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Americans are exceptional in many ways — including being number one in the world when it comes to spending on prescription drugs.
On average, Americans shell out $1,100 per year for their drugs — $300 more than Germans or Canadians do. And total US drug spending has more than doubled in the past 15 years, from $121.2 billion in 2000 up to nearly $374 billion in 2014, squeezing both payers and insurers alike.
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The problem of rising drug costs is not lost on President Donald Trump. He has been aggressive about singling out pharmaceutical companies for “getting away with murder” with their “astronomical” prices. And he’s campaigned on a pledge to bring costs down.
Today, speaking before a meeting with pharmaceutical executives, Trump hinted at how he’d do that — through a still-hazy combination of lowering taxes, ramping up competition, and deregulating the drug approval process. In a statement posted on Facebook later, he suggested that bringing big pharma manufacturing back to the US would lower prices. The problem with that last move, as experts have noted, is that it could actually make drugs more expensive, not less.
Trump’s precise plans for pharma are more confusing than clarifying at this point. But as he moves forward, if he really wants to make medicines more affordable for Americans, he should focus on these three things.
1) Allow payers to negotiate drug prices with the pharmaceutical industry
In countries with single-payer health systems, governments exert much more influence over the entire health care process. These governments usually create an agency that negotiates directly with pharmaceutical companies. The government sets a maximum price that it will pay for a drug, and if the company doesn't agree, it simply loses out on the entire market.
This puts drugmakers at a disadvantage, driving down the price of drugs. It also allows these countries’ regulators to more closely scrutinize the relative quality of the drugs they’re covering which also drives costs down, as Vox’s Sarah Kliff explained: “These agencies will typically make decisions about whether these new drugs represent any improvement over the old drugs — whether they’re even worth bringing onto the market in the first place. They’ll pore over reams of evidence about drugs’ risks and benefits.” If they determine that a drug isn’t worth including on their formulary, or that it’s priced too high, this also gives them the upper hand in price negotiations, Harvard’s Amitabh Chandra told Vox.
The US is exceptional in that it doesn’t do any of these things. Instead, America has long taken more of a free market approach to drugs. Pharmaceutical companies haggle separately over drug prices with a variety of private insurers across the country. Meanwhile, Medicare, the government health program for those over 65, which is also the nation's largest buyer of drugs, is actually barred from negotiating drug prices. Instead, Medicare is required to cover almost every drug the Food and Drug Administration approves for the market. That gives pharma much more leverage, and it also means there’s no quality control over which drugs get covered and which don’t.
So drug companies in the United States do what any other profit-maximizing company does — they try to get the highest prices possible without going so high that no one will buy them. And they do this because they can. “Drug companies in the US set the prices at whatever the market will bear,” said Aaron Kesselheim, an associate professor of medicine at Brigham and Women’s Hospital. “Unless you change that, all you’re going to do is get more drugs on the market that will be more expensive.”
One way to fix this would be to allow Medicare to use its vast bargaining power to negotiate drug prices, which would have a ripple effect on the rest of the market. On the campaign trail, Trump originally proposed to do just that. But as Matt Yglesias notes, Trump’s recent statements and policy actions suggest he may be walking back on this promise.
2) Improve competition from cheaper generic products
Trump talks a lot about increasing competition to lower drug prices. But if he really wanted to do that, he should focus on increasing competition among generic products.
The rationale behind this is simple. After a drug gets FDA approval, its manufacturer enjoys a period of monopoly through patent protection — which means it can generally demand higher prices. Once that exclusivity period is over, generic drugmakers can enter the market, offering low-cost copycats.
These drugs are drastically cheaper than their brand-name counterparts, mainly because generic drugmakers piggyback on all the research and development that was done by the original drugmaker. This means generic manufacturers don't bear the same R&D costs. They also don't spend much on marketing — a massive cost for pharma.
For instance, six tablets of the brand-name antibiotic Zithromax cost $150 — while the same amount of the generic version azithromycin costs about $10. (Generics are also chemically identical to name-brand drugs, which means that medically speaking, they're likely to work just as well. With a few exceptions, it's usually smart to buy generic versions of drugs whenever they are available.)
When brand name alternatives — such as various types of hepatitis C treatments or even different insulin therapies — come on to the market, drug prices don’t drop dramatically. When competition from interchangeable generic products increases, they do. As this recent report from IMS Brogan found, “Generics that entered the market between 2002 and 2014 reduced the price of medicines by 51 percent in the first year and 57 percent in the second year following loss of exclusivity.”
3) Look at how much companies spend on marketing
In Trump’s talk with drug companies today, he also promised that he would get rid of regulations to help companies innovate faster — and therefore lower drug costs.
But innovation is not the biggest cost driver for companies. In fact, most companies spend way more on advertising alone than they do on researching and developing new products.
This chart, by León Markovitz at Dadaviz and the BBC, captures this point nicely:
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This marketing push also contributes to high drug prices by encouraging doctors to use newer, high-cost products instead of cheaper generics that may perform just as well.
Trump has also repeatedly stated that regulations get in the way of innovation. As I wrote today, though, drug developers don’t cite regulations as the thing that slows down their innovation process. Instead, they say it’s really, really hard to find new and safe drugs that deliver on their promises. Over at Forbes, Matthew Herper had an interesting statement from Margaret Anderson, the executive director of the Milken Institute’s FasterCures initiative. “[She] systematically interviewed pharma execs about what was holding up innovation. ‘“Not one person said the FDA is the root of all evil,’ she says,” Herper wrote.
So, in Trump’s muddled statements about drug pricing, he seems to be misidentifying where the blocks for innovation and cost drivers in the system are. He’s also suggested doing things that will certainly increase the cost of drugs here, Harvard’s Chandra added. “The idea of bringing [pharmaceutical manufacturing] jobs back to the US is not really going to do anything. Manufacturing in the US will be more expensive than manufacturing in India — it would be a legitimate reason to increase prices.”
To make good on his campaign promises, Trump better face these realities soon.
