I’ve often said that drugs are the best deal in health care. However, that bargain is diminishing. A few years ago, drugs represented about 10% of health care expenditures, physician care about 20% and hospital inpatient care about 30%. Today, drug spending is 11%, while hospital spending is nearly one-third. The absolute best deal in health care are over-the-counter drugs (OTC). They represent around 1% of health care spending and account for the vast majority of care, most of which is self-care. At least initially, most care is self-care until consumers exhaust their self-care options and see a physician.
Drugs sold OTC are mostly drugs that used to be sold only by prescription. Think Ibuprofen, Claritin, Prilosec, to name only a few. When a drug goes OTC prices eventually fall by about 95%. Drug makers must petition the FDA before switching a drug from prescription-only to OTC. The FDA lacks the authority (or the desire) to force prescription drugs to be sold OTC. In that regard, the U.S. government (i.e., the FDA) is actually protecting the profit margins of drug makers by obstructing the competition that OTC sales would create. Think about that for a moment.
The cheapest prescription drugs are generic drugs, representing 91% of prescriptions filled but only 18% or drug spending.
Ninety-three percent of generic drugs have copays under $20 (as compared to 59% of brand-name drugs), and their average copay is $6.16 compared to an average out-of-pocket cost of $56.12 for their brand counterparts.
By contrast, brand name drugs are much more expensive. Brand name drugs account for 84% of drug spending, but only 8% of drugs dispensed. A third type of drug is not included in these totals. These are specialty drugs. Specialty drugs are not an official classification. Rather, they are hyper expensive drugs, such as gene therapies, oncology drugs, and biologic drugs derived from living substances. They are not the type that are typically dispensed at Walgreens or CVS. Some gene therapy drugs cost over $2 million. Indeed, some self-insured plans (mostly employer plans) find that specialty drugs represent about half the cost of drug benefits.
Per capita drug spending was $1,350 last year. As recently as the year 2000 the figure was $433. Whether this is good or bad depends on how you look at it. Through the 1990s and early 2000s, the way pharmaceutical companies made money was to develop drugs for the most prevalent chronic conditions. Examples include drugs for hypertension, high cholesterol, diabetes, allergies, etc. Since the passage of the Affordable Care Act (2010), drug makers have increasingly targeted hyper expensive biologics for rare diseases. Obamacare banned annual and lifetime caps on benefits. That created a market for million-dollar drugs that did not exist prior. In addition, many newer drugs are biologics, which are derived from living substances making them much harder to copy (i.e., make generics for).
Why are the prices of drugs high and rising? A Health Affairs article from January discussed the supposed reasons:
Industry has offered three broad justifications for high prices: that they are required to recoup the costs of research and development (R&D); that hikes in prices reflect incremental clinical (and occasionally nonclinical) benefits; and, that prices would not be so high if middlemen, such as pharmaceutical benefit managers (PBMs), passed on rebates to payers and consumers. A growing body of evidence, some of which is summarized in this article, contradicts these assertions.
The above reasons are mostly bunk. The reason prescription drugs are expensive and rising in price is simple. There is little in the way of competition to hold prices down. About 90% of drugs are paid for by third parties so patients are not nearly as price sensitive. There are significant barriers to entry, created by the FDA’s bureaucracy. And because we tolerate it. By that I mean Medicare, Medicaid and insurance companies cannot just refuse to cover expensive drugs by saying they are a poor value. Finally, consolidation in the industry that manages pharmacy benefits (PBMs) has created an environment where both drugmakers and middlemen extract larger prices from patients and their health plans.