Although the rate at which overall health costs are rising is historically low, employers, experts, and politicians are expressing alarm at the rising cost of prescription drugs. According to a recent Aon analysis, the average health care rate increase for mid-size and large companies in 2015 was 3.2%. Prescription drug costs, however, jumped by 10% last year according to a report by Truveris that was publicized by the Business Health Care Group.

In general, hospital expenses account for 30-40% of medical spending for commercial health insurance plans, with physician services contributing for another 30%. Historically, prescription drug costs typically accounted for about 15% of employers’ medical spending. Today it is not unusual for pharmacy claims to total 20-25% of all health plan costs.

Two of the most popular explanations for the growth in drug costs are the release of new high cost of specialty drugs and price increases by pharmaceutical companies. “Specialty” drugs are cutting-edge medications that treat severe, complex diseases like cancer, multiple sclerosis, and rheumatoid arthritis. Specialty drugs typically require immense resources to research, develop, and produce, and injectable and biologic products may require special handling.

Many of these new drugs have remarkable results that can give patients the proverbial “new lease on life.” For example, one FDA-designated breakthrough drug therapy with the brand name Orkambi (Lumacaftor/ivacaftor) can help cystic fibrosis patients who have struggled to breathe feel like they have “new lungs.” Another, Harvoni (Ledipasvir/sofosbuvir) is 94-99% effective at curing the most common form of Hepatitis C. Even with these marvelous results, many wonder whether the drugs are worth their high prices. An average cost of Harvoni treatment is $90,000, while Orkambi costs $259,000 per patient per year. According to the Associated Press, Vermont will pay $3.6 million for the Orkambi needed to treat only 40 cystic fibrosis patients this year, an amount equal to 7% of the entire state’s Medicaid budget deficit.

Surprising as it seems, the astronomical prices for these new drugs may be less responsible for the increase in total drug costs than the fact that drug makers are simply raising prices across the board for all sorts of drugs. John Fauber reported last year in the Milwaukee Journal Sentinel that prices for dermatology drugs have skyrocketed over the last six years, with nineteen dermatology products increasing by an average of 401% between 2009 and 2015. He noted that a paper in the journal JAMA Dermatology by Steven and Miranda Rosenberg found that Retin-A Micro, an acne drug, rose by 413.64% over that time, from $178.05 to $914.52. An antineoplastic medication made by the same company went from $1,686.78 to $30,320.12, an increase 1,697%.

Drug cost increases are continuing even after the practice began receiving widespread scrutiny and public condemnation last year. Earlier this week, Bloomberg reported that DRX, a provider of price-comparison software, conducted a survey that found that about 400 formulations of brand-name drugs increased at least 9.9% in the two months of December 2015 and January 2016.

In response to the criticism this has attracted, some in the drug industry continue to argue that it is appropriate to price drugs at the highest point the market will bear, even if this means some patients may be unable to afford them. The argument goes that pharmaceutical companies must provide a maximal return to investors in order to attract capital to fund R&D for new drugs. In addition, they point to patient assistance programs (PAPs) that provide help to uninsured patients. From this perspective, high drug prices help patients by leading to the creation of new cures and therapies, only insurers pay the high prices, and problems of individual access and affordability are resolved by the PAPs. Of course, this ignores the reality that higher drug costs for insurers, government, and private payers ultimately leads to higher health costs for everyone.

Documents released this week by the House Committee on Oversight and Government Reform from its investigations into Turing Pharmaceuticals reveal its CEO considered the increase of prices to maximize profits, not fund R&D, to be the “dirty secret” of the pharmaceutical industry. The documents also show the efforts of company executives to manage the anticipated backlash against its price increases. These executives believed patient advocates could be managed by framing the issue as a conflict between drug companies and insurance companies, and that advocates would not want to side with insurers. Physicians would not object, they believed, because health care providers are “less sensitive to price increases.” Consumers would buy at any price, they believed, because “[d]rugs are typically non-discretionary and consumers are relatively price insensitive.”

Slides from an undated presentation show that the company was most concerned with the response of payors, but that payers have yet to push back. The slides documented the success of past price increases as follows: “increased Chenodal price 5x with no pushback from payors … Licensing of Thiola . . . Increased price 21x with no pushback from payors . . . Acquisition of Daraprim . . . Increased price 43x with no pushback from payors.”

Politicians and advocacy groups are already clamoring for public action that is unlikely to occur and can hardly be relied on to provide results in the near term. Payors have the power to push back, but have not done so yet. With these harsh realities and dirty secrets now out in the open, one can only hope that plan sponsors will take a long and hard look at their pharmaceutical benefits this year.


Photo by is licensed under CC BY 2.0.