High prescription drug costs are a persistent problem in the United States. The U.S. spends nearly double per person what other high-income countries do — a big reason we spend so much more on health care overall than the rest of the world.
In three new Health Affairs papers supported by the Commonwealth Fund and The Drug Pricing Lab of Memorial Sloan Kettering, policy experts explore ways to get pharmaceutical prices under control. By increasing competition in drug markets, applying value-based purchasing, and protecting patients from high out-of-pocket costs, they believe policymakers can begin to make affordable prescription drugs a reality.
One leading driver of high drug costs is inadequate competition in the pharmaceutical industry. Potential competitors face high start-up costs and extensive government approval requirements, yet entrenched manufacturers also take advantage of regulatory loopholes to extend patent protections. These market dynamics bar potential competitors, leading to higher prices. And this price inflation is exacerbated by a regulatory environment that encourages more generous employer-provided health insurance plans and public-sponsored coverage for high-priced drugs.
The first two papers — one by Jonathan J. Darrow and Aaron S. Kesselheim, M.D., and the other by Steven D. Pearson, M.D., Len Nichols, and Amitabh Chandra — propose five pathways to increased competition, both between brand-name manufacturers and through lower-cost generic drugs:
- Government agencies could make more information available about a drug’s value to encourage patients and physicians to choose drugs that provide the most clinical benefit for the money.
- Pharmacists could have expanded ability to substitute prescribed medications with less expensive drugs that are chemically similar and just as effective.
- The Food and Drug Administration could expedite the approval process for generic drugs and other potential competitors to existing therapies.
- Policymakers could allow the importation of generic drugs from other countries, particularly during periods of drug shortages in the U.S.
- Regulators could crack down on frivolous patents that protect brand-name drugs from generic competition.
Beyond increasing competition, Darrow and Kesselheim argue for empowering government insurance programs like Medicare and Medicaid to exclude coverage of low-value drugs altogether. Pearson, Nichols, and Chandra further propose allowing the government to make patent protection and other forms of market exclusivity for drugs contingent on manufacturers fairly pricing their products. Under such a system, higher-value drugs would be rewarded with longer periods of protection from competitors.
Pearson and colleagues propose four additional ways to pay for drugs based on their value. First, the federal government could make greater use of comparative effectiveness research to negotiate the prices it pays to drug manufacturers — a strategy all other industrialized countries follow. Federal and state governments also could assess penalties on drug manufacturers that fail to provide good value. For instance, when New York exceeds a predetermined cap for Medicaid drug spending, state law allows it to assign value-based price targets for key drugs. New York can then demand supplemental rebates from manufacturers to reach these targets and can assess penalties against manufacturers that don’t negotiate a satisfactory rebate.
Insurers can be part of the solution as well. For instance, they could pay different rates for drugs used to treat multiple conditions, based on the relative benefits of each treatment. And insurers could negotiate outcomes-based agreements with manufacturers, which would be required to provide a larger rebate or a full refund when a drug doesn’t work as advertised.
Promoting competition and value-based purchasing would help reduce the prices we pay for prescription drugs. But high prescription drug costs aren’t just a financial burden: they are also detrimental to patients’ health. In the third of the Health Affairs papers, Stacie Duetzina, Juliette Cubanski, Diane Rowland, and Scott Ramsey, M.D., demonstrate how high prescription drug prices, coupled with a shift toward higher cost-sharing by health insurers, interfere with the care of patients who need expensive specialty drugs. Both commercial insurers and Medicare Part D have gravitated away from copayments (where the patient pays a flat dollar amount per prescription) and toward both coinsurance (where the patient pays a percentage of the drug’s total price) and higher deductibles. This leaves patients more exposed to rising drug prices. When out-of-pocket costs become unaffordable, patients may stop taking the medicine they need.
The authors propose several ways to avoid cost-related disruptions in patient care. For one, insurers could charge copayments for specialty drugs, rather than coinsurance. Coinsurance is intended to make patients more cost sensitive, so they’ll shop around for better-value drugs. But patients can’t shop for better deals when only one manufacturer sells each specialty drug, as is typically the case. Coinsurance, therefore, serves little economic purpose in this market.
Insurers also could give patients incentives to choose high-value drugs. For example, the most cost-effective drugs could be exempted from deductibles or subjected to lower cost-sharing. Policymakers, meanwhile, could impose a limit on how much Medicare beneficiaries with Part D plans must spend out of pocket on prescription drugs.
These strategies could help make prescription drugs more affordable for patients, while also holding down costs for the health care system as a whole. And that would go a long way toward bringing U.S. prescription drug costs — and health care costs overall — closer to those paid by the rest of the world.
Written with editorial assistance from Joel Dodge.