Drug Prices

If you had not heard of the drug Daraprim before the past week, you probably weren’t alone.

This week that changed.

The prescription medication has been front and center in the media after Turing Pharmaceuticals raised its price from $13.50 to $750 per pill — more than a 5,000 percent increase.

After a loud outcry over the price hike, CEO Martin Shkreli said his company would lower the cost. He said mistakes were made in informing people about why the firm believed the price spike was necessary. Daraprim is the generic version of the drug Pyrimethamine.

This is not the first time that a medication has taken center stage due to its steep price. Recently, Rodelis Therapeutics raised the price of cycloserine more than 2,000 percent. The specialized drug is used to treat tuberculosis. After an uproar, the price change was reversed.

When companies like Turing and Horizon Pharmaceuticals irrationally raise prices on older medications, it erodes faith in the American system.
Jennifer Luddy, Express Scripts

Horizon Pharmaceuticals increased the price of a pain-relief tablet, Vimovo, by 597 percent after it purchased the rights from AstraZeneca in 2013. The first day of selling the pill on Jan. 1, 2014, Horizon upped the price for 60 tablets to $959. This year on the same day, the price soared to $1,678, according to Truven Health Analytics.

Other drug prices are jacked up and never lowered.

Sovaldi, which treats hepatitis C, came under fire for costing $84,000 per 12-week course in the United States. Overseas, it was priced at a much lower rate.

These stories leave many wondering how companies seem to get away with pricing pharmaceuticals at high prices.

Companies can charge whatever they want for a drug. There is no regulatory oversight in pricing, Jennifer Luddy, a spokesperson for Express Scripts, told Healthline.

“When companies like Turing and Horizon Pharmaceuticals irrationally raise prices on older medications, it erodes faith in the American system,” Luddy said. “Their actions will drive legislators to seek to enact price controls, which could stifle innovation worldwide.”

Read More: New Hepatitis C Drug Without Interferon Achieves 93 Percent Cure Rate »

Drug Prices by the Numbers

Per Sjofors, founder and chief executive officer of the pricing advisory firm Atenga, told Healthline that he believes drug prices have doubled in the past several years because it was easy for insurance companies to pass these cost increases on to patients.

The Affordable Care Act changed some of that.

An Express Scripts report noted that branded-drug prices increased about 127 percent between January 2008 and December 2014 compared with an 11 percent rise in the consumer price index.

Drug Prices

During the same time, prices for the most commonly used generic medications went down about 63 percent.

In 2014, there was a 13 percent increase in prescription-drug spending.

In a June 2014 report, Needham & Co. officials said there were as many drug-price increases of 50 percent or more during the previous two and one-half years as there were in the prior decade, the Wall Street Journal reported.

Read More: ‘Drug Flipping’ Allows Pharmaceutical Companies to Raise Prices Sky High »

The Roots of a Price Hike

There are different types of price hikes.

One comes from companies like Turing Pharmaceuticals that buy generic drugs and raise the prices.

The other scenario is manufacturers who produce high-priced drugs.

In Horizon’s case with Vimovo, they bought the drug from AstraZeneca, even though there is a generic version of it.

Jennifer Hinkel, a partner at the health policy and advisory firm McGivney Global Advisors, told Healthline that generic drug price strategies are different from innovator drugs such as Sovaldi.

“Sovaldi is a major innovation. It's the first drug to offer a very high cure rate for hep C … It can lead to avoiding a liver transplant and it's a huge scientific breakthrough,” she said.

“If you look at how much Sovaldi is actually purchased through Medicaid and through the 340B program (both of which mandate enormous discounts on list price), the average price paid is much lower than the list price or retail price that is quoted in the media,” she added.

Hinkel said almost all private insurers, distributors, and pharmacies negotiate additional discounts on new products.

When generics undergo steep price hikes, it’s a different story, Hinkel said.

A company obtains rights to an old, generic asset that was "grandfathered in" without the current rigorous requirements and clinical trials required to get FDA approval.

A new owner can conduct small studies under the FDA's unapproved drug program, which then enables it to gain some market exclusivity and limit its competition. The company can then hike the price as if it were an innovator drug.

“This is an unintended consequence of this FDA program,” Hinkel noted.

Sometimes a single-source drug that isn’t taken by a large number of people can spur a price hike because the market isn’t large enough to encourage a competitor to come in and help lower the price.

Read More: Merck Challenges Harvoni with New Hepatitis C Treatment »

Regulations Restrict Companies

Hinkel said many large pharmaceutical companies are concerned about high prices, but they are constrained in what they can do because of the unintended consequences of pricing systems such as the Average Sales Price-based reimbursement by Medicare for injected/infused drugs or by 340B and Medicaid’s mandatory discount programs that cut into profit margins.

Those programs require companies to account for losses they know they will accrue from discounts.

“For example, although some companies would be interested in pricing based on outcome or based on how the drug is used, the current legal mechanisms for reimbursement and distribution prohibit this,” Hinkel said.

In many cases, the insurers, distributors, and hospitals are making as much or more margin on the system than the pharma companies.
Jennifer Hinkel, McGivney Global Advisors

Hinkel said that the price margins insurance companies are making indicate that they are not hurting financially.

“In many cases, the insurers, distributors, and hospitals are making as much or more margin on the system than the pharma companies,” she said.

Hinkel added that for prescriptions in the specialty and life-threatening areas, insurers typically do not have a choice to opt out of providing coverage for the medication.

Sometimes they can choose one as a more preferred option and lower the price or offer a better reimbursement to a doctor, but there must be data to show the drugs are equivalent.

Insurers can sometimes negotiate for step-therapy treatments. This involves offering a heavy discount so one nonequivalent drug is used first and the other product used second only if the first drug doesn't work for the patient.

Read More: Some Hospitals Overcharging By as Much as 1,000 Percent »

The Medicare Factor

Dr. David Rivera, an OB/GYN from Illinois, said generic drug prices are hurting Medicare because it cannot negotiate prices with manufacturers, as is done in other countries where drugs cost less than they do here.

“That was done deliberately for reasons that are obscure,” he told Healthline.

A Bloomberg editorial blames this situation on Congress. When the prescription drug benefit was created in 2003, it prohibited bargaining.

“Presumably, this was to maintain the support of drug companies, but it gives away great leverage that Medicare could use to keep drug prices in check,” the article said.

When talking about skyrocketing drug prices, Doug Hirsch, cofounder and co-chief executive officer of GoodRx, thinks it is important to focus on the cost patients are paying for them.

“Insurance is covering fewer and fewer drugs, and patients are paying greater amounts in the form of deductibles, restricted formularies, tiers, and more,” Hirsch said in an e-mail to Healthline.
Rivera added drug companies are getting away with high prices “because they can.”

He said there is no one to really stop them. There’s no government control, and insurance companies will either deny coverage or pass the costs onto their members.