Americans spend more on prescription drugs — average costs are about $1,200 per person per year — than anyone else in the world. It’s true that they take a lot of pills. But what really sets the U.S. apart from most other countries is high prices. Cancer drugs in the U.S. routinely cost $10,000 a month. Even prices for old drugs have spiked, as companies have bought up medicines that face no competition and boosted charges. While private insurers and government programs pick up the biggest share of the bill, high drug costs are ultimately passed on to the public through premiums and taxes. More than half of Americans in one poll said that bringing down drug prices should be a top priority of the federal government. President Donald Trump has vowed to do just that.
As President Trump pointed out in the State of the Union address, the United States has borne a significant amount of the negative effects associated with this development. For one, its regulatory apparatus has focused largely on drug safety, yet regulators have failed to emphasize cost-effectiveness when it comes to both new and existing drugs.
At the same time, the United States also pays significantly higher prices than the rest of the developed world when it comes to prescription drugs, due primarily to limited competition among drug companies.
These two problems are well-known to policymakers, consumers and scholars alike. The Trump administration’s recent proposal seeks to lower costs by restructuring drug discounts that occur between pharmaceutical companies, health insurers and entities called pharmacy benefit managers.
Unlike other nations, the U.S. doesn’t directly regulate medicine prices. In Europe, the second-largest pharmaceutical market after the U.S., governments negotiate directly with drugmakers to limit what their state-funded health systems pay. The U.K.’s National Health Service has refused to pay for some cancer drugs widely used in the U.S. on the grounds that they don’t constitute value for money. In the U.S., drug companies can more or less set whatever price the market will bear. For most outpatient drugs reimbursed through Medicaid, the public health program for the poor, drugmakers must provide rebates to the government. But most medicine costs are paid for by Medicare, the government program for the elderly, or by private insurers. When prescription-drug benefits were added to Medicare under a 2003 law, the pharmaceutical industry successfully lobbied to prohibit the federal government from using its huge purchasing power to negotiate drug prices. Private payers typically rely on third-party pharmacy-benefit managers, such as Cigna Corp.’s Express Scripts unit, to negotiate discounts. Often they make exclusive deals with drugmakers, which limits the choice of drugs patients have. The Trump administration’s proposed rebate restrictions would directly affect Medicare and Medicaid plans, but officials hope it would influence private ones as well. In the U.S., patients directly pay about 14 percent of prescription medicine costs out of their own pockets. In one survey, one in five adults in the U.S. said they failed to complete a prescribed course of medicine because of cost. The figure was one in 10 in Germany, Canada and Australia.
If the U.S. were to adopt price regulations like other countries, the impact on global pharmaceutical revenues would be substantial because the U.S. comprises a large share of global revenue. A 20 percent reduction in U.S. pharmaceutical prices would directly impact global pharmaceutical revenues, whereas an identical policy by any single European nation would have a small impact.
If reductions in global profits ultimately lower innovation, it could therefore be in the long-term self-interest of Americans to pay higher prices for drugs than citizens of other developed countries.
Problematically, policies designed to lower the prices that Americans pay for drugs and increase the prices that other countries pay may be difficult to enact. The core challenge is that individual countries behave, well, individually.
Although many European countries have economic agendas that are unified through the E.U., and the E.U. is, as a whole, comparable in size to the U.S., there exists no mechanism for cross-E.U.-country harmonized pricing that balances the innovation-access tradeoff that the U.S. currently privately faces.
Recognizing that countries have different incomes per capita, pricing policies could flexibly allow for higher prices in nations with greater income per capita. Ultimately, collective incentives across countries of similar income per capita are needed to support medical innovation. In addition to harmonized pricing, this could be achieved through bilateral trade agreements, but those negotiations, too, would be difficult to negotiate.
The discrepancy in drug pricing between the U.S. and other countries continues to draw attention, both from those that view price controls as a much-needed way to lower U.S. pharmaceutical spending, as well as those who believe that price controls may adversely impact innovation.
Answers to this debate depend on recognizing the importance of collective action across countries of similar wealth to balance affordability of medications today with access to new medications in the future. At present, the way to achieve this balance isn’t clear. While a single-payer approach to paying for drugs in the U.S. will lower drug prices today, the ‘price of health’ will rise as the future availability of health-improving technologies falls. Whether this is a price society is willing to pay remains the critical question.
This article is republished from The Conversation.