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What's behind surging prescription drug prices?

Study finds government policy creates monopolies

Photo (c) dredk - Fotolia
The current furor over dramatic price hikes for Mylan's EpiPen allergy medication has once again focused attention on prescription drug costs.

Writing in JAMA, the journal of the American Medical Association, researchers looked at the issue and concluded that government-protected monopolies are largely to blame.

Dr. Aaron Kesselheim, an internist at Brigham and Women's Hospital, is corresponding author of the study, which looked at medical and health policy literature from January 2005 to July 2016.

The research team found that U.S. consumers spend more on prescription drugs than anyone else. When a drug company introduces a new prescription product, the price is set based on what the market will bear. And because there is no competition – the new product is protected by a patent – it often bears quite a lot.

Up 20% in two years

In just a recent two-year period, from 2013 to 2015, the study found net spending on prescription drugs surged 20%. It is now at the point where prescription drugs make up 17% of total health care costs. Drug coverage now accounts for 19% of employer-based insurance benefits.

"Unlike other countries, the U.S. health care system allows manufacturers to set their own price for a given product," Kesselheim said.

That, he says, results in high drug prices, which also get a boost from the increasing cost and complexity of drug development. Then there is the monopoly Kesselheim says government policies create, and the restrictions on public and private health insurance providers to negotiate lower drug prices.

Brand name drugs are the most expensive because, when approved by the Food and Drug Administration, they get a seven- to 12-year period of exclusivity. No other company can manufacture or sell the drug.

Modest relief from generics

"The only form of competition that consistently and substantially decreases prescription drug prices occurs with the availability of generic drugs, which occurs when the monopoly period ends," Kesselheim said. "But there are a number of tactics we found that can delay entry of generic drugs or reduce their uptake."

In the past, some drug companies have paid off generic producers to delay the production of a generic.

Appearing on CNBC Thursday, Mylan CEO Heather Bresch, whose company is at the center of the latest drug price storm, said the entire U.S. health care system is broken, attributing dramatic price hikes to a number of factors, including the fact that about five entities stand between drug company and consumer, each taking a cut.

She likened the health care system to a bubble, such as the one that led to the financial crisis, and called on Congress to do more than “stick its toe in the process” and bring about real reform.

As a doctor, Kesselheim says high prescription drug costs have important clinical consequences. When drugs go up, along with insurance co-pays, patients often don't fill their prescriptions, he says.

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