High Drug Pricing in the U.S.

The high cost of prescription drugs in the U.S. is a well-known issue, affecting millions of Americans. In 2022 alone, U.S. spending on prescription drugs reached $406 billion, an 8.4% increase from the previous year. What’s more concerning is that U.S. per capita drug spending is more than double that of other high-income nations. With the U.S. spending $858 per capita compared to the $400 average for 19 industrialized nations, it’s clear that high drug prices are not driven by higher usage, but rather by the prices themselves.

Four Reasons Why Drug Prices in the U.S. Remain so High:

1. Market Exclusivity

One of the biggest drivers of high drug prices is market exclusivity, a period during which pharmaceutical companies have monopoly rights over their new drugs. The U.S. Food and Drug Administration (FDA) grants this exclusivity to incentivize pharmaceutical innovation. Depending on the drug type (e.g., orphan drugs, biosimilars), this exclusivity can last up to 12 years. During this time, companies can price their drugs as high as the market will bear, unchallenged by competition. A prime example of market exclusivity’s impact is the Humira saga, where the absence of competitors allowed AbbVie to set astronomical prices for its blockbuster drug.

2. Patents

Patents further protect pharmaceutical companies’ market share by preventing competition. Companies can apply for patents on various aspects of a drug, such as its formulation, administration method, or delivery device. These patents, usually lasting 20 years from the date of filing, extend a company’s ability to dominate the market, even after their FDA-granted market exclusivity expires. The infamous patent fortress built around Humira is a key example of how pharmaceutical companies leverage patents to delay the introduction of lower-cost generics and biosimilars.

3. Limited Negotiating Power

Other countries with single-payer healthcare systems use their consolidated negotiating power to drive down drug prices. However, in the U.S., the fragmented healthcare system lacks a unified body with the ability to negotiate prices effectively. While Medicare is the largest insurer in the U.S., it was historically barred from negotiating drug prices. Thanks to the Inflation Reduction Act, this has recently changed, and CMS now has the ability to negotiate drug prices for Medicare beneficiaries, which is expected to provide some relief. But for now, fragmented negotiating power among insurers continues to contribute to high drug prices.

4. Incentives within the Drug Supply Chain

The structure of the drug supply chain creates financial incentives for high drug list prices. Drug rebates, which are passed down to Pharmacy Benefit Managers (PBMs), insurers, and pharmacies, are often based on a percentage of the drug’s list price. As a result, there’s a strong incentive to maintain or even increase list prices because higher drug prices result in larger rebates for stakeholders within the supply chain. While patients may not pay the full list price of the drug, their out-of-pocket costs can still be high, particularly for those with high-deductible plans or those who are uninsured.

Conclusion

The issue of high drug pricing in the U.S. is multi-faceted, driven by market exclusivity, patent protections, limited negotiating power, and incentives within the drug supply chain. As a result, U.S. consumers often bear the brunt of these high prices. While recent legislation like the Inflation Reduction Act is a step in the right direction, much more needs to be done to alleviate the financial burden of prescription drugs on Americans.

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