Prescription Drug Pricing Trends Continue to Raise Concerns

Mergers and acquisitions among pharmacy benefit managers may help limit medication cost hikes.

While the overall value of prescription drugs is recognized for improving patient quality of life, there is growing concern over the increases in drug pricing, according to a study by researchers at the Daniel K. Inouye College of Pharmacy. A long-term solution has yet to be determined or implemented. One possible approach endorsed by the Obama administration is pay-for-performance if a drug reduces the incidence of hospitalizations.

In 2013, US prescription drug spending represented nearly 11% of total health care costs. Since the year 2000, the annual percent change in prescription drug costs was moderate, due largely to brand-name drugs going off patent, which allows for substitution with generic formulations at significantly lower costs than the corresponding brand drug. But recently, both generic and brand name drug prices have been increasing, resulting in higher rates of increase in pharmaceutical expenditures, the researchers found.

Prescription Drug Pricing

Drug prices are determined through a complicated set of interactions between pharmaceutical manufacturers, wholesalers, retailers, insurers, pharmacy benefit managers (PBMs), managed care organizations, hospitals, chain stores, and consumers.

Generic Drug Price Increases

Mergers and acquisitions in the generic marketplace have resulted in fewer manufacturers of generic drugs, which causes higher costs for generics, according to the study. Additionally, as new drugs enter the marketplace, the prices of older generic drugs may also increase.

In addition, there are drug shortages due to quality issues and increased FDA regulations, production suspension, and/or drug product recalls. A drug shortage can also drive up prices.

Drug Innovations and Pricing

When medications are innovative and represent a significant improvement in care, pharmaceutical manufacturers have considerable leverage in price setting.

Biosimilars, orphan drugs, and changes in drug company ownership all impact drug pricing. Biosimilars have complex molecular structures compared with traditional generic medications, are much larger molecules, and require complex manufacturing.

Orphan drugs are used to treat diseases occurring in fewer than 200,000 US patients. The cost and risk of developing and manufacturing these drugs require government subsidies, the study noted.

For example, the median cost per patient year for orphan drugs was nearly $100,000 in 2014. The most costly orphan drug for an ultra-rare indication costs in excess of $500,000 per patient annually.

When a drug is acquired by another company, its price is often increased because the acquiring company sees the drug as undervalued and raises its price to cover the acquisition cost.

The Future of Prescription Drug Pricing

Despite the recent escalation of drug prices, there is reason to believe that there may be some pressure to limit increases on prices in the near future. Mergers and acquisitions among PBMs may keep medication prices down, according to the study.

Another option, supported by the Obama administration, would implement pay-for-performance programs that incentivize reduced hospitalizations.

The researchers found that the best long-term solution to rising drug prices is still undetermined, but the debate over this issue will become increasingly contentious if drug price inflation remains as high as it was in the past year.