Prescription Drug Q&A: The U.S. market-based system makes it a world leader in discovering new medicines

Written by Derek Monson

October 22, 2020

This Q&A is part of an ongoing series seeking to describe and decode the prescription drug market for policymakers and the public so we can understand the price we pay at the pharmacy.

“We need state policies that address both access and affordability for patients” says Katelin Lucariello, director of state policy for the Rocky Mountain region for the Pharmaceutical Researchers and Manufacturers of America (PhRMA). “By looking at cost alone or only one piece of the cost, we only solve part of the equation.” She has five policy recommendations to improve access and affordability by addressing the full scope of the prescription drug market.

This is just one of the insights Lucariello offered in Sutherland Institute’s interview with her. Americans get what they pay for when it comes to prescription drugs. We pay higher prices for drugs but gain access to nearly twice as many new medicines as citizens in foreign countries that use the law or government programs to set drug prices. Americans also wait only about one-quarter the time (or less) compared with citizens in these foreign nations for things like new cancer medications.

To deepen your understanding of the prescription drug market from the perspective of drug manufacturers, you can read the full interview below.

Derek Monson, Sutherland Institute vice president of policy: Can you explain for the average person how manufacturers determine list prices for a new prescription drug, and how changes in those prices connect (or do not connect) to the price a patient pays at the pharmacy window?

Lucariello: While individual biopharmaceutical manufacturers are responsible for determining their medicines’ list prices, this does not happen in a vacuum and depends on many factors and considerations. Much of the public debate on medicine costs focuses on list price, but list prices are not a good indicator of what a patient will pay at the pharmacy counter and do not reflect the substantial discounts and rebates negotiated with health plans and pharmacy benefit managers (PBMs).

The U.S. has a dynamic business environment in which the net price of medicines is negotiated with PBMs and health plans, which have a lot of leverage in these negotiations. The top three PBMs control about 75% of pharmacy claims, allowing payers to maximize their negotiating leverage by combining their purchasing power into a small number of PBMs. PBMs use this leverage very effectively by negotiating a lower net price through rebates and discounts. These rebates and discounts exceeded $166 billion in 2018 alone and are growing every year. Due to negotiations in the market, net prices for brand medicines, the prices paid by PBMs and insurers, grew just 1.7% in 2019, slower than the rate of inflation for the third year in a row.

Unfortunately, patients are not always directly benefiting from these negotiations. Instead, PBMs and plans are increasingly requiring patients to pay more in cost sharing and out-of-pocket costs, despite a dramatic slowdown in list price growth and spending. Patients’ deductibles – the amount a patient pays out-of-pocket before their plan begins to pay – have increased 360% since 2006. Adding to this burden, a patient’s cost sharing for medicines, including deductible and co-insurance spending, is typically based on a medicine’s list price, not the net price after negotiated rebates and discounts. We need to make sure that patients benefit from these discounts when they pick up their prescriptions at the pharmacy counter.

Monson: Prescription drug policy proposals (e.g., allowing Medicare to directly negotiate on drug prices, international reference pricing) often simply translate to reducing drug costs by paying manufacturers less. How would such policies impact both manufacturers and patients?

Lucariello: Discussions about policy solutions that will help patients better access and afford their medicines have probably never been more important since so many individuals are struggling with the economic impacts of COVID-19. As you point out in your question, many of the approaches that have been offered only address one piece of a much bigger biopharmaceutical supply chain—which includes biopharmaceutical manufacturers, wholesalers, PBMs, payers, hospitals, and pharmacies. Each entity in the supply chain plays a role in the price a patient pays when they pick their medication up from the pharmacy counter. Nearly half of total spending on brand medicines goes to other supply chain entities, not the manufacturers that research and develop them. Addressing prescription drug costs requires looking at all of the entities involved in determining what a patient pays for their medicine.

The COVID-19 pandemic has also reinforced the need for continued biopharmaceutical innovation, now and in the future. Medicare price negotiations, international reference pricing, and drug importation all rely on government price controls that would upend our market-based system. Governments use these policies to extract the lowest possible price, which can result in unintended consequences. Patients in these countries have access to fewer medicines than patients in the U.S. Nearly 90% of new medicines launched since 2011 are available in the U.S. compared to just 50% in France, 48% in Switzerland, and 46% in Canada – countries that use some form of international reference pricing. Patients in these countries also wait much longer for access to medicines than patients in the U.S. In fact, of the new cancer medicines available globally, patients have to wait 11 months in the United Kingdom and 19 months in France, on average, compared to up to 3 months in the United States.

Policies that import price controls from other countries, whether through Canadian importation or government price controls, are the opposite of the market-based competition needed to expand patient access, improve affordability, and encourage investment in new treatments and cures.

Monson: One criticism of our prescription drug system is that it shifts costs toward Americans from other nations because those nations use government price controls on prescription drugs, while the U.S. largely allows the market to determine list prices. Is this criticism fair, and what is the industry doing to address it?

Lucariello: The U.S. leads the world in the discovery and development of new, life-saving medicines in part because we have a market-based system that incentivizes the substantial and risky investments required to bring a new drug to market. In 2018, biopharmaceutical companies invested $108 billion in R&D and provided over 4 million jobs in the U.S.

On the other hand, government price controls interfere with market forces by allowing governments to suppress prices below market value. Biopharmaceutical companies are often forced to accept these prices or face further restrictions on coverage. While this keeps prices artificially low, biopharmaceutical manufacturers have fewer incentives to invest in R&D in these countries, which means these countries ultimately benefit from the U.S. market.

Monson: In your view, what state policy reforms are needed to improve affordability and access to prescription drugs in the U.S.?

Lucariello: Your question gets at the essence of what this conversation is all about. We need state policies that address both access and affordability for patients. By looking at cost alone or only one piece of the cost, we only solve part of the equation. State policy makers should:

  • Allow patients to benefit from the lower, negotiated prices that PBMs and insurers pay for prescription medicines.
  • Require health insurers to offer at least one plan that excludes some medicines from the deductible and offers predictable set co-payments.
  • Require health insurers to cover some medicines without subjecting patients to a deductible.
  • Ensure patients benefit from the programs meant to help them afford their medicines. Health insurers should be required to count cost-sharing assistance that manufacturers provide patients towards deductibles and other out-of-pocket limits; this practice of not counting this assistance could be costing patients thousands of dollars in out-of-pocket costs.
  • Support voluntary value-based agreements in which payers and biopharmaceutical manufacturers work together to look at not just the cost of the medicines, but the value they bring to patients.

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