The United States spent nearly twice as much per person on healthcare than the average of other wealthy countries in 2017 ($10,224 vs. $5,280).1
In 2016, the U.S. spent $3.34 trillion or 17.9 percent of the gross domestic product (GDP) on healthcare expenditures.2 $329 billion of this was spent on prescription drugs. Centers for Medicare and Medicaid Services (CMS) projects that spending for retail prescription drugs will be the fastest growth in the health category.
In a report conducted by the National Opinion Research Center,3 drug costs continue to be a large part of the healthcare budget. Between FY 2015-2017, the average total drug spending per hospital admission increased 18.5 percent (28.7 percent outpatient; 9.6 percent inpatient). Growth in drug spending exceeded the growth in Medicare payment and general healthcare expenditures.
Drug costs to health system pharmacy are largely dependent on manufacturer pricing. Two of the largest drivers for new drugs for manufacturers are research and development and patent regulations. In 2016, the top 10 largest pharmaceutical companies spent 17 percent of revenue on research and development.4 This compares to 12 percent on health care overall. The average cost of a single FDA-approved medication (including the cost of drugs not approved) is estimated at $2.87 billion. In general, drug patents last for 20 years, but approximately 10 years of patent protection is appreciated after FDA approval. New formulations and indications along with paying generic companies to delay entering the market prolong the patent and increase cost. Streamlining the drug approval process could reduce costs.
Traditionally, drug manufacturers have used unit based pricing. This, in addition to limited regulations, enable companies to do frequent price increases. When a drug is ready to enter the market the environment often dictates the cost.5 For drugs with a cure, such as hepatitis C regimens, the cost is high as the value to the payer/patient is perceived to be high. New competition to the market results in significant cost reduction. Some drugs are priced high that have incremental improvements over standard of care for chronic conditions and might affect a subpopulation that is not well defined. Lower priced medications include vaccines and generics which have benefit but generally cost little. Manufacturers are looking to use more value based pricing to stakeholders (e.g., private payers, government, physicians, employers) and incorporate the value of the medication in comparison to overall treatment of the disease. This is typically how drug pricing is negotiated in foreign countries where there is one payer.
Nearly 90 percent of manufactured medications are sold to wholesalers. Health system pharmacies largely purchase from a primary and sometimes a secondary wholesaler. The negotiated contract with the wholesaler will have an aggregate effect on reducing drug cost.
Group Purchasing Organizations (GPO) can also have a significant impact on health system pharmacy drug costs. Manufacturers negotiate prices with the GPO based on the purchasing power of the GPO. The aggregate of entities represented by the GPO can realize significant savings provided products are purchased on contract.
Some private nonprofit hospitals that have a disproportionate share (DSH) designation are eligible for 340B pricing. Established as part of the Veterans Health Care Act, 340B pricing allows hospitals to purchase outpatient medication at a discounted price. This price averages up to 25 percent less that the cost when purchased through a GPO.
Drug shortages also play a significant role in drug costs. With fewer manufacturers making products, and in limited locations, manufacturing closures secondary to FDA noncompliance and geographic disasters often result in greater shortages. In the NORC report, drug shortages resulted in most health systems using other means of drug acquisition such as: off contract purchasing, outsourcing pharmacies, secondary contracts, direct purchasing, secondary wholesalers and 503A pharmacies. Each of these can increase cost.
The Trump administration hopes to reduce drug costs by boosting competition, improving incentives for lower drug prices, and out of pocket costs. Others feel that a single payer would be the answer; however, a recent report from the Congressional Budget Office (CBO) says that it would involve substantial changes to the current coverage model and would overburden provider organizations. Although a cost was not attached, some cite cost estimates at $13.8 to $36 trillion. The American Hospital Association (AHA) determined that it would result in a $800 billion cut to hospitals.6
With the complexity of the drug market, it is likely that it will take more than one action to mitigate the growing drug prices.
1. How does health spending in the U.S. compare to other countries? Peterson-Kaiser. Health System Tracker. December 7, 2018.
2. Prescription Drug Spending in the U.S. Health Care System. American Academy of Actuaries. March 2018.
3. Recent Trends in Hospital Drug Spending and Manufacturer Shortages. National Opinion Research Center (NORC). January 15, 2019.
4. US Pharmaceutical Pricing: An Overview. Axene Health Partners. May 11, 2018
5. A Roadmap to strategic drug pricing. In Vivo. The Business and Medicine Report. March 2016. Vol 34 (3).
6. New Report Outlines Negative Impact of Medicare Public Option Proposal on Hospitals, Health Systems and Patients. American Hospital Association. March 12, 2019.