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Expensive Miracles: Pharmaceutical Prices in the US

 4 min read / 

Sky-high pharmaceutical prices have been a constant frustration throughout the interminable US healthcare reform talks. According to an industry report by Vizient, a national pharmaceutical purchasing firm, prices are going to rise another 8% in 2018.

A great deal of attention has been brought to this recently by the rise of “pharmaceutical hedge fund” investment managers who buy a drug they find undervalued and then impose severe price hikes, the most notable of such actors is Martin Shkreli, the so-called “Pharma Bro.”

Inflating Prices

Shkreli has been anointed the most hated man of Big Pharma and has borne most of the public ire, however, the practice is widespread throughout the industry. According to a CBS news report, buying new drugs and raising prices is ubiquitous with over 60 drugs’ prices being doubled last year.

This price gouging practice takes advantage of health insurers and patients and is a huge factor in rising health costs. The future outlook is bleak as well, with the recent appointment of Alex Azar to Secretary of Health and Human Services. He was a former executive of massive drug maker and is raising concerns that he will do little to combat the rising prices.

The anger over rising costs and hedge fund price manipulation overshadows one critical concept – people need these treatments. The pricey pills and treatments save people’s lives every day.

There are now drugs that can cure Hepatitis C, hold certain cancers at bay, and otherwise save and enrich lives of those who would otherwise be debilitated by disease. Ailments that were formerly death sentences can now be just minor hiccups in a patient’s life. The US has emerged as the world leader in pharmaceutical R&D and researchers are working on new life-saving drugs constantly.

The problem lies in that this research is costly. A widely circulated study by the Tufts Center for the Study of Drug Development estimated that it takes over $2.5bn to bring a drug to market, including costs of unsuccessful projects that never become marketable as successful drugs. On the patient side, consumers are having trouble affording healthcare as medical bills have become recently the most common reason for bankruptcies according to a CNBC report, and the high cost of pharmaceuticals play a central role.

The question now is: how do we address the fact that these treatments can be out of reach for those that they are intended to help? There are a couple of options. The recent 21st Century Cures Act helps by shortening the FDA reviewal process to help reduce drug development costs, it also allows companies use data summaries to remove the need for full clinical trials which are a costly part of development.

This also allows generic drugs to enter the marketplace quickly, creating more competition and lower prices. The Cures Act is an example of forward progress but what other options are available to continue development of high quality of treatments while lowering costs for consumers? Maybe outcome-based contracts.

Outcome-Based Contracts

The pharma industry has lagged behind the rest of the US Healthcare system as it moves toward value-based care, however it is starting to explore outcome-based contracting. These are contracts between suppliers and providers that tie reimbursement levels to the observable outcome of the drug.

Outcome-based contracts have two main benefits, they make sure that pharmaceuticals maintain quality as they will not get paid for ineffective treatments, and they can hold healthcare providers accountable to not administer drugs that the patient doesn’t need or that will not work as they will not receive payment. Such contracts can require rebates if the drugs do not have the intended effect while others contain spending limits on certain drugs.

If the public and the insurers are able to impose more outcome based contracts there is a great chance that prices will come down while not affecting the firms research and development capabilities. These massive drug companies create new lifesaving treatments every day, now they should labor to make them more readily available to everyday people.

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