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Biomedical Research

Drug Pricing in the United States

Drug costs are a prominent issue in American healthcare. To investigate health care reform, one must examine the depth of the issue and what can be done. Americans pay higher drug costs than the rest of the world, despite their higher wages and while they also use newer and stronger drugs, some claim that the US is shouldering the burden for drug innovation.

By Aleicia Zhu

Published 9:03 PM EST, Sat April 10, 2021

Introduction

With the COVID-19 pandemic, the cost of healthcare in the United States has been a surging issue. According to the New York Times, one critically ill patient received a surprise bill for her helicopter lift—it was for $52,112 [1]. As a whole, the US spends 16.9% of its GDP on healthcare, which is more than any other country [2]. Likewise, the costs of drugs and ‘Big Pharma’ have been a recurring motif in what some see as the horror story of American healthcare costs. A single vial of the long-acting insulin Humulin R U-500, for example, can cost $1,487 and on the global market, the US accounts for half of the insulin industry’s profits [3]. Clearly, drug costs can be an issue for American patients, but the extent, policy, and solutions must be examined more closely.  

Results

As stated by the CDC, prescription drugs make up approximately 9.5% of healthcare expenditures [4]. Nevertheless, some groups make efforts to decrease their personal healthcare expenditures on prescription drugs. For the ages 18-64, out-of-pocket costs averaged $6 for generic drugs but $30 for the brand name. Some people in all age groups reported that they did not take their medication or requested a cheaper drug [5, 6]. The over 65 age group, in particular, reported not taking their medications at 4.8% and requesting a cheaper drug at 17.7%. In this same age group, those that were only covered by Medicare were less likely to take their medications as prescribed in contrast to those with private coverage [6]. For the 18-64 age group, the percentage that did not take their medication or requested a cheaper drug declined from 2013 to 2015 and remained stable from 2015 to 2017. Another declining solution used by this group includes alternative therapies, which were most highly utilized by women and the uninsured [5]. Even accounting for higher US incomes, Americans spend 90% more on prescription drugs than Europeans [7].  

Government policy also affects drug costs in the US. Medicare Part D, for instance, was a policy instituted in January 2006 designed to cover some outpatient drug costs and prevent them from increasing. To clarify, Medicare is a government program designed to pay for some of the healthcare costs of people who are 65 and older, have a disability, or have end-stage renal disease [9]. In a study by NBER, they found that the percent of elderly filling prescriptions rose 3% from 2005 to 2007 and out of pocket drug costs declined 15.8%, relative to the near-elderly. The spike in elderly filling prescriptions was mostly in 2006 and actually declined in 2007, though there is still an overall increase [10]. Medicare does use a coverage gap which was, in 2006, paying out of pocket drug costs up to $2250 and after $3600 annually per person. In the $2250 to $3600 range, plans cannot allow the beneficiary to pay more than 25% of the costs of brand name drugs, and some people do have supplementary Medicare advantage plans to pay for this. [11]. Beneficiaries still report financial difficulties, and people report lesser use of both essential and non-essential drugs during the gap. However, people also report that these issues have at least been mitigated from where they once were, though they do experience great confusion from this policy. As for cost to the government, the Congressional Budget Office estimated that the cost of these benefits were $811.5 billion from 2006 to 2017 [12]. Certain advocacy groups believe that this can be reduced by removing the noninterference clause, a segment of the Medicare Modernization Act (which created Medicare Part D) that bans the government from negotiating these drug costs. Not to mention, this receives overall support of 88% of the public. Only private plan sponsors can negotiate these, but supporters claim that the government could have more collective power in driving these expenditures down [13]. The Veterans Affairs system is different, with the government organization owning a network of pharmacies rather than reimbursing privately owned ones. The 1992 Veterans Health Care Act put price ceilings on drugs and the VA is allowed to negotiate, offering themselves steep discounts. Out of all federal purchasers, the VA has the lowest per prescription costs [14]. 

Still, it is important to keep in mind the costs of manufacturing the drugs themselves. Detractors of negotiating down drug costs argue that Americans are subsidizing the healthcare systems of the rest of the world. Without them, pharmaceutical companies would not be able to turn profit and would stop selling the drugs or innovating new ones [15]. Some research indicates that drug development is sensitive to expected future revenues [16]. Drug development is, indeed, expensive. Moreover, pharmaceutical companies need to recoup the costs of failed drugs, not just the ones that make it to market. According to the New England Journal of Medicine, only 11.8% of drugs succeed in obtaining clinical approval [17]. In 2013 dollars, a study in the Journal of Healthcare Economics estimated that the cost of research and development is $2.558 billion [18]. Americans’ drug expenditures are higher, but Americans are also more likely than Europeans to use newer and higher-strength drugs [19].  The $1,487 quoted was for the newer, long-acting Humulin R U-500; Walmart’s ReliOn insulin costs $25 per vial, though it is more inconvenient to use. The Washington Post asserts that pharmaceutical companies spend more on marketing than research and development, but one must be careful to understand that ‘marketing and administration’ were proclaimed to be only marketing. Administration includes almost all costs except R&D and some quality control and maintenance.  

Discussion

On the whole, drug costs in American healthcare are complicated. They are simultaneously a pressing issue in healthcare affordability but also not the greatest issue the US healthcare system faces. For instance, hospital care and clinical services are far more expensive than prescription drugs’ 9.5% of healthcare costs; respectively, they make up 32.7% and 19.9% [4]. Administrative costs are also extremely burdensome, as the US has a labyrinthine system of different private insurers, separate billing codes, Medicare, and Medicaid. In essence, it is a difficult and time-consuming process for physicians and healthcare organizations to get reimbursed. In 1999, administrative costs accounted for 31% of healthcare expenditures in the US, whereas it accounted for 16.7% of Canadian healthcare expenditures. For context, Canada has only one payer—the provincial government—and duplicative private care is illegal. Of course, this single-payer system has its own issues. Wait times are a prominent one in US media. Overall, healthcare reform is an exceedingly complex issue, where every system has its pros and cons.

Americans will, likely, also need to accept certain trade-offs to reduce drug prices. This may include using older or weaker drugs [19]. As with Canada, the government may have to cap or subsidize drug prices instead of paying for them entirely. While physician care and hospital stays have no cost at the point of service, pharmacare still requires payment [20]. Americans will also need to tolerate the taxes to pay for this. While the proposed single-payer system ‘Medicare-for-All’ is popular when not described, support drops from 56% to 37% when told Americans would have to pay more taxes and that it would ban duplicative private care. Some advocates also propose nationalizing the pharmaceutical industry, but it is unclear if Americans are willing to pay the taxes to maintain the same amount of research and development. The Brookings Institute proposes that Europeans pay an extra 20% for drugs make up for it and increase innovation so that they and their global counterparts can benefit [21]. 

Conclusion

American healthcare has been an ever-present issue, from Teddy Roosevelt’s national health insurance to Bernie Sanders’s Medicare-for-All program [22]. On top of that, discussions of ‘Big Pharma’, drug costs, and corporate interests have intertwined with that. Nevertheless, it is important to look into the complexity of the issue. Americans will likely need to have trade-offs if they desire lower healthcare costs, though it does not they should not support reform. These negatives need to be recognized but also balanced against the positives.  

Aleicia Zhu, Youth Medical Journal 2021

References

  1. A $52,112 Air Ambulance Ride: Coronavirus Patients Battle Surprise Bills. (2021). The New York Times. https://www.nytimes.com/2020/10/13/upshot/coronavirus-surprise-medical-bills.html
  2. ‌U.S. Health Care from a Global Perspective, 2019: Higher Spending, Worse Outcomes? (2020, January 30). Commonwealth Fund. https://www.commonwealthfund.org/publications/issue-briefs/2020/jan/us-health-care-global-perspective-2019
  3. ‌“The absurdly high cost of insulin” – as high as $350 a bottle, often 2 bottles per month needed by diabetics. (2016). Natap.org. https://www.natap.org/2019/HIV/052819_02.htm
  4. FastStats – Health Expenditures. (2021). https://www.cdc.gov/nchs/fastats/health-expenditures.htm 
  5. Products – Data Briefs – Number 332 – February 2019. (2021). https://www.cdc.gov/nchs/products/databriefs/db333.htm
  6. Products – Data Briefs – Number 332 – February 2019. (2021). https://www.cdc.gov/nchs/products/databriefs/db335.htm
  7. ‌Goldman, D., & Lakdawalla, D. (2018, January 30). The global burden of medical innovation. Brookings. https://www.brookings.edu/research/the-global-burden-of-medical-innovation/#footref-3
  8. Products – Data Briefs – Number 332 – February 2019. (2021). https://www.cdc.gov/nchs/products/databriefs/db335.htm
  9. How Part D works with other insurance | Medicare. (2021). Medicare.gov. https://www.medicare.gov/drug-coverage-part-d/how-part-d-works-with-other-insurance 
  10. Ketcham, J., & Simon, K. (2008). NBER WORKING PAPER SERIES MEDICARE PART D’S EFFECTS ON ELDERLY DRUG COSTS AND UTILIZATION. https://www.nber.org/system/files/working_papers/w14326/w14326.pdf
  11. Costs in the coverage gap | Medicare. (2021). Medicare.gov. https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/costs-in-the-coverage-gap
  12. ‌Hsu, J. (2008). Medicare Beneficiaries’ Knowledge of Part D Prescription Drug Program Benefits and Responses to Drug Costs. JAMA, 299(16), 1929. https://doi.org/10.1001/jama.299.16.1929 
  13. What’s the Latest on Medicare Drug Price Negotiations? (2019, October 17). KFF. https://www.kff.org/medicare/issue-brief/whats-the-latest-on-medicare-drug-price-negotiations/
  14. Veterans Health Administration | Health Affairs Brief. (2021). Healthaffairs.org. https://www.healthaffairs.org/do/10.1377/hpb20171008.000174/full/
  15. ‌Whitman, E. (2015, September 24). How The US Subsidizes Cheap Drugs For Europe. International Business Times. https://www.ibtimes.com/how-us-subsidizes-cheap-drugs-europe-2112662
  16. ‌Dubois, P., de Mouzon, O., Scott‐Morton, F., & Seabright, P. (2015). Market size and pharmaceutical innovation. The RAND Journal of Economics, 46(4), 844–871. https://doi.org/10.1111/1756-2171.12113
  17. ‌DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2015). The cost of drug development. New England Journal of Medicine, 372(20), 1972-1972. doi:10.1056/nejmc1504317
  18. DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2016). Innovation in the pharmaceutical industry: New estimates of R&D costs. Journal of Health Economics, 47, 20–33. https://doi.org/10.1016/j.jhealeco.2016.01.012
  19. Goldman, D., & Lakdawalla, D. (2018). THE GLOBAL BURDEN OF MEDICAL INNOVATION. University of Southern California. https://healthpolicy.usc.edu/wp-content/uploads/2018/01/01.2018_Global20Burden20of20Medical20Innovation.pdf 
  20. The Lancet. (2019). Canada needs universal pharmacare. The Lancet, 394(10207), 1388. https://doi.org/10.1016/s0140-6736(19)32324-4
  21. Goldman, D., & Lakdawalla, D. (2018, January 30). The global burden of medical innovation. Brookings; Brookings. https://www.brookings.edu/research/the-global-burden-of-medical-innovation/#footnote-14
  22. A Brief History: Universal Health Care Efforts in the US – PNHP. (2018, April 17). PNHP. https://pnhp.org/a-brief-history-universal-health-care-efforts-in-the-us/

By Aleicia Zhu

I am a teen who studies at a school for biotechnology. There, we learn the fundamentals of basic research. Using the skills I have learned, I hope to pursue an MD/PhD in neurology!

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