By D. Cascardo, MA, MPA, CFP
Although many Americans have insurance that covers most of the prescription drugs they take, many more do not have any insurance or have ridiculously high co-payments with the plans they do have. Those who need to take “brand name” drugs rather than generics, may find those drugs are not covered or that the Tier requires a high co-pay.
Pharmaceutical companies and their investors are quick to say that the costs of research and clinical trials required to find and test a new drug are the culprit. Then why is the research dependent on biotech, for-profit companies, rather than government researchers? Especially when the government mandates a new type of drug be developed for a new threat to the nation’s health (e.g., HIV, Ebola).
Developing a new “blockbuster” drug is expensive but can mean a big payday for pharmaceutical companies and their investors. Venture capitalists look to see what the potential market for a new drug is and will put money into developing what they hope the market (patients and their doctors) will demand. For instance, diabetes is rapidly increasing worldwide. The market is growing and companies that are developing new forms and/or administrations of insulin are attractive to investors.
The hypothetical venture capitalist thinking about whether to fund a biotech firm or a social media startup will make that decision partly on which venture may garner the biggest profits.
But WHY are drugs in the United States so much more expensive than their counterparts in other parts of the world?
Pick any brand name drug, and you’ll almost certainly find that the price in the United States is significantly higher than in other countries for the exact same drug. However, in the United Sates, the regulatory system is different. The U.S. government does NOT regulate or negotiate the prices of new prescription drugs. In other countries, a government agency will meet with pharmaceutical companies and haggle over an appropriate price.
Medicare, the large health insurance plan which covers millions of Americans over the age of 65, is expressly prohibited by federal law from negotiating drug prices or making decisions about which drugs it covers. Instead, Medicare is required to cover nearly all drugs that the Food and Drug Administration approves. This means that Medicare must cover drugs that aren’t an improvement over what currently exists, so long as the FDA finds they’re safe for human consumption.
Government agencies in other countries will not only haggle over pricing, but will typically make decisions about whether new drugs represent any improvement over old drugs, or decide if they are even worth bringing onto the market in the first place.
Pharmaceutical companies in the U.S. know that as long as their products are safe, Medicare will buy them.
The result of this system is that Americans spend $858 per person on prescription drugs. That’s about twice as much as Australians and three times as much as the Dutch.
WHAT WOULD PRICE-REGULATING DRUGS MEAN FOR PRICES IN THE U.S.?
Presumably, prices would go down and we would spend less on prescription drugs. That could also mean that health insurance premiums wouldn’t go up as quickly—and may even decrease.
A United State agency that negotiated drug prices on behalf of the country’s residents would likely be able to demand discounts similar to those of European countries.
The Veterans Health Administration, which does negotiate drug prices, gets drugs that are usually 40 percent cheaper than what Medicare pays. However, it covers fewer products, so many patients who are eligible for Medicare also sign up for those plans to cover those prescriptions not available through the VA.
WHAT ARE THE TRADE-OFFS?
There would be trade-offs since every policy decision inherently comes with trade-offs. Most likely, insurance plans would not cover the wide variety of drugs now available.
Currently, the United States’ exceptionally high drug prices help subsidize the rest of the world’s drug research. Although we benefit with new and better prescription drugs, those benefits are also available to the rest of the world at lower, regulated prices.
Price regulation may mean there would be less research and innovation in drugs.
If there are fewer dollars spent on pharmaceutical research, there would most likely be less progress in developing new drugs for Americans and everybody else. If a national board made decisions about what prices were appropriate for drugs, it would need to have the ability to reject the drugs that didn’t make the cut.
Conversely, when the government mandates coverage of a new type of drug, there is more research and more clinical trials to develop that particular treatment. For instance, when Medicare began covering the flu vaccine for its millions of enrollees, there was a 2.5-fold increase in clinical trials for new flu vaccines since usage of the flu vaccine was guaranteed to increase. And an increase in the market would mean bigger profits for the manufacturers.
INNOVATION vs ACCESSIBILITY
If the United States began to price regulate drugs, medications would become cheaper. Price controls might lead to less investment in pursuing new cures in the future. Americans would have more access to drugs but could also expect a decline in research and development of new drugs.
Venture capitalists might find the risk versus reward is not worth backing start-up biotech firms, and big pharmaceutical companies may decide the potential return on investment is not worth the costs involved to bring a new drug to market.
That might be okay. As a society, are we willing to trade some level of innovation to lower drug prices and make medication more financially accessible to those who need them right now? Should we forego windfall returns to big pharma and venture capitalists in favor of not forcing patients to choose between getting a prescription filled and buying groceries?
Debra Cascardo, M.A. M.P.A, C.F.P. is an award winning journalist and a Fellow of the New York Academy of Medicine.