By Shannon, Fall 2022.
On top of the many other bills they need to pay, patients in the US are worried sick over an often overlooked yet crucial problem in the industry– increasing drug prices. In 2017, the Altarum Institute, a nonprofit organization that focuses on health and healthcare, identified prescription medications as the “fastest growing [price] category” in comparison to hospital services, nursing home care, and durable medical equipment. In 2022 alone, several drugs have experienced price increases of up to 500%. [1] These escalating prices far exceed current inflation rates, as there were more than 1,000 products with price increases that increased beyond the inflation rate of 8.5% during the same time period. [2] Growing drug pricing heavily impacts the consumers across the country, as about six in ten adults currently take at least one prescription drug. [3]
So why is this happening? The pricing of drugs depends on two major factors: the company producing the drug and the market. Since federal law prevents the government from regulating drug prices and participating in price negotiation, companies are able to set prices however they like based on market demand. If there are no or few competing drugs that target similar conditions, companies have more freedom in how high their prices can go. But for markets where there are multiple competitors, companies have no choice but to set a price that is similar to the market’s. [4]
Many pharmaceutical companies utilize this supply and demand relationship to manipulate the market. Take for example the Orphan Drug Act of 1983, which was passed in order to encourage the development of orphan drugs, or drugs targeted for rare diseases that affect a small population in the US. While this act has achieved its original purpose and allowed many individuals suffering from uncommon conditions to access appropriate treatments, it has also inadvertently enabled companies to boost their profits and monopoly in the field. When a manufacturer earns FDA approval of an orphan drug under this act, they also gain exclusive rights for seven years in the market. This means that the government will not approve any other orphan drug for the same disease until after that timeframe, thus allowing pharmaceutical companies to set whatever price they desire.
Between 2018 and 2019, more than half of novel drugs received an orphan drug designation. [5][6] A reason for this is that drug manufacturers often engage in “salami slicing”, which is the splitting of diseases into a wide range of sub conditions that can be considered rare diseases [7]. Salami slicing allows manufacturers to produce products of the same pharmaceutical application for several niche groups within a larger rare disease category, thus generating drugs that can be labeled and approved for multiple orphan drug use. For example, US biopharmaceutical company AbbVie requested approval for pediatric use of their star product Humira, an immunosuppressive drug, in treating juvenile rheumatoid arthritis. In 2008, the FDA approved its use as an orphan drug. Humira has since been approved for four more rare diseases, allowing AbbVie to lengthen their monopoly in the field and maintain their high prices. [8] Other renowned pharmaceutical companies have also tried to maximize the possible usage of their drugs. One of Bristol Myers Squibb’s most popular cancer drugs, Opdivo, has already been approved for 7 different cancer subtypes within the past decade. [9] Pfizer, another pharmaceutical company, currently has 11 drugs with orphan status as of July 2022. [10]
Due to the lack of federal regulation, companies can continue to exploit the high passing rate and frequency of these “orphan drugs”. In response, the House of Representatives passed the Build Back Better Act in 2021, which allows the government to negotiate drug prices directly with companies and prohibits price increases higher than the rate of inflation after the original launch price. Companies and manufacturers who do not comply with this would be faced with high monetary penalties. The eligibility for negotiation is specific for brand drugs with no competitors, targeting the major loophole of the Orphan Drug Act. The Congressional Budget Office (CBO) predicts that this could save almost $80 billion for the government and consumers over the next decade while minimizing the disincentive on the release of new drugs that could come with the price regulation. [11] Despite the optimism, people have criticized that the new bill wouldn’t truly fix the issue of a high starting price when drugs are first introduced to the market. Karen Van Nuys, a research assistant professor at the University of Southern California Schaeffer Center for Health Policy and Economics, says: “If you are a manufacturer that is potentially facing that kind of restriction after you launch, you’re going to hike up your list price. It’s still raising drug prices. It’s just the way or the mechanism by which prices rise changes.” [12]
Though the true impact of the Build Back Better Act can only be observed over time, it is difficult for the government to have complete leverage over large, private firms in terms of price regulation as they can constantly find ways to maximize their profits and control in the drug market. Moving forward, more direct and effective policies should be implemented in order to slow down price growth of prescription medications and address the issue of high starting prices. These lower prices would greatly benefit the public and improve health outcomes, allowing individuals to receive proper treatment without the concern of emptying their wallets.
[1] The Altarum Institute. 2017. “Health price growth falls to 1.5%”. Center for Sustainable Health Spending. https://altarum.org/sites/default/files/uploaded-related-files/CSHS-Price-Brief_Aug_2017.pdf
[2] Bosworth A., et al. 2022. “Price Increases for Prescription Drugs, 2016-2022”. ASPE Office of Health Policy. https://aspe.hhs.gov/reports/prescription-drug-price-increases
[3] Hamel L., et al. 2022. “Public Opinion on Prescription Drugs and Their Prices”. Kaiser Family Foundation. https://www.kff.org/health-costs/poll-finding/public-opinion-on-prescription-drugs-and-their-prices/
[4] Entis Laura. 2019. “Why Does Medicine Cost So Much? Here’s How Drug Prices Are Set”. Time. https://time.com/5564547/drug-prices-medicine/
[5] Center for Drug Evaluation and Research. 2018. “Advancing Health Through Innovation: 2018 New Drug Therapy Approvals”. FDA. https://www.fda.gov/media/120357/download
[6] Center for Drug Evaluation and Research. 2019. “Advancing Health Through Innovation: 2019 New Drug Therapy Approvals”. FDA. https://www.fda.gov/media/134493/download
[7] Bostyn Sven. 2021. “Tackling Salami Slicing and Indication Stacking in Orphan Drug Innovation Incentives”. Harvard Law Bill of Health. https://blog.petrieflom.law.harvard.edu/2021/09/15/orphan-drug-innovation-incentives/#:~:text=%E2%80%9CSalami%20slicing%E2%80%9D%20refers%20to%20the,as%20certain%20forms%20of%20cancer).
[8] Tribble S., et al. 2017. “Drugmakers manipulate orphan drug rules to create monopolies”. Spectrum News. https://www.spectrumnews.org/news/drugmakers-manipulate-orphan-drug-rules-create-monopolies/#:~:text=Humira%20was%20approved%20by%20the,between%2030%2C000%20and%2050%2C000%20Americans
[9] FDA. “Search Orphan Drug Designations and Approvals” https://www.accessdata.fda.gov/scripts/opdlisting/oopd/listResult.cfm
[10] Pfizer. 2022. “Pfizer Pipeline”. https://cdn.pfizer.com/pfizercom/product-pipeline/Pipeline_Update_28JUL2022_0.pdf?v9aJurw3hqVCO8AwGCx9M_cnB3qJiKCc
[11] Rapfogel N., et al. 2021. “The Build Back Better Act Would Improve Health Care and Lower Costs”. The Center for American Progress. https://www.americanprogress.org/article/the-build-back-better-act-would-improve-health-care-and-lower-costs/
[12] Sullivan K. 2022. “Prices of new drugs have soared. Will legislation be able to stop it?”. NBC News. https://www.nbcnews.com/health/health-news/prices-new-drugs-soared-will-legislation-able-stop-rcna32138