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https://en.wikipedia.org/wiki/Prescription_drug_prices_in_the_United_States

Prescription drug prices in the United States have been among the highest in the world. The high price of prescription drugs became a major topic of discussion in the new millennium, leading up to the U.S. health care reform debate of 2009 and has received renewed attention in 2015.

Drug Pricing Concerns
Pharmaceuticals are the only major health care service, in which the producer is able to set prices relatively unrestrained according to Peter Bach from the Health Outcomes Research Group, Memorial Sloan Kettering Cancer Center, New York and Steven D. Pearson from the Institute for Clinical and Economic Review, Boston. As of 2004 prices of brand name drugs were significantly higher in the United States than in Canada, India, the UK and other countries, nearly all of which have price controls, while prices for generic drugs tended to be higher in Canada.

In 2005 the Government Accountability Office (GAO) had examined the change in drug retail prices from January 2000 through December 2004 and found the average usual and customary (U&C) prices for a 30-day supply of 96 drugs frequently used by people enrolled in BlueCross BlueShield Federal Employee Programs for Medicare and non-Medicare increased 24.5%. Drilling down, the average U&C prices for brand prescription drugs increased three times as much as the average for generic prescription drugs.

In 2007, the AARP published a series of studies saying that prescription drug prices are rising significantly faster than general inflation. The American Enterprise Institute, a conservative think tank, has criticized the methodology as overstating drug price inflation.

A December 2015 NYT editorial stated that "drug prices have been pushed to astronomical heights for no reason other than the desire of drug makers to maximize profits," pointing in particular to strategies carried out by Turing Pharmaceuticals and Valeant Pharmaceuticals to acquire rights to make and sell generic drugs that had administrative exclusivity and then raise the prices dramatically, which were widely condemned inside and outside the pharmaceutical industry. In response to these moves, the Department of Health and Human Services (HHS) and both houses of Congress held a public meeting and hearings resepectively to investigate price gouging and the factors determining drug prices in the United States.

Drug Pricing Factors
As mentioned above, pharmaceutical companies are the only major health care service able to set prices for drugs. The task of pricing any pharmaceutical drug for sale to the general public in it itself is a daunting task. Setting a high ceiling price for a new drug would be problematic as physicians would shy away from prescribing the drug because the cost would be too great for the benefit. However, setting too low of a price implies inferiority, that the drug is too “weak” for the market. Overall, there are many different pricing strategies and factors that go into the research and evaluation of a future drug’s price with whole departments within US pharmaceutical companies like Pfizer devoted to cost analysis. Regardless of the pricing strategy however, one theme remains common within all factors: to maximize profits.

Chart data from International Federation of Health Plans.

This chart shows some discrepancies seen in the pricing of drugs in different countries. This does not indicate, however, that the United States is more interested in profits than other countries, but rather reflects the different processes countries use to determine the price of a drug. Different countries value drugs in a different way from the United States, and thus price them differently. For instance, Canada has a drug ceiling price that drug prices cannot exceed. There are so many factors that affect drug prices throughout the world besides maximizing profit.

Research and Development
Chart showing research and development statistics for pharmaceutical companies.

Severin Schwan, the CEO of the Swiss Pharmaceutical company Roche, reported alone that the company’s research and development costs amounted to $8.4 billion dollars, a quarter of the entire NIH budget. Given the profit driven nature of pharmaceutical companies and their astronomical research and development expenses, companies use their research and development expenses as a starting point to determine appropriate yet profitable prices.

Pharmaceutical companies spend an astronomical amount on research and development before a drug is released to an open market. These research and development costs can be further divided into three major fields:  the discovery into the drug’s specific medical field, clinical trials, and failed drugs.

Discovery
Discovery is an area of research and development that amounts to the most amount of time and money. The process involves scientists/researchers to determine the germs, viruses, and bacteria that cause a specific disease or illness. This time frame itself can range from a 3-20 years and depending on the time frame, range between several million to tens of millions of dollars. Once established, research teams attempt to break down disease components to find abnormal events/processes taking place in the body. Only then do scientists work on developing chemical compounds to treat these abnormalities with the aid of computer models.

After “discovery” and a creation of a chemical compound, pharmaceutical companies move forward with the Investigational New Drug (IND) Application from the FDA. After investigation into the drug and given approval, pharmaceutical companies can move into pre-clinical trials and clinical trials.

Pre-Clinical and Clinical Trials
Pre-clinical trials focus on non-human subjection and work on animals such as rats. This is the most inexpensive phase of testing.

The FDA mandates a 3 phase clinical trial testing that tests for side effects and the effectiveness of the drug with a single phase clinical trial costing upwards of $100 million.

After a drug has passed through all three phases, the pharmaceutical company can move forward with a New Drug Application from the FDA. In 2014, the FDA charged between $1 million to $2 million for an NDA.

Failed Drugs
The processes of “discovery” and clinical trials amounts to approximately 12 years from research lab to the patient, in which about 10% of all drugs that start pre-clinical trials ever make it to actual human testing. Each pharmaceutical company (who have hundreds of drugs moving in and out of these phases) will never recuperate the costs of “failed drugs”. Thus, profits made from one drug need to cover the costs of previous “failed drugs”.

Relationship
Overall, research and development expenses relating to a pharmaceutical drug amount to the billions. For example, it was reported that AstraZeneca spent upwards on average of $11 billion per drug for research and developmental purposes. The average of $11 billion only comprises of the “discovery” costs, pre-clinical and clinical trial costs, and other expenses. With the addition of “failed drug” costs, the $11 billion easily amounts to over $20 billion dollars in expenses. Therefore, an appropriate figure like $60 billion dollars would be an approximate sales figure that a pharmaceutical company like AstraZeneca would aim to generate in order to cover these costs and make a profit at the same time.

Total research and development costs provide pharmaceutical companies a ballpark estimation of total expenses. This is important in setting projected profit goals for a particular drug and thus, is one of the most basic steps pharmaceutical companies take in pricing a particular drug.

Benefits and Side Effects
Drugs are made with the intention of curing, treating, or preventing a condition, disease, or illness. This is done either by "adding" or "deleting" something within the human body. Although all drugs incur side effects, these side effects are weighed heavily against the benefit the drug brings. Often times, companies will examine the net gain. If there is a serious net gain, pharmaceutical companies can justifiably charge a premium. However, if the net gain is marginal, it would be unreasonable to give a drug an astronomically high price if there are serious side effects or if the benefits are not too great.

The drug Lipitor (Calcium atorvastatin), renowned for lowering cholesterol levels, can cause many typical drug side effects such as constipation, diarrhea, nausea, fatigue, gas, heartburn, headache, and memory loss. The ability to lower cholesterol levels is objectively and unmistakably worth the side effects and thus, Pfizer can charge a premium over its long term 20 year patent.

Companies can also look at these side effects and compare them to the side effects of other competitor drugs on the market. If the effects are comparatively better than a competitor, prices can rise without much penalty. However, if there are more side effects, the pharmaceutical must charge significantly less. For example, Lipitor’s competition is generic simvastatin, known to be a cheaper alternative (Lipitor sells for $1 a day without insurance while simvastatin is roughly 50 cents a day). The side effects of simvastatin are generally the same as Lipitor, except that simvastatin may also induce sleep problems and even depression. Hence, simvastatin must be priced at half of Lipitor's worth as it has more deleterious side effects.

Uniqueness and Patenting
One of the most important factors that determine the cost of a drug is the uniqueness of that drug, or in other words, its exclusiveness. What is the competition from other drugs to treat the same illness/disease. Is there any other drug that treats the same thing? If so, does it do it to the same extent? With increased competition, prices for drugs tend to be lower and with lower levels of competition, companies have more reign to control prices, thus making it easier to maximize profit. So, with this in mind, many drug companies use the existing US patent laws to their advantage. According to Title 35 of the United States Code, a patent allows no other company to use the same procedure to make the same product for exactly 20 years. Afterward, anyone can reproduce the exact same product at will. The patent allows for a window of time for maximum profit, because the patent ensures that the company with the patent has the most unique product. Once that window has expired, the company will have to deal with increased levels of competition with generic drugs. An example of this trend can be seen in the world's best-selling drug of all time, Lipitor. This drug did something else no other cholesterol drug at the time could do, increasing levels of HDL (good cholesterol) in addition to decreasing levels of LDL (bad cholesterol) faster than any other statin on the market. Pfizer used a patent to protect this approach, and for 20 years, an enormous profit was seen.

In the graph to the right, a dramatic decrease in sales and price is seen when the patent window expires and generic drugs become introduced. However, for all the drugs shown, the sales were all tremendously high before the expiration date, so the companies must have thought that the great levels of profit outweighed the drop in revenue.

The revenue change for Lipitor after its expiration date was dramatic. According to The 2012 Pfizer Annual Financial Report, the total revenue decreased by a total of 59%. This is directly attributed by Pfizer to the loss of exclusivity that Lipitor experienced in the month of November in 2011. Other drugs mentioned in the report had also experienced losses of exclusivity, Caduet, Xalatan, and Aromasin are some. All of these drugs had revenue drops of over 35%. This stresses the importance of the patent because it makes the profits for 20 years so great, that a 35% (or even greater) drop in revenue is acceptable for these companies.

Stakeholders
Patients and doctors can also have some input in pricing, though indirectly. Customers in the United States have been protesting the high prices for recent “miracle” drugs like Daraprim and Harvoni, both of which attempt to cure or treat major diseases (HIV/AIDS and Hepatitis C). Public outcry has worked in many cases to control and even decide the pricing for some drugs. For example, there was severe backlash over Daraprim, a drug that treats toxoplasmosis. Turing Pharmaceuticals under the leadership of Martin Shkreli price gouged the drug 5,500% from $13.50 to $750 per pill. After denouncement from 2016 presidential candidates Hillary Clinton and Bernie Sanders, Turing Pharmaceuticals finally decided to reduce the price.

With the recent trend of price gouging, legislators have even introduced reform to curb these hikes, affectively controlling the pricing of drugs in the United States. Hillary Clinton announced a proposal to help patients with chronic and serious health conditions by placing a nationwide monthly cap of $250 on prescription out-of-pocket drugs.

Some of the reason for these astronomical prices are higher research and development costs. Research for a drug that is curing something no one has ever cured before will cost much more than research for the medicine of a very common disease that has known treatments. Also, there would be more patients for a more common ailment, so prices would be lower. Take, for example, the drug Soliris. It only treats two extremely rare diseases, so the number of consumers is understandably low, making it an orphan drug. Soliris still makes money in the billions because of the high price for the drug (over $400,000 per year per patient). The benefit of this drug is immense because it cures very rare diseases that would cost much more money to treat otherwise, which actually saves insurance companies and health agencies millions of dollars. Hence, insurance companies and health agencies are willing to pay these prices.

Relationship between drug research and development and retail price
Pharmaceutical companies argue that the prices they set for a pharmaceutical drug are necessary in order to continue to fund research. 11% of drug candidates that enter clinical trials are successful and receive approval for sale. Although the cost of manufacturing is relatively low, the cost of developing a new drug is relatively high. In 2011, "a single clinical trial can cost $100 million at the high end, and the combined cost of manufacturing and clinical testing for some drugs has added up to $1 billion." The U.S. pharmaceutical industry is able to invent drugs that would not be profitable in countries with lower prices, because of high drug prices in the United States.

Critics of pharmaceutical companies point out that only a small portion of the drug companies' expenditures are used for research and development, with the majority of their money being spent in the areas of marketing and administration.

A study found that European pharmaceutical companies are just as innovative, or perhaps even more so, than their U.S. counterparts, despite price controls. In addition, some countries, such as the United Kingdom and Germany, encourage comparative-effectiveness reviews, whereby cost-benefit analyses are applied to rival drugs to determine which perform best.

Drug expenditures
Spending on pharmaceuticals, defined as expenditures on prescriptions medicines and over-the-counter products excluding pharmaceuticals consumed in hospitals has been mentioned together with price, although not being the same. Historically, spending on pharmaceuticals accounted for 11.5% of U.S. national healthcare expenses in 1960, gradually falling to a low of 5.5% of national healthcare expenditures in 1980 before rising back to 10.4% in 2000. From 2000 to 2013, drug expenditures ranged between 10.4% and 12.0% of U.S. healthcare expenses. The latest data on US 'pharmaceutical spending' in international comparisons are $1034 per capita in 2013.

Effects
Because of the price differential between the U.S. and Canada, US Americans purchased more than US$1 billion in brand-name drugs per year from Canadian pharmacies as of 2004 to save money.

The Washington Post wrote in 2003 that "U.S. Customs estimated 10 million U.S. citizens brought in medications at land borders each year. An additional 2 million packages of pharmaceuticals arrive annually by international mail from Thailand, India, South Africa and other points".

A quarter of Americans taking prescription drugs said they had not filled a prescription in the past 12 months due to cost, and 18 percent reported they "cut pills in half or skipped doses" according to a Kaiser Family Foundation survey in June 2015.

Drug company profits
A Kaiser Family Foundation survey from June 2015 found the public citing "drug company profits as the number one reason for the high cost of prescription drugs (picked by 77%), followed by the cost of medical research (64%), the cost of marketing and advertising (54%), and the cost of lawsuits against pharmaceutical companies (49%)."

As of 2015, several pharmaceutical companies had developed a new business strategy "of dominating noncompetitive markets for older drugs and then increasing the price substantially".

Pharmacy Benefit Managers
Pharmacy benefit managers (PBM)s may increase drug prices they charge to their clients, in order to increase their profits. For example, they may classify generic drugs as brand name drugs, because their contract does not contain a definition, contain only an ambiguous definition, or a variable definition. This allows them to "classify drugs for one purpose in one way, and for another purpose in another way", including a change at different points during the life of a contract. This as of 2010 unlitigated freedom affects "drug coverage, making contract terms, and the reporting about the satisfaction of contract terms"

Drug rebates
Drug manufacturers may offer to pay an insurance company a rebate after they have sold them a drug for full price. This is largely invisible to the consumer, because a drug company does not report how much it returns to the payer. However the total aggregate in the US has been estimated at $40 billion per year.

Orphan drugs
Drug companies can price new medicines, particularly orphan drugs, i.e. drugs that treat rare diseases, defined in the United States as those affecting fewer than 200,000 patients, at a cost that no individual person could pay, because an insurance company or the government are payors. An orphan drug may cost as much as $400,000 annually. The orphan drug business model could come under increased payer regulation.

FDA backlog in generic drug application review
Generic drugs cost less. The FDA reviews applications by companies wishing to manufacture generic drugs to guarantee quality and bioequivalence. In fiscal year 2014 none of about 1500 applications had been approved by the end of 2014. The slow pace of the FDA review (6-12 months even for a priority review) has not allowed the market to correct itself in a timely manner, i.e. not allowed manufacturers to begin to produce and offer a product when a price is too high. The following suggestions have been made: prioritize review of applications for essential drugs, i.e. move them up in the queue. If the FDA felt unable to make this largely economic evaluation about priority, the DHHS Office of the Assistant Secretary for Planning and Evaluation could do this. Second, the FDA could temporarily permit compounding. And third, the FDA could "temporarily permit the importation of drug products reviewed/approved by competent regulatory authorities outside the United States".

In a January 2016 senate hearing, the director of the FDA’s Center for Drug Evaluation and Research said that increasing number of generic drug applications had "overwhelmed the FDA staff and created unpredictability and delay for industry" but that since the 2012 Generic Drug User Fee Amendments the FDA is ahead of schedule in reducing the backlog.

Discounts
Private insurers can negotiate discounts, and discounts are mandatory for State Medicaid programs, administered by the Health Resources and Services Administration (HRSA). Per HRSA's 340B Drug Pricing Program drug manufacturers must provide outpatient drugs "to eligible health care organizations/covered entities at significantly reduced prices".

Value-based prices
Professional associations in Oncology and Cardiology have made efforts to determine reasonable price ranges for drugs commensurate with their value based on published evidence of their treatment benefit, aka value-based pricing, including the Institute for Clinical and Economic Review, and the DrugAbacus.

Policy makers
The US Food and Drug Administration has a "priority review process" for drugs which compete with another drug whose price exceeds its value-based price. Congress could also grant the FDA the ability to change the exclusivity period for new drugs. The Pharmaceutical Research and Manufacturers of America has suggested that FDA clear its backlog in generic drug applications. The FDA could also temporarily allow the import of drugs approved for sale outside the United States.

In December 2015, the Department of Health and Human Services held a public meeting and both houses of Congress had hearings on off-patent drugs with limited or no competition.

Canada's Model
Advocates point to the success of Canada's Patented Medicine Prices Review Board, which puts a ceiling on prices for all drugs. Many of the drugs purchased in Canada are purchased by the government and gives low-income and elderly patients access. This system is very similar to how the United States purchases medications for military personnel, but Canada implements controls on a much wider scale.

Healthcare providers
Healthcare providers can substitute three-month for one-month supplies of medicines. A three-month supply represented a 29% decrease in out-of-pocket costs and an 18% decrease in total prescription costs in one study.

Individual importation of lower cost prescription drugs from foreign countries - as done by 2% of U.S. consumers in 2011 and 2012-, is likely no effective public health solution.