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Ever Growing Price of Medications: Reasons Why

It has been reported by the GAO-government accountability office, that prices on drugs doubled between 2000 and 2008. The rise was attributed to industry consolidations and price hikes by third-party providers who repackage drugs. And while generics can lower the prices after branded patents expire, branded manufacturers lose approximately 80% of their market share. It should also be noted, that in the US it takes an average of 12 years for a drug to pass through all the trials as it moves from test tube to patent. And the patent protection starts when the molecule is first registered with the patent office. So once it is released for sale the companies often only have 8 years on average to recover the costs of research and productions of the medication and turn a profit (Dooney & Hunter, 2014).


Many recognize escalating drug prices as a significant dilemma related to America’s rising healthcare costs. Yet few can agree on what to do about them. One theory is to remove all governmental influences and let the marketplace forces get to reduce the prices down to consumer-friendly prices. Unfortunately, the prescription market is not a normal market. Some of the reasons identified include lack of price transparency, information and control asymmetries between patients and doctors, third-party payors, demands that remains constant irrespective of any exorbitant price increases and patent-ensured monopolies.

In an effort to correct this, it has been suggested that Congress should apply a medical loss rating framework to the drug industry similar to the health insurance industry. This framework seeks to balance corporate profits with consumer benefits by separating profits and other less value-adding expenses from those that add greater value to the consumer. In the health insurance industry 80:20 is the ratio framework. If the profits etc cross the 20% threshold then the company must reimburse this excess back to the patient.

It is thought if a stricter ratio was imposed on Big Pharma of 40:60 then if they failed to reach the 40% they would be compelled to return the excess back to the consumer. Healthcare spending in America is growing at an alarming rate. It is estimated to rise by 1.3% faster than the GDP. For people under the age of 65, the drug prices are expected to rise by 11.6% in 2017 as wages only increase 2.5% in 2017. It is not surprising then that biotech companies consistently rank higher than almost any other industry.

It is felt imposing a medical loss ratio (MLR) would help manage market failures in the drug industry. Market failure happens when a market fails to function as a normal free market by not allocating resources efficiently or achieving price equilibrium. And an MLR sees the difference between money spent on other expenses (administration expenses and profits) from medical loss. A medical loss is defined as care-related and improvement expenditures like treatment providers’ salaries and research and development (R&D) cost. MLR regulation ensures health insurers moderate the premium hikes. Without the normal steadying free-market forces in place, unfettered drug prices will increase (Schiel, 2018).

Epinephrine is the first-line treatment for systemic allergic reactions (SARs) to foods, insect stings or bites, medications and other allergens. Early use of SARs can be life-saving; delayed-use has ended with death. Epinephrine autoinjectors (EAIs) were developed in the 1970’s and were first approved by the US FDA (Food and Drug Administration) in 1987 with EpiPen. Annual direct costs of EAIs in 2010 are estimated to be $294 million and accounted for about 25% of the $1.2 billion annual cost to treat SARs including anaphylaxis.

Average wholesale price (AWP) of EpiPen was relatively stable until Mylan acquired the product from Merck in 2007. Since then the AWP for a two-pen pack has increased 545% going from $113.27 each to $730.33. And this is not an optional purchase for those who depend on it to save their lives. Insurance coverage also differs for each EAI being dispensed once it was prescribed. More than 50% of EpiPen prescriptions are abandoned or not filled once the cost exceeds $300 for a two-pack.

This study found this out-of-pocket cost is higher for Caucasian subjects and is hypothesized that Medicaid enrolled children may have lower costs. It has been suggested that epinephrine is classified as a preventative medicine by the US Preventative Services Task Force (USPSTF). Making use of ampoules of epinephrine and an empty syringe by parents as a cost-saving alternative is commendable but has demonstrated a longer period of delay as parents take 142 seconds to draw up and give versus 29 seconds by an ER nurse. The rising cost of EAIs has made self-administered epinephrine potentially unavailable to some people who have need of it. Classification of EAIs as an USPSTF preventative medication could improve access by reducing or eliminating co-payments (Westermann-Clark, 2018).

Understanding the drivers of market concentration in the generic pharmaceutical industry is essential to guaranteeing the availability of low-cost generics. The increasing use of low-cost generic drugs offers relief from rising health care costs. The US FDA estimated that generic drugs saved the healthcare system about $67 trillion over the past decade. Competition among generic drug manufactures decreases the price of generics. In 2005 report from FDA just adding one additional generic manufacturer can lower the cost consumers by 52% of the brand drug price. Add an extra 3-4 competitors and the price can drop to 21% of brand version.

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The FDA requires even producers of generic medications to submit an Abbreviated New Drug Application (ANDA) and demonstrate to them that the generic product is safe and effective. Unfortunately for summers, there is a chronic backlog of processing these applications at the FDA. This study found that the ANDA review time was proportional to the number of the backlog. Another barrier the study found was that ANDAs can’t be submitted until after the branded medications patent runs out.

In an effort to deal with rising health care costs it is important to understand how the industry behaves. This study looked at the level of competition in more than 800 drug markets that were opened for generic they found delays in ANDA approvals can significantly dampen competition in the generic drug market. In order to decrease generic prices by increasing competition, the FDA needs to plan ahead of time based on the number of drugs about to come off patent (Wang, 2018).

DTCA (direct to consumer advertising) of pharmaceutical firms may be defined as an attempt by the pharmaceutical companies to advertise or promote information regarding prescription drugs directly to the patient. Several types of DTCA have been employed. They include help-seeking ads, reminder ads, and product claim ads. The help-seeking ads are categorized by the presence of information regarding a disease while omitting the drug information. Reminder ads provide limited information regarding prescription medications. This variety of advertising does not provide indications or any claim on efficacy or drug effects. While the product claim advertising provides the indications, efficacy, and safety profile of the drug.

Many feel that DTCA is under-regulated and urge the need to strengthen regulations. DTCA impacts the public in both good and bad ways. The benefits have included a better-informed patient had had the drawback of misleading people and overutilization of the medication. According to CMS, prescription drug costs saw a 12.2% growth rate in 2014 from 2013. Rising healthcare expenditure is a major issue in US Healthcare and it is threatened to worsen due to the growing trend of DTCA.

With the increase of internet-based information, consumers have been actively searching for information including searches for medical information. This has allowed for eDTCA globally via multiple channels such as websites, satellite TV, and social media. Prescription Drug Coupons (PDC) are a newer form of pharmaceutical marketing by offering discounts for using branded medications for patients with third-party insurance or who are paying out of pocket. The goal of PDC is to alleviate the burden of cost related expenses of expensive branded drugs that might result in non-adhearence and further complications. PDCs have another trend in DTCA in the US. Black box warnings on some medications may be glossed over in an effort to sell the medication to the patient. DTCA can increase drug utilization by raising the awareness of patient of a specific disease. Two examples are Tegaserod that was withdrawn in 2007 after DTCA and Vioxx that was withdrawn in 2004; both for heart damage related complications (Coustasse, 2018).

Work Cited
Coustasse, A. et al. (2018). Trends and effects of pharmaceutical DTCA. International Journal of Pharmaceutical and Health Care Marketing, 12(1). Marshall Digital Scholar. 009

Dooney, J. & Hunter, R.J. (2014). Products liability in pharmaceutical industry. International Journal Advances in Social Science and Humanities,2(7).

Schiel, C.R. (2018). Leveraging pharma to lower premiums: Medical loss ratio regulations in the pharmaceutical industry. Bringham Young University Law Review,2018(1) article 8.

Wang, Y. et al. (2018). Manufacturing and regulatory barriers to generic drug competition: A structural model approach. SSRN Elsevier.

Westermann-Clark, E. et al. (2018). Economic considerations in the treatment of systemic allergic reactions. Journal of Asthma and Allergy,11. Dove Press.