drug_prices_1024x620Lately it seems as if specialty drugs are everywhere. While it used to be that only a small number of patients were treated using these expensive medications, manufacturers are increasingly developing specialty products to treat conditions that affect a much larger population over a longer period of time. 

One example is PCSK9 inhibitors, a new type of cholesterol-lowering drug that costs more than $14,000 per year. Although this product is currently indicated for those with familial hypercholesterolemia and certain patients with heart disease, the patient population is expected to eventually expand to possibly 15 million people. 

These high cost projections have understandably raised alarms and unfortunately, there is no indication that we can expect a market correction soon.

The time has come to stop viewing drug products with remarkably high prices as isolated incidents. Instead, we should acknowledge that we are moving into a troubling “new normal” of dramatic and persistent escalations in prescription drug prices and spending — and we should consider a remedy.

The Rise Of Specialty Drugs

One of the primary drivers of this “new normal” is specialty drugs. Because of their extremely high costs, specialty drugs account for a disproportionate share of overall drug spending and have a corresponding effect on spending growth. 

Specialty drugs often experience substantial price growth every year they are on the market. Such price increases raise the cost of therapy. The average annual cost of therapy for widely used specialty prescription drugs used on a chronic basis exceeds $53,000. This amount is higher than the median U.S. household income and almost three and a half times higher than the average Social Security retirement benefit.

Lack Of Meaningful Price Competition For Biologics

Another factor contributing to our “new normal” of high prescription drug prices and spending is the lack of meaningful competition for expensive biologic drugs. Congress gave the Food and Drug Administration (FDA) the authority to approve follow-on biologics, or biosimilars, as part of the Affordable Care Act. 

According to the National Conference of State Legislatures, at least 31 states have considered legislation that would establish standards for biosimilar substitution in the past two years. The bills’ provisions vary from state to state, but typically require (1) patient consent for the substitution; (2) the pharmacist to notify the prescriber of the switch; and (3) the pharmacist and prescriber to maintain written records of the switch for several years. These requirements would likely be burdensome on patients and providers, leading FDA to raise concerns about their effects on access to biosimilars.

It remains unclear whether the U.S. health care system is even ready for biosimilars. A QuanticaMD survey of nearly 300 primary care physicians and specialists found that, although they believe biosimilars will bring value to health care, they might be reluctant to prescribe them. Further, patient awareness of biosimilars remains low.

The Research Pipeline Is Full Of Expensive Products

Another factor that will continue to drive a “new normal” of high prescription drug spending is drug manufacturers’ increased focus on products that can command high prices. In 2010, specialty drug approvals exceeded traditional drug approvals for the first time and have continued to do so. In 2014, 27 of the 51 drugs approved by FDA were specialty drugs.

Orphan drugs—a subset of specialty drugs used to treat diseases that affect fewer than 200,000 people—seem to be particularly attractive to manufacturers. Such drugs typically come with high price tags due to their smaller patient populations, costing an average of $137,000 per year. Sixty-one orphan drugs were launched in the last five years, compared with 31 between 2005 and 2009. The population sizes for orphan drugs are also growing smaller, which will likely drive prices even higher. Of the 18 orphan drugs launched in 2014, half were for diseases afflicting fewer than 10,000 patients.

Getting Away From ‘What The Market Will Bear’

Another factor pushing us towards a “new normal” of high prescription drug prices and spending is the appetite (or lack thereof) for change. For example, there is broad consensus that prescription drug prices should be linked to their value. However, there is much less agreement on how this idea should be implemented. For now, drug manufacturers are free to set prices based on “what the market will bear.”

There has been some progress. For example, the Institute for Clinical and Economic Review (ICER) developed a conceptual framework to guide value assessments for medical services, including prescription drugs. They concluded there was value in these therapies but also raised concerns about whether their effects will translate into lower incidents of heart attack and stroke. Further, ICER concluded that a discount of 67 percent off the drugs’ list price would better represent their overall benefit. ICER’s assessment is still in draft form and it remains unclear whether the report will have any effect. Nevertheless, such work is a step in the right direction.

Some insurers and pharmaceutical benefit managers are also exploring pay-for-performance deals. For example, Harvard Pilgrim recently announced it would provide exclusive formulary access to one of the PCSK9 inhibitors approved by FDA in exchange for a price discount as well as additional rebates if the drug is unable to achieve certain performance targets  While new to the U.S. system, other countries have been entering into pay-for-performance agreements for several years.

Where Do We Go From Here?

Unfortunately, we can no longer rely on less expensive generic drugs to moderate prescription drug spending. The substantial savings from a large number of recent patent expirations for popular traditional drugs—also known as the patent cliff—peaked in 2012 and is slowly subsiding. Further, with generic dispensing rates reaching 90 percent, the health care system may be close to maximizing the savings associated with generic drugs.

Spending increases driven by high and growing drug prices will eventually affect all Americans in some way. Higher prescription drug spending is usually passed along to everyone with health coverage in the form of increased health care premiums, deductibles, and other forms of cost sharing. Prescription drug spending growth also increases costs for taxpayer-funded health programs like Medicare and Medicaid; this translates to higher taxes, cuts to public programs, or both.

More importantly, an increasing number of Americans will be unable to afford the prescription drugs that they need, which will lead to poorer health outcomes and higher health care costs in the future.

A number of steps can help address these trends. These include:

Increase Transparency

Before FDA approval, manufacturers should be required to disclose information on the estimated pricing for their product and a corresponding rationale for that price. This will help reduce uncertainty and vulnerability for the government, employers, and insurers, which often do not learn a new drug’s price until it comes on the market. In addition, manufacturers should be required to report on subsequent price increases over a specific threshold, or when a drug’s price increases multiple times during a year.

Increase Competition

An important first step toward increasing competition would be to decrease the market exclusivity period for biologics from 12 years to no more than seven years. In addition, policymakers should ensure that only truly innovative products receive additional market exclusivity.

Too often, manufacturers extend the monopoly protections for their products by introducing a “new” version that is essentially the same as the original drug. Extended release formulations or combination therapies are common examples. Policymakers should take steps to limit such tactics, commonly known as “evergreening,” and reward only true innovation with additional exclusivity protections.

Increase Information On Treatment Value

Patients, providers, and payers want usable information about the safety and effectiveness of prescription drugs. This requires much larger investments in research, particularly as more treatments enter the market with price tags in the tens of thousands of dollars. At least part of this research could come from existing sources.

For example, drug manufacturers could be required to conduct comparisons of their products with existing treatment regimens much like they do for other countries. Once such information is more widely available, it will become easier to develop payment arrangements that encourage the use of high value treatments in the public sector and the private sector.

The United States is entering a “new normal” in which high prescription drug spending is the rule, not the exception. It is up to policymakers and voters to decide whether this shift—and the inevitable trade-offs that will accompany it—is worth the price.