As reported by Market Watch and Axios, drug prices are on the rise the beginning of 2020. The increases exceed the 2% inflation the nation has been incurring and the 3.4% growth in wages recently incurred by nonsupervisory labor. According to Market Watch, overall drug pricing will rise 5.8% at the start of 2020 due to price increases. This is about the same as Medical CPI.
Fortune Magazine; “The price hikes are almost all below 10%, with the median price increase hovering around 5%, though more price increases could come in the following weeks.
The increases are lower than the 2019 average price increase at 6.3% and it is within the 10% annual limit many Big Pharma companies have pledged to honor while politicians zero in on drug pricing as a key talking point in the 2020 election.”
What is an issue is what the end consumer pays in price and how those prices play back into the cost of the drug, the cost of healthcare, and the rising cost of healthcare insurance. Bob Herman at Axios points out; brand name drugs start out with high sticker prices such as Humira’s $58,000 per year (Elsevier’s Gold Standard Drug Database). Healthcare insurance plans negotiate discounts off of the list price which are kept secret and the negotiators (PBMs) keep some of the savings for themselves which is also kept secret. The drug is awarded a Tier status within each insurance company plan at a price preserving the discounts as profit for the healthcare plan and the PBM. The balance goes back to the manufacturer.
The pricing system for brand name drugs administered by a doctor and yet another system for certain hospitals are different from the one for healthcare insurance companies.
For a generic drug which costs $3 to make and sells for $15; the resulting split of the remaining $12 could be a manufacturer receiving an approximate $3, the pharmacy $1.50, a wholesaler $2 and the largest share going to the healthcare insurance company managing your insurance plan’s drug benefits of approximately $5.50.
Past the leap, why is it difficult to negotiate prices.
A lack of the transparency in costs versus pricing is a major issue in negotiating pricing in the US and also globally as identified by the World Healthcare Organization. We are negotiating price blindfolded while openly giving pharmaceutical companies exclusivity for 5 to 12 years to recoup the costs of bringing new drugs to market when it is clear the companies are recouping risk adjusted costs in a median time of 3 – 5 years .
Efforts to allow Medicare to negotiate pricing are blocked by political interests beholden to the pharmaceutical interests. September of last year, the House released H. R. 3; “The Lower Drug Costs Now Act” which I wrote about here. H. R. 3 gave Medicare the ability to negotiate directly with Pharma companies, to pass on those lower prices to healthcare insurance companies, force Pharma companies to offer the same low prices as offered to countries, and uses some of the savings to be invested in new R&D (as if pharma needed it). Of course, McConnell stopped it in the Senate like he has done with other House bills.
In 2018, the pharmaceutical industry had said it would halt price increases as a result of pressure from Trump. Twenty-eight drugmakers filed notifications with California agencies in early November 2018 to raise the price of their drugs in January, 2019. And again in 2020, the nation is on the verge of increased pricing.
A warning by the industry.
In a recent “feel – good” January podcast, Johnson and Johnson’s CEO Alex Gorsky warns Fortune’s On Leading Correspondent Susie Gharib on the consequences of controlling the rising costs and subsequent prices of healthcare.
“We (Gorsky) need to consider what these pharmaceuticals are doing for patients lives. If you take a look at the improvements and innovations and technology we have see over the last five or ten years and likely what we are going to see in the next five or ten years, it is nothing less than remarkable. The challenges of course are how are we going to pay for all of these things and how are we going to make sure we sustain the high levels of R&D investment and at the same time that we understand the economic and the value implications that can have on the healthcare system.
Later in the podcast a warning; “What we need is to be thoughtful about making whole sale changes to the system that can have untold consequences that restricts patients access to these kind of products or actually is a disincentive to continue research that produces that next break through.”
The disincentive being do not stop us from raising drug prices at two and more times inflation or we will stop bringing new drugs to market. Axios: At this point, no one should think that drug companies are going to voluntarily stop raising list prices. And neither should we believe the larger segment of the healthcare market will stop either.