U.S. Drug-Pricing Procedures Are Often Misunderstood

Much attention has been placed on the fact that drug prices on branded pharmaceuticals are higher in the United States than in most other parts of the world, certainly more than in most developed countries. Indeed, name-branded drugs may be as much as 25-40% more expensive in the United States than in Europe and Canada. There are calls to re-import drugs from other nations where prices are cheaper. But this gap in drug prices seems to be narrowing, and drug prices—when viewed as a whole—may not be more expensive in the United States. Generic drugs in the United States are generally cheaper than in the rest of the world due to the large number of U.S. firms that rush to take advantage of expired patents. So, the U.S. system is not necessarily more expensive; the pricing system is just different. Americans pay more initially while drugs are under patent protection, but prices then fall below those in the rest of the world once generics are introduced.

But rising prices are not the only factor contributing to high rates of drug spending in the United States. There is also a second factor driving up overall drug costs, referred to as "prevalence," or the number of instances in which a particular drug is prescribed and purchased. As the American population ages and doctors become more efficient and aggressive in treating diseases, the number of cases diagnosed and the prescriptions written may rise. For example, in the mid-1990s, U.S. spending on asthma medications rose by almost 100%. This was fueled by much more aggressive treatment of the condition by physicians, who were diagnosing more cases, writing more prescriptions, and encouraging more frequent use of medications. In this instance, spending on drugs rose without drug prices increasing at all. Similar phenomena are also occurring as the baby-boom generation ages and obesity among Americans becomes epidemic. Drugs that lower cholesterol or blood pressure are increasingly necessary for these populations, and overall spending on drugs is climbing outside of price increases. Some experts estimate that only three percentage points of the 9.1% rise in drug spending last year can be attributed to price increases, which puts inflation in the pharmaceutical industry in line with inflation for the overall economy. While this claim may be a little overstated, we cannot underestimate the impact that the greater prevalence of pharmaceutical drug-use has had on the increases in overall drug spending.

More and more employers are finding the answers to their drug cost problems by turning to a pharmacy benefit manager (PBM). A PBM will create incentives and procedures to ensure that patients and doctors are making the most cost-efficient prescription decisions. PBMs may analyze a drug benefit program and decide that a patient choosing a name-branded drug when an equivalent generic is available will be required to pay the cost-difference. PBMs may also institute a "step therapy" program through which drug decisions are made. When managing a health problem with many available solutions, a PBM may dictate a treatment course where the most cost-effective solution is tried first, and more expensive therapies are explored only when that treatment fails. These programs ensure that cost increases are only seen in cases where there is a real benefit to using more expensive medications. Employers using these strategies do see significant savings in their prescription drug spending.