate with drug manufacturers, wholesalers and pharmacies.

The interactions between these parties and the deals they make present various opportunities to tamp down the ultimate price of drugs — or drive it up even more. Because there's little transparency in this market — transactions among parties in the drug supply chain are rarely made public — it can be difficult to tell whether any of them are contributing to higher drug prices or being incentivized not to keep them under control.

The solution: Given the complexity of the pharmaceutical distribution system, there are no simple answers, but improvements are possible. For one, says Purvis, health insurers need to be aware of the rebates and fees being negotiated on their behalf within the distribution chain; knowing that could help them root out possible inefficiencies. Other proposed fixes, however, might be counterproductive, Purvis says, such as proposals to publicly reveal detailed information about all of the transactions taking place within the supply chain. “Many experts have noted that would allow competitors to figure out what their rivals are charging, which could dampen incentives to offer lower prices. Such disclosures could also allow drugmakers to coordinate prices increases.”

The problem: The research giveaway

Big Pharma justifies high drug prices by saying they are needed to cover the costs of innovative research and development. That number is pegged at $2.6 billion per drug, according to a 2014 analysis by the Tufts Center for the Study of Drug Development, which gets 25 percent of its funds from pharmaceutical company donations. But experts say that estimate of development costs is somewhat deceptive because it encompasses far more than the actual expenditures for guiding a drug through the lengthy approval process; for example, it also includes capital costs (what the money would yield if it was invested rather than tied up developing a new drug).

The reality is that virtually all of today's new drugs, such as blockbuster immunotherapies for cancer, have roots in government-funded research at the National Institutes of Health or leading academic centers across the country. Every one of the 210 new drugs approved by the FDA between 2010 and 2016 began life in NIH-funded labs, representing grant funding totaling more than $100 billion, a 2018 report by researchers at Bentley University reveals.

Drug companies rarely, if ever, do these fishing expeditions of basic research, the stuff that might one day lead to a breakthrough drug but doesn't have an immediate payoff. That work is increasingly funded by taxpayers. Sovaldi, a medicine made by Gilead Sciences, is a prime example of how this process plays out. The drug, a highly successful treatment against the hepatitis C virus, was developed by a biotech company cofounded by a Department of Veterans Affairs scientist. Gilead then bought the company, including the monopoly rights, for $11 billion, then spent an additional $300 million to steer Sovaldi through clinical trials. In 2013, the drug was priced at $1,000 per pill, or $84,000 for the 12-week course of treatment, even though it cost no more than $136 to produce one treatment, according to a 2014 analysis by University of Liverpool researchers. The patent doesn't expire until 2029, ensuring the company of generous profits for many years.

It's all perfectly legal, since taxpayer-funded scientists are permitted to patent their discoveries in order to speed discoveries from the laboratory bench to a patient's bedside.

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The solution: Policy makers are considering a variety of options, such as demanding a higher return on investment for taxpayer-funded research that is ultimately commercialized, or allowing the government to infringe on, or even break, the patents of drugmakers that charge unreasonably high prices.

Other approaches that could help:

  • Increase generic competition Pending bills would beef up FDA budgets for reviewing generic applications to accelerate approvals, as well as implement other measures to increase the availability of generic drugs. “The timely introduction of generics is really the most effective way we have right now to consistently reduce drug prices,” says Sarpatwari, of Brigham and Women's Hospital. “It's only when you have a decent amount of competition that prices fall."
  • Limits on out-of-pocket costs One fix would be to cap out-of-pocket drug costs for Medicare Part D enrollees. Currently, even after reaching catastrophic levels of spending, these patients still have to keep paying for high-priced prescription drugs.
  • Value-based pricing Right now, a drug's price tag often bears no relationship to its clinical benefits. “When new products come on the market, we often don't know if they're any better, but we treat them like they are,” says AARP's Purvis. The Department of Health and Human Services (HHS), which oversees Medicare, has a stated goal, shared by AARP, of better aligning the price of a drug with the value that it provides to patients. There are challenges, however, in measuring a drug's fair price. How much is it worth to add just a few weeks to a patient's life? How do you distinguish a genuine advance from a mild improvement? “Everyone defines value in different ways,” says Gerard Anderson, a professor of health policy and management at the Johns Hopkins University Bloomberg School of Public Health in Baltimore. “Is it that you're cured? Or is it, ‘It's brought down sugar levels in diabetics'? No one agrees on how to measure it.”
  • Consumer education As part of its drug-pricing blueprint, HHS is calling for increased price transparency so consumers can make more informed decisions. To this end, Medicare and Medicaid have updated their pricing dashboards, Congress passed an anti-gag clause allowing pharmacists to tell consumers about drugs that are more affordable than ones they've been prescribed, and drugmakers are being encouraged to include list prices in their direct-to-consumer advertising. Still, Purvis says that simply knowing the price isn't necessarily as helpful as other information, such as whether a drug works better than similar medications.

The bottom line on all of this is that “real people suffering from real diseases should not have to beg, borrow or steal to control their disease,” says Rena Conti, associate research director of biopharma and public policy for the Institute for Health System Innovation and Policy at Boston University. “Our system can be better."

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