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Why Big Pharma Keeps Raising Drug Prices

We’ve become accustomed to the relentlessly rising cost of prescription medicines. The collection of highly profitable pharmaceutical companies, aptly coined “Big Pharma,” have succeeded in countering any questioning price controls with hefty political campaign donations. But the companies’ largely uncontested power to jack up prices may be changing.

Indeed, the pharmaceutical behemoths have recently succeeded where others have failed in making unlikely allies of two of the most antagonistic players on the national scene these days: President Donald Trump and his Democratic rivals in Congress.

Both President Trump and leading Democrats in Congress are targeting the drugmakers’ pricing policies, arguing that the companies are making their most important breakthrough medicines unaffordable for many Americans. The costs of the treatments, critics argue, also have become a significant financial burden to employers who provide health coverage, and for Medicare and Medicaid, the enormous government health insurance plans.  For folks without insurance, the costs have put some critical medicines out of reach. The question right now is whether this latest combative reaction will result in laws or regulations to stifle the previously unchallenged surge in the cost of medicines.

Last year, Trump made news when he specifically pointed out Pfizer, the nation’s biggest drug company, after it raised prices in July for about 100 of its products by as much as nine percent. Among the treatments were those for cancer, heart disease, and Pfizer’s widely prescribed pain medicine, Lyrica, whose list price has jumped from $4.80 a pill in 2015 to $7.43 as of 2018. What can possibly account for such a substantial price difference?

Consumers were especially outraged because the hike followed an inexplicable similarly sized increase just six months earlier. After some heat in the social realm and from the president specifically, Pfizer backed down, promising to hold off the increases until this past January.  Seven other drug companies showed they, too, understood. They immediately pledged not to jack up prices again in 2018. All of them, however, had already pushed up costs on most their medicines earlier in the year.

In February, a Senate committee had top officials from seven major drug companies—six of them company CEOs—testify in a public hearing. The politicians—Democrats and Republicans alike—sharply criticized the executives, demanding they justify annual price jumps of medicines that generate billions of dollars a year in revenue.

The committee identified insulin prices for particular scorn. Several brand name versions of the genetically engineered human form of the insulin hormone, used to treat diabetes, have been on the market for decades, long past the normal expiration of a medicine’s initial patent.  When a drug patent lapses less costly generic versions can come to market. Eli Lilly’s Humalog brand of insulin has long been vilified as a poster child for the industry’s practice of preventing cheaper competition by making minor changes in the product’s design or manufacturing techniques in order to extend patent protection. This practice of fending off lower cost competition has allowed Lilly to increase the list price of Humalog from about $20 a vial in 1996 when the product was first introduced to a whopping $275 today. Diabetes patients use about two vials of the injectable drug a month.

Prior to the Senate hearing, the committee sent Lilly execs a letter asking them to explain how the company sets its prices, noting that taxpayers spend more than $1 billion a year for Humalog through Medicare and Medicaid. “The American people ought to know how the company prices its product,” the letter said. A similar insulin product from Sanofi has risen in price by 77% since 2013, the Senate said.

Lo and behold, several weeks after the hearing, Lilly said it would begin selling a half-priced version of Humalog under a different name. In order to get the lower cost product, however, patients will have to know it exists and ask doctors to prescribe the lower priced version by its name, Lispro. Lilly didn’t explain why it now can afford to slash by half the price of the essentially identical product. Instead, in a statement, the drugmaker said it was offering the new product as a “bridge that addresses gaps in the current system until we have a more sustainable model.” Lilly didn’t describe what a new model might be.

Despite the turnaround, Sen. Ron Wyden, a Democrat from Oregon and longtime industry critic, said the committee’s investigation into pricing practices of the insulin makers would continue. The inquiry is aimed at identifying exactly why the company raised its prices so often, given that there was no substantial increase in production costs.

Humira, the world’s best-selling medicine with $20 billion in annual sales as of 2018, was also singled out by the committee. The drug, also a biotech product, has a list price of more than $35,000 a year for patients that take the shots on a regular basis for treating several ills, including psoriasis, rheumatoid arthritis, and Crohn’s disease. Sen. John Cornyn, a Texas Republican, wondered how the drug was able to block generic competition by filing 130 patents since the drug was first introduced more than 20 years ago.  “At some point,” Cornyn said, “that patent has to end so that the patient can get access to that drug at a much cheaper cost.”

Big Pharma has a number of explanations in its defense, none of which pass much of a smell taste. If anything, the companies’ reasoning reflects the weirdness of the nation’s drug pricing system. Foremost, drugmakers argue, revenue from existing drugs pay for research into new medicines. For years, drugmakers have said the cost of bringing a drug from lab to medicine cabinet can easily top $1 billion. But the companies have refused over the years to provide an audit to support the claim. Instead, researchers backed by industry funding produced the $1 billion by simply dividing the total amount spent on research by the amount of drugs that reach the market. Additionally, this argument is supported by the fact that nine out of 10 drugs in development fail. So, in order to cover research, development costs, and still make a profit, prices of existing meds must rise.

The industry makes another compelling case, based on the bizarre way drugs get from drugmaker to the consumer. Drugmakers point out that few patients actually pay the high list price. Most of us with insurance are getting lower priced medicines negotiated by companies called “pharmacy benefit managers,” or PBMs. These PBMs use their high volume buying power to demand rebates off the list price. The drug industry argues, however, that the PBMs actually pocket the rebates as profits, so that insurers (those provided by employers and government plans) don’t get the benefit of the discounts. In order to still profit and cover R&D costs, drug companies raise prices to counter the rising costs of rebates demanded by the PBMs. Insurers use the PBMs to buy the medicines they offer their customers. Under law, Medicaid, the government plans run by states and co-funded by each state, get the same rebates as the companies give to the PBMs.

Granted, this doesn’t seem to make much sense if you believe in market economics fueled by consumer demand.  Instead, it sounds to me that the industry and insurers are simply playing a game of collusion to keep profits high. It reflects a real problem among the biggest drugmakers like Pfizer, Merck, Glaxo, and others. Few of the breakthrough medicines that generate blockbuster profits first emerge from corporate labs. Instead, initial ideas for new medicines arise in academic labs supported with funding from the US government. Most of these products are created in the research labs inside the industry’s smaller biotech firms. In order to keep their product pipeline full, the big industry players have been buying up the biotechs at a feverish rate, and paying ever-higher prices for them as competition among the buyers intensifies. This product and company buying is largely funded with cash from existing products, or with stock whose value can only grow with increased profits.

In addition, as we can see on TV, the drugmakers are aggressively marketing medicines to consumers through lavishly produced commercials that look more like mini-dramas than the doctor-directed educational advertising you might expect. Indeed, the cost of marketing and purchasing new drugs, and/or the biotechs that produce them, likely are the real reasons for annually increasing drug prices.

Those of us with really good insurance coverage rarely care much about whether a drug costs twice as much now as it did a few years ago. But don’t be fooled. Those high prices are paid by someone, either by your company, which might respond by keeping wages in check, or state and federal governments that must balance their budgets by cutting back elsewhere.

In many cases, those without insurance, and without the volume buying power of the PBMs to negotiate for them, often pay the actual list price. To be sure, many drug companies will help those without insurance. If you or your doctor are savvy enough to navigate this process, most drug companies offer special discounts to those who can prove a financial need. The application process isn’t easy and few doctors are aware of it. The newest cutting edge cancer medicines, some of which carry list prices of  $100,000 or more for a course of treatment, likely cost insurers about half the list price. The uninsured either have to raise funds creatively through yard sales, credit cards, or if you can figure it out, the discount plans the drugmakers offer to those with limited budgets.

So, what’s the solution? Unlike the PBMs and Medicaid, which covers low-income consumers, Medicare isn’t able to get company rebates. Under a law only passed during the George W. Bush presidency, the US government (for the first time) paid for prescription drugs for Medicare recipients. For many years prior to that, Big Pharma lobbying and hefty campaign contributions kept Congress from providing a drug benefit. This was fairly ludicrous, as seniors are the largest group of drug users and the least likely to afford list prices paid by the uninsured. Big Pharma dropped its fight against Medicare coverage with the stipulation that Medicare can’t negotiate discounts or rebates.

Some Medicare recipients benefit from PBM price reductions, but only if they have their Medicare managed by an insurer in a relatively new federal program called Medicare Advantage. More and more seniors are signing up for the new plans. The downside is that Medicare Advantage plans require patients to see only doctors in the plans’ networks, a problem for those whose providers are not network members.

If Congress has its way—and there are indications President Trump may go along—Medicare may finally get the benefits of volume buying that PBMs and Medicaid now get. Having followed the industry’s ability to fight off such regulations in the past, I don’t give these efforts more than a 50-50 chance. As for the larger pricing policy in general, it is likely that only some kind of citizen protest may succeed in bringing medicine pricing under control. Even then, I wouldn’t bet on it. My word of advice would be to stay aware of the drug pricing landscape and stay vigilant in fighting for cheaper prices, whether it’s negotiating for your actual payment, or spreading awareness toward the greater cause.


Michael Waldholz is a Pulitzer Prize winning healthcare journalist and author. For many years, he was the chief medical reporter at the Wall Street Journal. While we have a host of health-related subjects we plan to cover in the Healthcare Matters series, please feel free to send any questions you have for the author or our team to, and don’t forget to follow us on FacebookTwitter, and Instagram.

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