Drug pricing in the United States has been a complicated issue since the regulation of food and drugs begun in 1906. Understandably, high drug prices and efforts to bring them under control are hot topics in the news; it is estimated that prescription drugs account for one out of every 10 health care dollars spent in the U.S.[1]
FDA Influences on Drug Pricing
Drug pricing is influenced by many factors, including federal regulation by the U.S. Food and Drug Administration (FDA). While FDA has not officially been involved in drug pricing until recently, they have always had a way of regulating drug pricing from patent regulation to advertising regulation.
One of the main ways that FDA affects drug pricing is through regulations on innovative and generic drugs. When a new drug application (NDA) is submitted to FDA, the company must pay a “user fee” which helps cover FDA’s costs in reviewing the NDA. Understandably, the NDA represents a rigorous scientific dossier supported by numerous animal and human clinical studies for safety and efficacy of the new drug. This year, the user fee for an innovative drug is $2,038,100 — just to file the application for FDA review! The drug manufacturer also applies for a patent to protect its research and development investments. If a patent is awarded, the drug has approximately 12 years of total market protection from other companies making the same drug at a lower cost. Essentially, the company has the right to charge whatever price the market will bear for the new drug once approved. This amounts to an artificially high price because of the “monopoly rent” the drug maker can charge due to the patent protection. With only the innovative patent-protected drugs on the market, innovator drug prices are very high; the user fees and cost of research and development are passed on to consumers who also must bear the monopoly rent.
However, after a drug patent expires, other companies in the industry can begin producing generic versions of the drugs. The approval process for these drugs is much easier because it involves an Abbreviated New Drug Application (ANDA) rather than a full NDA. The ANDA must demonstrate to FDA that the generic drug is bioequivalent to the innovative drug it is copying.[2] The user fee paid to FDA for a generic drug ANDA at filing is much lower at $70,480. Since there is no longer a monopoly on the drug, competition for the innovative drug naturally drives the prices down for bioequivalent drug products.
FDA is authorized to charge user fees (and instructed how much to collect each year) under the Prescription Drug User Fee Act (PDUFA), which was recently renewed by Congress and President Trump. As a result, each year FDA’s user fee program affects drug pricing negatively, particularly as the user fees for new drug applications go up – and they have almost every year. FDA’s delays in approving generic drugs under the ANDA is also a contributing factor in high drug prices.
Pharmacy Benefit Managers
Another threat to lower drug pricing is the expanded use of Pharmacy Benefit Managers (PBMs). PBMs are private business entities that manage drug formularies for insurers by negotiating drug rebates with drug companies and distributing and selling drugs. However, PBMs often take a price-dependent cut of any drug rebates; the pricier the drug, the greater cut a PBM can take. While the theoretical function of PBMs is to keep drug prices down for the insurers, the PBMs make money every step of the way from drug purchase to sale and distribution, leading to price increases.
Patient Assistance Programs
One particularly surreptitious way drug companies have been ensuring drug pricing remains as high as possible is through the use of patient assistance programs. According to Dr. Gerard Anderson of the Johns Hopkins Schools of Public Health and Medicine, “The problem with patient-assistance programs is that they allow drug companies to raise prices while keeping patients immune from all cost sharing.”[3] High drug costs do not go away, but get shifted to other parties. For some patient assistance programs, benefit managers find charities that will pay for specific drugs. Unfortunately, this helps maintain high drug prices as drug makers have no incentive to bring prices down. Even if the patient cannot pay, the charity will. Additionally, some patient assistance programs are funded by the drug companies themselves. Although these programs are considered charitable deductions by the IRS, a Wall Street Journal analysis suggested that for every $1 million put toward patient assistance programs by drug companies, $21 million in increased drug sales results. Through patient assistance programs, pharmaceutical manufacturers take tax deductions and can point to the assistance programs as evidence of claims to help patients. All the while, the program ensures that there is always a market for expensive drugs.
Drug Pricing Woes: Federal and State Governments Step In
So what then, is the solution to prescription pricing woes? FDA and the states are taking steps to reduce drug pricing in various ways. On June 27, FDA published a list of off-patent drugs that do not have generic alternatives and expressed its intent to expedite the review of generic versions of these drugs until there are three generics approved for a given drug product. Eventually this move could increase the availability of generics and hopefully will drive the costs of drugs down for healthcare providers and patients.
States Step In
States are also stepping in, with California leading the charge. In November of 2016, California attempted to pass Proposition 61, which would cap California prescription drug prices at the price the Department of Veteran Affairs pays for them. The proposition was narrowly defeated (53% against). Not to be stymied, on September 11 California’s Assembly passed a drug transparency bill that would require drug manufacturers to give advance notification of substantial price hikes (more than 16% over two years), and require health plans to disclose drug spending details including the most frequently prescribed drugs and which drugs cost them the most. The bill, titled Senate Bill 17 (SB17), was signed by California governor Jerry Brown on October 9 and goes into effect on January 1, 2018. Governor Brown also signed a related bill on October 9, entitled Assembly Bill 265. This bill aims to limit the use of high-cost drugs by preventing prescription drug manufacturers from offering vouchers and discounts for name-brand drugs to patients if their health coverage covers a lower cost generic drug.[4]
Other states are taking up the cause: in May, Maryland passed a drug pricing law allowing Medicaid to alert the attorney general if drug manufacturers raise the price of a drug by 50% or more in a year. Maryland Governor Larry Hogan has not yet vetoed or signed the bill. Ohio is taking a stab at pricing using the ballot measure Issue 2, which is essentially identical to California’s Proposition 61. Ohio residents will vote on Issue 2 this November. Congressman Doug Collins of Georgia is working on a bill that would require more transparency from PBMs.[5]
Outlook
The US drug approval process is long and costly, and innovative pharmaceutical companies pass the extensive costs of research, user fees, and monopoly rent on to consumers. Inefficient and self-serving pharmaceutical programs like the use of PBMs and patient assistance add to drug price bloat. Reducing the high prices of prescription drugs will not come from any single step; rather, a complex and thorough overhaul of the various entities and systems involved in drug design, development, approval, manufacture, distribution, and sale will be required.
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- Editor’s note: This is part 3 of a multi-part series on drugs and drug pricing. See also Reducing Prescription Drug Costs: The Solution Hiding in Plain Sight and The Intellectual Property Rights Challenge of Global Drug Pricing
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[1] Johns Hopkins University. “Examining the Rising Costs of Prescription Drugs in the U.S., and Possible Alternatives” April 3, 2017. Found at: https://hub.jhu.edu/2017/04/03/drug-pricing-health-policy-expert-gerard-anderson/
[2] Bioequivalent drugs have the same biological activity as the innovative drug as well as the same active ingredients, route of administration, dosage form, strength, and conditions of use.
[3] Lopez, Linette.“A Wall Street Investor Call Revealed Part of the Secret of Why Drugs are So Expensive,” Business Insider, June 19,2017. Found at: http://www.businessinsider.com/mallinckrodt-acthar-express-scripts-call-by-wells-fargo-2017-6
[4] The full text of the bill may be found at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180AB265
[5] Id.
