Pharmacy costs are at an all-time high, presenting a burden for health plans and members alike. Drug claims continually contribute to the large renewal increases health plans have seen over the past few years. These costs are often passed on to the plan members, in more ways than one. Studies have found that a large percentage of written prescriptions go unfilled due to the cost of the medication or coverage rejections on the part of the health plan.
This is a problem for many employers and consumers, and one that isn’t likely to see a resolution anytime soon. According to a recent report, the U.S. market at net prices grew 11.4% in 2024, up from 4.9% in 2023, and U.S. medicine spending is forecast to grow 3 to 6% through 2029. Over the next five years, medicine spending will grow between 5–8% on a list price basis and 3–6% after discounts and rebates.
While these facts and projections may be distressing, they come as no surprise to most of us. High prescription drug costs have been an issue in the public eye for years now. So what’s driving the prices we see?
Specialty Drugs
At first glance, the answer seems obvious. In an effort to combat various complex health problems, pharmaceutical companies have developed a wealth of specialty medications, each of them with a hefty price tag. One source predicts an average of 50-55 new medications per year over the next five years, most of which will be specialty drugs. And, as a recent report found, “the average annual price of specialty drugs has tripled over the last ten years from nearly $18,000 to more than $52,000 today.”
Most pharmaceutical companies attribute these prices to research and development costs, with the Pharmaceutical Research and Manufacturers of America (PhRMA) asserting that it costs an average $2.6 billion to develop each new medication, due to hurdles like clinical trials, failure of promising drugs, and the costly FDA drug approval process.
Yet, when you consider that these same medications are often sold in Europe by the same companies at a far lower price, this explanation begins to fall apart. The validity of PhRMA’s findings has been called into question, and a separate study found that there was little to no correlation between the amount spent on research and development (R&D) and the eventual cost of that drug. In fact, the majority of major drug manufacturers spend more on advertising than R&D. And while new medications certainly come at a premium, we have also seen significant price hikes in medications that have been on the market for years—some of them widely used generic drugs.
But if these drug prices aren’t based on R&D or other up-front costs, what is fueling the increasingly expensive drug market?
Systemic Incentives
Simply put, drug manufacturers have no incentive to keep prices low, and every incentive to charge exorbitant prices. After initial costs for R&D, FDA approval, and advertising are subtracted, the top pharmaceutical companies are still making billion-dollar profits.
When comparable nations remain seemingly exempt from these problems, it’s worth investigating how the US has become entrenched in its current situation. The roots of the issue are widespread and systemic. As one expert put it, “We designed a system in terms of drug costs that is all engines, no brakes.” Let’s examine some of those engine components:
- Scattered Negotiations: While other wealthy countries have consolidated their pharmacy negotiations into a single entity—giving them added leverage and the ability to walk away from exceptionally unfavorable terms—the US has maintained a decentralized system where insurance carriers, pharmacy benefit managers (PBMs), and other similar organizations are left to negotiate prices on an individual basis. In exchange for this loss of bargaining power, pharmaceutical companies have found that Americans are able to access these medications faster and with fewer restrictions.
- Cornering the Market: Pharmaceutical companies have been known to get creative with patents, monopolizing that particular drug for far longer than would otherwise be allowed. This can include filing multiple patents with questionable relevance to the original, or even acquiring patents for older drugs. These tactics allow the companies to raise the price as high as they deem fit, because they have no competition incentivizing them to keep the prices reasonable.
- Intermediary Incentives: Pharmaceutical companies may be seeing the lion’s share of profits from the drugs they create, but they are by no means the only parties seeing incentives to keep prices up. Our current system often relies on PBMs to act as middlemen between drug manufacturers and health plans, negotiating prices and advising on which drugs to cover. However, many PBMs are compensated for these services based on a percentage of the plan’s total pharmacy spending—meaning the PBM makes more money when drug prices are higher.
- A Tangled Web: The pharmacy drug system is complex and operates at an unwieldy scale. This makes it difficult for even industry experts to pinpoint specific problems and abuses, and harder still to engineer solutions. For the average consumer, comparison price shopping often seems like a laughably impossible task.
What Can Be Done?
Nothing sums up the pharmaceutical industry quite as neatly as this New York Times quote from a Stanford professor: “Drugs are so expensive in the U.S. because we let them be.” Because of the complexity and bulk built into our system, any efforts to curb these issues will likely be slower than we’d wish. The good news is that we’ve already begun.
- Legislative Changes: The Inflation Reduction Act of 2022 seeks to improve our negotiating power as a nation. Set to take effect in 2026, the act allows the federal government to negotiate drug prices for Medicare, which is then expected to lower prices for those drugs across the board. Rather than take on the entire pharmaceutical industry all at once, the act has targeted 10 drugs to start on, with more added to the list each year. While this may feel like a drop in the bucket to those who are on the 20,000 drugs that didn’t make this list, the expected price reduction will have a large and welcome impact on the many Americans who do use one of these price-protected drugs.
- Biosimilars: While new specialty medications are consistently hitting the market, cheaper alternatives are also making their way into the market. Generic versions and biosimilars (alternative versions of biologic drugs like Humira or Remicade) can often provide the same results at a drastically lower price. These have been a popular solution in Europe for years; following their lead could mean an estimated $54 billion in savings over the next ten years.
