Prescription Drug Pricing: Does Accessibility Really Inhibit Innovation?

Chris Li

Abstract

Amidst a drug pricing crisis where nearly 23% of Americans are subject to medication insecurity, pharmaceutical companies continue to raise prices. High pharmaceutical pricing is justified by correlating high pricing with high revenue that is assumed to be reinvested into research and development (R&D) for new innovative products. This assumption operates on two fronts: first, revenue is reinvested into R&D, and second, R&D budgets are used for innovative research. Data indicates both claims are false. Many pharmaceutical companies spend more on marketing than they do on R&D, and R&D budgets are geared not towards furthering innovation but rather finding ways to marginally adjust existing products to extend patents and market exclusivity. Solutions should be geared towards allowing price negotiations, further regulating pharmaceutical marketing, and incentivizing real innovation by enforcing more stringent patent regulations that decrease patent length and ensure patent extensions are for legitimately novel discoveries.

Introduction

One of the most striking examples of the structural inadequacies in American healthcare lies in pharmaceutical pricing. Americans pay 2.56 times more for prescription drugs and 3.44 times more for brand–name prescriptions when analyzed against 32 comparison nations. 1 This prohibitive cost is reflected in the nearly 23% of Americans who are subject to “medication insecurity”, or the inability to pay for at least one medication in the last year. 2 Despite the obvious danger posed by these costs, prices continue to rise. The justification for these high prices from the pharmaceutical companies’ perspective lies in innovation: without these prices and revenues resulting from them, they would have substantially less money to use on research and development. This justification brings up the questions: why are prices so high? Where does pharmaceutical revenue actually go? This paper will analyze these questions as well as propose solutions to the rampant profiteering of the pharmaceutical industry.

Why are prices so high?

While the issue of pricing in the pharmaceutical industry is complex, a good place to start is with patents. Pharmaceutical companies are able to charge incredibly high prices for drugs because they have patent protection. Drug companies receive 20-year long patents; excluding the approximate 7.5 years of development, this yields about 12.5 years of pricing exclusivity. 3 Companies will oftentimes extend these lengthy patents through evergreening “me-too” drugs: trivial developments that operate nearly identically to the original drug. 4-8 The patent system as it currently exists doesn’t incentivize innovation: it incentivizes companies to make marginal adjustments to maintain market exclusivity. Many of the largest pharmaceutical companies use much of their R&D costs on this perpetual “updating”. 4 After all, once the patent runs out, generics that are functionally identical can enter the market and reduce cost.

The topic of generics raises a second concern. Even after patents run out, biosimilar drugs face their own challenges. When small molecule drugs are released, patents are required to disclose the active ingredient for the generic drug. However, in biosimilar drugs, patents do not need to disclose the original cell line, making replicating the treatment much more difficult. Companies thereby artificially extend their market exclusivity by making replication of biosimilars needlessly difficult. 3

Outside of gaming the patent system, pharmaceutical companies have no pressures to decrease price with little negotiation to lower costs. 5 Most healthcare coverage in the US comes from private plans with feeble negotiating power and even those covered under public plans (like Medicare Part D) still pay large sums because of explicit non-interference clauses. 6

The US healthcare system is set up perfectly for pharmaceutical profiteering: companies set their prices for a decade or longer and there is very little negotiating power from public or private insurance companies to bring prices down.

Do companies really spend so much on R&D?

While companies claim revenue generated by inordinately high pricing is essential for R&D to develop novel drugs, the data indicates that this is simply false. Prasad et al. recently identified 10 companies that released cancer drugs. The R&D costs totaled 9 billion dollars, but generated 67 billion dollars in revenue. 8 Given that these companies are making many times their R&D investment, where is the money going?

Marketing. Especially in the US, which accounts for between 64 and 78% of the drug industry’s profits, reaching the consumer is key to maximize revenue. 9 Drug companies do this by investing billions into marketing: 9 out of the top 10 pharmaceutical companies invested more in marketing than in research per Markovitz. 10 There are two ways in which drug companies do this.

The first is termed direct-to-consumer (DTC) advertising. 11 A 2012 analysis yielded a figure of $3 billion and that figure has doubled in only 5 years to $6.1 billion in 2017. 12, 13 Distressingly, the information presented in these ads isn’t always verified: the FDA does not look at the information before it is released and only begins to regulate content after ads are released. 11, 12 The US and New Zealand are the only two countries allowing DTC, with many countries banning themfor the misinformation and selective presentation that it perpetuates.

The second way is through physicians. Previously, companies would spend massive amounts of money on gifts, events, and sponsoring lectures to incentivize physicians to prescribe their specific drug. That figure was as high as $24 billion in 2012 and while rules in many hospitals requiring physicians to disclose gifts and payments received are increasingly prevalent, that figure hasn’t magically disappeared. 12

Analyzing where the money goes points to two concerns. First, R&D reinvestment may not provide new innovations, but rather perpetuate market exclusivity. Second, revenue not reinvested in R&D is put into marketing that may be inaccurate, or may incentivize physicians to prescribe you a certain medication that maximizes profit, rather than patient health.

Solutions

Much of the current policy debate centers around how to maintain innovation while decreasing prices, under the presumption that decreasing prices decreases innovation. It is clear, however, that drug companies do not need these astronomical prices to maintain R&D costs. Because of this false presumption, solutions must instead incentivize innovation by fundamentally changing how companies pursue patents, R&D, and marketing.

As it stands, companies have over a decade of market exclusivity resulting from patents. Reducing this timeframe is one step to reducing costs. This requires international cooperation: the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) assures patent protections for at least 20 years. 14 Policy should prevent the rampant evergreening that extends the patent and market exclusivity for the company to ensure only novel and functionally distinct products are given patents, not companies changing a drug slightly to extend their monopolizing time frame. By lowering the patent length and limiting evergreening, more generics can come on the market earlier. However, biosimilar drugs are still difficult to replicate, especially because the existing patent system does not require important information to be included. Ensuring patents contain all information to make biosimilar manufacturing a smoother process will eliminate mechanisms to artificially extend patent life.

Price can be regulated by allowing negotiation. For example, non-interference clauses could be removed from Medicare. As of 2021, more than 48 million of the 62 million people on Medicare have Part D plans, which helps cover drug costs. This is a stark rise from the 39.1 million covered in 2013, where Medicare alone accounted for 7% of the global prescription drug market. 5 By allowing large programs like Medicare to negotiate for itself rather than through for-profit intermediaries with limited negotiating power, prices can be further controlled. 15, 16

Changing the way companies spend can also incentivize real innovation. Pharmaceutical companies’ budgets are based more on marketing rather than research. Policy should create a system that is the other way around. One way to do this is by limiting or banning DTC advertisements, as nearly every other nation has done, and creating more stringent limitations on how (and how much) companies can market to physicians. This pharma-physician relationship is an unignorable conflict of interest impeding the far more important patient-physician relationship. By reducing the extent to which companies can market, their revenue could instead be diverted to more R&D, that with patent reform, would research more innovatively. If this outright restriction on marketing is politically unfeasible, ensuring that the FDA has more oversight and approval over marketing and introducing a tax on marketing spend to be used for increased National Institute of Health (NIH) funding or paying for drugs for underserved populations would be a step in the right direction.

The excessive profiteering of the pharmaceutical industry is based on the misconception that high costs are necessary to generate the revenue that pushes forward R&D and by extension, innovation. However, these high costs are a function not of innovation, but of a broken marketplace with no competition or negotiation. This money is then pushed into entrenching that exclusivity through secondary patents and marketing to consumers and physicians. While certain to have industry pushback, introducing patent reform, allowing Medicare the power to negotiate, and limiting pharmaceutical marketing are important solutions to decreasing drug pricing while truly furthering innovation.

About the Author

Christopher Li is a first-year at Harvard College interesting in studying either History of Science or Human, Developmental, and Regenerative Biology.

References

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