Why are prescription drugs so expensive? Blame a lack of competition AP

We seem to be inundated with news stories about the high costs of prescription drugs and some families’ consequent struggles to pay their bills.

If you’re taking a prescription drug, there’s an 86 percent chance it’s a very affordable generic version of a brand name medication. But that still leaves millions of Americans taking new drugs, and some of them are very expensive. It’s important to understand why and what can be done about it.

There are four reasons why prescription drugs have become so pricey.

Developing a new drug comes with a heavy price tag. Drug manufacturers report their annual research and development expenditures to be $51.2 billion in 2014.

But while R&D costs rise at a fairly steady rate, drug approvals vary significantly—usually between 20 and 30 per year, but often more. Averaging those costs—including some post-approval expenditures—over the decade 2004-13 results in an average cost of about $1.75 billion per newly approved drug.

And that’s only an average figure. In some cases, scientists will spend years and hundreds of millions of dollars researching a specific disease (e.g., Alzheimer’s) before they identify a possible treatment. And even then there’s a very high failure rate as the new medicine moves through the process and on to human clinical trials.

New drugs are targeting fewer patients. Over the past 20 years, drug company R&D has increasingly shifted from developing relatively simple, small-molecule drugs that target widespread chronic diseases—where development costs were spread over millions of patients—to large, complex molecules, often injectable biologics, that target much smaller patient populations.

For example, between 1990 and 1995, the U.S. Food and Drug Administration (FDA) approved between 55 and 89 drug company requests for rare (or “orphan”) drug disease status—i.e., diseases that affect fewer than 200,000 people. And many of the new drugs in the development pipeline are targeting even fewer patients, say, 25,000 to 50,000. Those requests have exploded over the last decade, with the FDA granting orphan drug status to 260 new molecules in 2013 and 293 in 2014.

So while R&D spending is rising at a relatively steady pace, the number of potential patients who can benefit from the new drugs is shrinking dramatically. That means the cost of those new drugs to the relative handful of patients who need them rises exponentially. In short, the math is working against us.

Health insurance is not helpful. Health insurance premiums are going up quickly, and insurers have taken a number of steps, both visible and less so, to try to mitigate steep premium increases. But that often means patients are paying more out of their own pockets—a lot more.

Health insurers have long used tiered pricing for generic vs. brand name drugs as a way to encourage more generic use. Then they added a third tier to separate their “preferred”—which some would argue means less expensive—brand name drugs from some of the newer drugs.

In 2009, insurers added a fourth (and in some cases a fifth) tier for certain high-cost specialty drugs, but with an important change—rather than a copay of, say, $10, $25, or $50, patients must pay 30 percent, 40 percent, or more of the cost for specialty drugs in an insurer’s top tier.

Thus, even patients who have Obamacare-qualified coverage may find themselves paying thousands of dollars a month in prescription drug costs.

Competition is key. So what do we do? There are several new models being tested for paying for prescription drugs.

But one of the most important solutions is to ensure widespread competition. Companies that develop competing drugs often release them at a lower price—which is what you want and expect from a free market system.

Competition gives physicians the option of prescribing a lower-cost drug if it is equally effective. And with more than 7,000 new drugs in the testing pipeline, there is lots of potential competition.

The good news is that insured people get most brand name drugs at a discount of between 30 percent and 50 percent off what might be called the list price—and many low-income families get them for free.

Still, the government’s best course of action isn’t price controls, but streamlining the drug-approval process to ensure that as many drugs can hit the market as quickly—and as safely—as possible.

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