Researchers Have Identified This as the Primary Reason Why Drug Prices Are Soaring

By Markets Fool.com


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If you've filled a prescription at any point recently, you probably don't need me to tell you that drug prices are soaring.

According to an analysis released in January by healthcare data tracking company Truveris, prescription drug prices jumped by more than 10% in 2016, which includes a 14.77% increase from branded drugs and a 9.21% jump in specialty drugs (i.e. treatments for complex conditions such as cancer, hepatitis C, and so on).

A separate study conducted by AARP known as the Rx Price Watch Report notes that the median amount older Americans spend on prescription drugs has jumped more than 170% to $11,341 per year between 2005 and 2013. Considering that AARP's data doesn't take into account the bevy of newly released specialty cancer drugs that came to market in 2014 and after, one can only imagine how much these annual costs have since soared.

At the heart of the issue are inherent advantages that drug companies have that influence their pricing of branded and specialty drugs. There are a few reasons for drug companies to keep the prices of drugs high. For one thing, drugmakers want to price their products high enough that they can cover their development and marketing costs. Perhaps less well-known is that drug companies are also looking to cover the costs of the many unsuccessful drugs that never make it out of clinical or preclinical trials, or even the lab/discovery stage. Hundreds, if not thousands, of ideas can fall short in the discovery stage, but that doesn't mean they don't cost drugmakers valuable capital.

Other expenses tend not to be as apparent. For instance, drugmakers count on the higher standard of living in the U.S. to help subsidize their ventures into emerging markets where they would otherwise be unprofitable. Drugmakers also need to cover the legal expenses associated with protecting the patents on their drugs.

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The primary source of rapidly rising prescription drug prices

But none of the aforementioned reasons explains why prescription drug prices are surging. According to a newly published report in the Journal of the American Medical Association by three researchers at Harvard Medical School, the root cause of rising drug costs is lengthy periods of patent exclusivity.

For the report, the three researchers analyzed peer-reviewed medical and health policy literature between Jan. 2005 and Jul. 2016, specifically looking for sources that addressed the pricing of prescription drugs, as well as the possible justifications for those prices. What researchers noted was that "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." In layman's terms, exceptionally long periods of patent protection, coupled with Medicare's inability to deny coverage to certain drugs, have given drugmakers an exceptionally strong amount of pricing power (which they are clearly using).

An even deeper dive into the researchers' findings by NPR showed that new drugs being approved have an average patent exclusivity of 12.5 years. Remember, this period protects branded therapies against generic competition, which all but assures branded-drug developers the ability to raise their prices well beyond the launch date of their therapies.

What's more, patent exclusivity periods are often extended well beyond their traditional lengths due to legal wrangling and operational maneuvering. An example would be a drugmaker using its full legal power to block a generic entrant into the marketplace. Doing so can delay a generic entrant (or series of entrants) long enough for a branded drugmaker to alter its drug or dosing and switch patients over to a new formulation, thus negating the need for a generic drug. This is why, according to the JAMA study, branded drugs account for 72% of all spending, but just 10% of all prescriptions dispensed.

Teva Pharmaceutical (NYSE: TEVA) did this recently with its blockbuster multiple sclerosis drug Copaxone. With Copaxone's patent set to expire, Teva Pharmaceutical filed litigation to block generic competitors from entering the market. This afforded Teva the time needed to bring Copaxone XR, its new extended-release formulation that has to be injected three times a week, to market. With Copaxone XR, Teva had a way to transition those patients used to Copaxone over to its new formulation without losing much in the way to generic competition.


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The two quickest fixes to rising prescription drug costs

How should lawmakers on Capitol Hill fix this problem for the American public? One suggestion from researchers is to adjust the period of patent exclusivity to allow generic drugs quicker access to the marketplace. Democratic presidential candidate Hillary Clinton proposed exactly such a maneuver during the early days of her campaign. IMS Institute for Healthcare Informatics predicts that generic prescriptions will account for 91%-92% of all scripts written by 2020, so easing that access even further could reduce prescription drug inflation.

Of course, we should also be well aware that drugmakers would be unlikely to take kindly to new regulations that would substantially reduce their pricing power. Drugmakers could choose to hike branded-drug prices even higher with a reduced period of exclusivity. Worse yet, drugmakers could shelve certain types of innovative research because they may not be generating as much profit, which hurts patients, and could adversely affect jobs within the industry.

The researchers' secondary suggestion is to allow government-funded programs such as Medicare the option to deny coverage to specific drugs that aren't priced according to their benefits profile. Medicare isn't even allowed to negotiate on its own behalf, which has led to its paying a much higher price for branded therapies than its sister program, Medicaid. Medicare having the ability to deny coverage for select drugs could persuade drugmakers to offer more competitive prices.

However, even giving Medicare the option of picking and choosing what drugs to cover could be controversial. Giving Medicare more liberties would be akin to allowing the federal government to get more involved in the free market of drug pricing, which wouldn't sit well with some lawmakers on Capitol Hill.

One thing is for sure: the debate on drug prices doesn't look as if it'll be swept under the rug as in years past. However, a workable solution could still be many years off.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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