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The true story of America’s sky-high prescription drug prices

Let’s say you’re at the doctor. And the doctor hands you a prescription.

The prescription is for Humira, an injectable medication used to treat a lot of common conditions like arthritis and psoriasis. Humira is an especially popular medication right now. In 2015, patients all around the world spent $14 billion on Humira prescriptions — that’s roughly the size of Jamaica's entire economy.

Let’s say your doctor appointment is happening in the United Kingdom. There, your Humira prescription will cost, on average, $1,362. If you’re seeing a doctor in Switzerland, the drug runs around $822.

But if you’re seeing a doctor in the United States, your Humira prescription will, on average, run you $2,669.

How does this happen? Why does Humira cost so much more here than it does in other countries?

Humira is the exact same drug whether it’s sold in the United States, in Switzerland, or anywhere else. What’s different about Humira in the United States is the regulatory system we’ve set up around our pharmaceutical industry.

The United States is exceptional in that it does not regulate or negotiate the prices of new prescription drugs when they come onto market. Other countries will task a government agency to meet with pharmaceutical companies and haggle over an appropriate price. 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.

The United States allows drugmakers to set their own prices for a given product — and allows every drug that's proven to be safe come onto market. And the problems that causes are easy to see, from the high copays at the drugstore to the people who can’t afford lifesaving medications.

What’s harder to see is that if we did lower drug prices, we would be making a trade-off. Lowering drug profits would make pharmaceuticals a less desirable industry for investors. And less investment in drugs would mean less research toward new and innovative cures.

There’s this analogy that Craig Garthwaite, a professor at Kellogg School of Management who studies drug prices, gave me that helped make this clear. Think about a venture capitalist who is deciding whether to invest $10 million in a social media app or a cure for pancreatic cancer.

“As you decrease the potential profits I’m going to make from pancreatic cures, I’m going to shift more of my investment over to apps or just keep the money in the bank and earn the money I make there,” Garthwaite says.

Right now America’s high drug prices mean that investing in pharmaceuticals can generate a whole bunch of profits — and that drugs can be too expensive for Americans to afford.

Let’s say you’re a pharmaceutical executive and you’ve discovered a new drug. And you want to sell it in Australia. Or Canada. Or Britain.

You’re going to want to start setting up some meetings with agencies that make decisions about drug coverage and prices.

These regulatory bodies generally evaluate two things: whether the country wants to buy your drug and, if so, how much they’ll pay for it. These decisions are often related, as regulators evaluate whether your new drug is enough of an improvement on whatever is already on the market to warrant a higher price.

So let’s say you want to sell your drug in Australia. You’ll have to submit an application to the Pharmaceutical Benefits Advisory Committee, where you’ll attempt to prove that your drug is more effective than whatever else is on the market right now.

The committee will then make a recommendation to the country’s national health care system of whether to buy the drug — and, if the recommendation is to buy it, the committee will suggest what price the health plan ought to pay.

Australia’s Pharmaceutical Benefits Advisory Committee is not easy to impress: It has rejected about half of the anti-cancer drug applications it received in the past decade because their benefits didn’t seem worth the price.

But if you do succeed — and Australia deems your drug worthy to cover — then you’ll have to decide whether the committee has offered a high enough price. If so, congrats! You’ve entered the Australian drug market.

Other countries regulate the price of drugs because they see them as a public utility

Countries like Australia, Canada, and Britain don’t regulate the price of other things that consumers buy, like computers or clothing. But they and dozens of other countries have made the decision to regulate the price of drugs to ensure that medical treatment remains affordable for all citizens, regardless of their income. Medication is treated differently because it is a good that some consumers, quite literally, can’t live without.

This decision comes with policy trade-offs, no doubt. Countries like Australia will often refuse to cover drugs that they don’t think are worth the price. In order for regulatory agencies to have leverage in negotiating with drugmakers, they have to be able to say no to the drugs they don’t think are up to snuff. This means certain drugs that sell in the United States aren’t available in other countries — and there are often public outcries when these agencies refuse to approve a given drug.

At the same time, just because there are more drugs on the American market, that doesn’t mean all patients can access them. “To think that patients have full access to a wide range of products isn’t right,” says Aaron Kesselheim, an associate professor of medicine at Harvard Medical School. “If the drugs are so expensive that you can’t afford them, that’s functionally the same thing as not even having them on the market.”

It also doesn’t mean we’re necessarily getting better treatment. Other countries’ regulatory agencies usually reject drugs when they don’t think they provide enough benefit to justify the price that drugmakers want to charge. In the United States, those drugs come onto market — which means we get expensive drugs that offer little additional benefit but might be especially good at marketing.

This happened in 2012 with a drug called Zaltrap, which treats colorectal cancer. The drug cost about $11,000 per month — twice as much as its competitors — while, in the eyes of doctors, offering no additional benefit.

“In most industries something that offers no advantage of its competitors and yet sells for twice the price would never even get on the market,” Peter Bach, an oncologist at Sloan-Kettering Memorial Hospital, wrote in a New York Times op-ed. “But that is not how things work for drugs. The Food and Drug Administration approves drugs if they are shown to be ‘safe and effective.’ It does not consider what the relative costs might be.”

What happens when you don’t price-regulate drugs? Just look at the United States.

The United States has no government panel that negotiates drug prices. There are thousands of health insurance plans all across the country. Each has to negotiate its own prices with drugmakers separately. Because Americans are fragmented across all these different health insurers, plans have much less bargaining power to demand lower prices.

In other words: Australia is buying drugs in bulk, like you would at Costco, while we’re picking up tiny bottles at the local pharmacy. You can guess who is paying more.

“You could say that American health care providers and pharmaceuticals are essentially taking advantage of the American public because they have such a fragmented system,” Tom Sackville, president of the International Federation of Health Plans, says. “The system is so divided, it’s easy to conquer.”

There is one especially large health insurance plan in the United States: Medicare, which covers about 55 million Americans over the age of 65. But federal law expressly prohibits Medicare from negotiating drug prices or making decisions about which drugs it covers. Instead, Medicare is required to cover nearly all drugs that the Food and Drug Administration approves. This means that Medicare must cover drugs that aren’t an improvement over what currently exists, so long as the FDA finds they’re safe for human consumption.

Drugmakers know that as long as their products are safe, Medicare will buy them. “For Medicare, the sky really is the limit,” on drug prices, says Jamie Love, who has studied drug pricing and directs the DC nonprofit Knowledge Ecology International.

Americans end up spending way more on prescription drugs than anyone else

The result of this system is that Americans spend $858 per person on prescription drugs. That’s about twice as much as Australians and three times as much as the Dutch.

Americans aren’t buying lots more drugs. We’re just spending more on the ones we do buy.

There isn’t much evidence that Americans use an inordinately high amount of prescription drugs. It's just that when we buy prescription medications, we pay more for the exact same product.

These are the prices for the cancer drug Avastin in different countries.

And these are the prices for Harvoni, a drug that cures hepatitis C.

Pick any brand-name drug, and you’ll almost certainly find that the price in the United States is significantly higher than in other countries.

What would happen if the United States started price-regulating drugs?

For one thing, we’d spend less on prescription drugs. If the United States set up an agency that negotiated drug prices on behalf of the country’s 319 million residents, it would likely be able to demand discounts similar to those of European countries.

This would mean that health insurance premiums wouldn’t go up nearly as quickly — they might even go down.

There would be trade-offs. We’d likely have to give up some of the choice of drugs that our insurance plans cover. If a national board made decisions about what prices were appropriate for drugs, it would need to have the ability to reject the drugs that didn’t make the cut.

Consider the Veterans Health Administration, which does negotiate drug prices. It gets drugs that are usually 40 percent cheaper than what Medicare pays. But it also covers fewer products.

Margot Sanger-Katz recently reported for the New York Times that “many older patients who get their health insurance from the V.A. also sign up for Medicare drug plans to cover medicines that the V.A. won’t.” At the same time, VA doctors do say their patients are generally able to obtain the medications they prescribe.

Economic research suggests that price regulation might mean less innovative drugs, too

Investors respond to economic incentives. When they see a market that will pay lots of money for their products, they’ll put more money toward developing the type of drugs that market wants.

Consider the hypothetical venture capitalist from earlier, who is thinking about whether to fund a biotech firm or a social media startup.

Part of that decision will revolve around the type of business that interests her — and part around what profits she thinks can be made.

We’ve seen this happen in real life, too: When the government mandates the coverage of a new type of drug, there are more clinical trials to develop that particular treatment.

Consider the work of MIT economist Amy Finkelstein. She looked at what happened after Medicare began covering the flu vaccine for its millions of enrollees. And she found that with the usage of the flu vaccine guaranteed to increase, there was a 2.5-fold increase in clinical trials for new flu vaccines.

Separate research shows a significant increase in research dollars for drugs that the elderly typically take after Medicare began covering prescription drugs in 2005.

Right now, the United States’ exceptionally high drug prices help subsidize the rest of the world’s drug research. We benefit from that work with new and better prescriptions — and so does the rest of the world.

In other words: Right now, the United States is subsidizing the rest of the world’s drug research by paying out really high prices. If we stopped doing that, it would likely mean fewer dollars spent on pharmaceutical research — and less progress developing new drugs for Americans and everybody else.

This is a central dilemma in drug pricing policy: Should we trade off some innovation for some access?

Every policy decision comes with trade-offs, and that’s true of regulating drug prices. If the United States began to price regulate drugs, medications would become cheaper. That would mean Americans have more access to drugs but could also expect a decline in research and development of new drugs.

We might have fewer biotech firms starting up, or companies deciding it’s worth bringing a new drug to market.

That might be okay: We might decide as a society that we are willing to trade some level of innovative to lower drug prices and make medication more financially accessible to those who need them right now.

It’s a hard question to think about: Do we want to lower the price of the hepatitis C cure that hit the market for $84,000 — knowing that price controls might lead to less investment in pursuing other cures in the future?

“If you have hepatitis C today, you probably want to have the drug for a cheaper price,” Garthwaite says. “If you have pancreatic cancer today, you probably want to do everything you can to get more money put into the research and development pipeline to cure that disease.”

He adds, “This isn’t an easy question to think about, how much innovation we’re comfortable paying for — or the idea that we might be spending too much on innovation.”

But it’s a conversation that America’s exceptionally high drug prices are forcing us to consider, as drug prices skyrocket — and one in four Americans report trouble paying for their prescription drugs.

Are we, as a country, comfortable paying higher prices for drugs to get more innovation? Or would we trade some of that innovation to make our drugs more accessible to those of all income levels?