High prescription drug costs are a complex problem with consequences for both consumers and health care systems. The Center for Medicare and Medicaid Services (CMS) estimates prescription drug spending will grow an average of 6.3 percent each year over the 2016-2025 period. High drug prices have been associated with market trends, patent protections, and lack of competition. While there are solutions that can be instated at the federal level, states are taking it upon themselves to pass certain policies to diminish the burden on consumers. Even with protective measures already in place, prices have been increasing at an exponential rate over the past decade, the main issue being the market.

The pharmaceutical industry can be best described as an oligopoly, a market dominated by a small number of large sellers, thus limiting the amount of competition. In a perfect world, generic counterparts would be able to enter the market more quickly, thus increasing competition, and lowering prices. However, there are several practices that prevent competition. The main ones being exclusivity, patent extenders and pay-for-delay.

What Contributes to High Drug Prices and Why it Matters

The Food and Drug Administration grants exclusive marketing rights for approved drugs, which is separate from patent life. There are four main types of exclusivity: orphan drug, new chemical, pediatric, and other. Depending on which category the drug falls under, exclusivity can last anywhere from six months to seven years, which influences the level of innovation and competition in the market.

Patent extensions also affect competition. One method related to patent extension is marketing me-too drugs. Me-too drugs have similar formulations to their predecessors but are advertised as being a more effective drug. Since the drug falls under the same patent, this blocks generic counterparts from entering the market.

Brand name manufacturers can also stop generic competitors from entering the market through pay-for-delay as well. Pay-for-delay tactics are when manufacturers offer patent settlements to generic companies in order to prevent these cheaper alternatives from coming to market.

In addition to the lack of competition, the pharmaceutical supply chain is very dense and intricate, so even if consumers are buying the cheaper drug they might not see that positive difference in their pocket due to the price variability. A recent USC Schaeffer study tracked the flow of funds across the pharmaceutical supply chain and found that more than $1 in every $5 in spending on prescription drugs goes towards profits of pharmaceutical companies, warranting more competition in the system.

Higher prices negatively impact consumers and their health outcomes due to the inability to afford medications. In a recent Community Catalyst report, a majority of Americans across the political spectrum consider prescription drug costs unreasonable and a top priority for Congress. A Kaiser Family Foundation survey found that one in four of those taking a prescription drug skipped doses or cut pills in half due to costs. This statistic is especially troublesome for patients with chronic conditions. For instance, one-third of Medicare patients with leukemia failed to fill prescriptions within six months of diagnosis when the cost of the life-saving drug, Gleevec, went up to $146,000 a year.

Because consumers have to decide between food and other expenses or their medications, high prescription drug costs also contribute to higher costs to the health care system overall through unnecessary hospitalizations, emergency services and physician visits.

This is trend applies to payers as well. A new report by AcademyHealth organizational affiliate the Association for Accessible Medicines found that in 2017, generics generated $265 billion in total savings across payers. Savings for Medicare and Medicaid amounted to $82.7 billion and $40.6 billion, respectively, which translates to an average $1,952 for every Medicare enrollee and $568 for every Medicaid enrollee.

Promising Policy Proposals

At this year’s AcademyHealth Annual Research Meeting, one well-attended session highlighted various federal and state policy strategies and future questions researchers need to address to mitigate the financial burden of prescription drug costs. State policies featured in the session focus on increasing transparency, price gouging, and regulating pharmacy benefit managers (PBMs) amongst others.

Transparency laws can target either the manufacturer, pharmacies or insurers. For example, in Vermont, pharmacists are required to dispense the lowest priced generic, insurers are required to file rate increases and total spending with the state, and manufacturers must provide cost justification to the Attorney General. Maine’s transparency law allows the attorney general to compile a list of prescription drugs and the drug’s percentage of wholesale acquisition cost (WAC) increase and make that list public.

The National Association of State Health Policy tracks price gouging bills that enable states to take legal action and impose financial penalties on drug manufacturers that dramatically increase their prices over specific time periods. There have been multiple attempts by states in their recent legislative sessions to pass price gouging practices, but there has been backlash as to what this can do to market trends since prescription drugs are regulated and sold through a national marketplace rather than a state marketplace.

While PBMs are meant to negotiate lower costs with manufacturers on behalf of consumers, those savings do not necessarily reach the consumer. Some states, such as South Dakota, Colorado, and Kansas have enacted legislation focused on disclosing PBMs practices aimed at keeping prices down. These practices include rebates offered to manufacturers for allowing pharmacists to discuss cheaper alternatives with patients.

There are other promising policy actions at play in the states such as implementing rate setting, importing drugs from Canada, purchasing drugs in high volume, and creating state task forces or commissions to study and find solutions to high prescription drug costs.

Overall, prescription drug costs are an intricate issue and there are multiple reasons for high prices, but there are policy proposals in practice to change course. As more research is being published about the effects of prescription drug costs, it is up to policymakers to create positive change.