At the request of Senator Bernie Sanders and Congressman Elijah Cummings, the Government Accountability Office recently issued a report on pharmaceutical company profits and drug prices. The GAO found that drug spending has nearly doubled since the 1990s mostly because drug prices continue to skyrocket and because of increased use of costly drugs. It shows that research and development costs do not explain or justify high drug prices.
Why are drug prices so high? Drug patents are responsible in significant part for high drug prices, affording drug companies monopoly pricing power. Consolidation in the drug industry and lack of adequate competition in the generic drug market are also to blame.
The GAO analyzed pharmaceutical company revenue, profit margins, and merger and acquisition deals worldwide between 2006 and 2015. It found a 45 percent increase in drug and biotech sales revenue in that period, from $534 billion to $775 billion in 2015 dollars.
Two out of three drug companies also increased their annual average profit margins, with the largest 25 companies, seeing annual profits of between 15 and 20 percent. These margins are two to five times higher than the annual average profit margin of the largest 500 non-drug companies, which was between 4 and 9 percent.
There is concerning industry consolidation. Ten pharmaceutical companies generated 38 percent of sales. But, within certain therapeutic classes, fewer companies controlled even more of the market. And, market pressure is leading large drug companies to acquire smaller ones to drive greater profits. Lack of competition in the drug industry, particularly for generics, fueled higher drug prices. Based on the data, the GAO also found a link between industry mergers and lack of innovation.
While drug company profits have increased dramatically, research and development spending has not, rising just over eight percent to $89 billion from $82 billion between 2008 and 2014. The U.S. government spends about $28 billion a year on research. Tax benefits to drug companies for research and development of orphan drugs helped foster their investments.
The FDA approved between 179 and 263 drugs each year. Between 23 and 35 of these drugs were treatments for unmet medical needs or to “help advance patient care.” The GAO does not explain this term, which may mean simply new ways of dispensing old drugs and nothing innovative from a treatment perspective.
The GAO explains that insured consumers are often less price conscious with prescription drugs than they are with products for which they have to pay in full and that can promote price inflation and drive up spending. In addition, doctors may not be aware of low-cost alternatives they could prescribe or they simply may be inclined to prescribe the most expensive drug, which can further drive up spending. And, Medicare is often required to pay for even the expensive drugs that may offer no added value, which drives up spending further still.
The GAO does not discuss incentives of health insurers and pharmacy benefit managers to promote high-priced drugs over lower-cost alternatives. But, there’s every reason to believe that fees to PBMs to promote high-priced drugs on insurer formularies over lower-cost alternatives are also in some way responsible for driving up drug spending. Insurers are likely benefiting from this arrangement or they would be doing something to stop that practice.
Senator Sanders and Congressman Cummings sent a letter to President Trump alerting him to the GAO report and urging him to make good on his promise to the American people to address skyrocketing prescription drug costs.
If you want Congress to rein in drug prices, please sign this petition.
Here’s more from Just Care:
- Six things you should know about your 2918 Social Security benefits
- National Academy of Sciences recommends drug price negotiation to make drugs affordable
- Pharma profits from patenting OTC drugs
- With drug prices soaring, millions buy drugs abroad
- Common OTC drugs linked to cognitive impairment