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What You Don’t Know About the Cost of Grandma’s Prescription

Trump wants to drive down the costs of prescription drugs in the United States, which are much higher than in other industrialized nations. One expert tells us what she thinks of his proposal.

By Carson Leigh Brown


Ex-pharmaceutical executive Martin Shkreli exits the U.S. District Court for the Eastern District of New York, June 6th, 2016, in Brooklyn. (Photo: Drew Angerer/Getty Images)

Big Pharma is often accused of endangering the lives of sick people for profit, but, in 2015, Martin Shkreli provided the world with a particularly vivid example. In September of that year, after Shkreli’s former pharmaceutical company acquired the rights to Daraprim, a drug that treats infections that can be fatal to cancer and HIV patients, it raised the price by more than 5,000 percent. Shkreli became the poster boy for public disgust in the industry; he has since been named the mosthatedman in America.

“In particular, there’s something about that one [Shkreli], the way he raised it and to that extent and then he sat back smug like he was hot stuff,” Donald Trump said in response to a reporter’s question about high drug prices at a campaign stop in South Carolina in 2015.

On Tuesday, now-President Trump met with pharmaceutical executives to discuss lowering the costs to Medicare and Medicaid of drugs like Daraprim. “[T]he pricing has been astronomical for our country,” Trump said. “We have to do better.” The president says he wants to curtail unnecessary drug price hikes by shortening the Food and Drug Administration’s drug-approval process and increasing production of medical products in the United States.

Flood the market, prices have to drop, right? Maybe not. As it stands, stages of drug production can happen in various parts of the world, typically depending on the cost and benefit to the company. Moving the entire process to the U.S. could add American jobs, but would likely also increase production costs.

And, according to a study published last August in the Journal of the American Medical Association, high drug prices in the U.S. are largely due to requirements on government-funded health care to cover anything approved by the FDA; new FDA-approved drugs get an exclusivity period for new drugs, allowing these companies to take initial control of the market. In other words: If you create a new drug for an under-treated condition, the government makes it difficult for any other company to produce a drug that will encroach on your territory for a limited period, resulting in a monopoly.

To grapple with how and why the process works this way, we talked with Rachel Sachs, an associate professor of law at Washington University in St. Louis. Sachs studies how health and intellectual property laws affect food and drug regulation and met the researchers behind the AMA study when she was a fellow at Harvard Law School. Sachs explained why drugs cost so much in the U.S.—and why Trump’s plan to streamline the FDA might be entirely ineffective.

One of the solutions the study offered for lowering American pharmaceutical costs is to enforce more stringent requirements for the award and extension of market exclusivity rights. Could you explain how exclusivity rights work and what their impact is?

There’s market exclusivity provisions that are granted by the FDA. The idea [of the paper] is that this has given new drugs monopoly protection — we’ve enabled [drug companies] to charge high prices for their product for some period of time, and we’ve done that because it’s really expensive to bring a drug to market. What we’ve had to do is make it profitable for a company to do that, and one way to do it is to enable them to charge monopoly profits for a period of time by restricting others from accessing the market. That ends up causing problems for patients who now can’t afford the drugs, [and] for insurers who don’t feel like they can provide it to their patient population.

What drugs are seeing the highest price inflation?

Different drugs have high prices for different reasons, and some drugs deserve high prices and others don’t. In my view, the outrage is justified when we see Shkreli jack up the price of a drug by a huge margin overnight, or when we see the EpiPen increase in price from a couple hundred to $600 over a few years. Price increases of that type have been hitting patients particularly hard over the past few years and they’re much more difficult to explain than when you see a truly new cure come to market and it’s priced accordingly.

[One such cure is] called Sovaldi, made by Gilead. Gilead has gotten an enormous amount of heat from Congress, activists, academics, patients, and states for the price that they’re charging. In my view, they’ve been an unfortunate scapegoat because they are not the worst offender by any means, and so what they’ve been criticized for doing is making a truly effective cure for an enormous amount of people. It’s just that given the price that comes with that, it’s not possible to give it to everyone at once under our current system of paying, and that’s the problem.

State budgets can’t absorb the cost of the drug all at once to the extent that they can’t in any given year give it to all of their Hepatitis C patients. And so you’ve seen a lot of rationing and that is a really big problem. In my view, this is a situation in which we need to come up with creative ways to pay for cures.

For a drug like Sovaldi, is the high cost associated with production and research expenses?

Not really. A term you’ll probably hear a lot is that drug companies will charge what “the market will bear,” rather than based on the cost of production. Of course, the cost of production sets a floor, but the pharmaceutical industry is able to command extremely high prices above that because there’s often not competition, and often patients are price-insensitive because they’re insulated by their insurance from the actual price of the drug. And, also, patients are in dire straits: A sick patient who is going to take a drug now and get billed for it later will do what they need to do to get better. That’s understandable and that’s necessary. It’s just that the system we’ve set up allows companies to charge prices that don’t obey the normal laws of supply and demand.

Journalists often cite other industrialized countries as the standard for what is possible stateside. Our prices for the same drugs are much higher than the average. Why is that happening?

They’ve set up a much different regulatory and reimbursement system than we have. One example is in the United Kingdom: The National Health Service has a much more tightly controlled pricing system. They pay a lot less for most drugs than we do, but they also have the ability to say, “Your drug isn’t worth the price you’re asking us to pay, and we’re going to walk away from the bargaining table and we’re not going to provide your drug to our citizens.” Because they’re a national health insurer, they’re negotiating on behalf of the entire population.

In the U.S., you often hear about giving Medicare the authority to negotiate drug prices, and this is something the president is very fond of saying: If we gave Medicare the authority to negotiate prices, we would get better prices, we would make a good deal. But the problem is you can’t make a good deal if you’re not willing to walk away from the table. And Medicare and Medicaid are required by law to cover most FDA-approved drugs, so if you’re the only drug approved for a particular condition, Medicare can’t walk away from the table if it doesn’t like what you’re offering. That is one of the big reasons that we end up paying more: both because Medicare can’t negotiate, and because Medicare doesn’t have a choice about what it’s going to cover.

Does that mean that, when the U.K. says no and walks away, then patients can’t get the newest drug? Or does that leave some patients without drugs for their conditions entirely?

It depends on the condition. If there’s a number of drugs in the class, usually you can find at least one or two who are willing to play ball. Part of the problem the U.K. has had is with cancer drugs. Because the newest cancer drugs are so expensive, they’ve actually set up a separate fund to pay for some of these high-cost cancer drugs, but they’re still not available to everybody. Once you decide you’re going to spend a limited pool of money, you have to make choices about the ways in which you spend that. You suddenly can’t pay for everything and that’s a choice that we may be moving closer to.

Trump called for a shortened timeline to improve new drugs. What are your thoughts on his solution?

This idea that the FDA is standing in the way of innovation and if only we could abbreviate the FDA approval process, we would suddenly have a whole wave of innovative, new, low-cost drugs is fiction. You don’t have to take my word for it, I can send you linksfrom scientists and former pharmaceutical executives.

Over the past 25 years, the FDA has made enormous strides in streamlining and speeding the drug development process and that’s all been in collaboration with Congress and the executive branch. Congress has created new accelerated approval pathways for the FDA to exercise flexibility in approving drugs more quickly, and with less evidence for serious conditions where there are no good options available. We’ve made an enormous amount of progress on this front, and it’s not clear exactly what Trump means when he says that he wants to accelerate the approval process.

Trump has not said specifically what about the process he would like to cut or speed up, and it is not clear that the process as a whole could be accelerated very much at all without significant problems — one of which would be the approval of drugs that are either unsafe or ineffective or both, and would do more harm than good in the patient population.

What should the government be doing to remedy this situation?

One strategy would be to come up with a system that would curb price increases on drugs, especially generic drugs like Shkreli’s product. Another strategy would be to allow Medicare to negotiate drug prices with more latitude than we’ve given them [previously]. Right now there are six classes of drugs where Medicare has to cover every drug in the class. If we were to more finely define those categories or come up with a system for negotiating within those categories, we might be able to save some money.

More generally, one problem I and many others have is that none of this information is transparent or public. All I know are the list prices for these drugs and I know aggregate statistics about how much Medicare and Medicaid spend. There is some information on how Medicare and Medicaid spend on specific drugs or specific classes, but I don’t know how much Medicaid pays for a specific drug for a specific patient because those numbers aren’t public. I don’t know what the discounts are that companies are giving. So I think it’s important to recognize that, when we see a price like $300,000 a year, no one is paying that, but part of the problem is that we don’t know what they’re actually paying. It’s difficult to prescribe policy solutions without first understanding truly what the problems are.

How would one go about getting that information?

You’d have to pass a law.

What roles does education for patients, prescribers, payers, and policymakers play in this?

Educating all of those groups is important for different reasons. Providers who are often just trying to do what’s best for their patient often don’t want to know what the prices of these drugs are because maybe it would affect their clinical decision-making in a way we don’t like. On the other hand, maybe they’re not really doing what’s best for their patient by prescribing a drug that the patient can’t afford and therefore doesn’t take.

Policymakers generally and understandably do not appreciate the complexity of the system and the way it works now. So you see some proposals that either wouldn’t work at all or are misguided in terms of the side effects they would have, or ones that would address the wrong slice of the problem. There’s a range of ways in which I would like to educate policymakers and providers, but I think people, even if they’re given all the right information, are going to want to take the drug that’s best for their condition, and what are you going to say to that?

This interview has been edited for length and clarity.