Rising Cost of Pharmaceuticals Research Example

Introduction

Access to quality and affordable healthcare is an essential component for every country to achieve its developmental objectives. However, in the U.S. the increasing rates of medicine has received much concern from patients, prescribers, payers, manufacturers, and policymakers. Net spending on prescription drugs in the United States recorded a 20 percent increase in 2013 and 2015. The United States government has been spending more on drug prescriptions for its citizens. Since the Medicare drug benefit in 2016, the government has paid over 40 percent of the nation's total retail prescription drug expenditure (Kesselheim, Avorn, and Sarpatwari 859). The country has spent more on prescriptions than any other countries in the world. The per capita spending of the United States in 2013 was 858 dollars compared with an average of 400 dollars for nineteen advanced industrialized nations.

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For this case, it is essential to understand some of the causes that lead to the rising costs of pharmaceuticals in the United States. Pharmacy benefit managers and manufacturers are the leading factors that cause the rise of pharmaceuticals to increase yearly. The essay will also address solutions that can be adopted by the relevant stakeholders to curb the rising costs of medicines that has significant implications for the consumers and the government.

The Key players in the Pharmaceutical Business and how they Cause Prices to Hike

The spending by the health care system in the U.S. on prescription drugs is growing at a rapid rate. The government should create measures to reduce the increased spending. However, it is essential to understand the fundamental drivers that are hiking the prices so high; thus, affecting the lives of the consumers. Manufacturers, sponsors, and pharmacy-based managers (PBM) are the key players who are causing the menace of the rising pharmaceutical costs. The average wholesale price set before discounts by manufacturers has been increasing over the years. In 2015, the average price list of branded drugs rose to 15 percent, and the rate has increased 10 percent more since 2012 (Sood, Shih, Nuys, and Goldman). The lack of proper information that indicates how the manufacturers run their activities provides them with an opportunity to interfere with the prices and gunner significant revenue at the expense of frustrating the consumers. The manufacturers enter into contracts with PBM's and sponsors. The PBM negotiates with drug manufacturer's to process pharmacy claims and offer formulary placement for the manufacturers' products in exchange for rebates and other fees payable to the PBM. The PBMs negotiate refunds on behalf of their clients. The formularies help the PBMs to arrange drugs in tiers that help them to determine how much each patient will pay out of their pocket (Tirrell). The PBM also negotiates contracts with pharmacies to set reimbursements for drugs dispensed by the pharmacy. The PBMs have incentives that enable them to drive list prices higher than average. For instance, a drug might cost $120, and the negotiated rebates reduce the rates to $80. The PBM is paid the $40 difference. However, these discounts do not reach the customers at the point of sale.

The top three PBMs in the United States, wholesaler, and retailers are earning excessive returns from the sale of pharmaceutical products (85, 66, and 49 percent). The market power by the wholesalers and retailers cause the rise in the cost of pharmaceutical products. For instance, pharmacies charge varying prices for similar products and the uninsured customers pay higher rates than insured consumers do. PBMs often argue that their large sizes provide them with the necessary bargaining power. However, it is unclear how the discounts they obtain are trickled down to health plans and consumers (Sood, Shih, Nuys, and Goldman). Manufacturers have been identified to participate in anticompetitive pricing practices, which bring many excessive returns while hurting the consumers. Manufacturers have tried to hide from the situation by pointing the finger at the intermediaries claiming that they not only benefit from the rising drug prices but to their increase (Tirrell). The middlemen, in this case, are the pharmacy benefit managers.

The Lack of Competition and Proper Regulation of Biologics

Biologics are drugs that are genetically engineered from plants and animals. Biologics are more expensive than small molecule drugs. Biologics are the fastest growing sector of the pharmaceutical market. The United States has spent more than $105.5 billion in 2016 toward the development of biologics; however, the lack of a proper regulatory framework has led to the introduction of few biosimilars (Waxman, Corr, Martin, and Duong 24). Approval regulations for biologics did not exist until 2010 and companies were expected to pursue a biologics licensing application with complete clinical trial data (Benjamin, Falit, Singh, and Brennan 295). The barrier to entry kept most manufacturers out of the market, and this gave a chance for the companies developing biologics to control prices in their favor. The Biologics Price Competition and Innovation Act were formulated to regulate the production of biologics just like what Hatch-Waxman Act governs the small molecule drugs. It was expected that the FDA would explain the legislation further and help the public benefit from the low-cost pharmaceutical products due to competition from manufacturers. However, the bill was incomplete, and FDA has failed to regulate the market of biologics accordingly. The FDA has approved four biologics. Only two of the approved biologics are in the market. These two alternatives have a 15 percent lower price than Neupogen. A comparison of the United States with Europe shows that Europe has twenty-three biosimilars for nine biologics, and the move has led to significant price decreases (Waxman, Corr, Martin, and Duong 24).

The Lack of Robust Competition among Generic Drug Manufacturers

Over 500 drugs have only one marketed generic product. Such a scenario keeps the prices of drugs at a high due to the lack of competition (Waxman, Corr, Martin, and Duong 22). Of the top 200 generic drugs approved by the FDA, 22 percent increased their prices, which exceeded inflation between 2005 and 2014. A low return on investment in the generic market has led to more than 180 off-patent drugs to lack generic competition. Moreover, brand name manufacturers misuse the Risk Evaluation Mitigation Strategies (REMS) to prevent competitors from obtaining samples that are necessary for bioequivalence, which is an essential step for generic drug making (Waxman, Corr, Martin, and Duong 22). The FDA allows manufacturers to adhere to a risk mitigation strategy; however, some manufacturers can also introduce their approach. Half of the drugs with REMS have minimal distribution, which restricts generic manufacturers from entering the market. The practice of merging and acquiring companies has led to less competition among generic drug manufacturers. For instance, Valeant Pharmaceuticals acquired 100 companies as a strategy to increase prices. Other companies have also adapted the acquisition technique, and it is expected that the trend will continue to exist. Market exits are also reducing the competition in the generic market. Manufacturing issues, low profits, and drug safety has caused some companies to exit the market. Exiting the market limits the competition and increases pharmaceutical prices. For instance, the limited demand for digoxin tablets, which are simple to manufacture have led to the cost of the drug to rise, and the patients suffer from the high price.

The high cost of pharmaceutical products has also been brought about by the market failures in the U.S. generic drug market. An increasing number of drug shortages have been recorded in the last decade, and the FDA refers to it as a period when the demand of the drug within the United States exceeds the supply (Bollky and Kesselheim 4). The Government Accountability Office (GAO) of the U.S. identified that the number of drug shortages tripled from 154 in 2007 to 456 in 2012. The scarcity involved off-patent products. The drugs in shortage include sterile injectable drugs such as epinephrine. Oral generic drugs have also been in shortage. Other drugs have also been in deficit such as buspirone, biologics, and vaccines.

Source: U.S. Government Accountability Office, Drug Shortages: Public Health Threat Continues, Despite Efforts to Help Ensure Product Availability, GAO-14-194 (Washington, DC, 2016), 15, http://www.gao.gov/assets/670/660785.pdfEvergreening by some Drug Manufacturers

Some manufacturers use the long periods of patent protection and restoration to increase brand name drug prices even when the companies have not made any improvements on the drug (Waxman, Corr, Martin, and Duong 28). Additionally, the permissive U.S. patent enables manufacturers to strategically patent small changes and convince prescribers and patients to switch to the new product and discontinue the use of the older versions of the drug (Kesselheim, Avorn, and Sarpatwari 861). Some manufacturers develop a patent cluster, which is a dense of the portfolio to cater for one drug. By producing a collection for a single drug, the company protects and eliminates competition for their product. Mylan's EpiPen secured four patents for EpiPen that do not expire until 2025 while the Epinephrine solution is currently under no copyright (Waxman, Corr, Martin, and Duong 29). Such a move by Mylan makes it difficult for a competitor to develop an alternative drug. Besides, evergreening is another practice common among drug manufacturers in the United States. Some companies seek patents on the variations of their original drugs. The licenses contain information that caters for combinations, dosages, release, and formulations that are unrelated to the drug's effectiveness. Such a strategy extends a drug's monopoly in the market. For instance, Suprenza, a weight loss drug was granted patent extension in 2013, which was to expire in 2029. The new patent was used for an oral dissolving tablet, which critics argue was not patentable (Waxman, Corr, Martin, and Duong 29). Engaging in such practices creates a monopoly of drugs and minimizes competition, which in turn prompts the manufacturers to hike the prices of pharmaceutical products without considering the patients.

The Lack of Pharmaceutical Distribution Systems to Provide Pricing Information to Patients, Providers, and Payers at the Point of Care

The drug distribution system composes of various stakeholders, and each system has a complicated relationship with the other. The primary players in the distribution sector include the manufacturers, wholesalers, retailers, insurers, and pharmacy benefit managers (PBMs) (Waxman, Corr, Martin, and Duong 30). The presence of intermediaries creates a complicated flow of payments and discounts. Transparency lacks regarding payments and rebates that each player in the distribution receives. The lack of clarity makes it difficult to identify whether the players are driving up drug prices. The citizens are left in the dark and end up receiving prescriptions and buying drugs without knowledge of the price tag on the pharmaceutical product.

Strategies to Curtail the Rising Costs of Pharmaceuticals

The United States government should alter patent protection to include price competition to reduce prices of pharmaceutical products. Provisions under the Hatch-Waxman Act that delay the introduction of generic products should be eliminated. The FDA, FTC, and the DOJ should actively monitor, evaluate, and report how the pharmaceutical market is performing. These agencies should identify concentrated markets, anticompetitive behaviors, and potential sole source markets (Waxman, Corr, Mart...