Why are Prescription Drug Costs so High in the United States? 

Edited by: TJVNews.com

Florida’s recent plan to import medications from Canada, approved by the FDA, has brought renewed attention to the exorbitant cost of prescription drugs in the United States. Despite efforts to address the issue, drug prices in America remain significantly higher than those in other affluent nations, as was recently reported in the New York Times.

The exorbitant cost of prescription drugs in the United States is a multifaceted issue, rooted in the absence of a centralized negotiator and the lack of price controls.  It remains a significant concern, impacting not only patients but also various stakeholders within the healthcare system

In contrast to other wealthy countries that rely on a single negotiating body, often the government, the U.S. pharmaceutical market features negotiations split among tens of thousands of health plans, according to the NYT report.  This fragmentation significantly weakens the bargaining position of buyers, leading to higher drug prices. Health policy expert Stacie Dusetzina from Vanderbilt University School of Medicine emphasized to the NYT that the U.S.’s unwillingness to negotiate aggressively is a key reason for inflated drug costs.

The Inflation Reduction Act of 2022 marked a modest step forward, authorizing Medicare to negotiate directly with drug companies over the prices of select drugs years after their entry into the American market, as was indicated in the NYT report.  However, analysts argue that broader negotiating authority is crucial to address drug prices comprehensively. The NYT report said that pharmaceutical companies have argued that higher U.S. drug prices correlate with added benefits, including faster access to medicines with fewer insurance restrictions.

Unlike some countries that set limits on how much they will pay for medicines, the U.S. lacks effective price controls. For instance, France caps the growth of drug companies’ sales, triggering government rebates if sales surpass the specified threshold. As was indicated in the NYT report, in the United States, drug companies face no legal restraints on prices for patients covered by commercial insurance or on introductory sticker prices when drugs first enter the market.

Stanford law and health policy professor Michelle Mello told the NYT that the high cost of drugs in the U.S. is a result of a system designed without brakes on drug costs, allowing pharmaceutical companies to set prices without effective constraints.

The existing system creates perverse incentives that go beyond pharmaceutical companies, involving doctors, hospitals, and intermediaries. The NYT report pointed out that one glaring example is seen in Medicare policies for certain drugs, particularly those administered intravenously in doctors’ offices, such as chemotherapy. Doctors incur upfront costs for these drugs and bill Medicare for both the drug cost and a percentage set by Medicare to cover their overhead. The report in the NYT noted that this system incentivizes doctors to choose higher-priced drugs, as a percentage of a more expensive drug translates into significantly higher reimbursement compared to a cheaper alternative.

Pharmacy benefit managers (P.B.M.s), large entities negotiating with manufacturers on behalf of employers and health plans, also play a role in misaligned incentives, the NYT report added. P.B.M.s often profit more when drug sticker prices are higher, leading to situations where patients may be directed towards costlier medications even when more affordable alternatives exist.

The U.S. healthcare system’s fragmentation and complexity contribute to the opacity of drug pricing. This complexity makes it challenging for doctors and patients to decipher actual drug costs at the pharmacy counter when deciding between seemingly comparable medications, the NYT report said.

The role of middlemen, particularly P.B.M.s, has drawn criticism, with industry executives arguing that the U.S. is unique in allowing unchecked profiteering by these intermediaries. According to the information provided in the NYT report, a 2022 study funded by Pharmaceutical Research and Manufacturers of America (PhRMA), the main lobbying group for the drug industry, revealed that manufacturers retain only half of the money initially spent by healthcare payers on prescription drugs before applying discounts.

The combination of the lack of a central negotiator and the absence of price controls creates a challenging environment for managing prescription drug costs in the United States. As policymakers navigate potential solutions, addressing negotiation structures and implementing effective price controls emerge as essential steps to bring drug prices in line with international standards. The debate continues on striking a balance between fair compensation for pharmaceutical innovation and ensuring affordability for patients.