Why Prescription Drug Prices in the US Are So High - Jiaxing Outdoor Equipment Co.,Ltd

Americans spend more on prescription drugs than anyone else in the world. It's true that they take a lot of pills. But what really sets the US apart from most other countries is high prices. In August, Congress passed a law aimed at cutting drug costs for elderly and disabled patients who rely on the government's Medicare health program. The pharmaceutical industry opposes the change, and Merck & Co. is suing the government over it.

1. How much do drugs cost in the US?

Average costs are about $1,300 per person per year. The median launch price of a new drug in the US in 2021 was $180,000 for a year's supply. While drugmakers aren't hiking prices of existing products quite as aggressively as they did prior to 2019, they still continue to steadily raise list prices around 4% a year, according to 46brooklyn Research, a nonprofit drug pricing research firm. While private insurers and government programs pick up the biggest share of the bill, high drug costs are ultimately passed on to members of the public through the premiums they pay to keep their insurance policies active and the taxes they pay to the government. Plus patients in the US directly pay about 13% of prescription medicine costs out of their own pockets. In one survey, one in five adults in the US said they failed to complete a prescribed course of medicine because of cost. The figure was one in 10 in Germany, Canada and Australia.

2. Why are prices so high in the US?

Unlike other nations, the US doesn't directly regulate medicine prices. In Europe, the second-largest pharmaceutical market after the US, governments negotiate directly with drugmakers to limit what their state-funded health systems pay. The UK's National Health Service has refused to pay for some cancer drugs widely used in the US on the grounds that they don't offer value for money. In the US, drug companies have more or less been able to set whatever price the market will bear. A probe by a Congressional committee concluded at the end of 2021 that drug companies had raised prices "with abandon," using anticompetitive strategies and manipulating the patent system and marketing exclusivities granted by regulators to do so.

3. How does it work in the US?

Most medicine costs are paid for by private insurers or Medicare, the largest single buyer of health-care products and services in the US. For most outpatient drugs reimbursed through Medicaid, another US health program that provides care for the poor, drugmakers must provide the government rebates that bring prices down. Private payers, on the other hand, typically rely on third-party pharmacy-benefit managers, such as Cigna Corp.'s Express Scripts unit, to negotiate discounts. Often these PBMs make exclusive deals with drugmakers that can lower prices, although they tend to limit the choice of drugs patients have. When prescription-drug benefits were added to Medicare under a 2003 law, the pharmaceutical industry successfully lobbied to prohibit the federal government from using its huge purchasing power to negotiate drug prices. Provisions in the Inflation Reduction Act that became law in August changed that.

4. What did the new provisions do?

They give Medicare the power to negotiate how much it will pay for a certain number of high-priced therapies for the first time in its history. The Department of Health and Human Services plans to release a list of the first 10 drugs for negotiation by September, and prices will take effect in 2026. The Congressional Budget Office estimates the negotiations will save the government almost $100 billion by 2031.

5. What do drug companies say?

Pharmaceutical companies argue that they need robust profits to bankroll the development of medical advances and that restricting prices would harm innovation. In its lawsuit, Merck argues that the government's new negotiation process will violate the US Constitution's Fifth Amendment, which requires the government to compensate citizens when it takes property for public use.

6. What do supporters of price regulation say?

Critics point to the drug industry's fat profit margins and say companies exaggerate drug-development costs. Doctors and insurance executives worry that many medicines are becoming unaffordable. Advocates of greater price regulation argue that it needn't hamper innovation. They say drugmakers could reduce spending on marketing and cite an analysis that found promotional budgets exceed those for research and development at most big companies.

--With assistance from Nacha Cattan.

More stories like this are available on bloomberg.com