Drug Prices in the U.S. Are Sick. What’s the Cure?

According to a poll taken after the 2018 elections by Politico and Harvard's School of Public Health, American citizens really want Congress to do something -- anything -- about the skyrocketing cost of prescription drugs in this country. Among those surveyed, 80% listed it as an "extremely important" priority, and that was the top response among Democrats and Republicans. Understandably so. We grow angrier with each new revelation that a pharmaceutical company has purchased rights to a once-inexpensive lifesaving drug and is now charging 50 times as much for it, or that a new (and again, lifesaving) treatment is set to hit the market for $2.1 million a dose. And sadly, neither of those is an exaggeration. But the most galling aspect has to be that we are in it alone. For example, on average, the world's top 20 most-sold medicines cost three times more in the U.S. than they do in the UK.

In this segment of the Motley Fool Answers podcast, co-hosts Alison Southwick and Robert Brokamp tackle the issue with the help of Leigh Purvis, director of health services research at AARP's Public Policy Institute. They'll dig into the root causes and perverse incentives that have propelled drug prices so much higher and how other nations have avoided the problem. They also discuss a number of potential solutions and consider how the question of profits versus profiteering should be viewed by investors in the pharma sector, who have a natural bias toward bigger numbers on the bottom line.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 4, 2019.

Alison Southwick: According to the Kaiser Family Foundation, one in four Americans report trouble paying for their prescription drugs and that they, or a family member, have not filled a prescription, have cut their pills in half, or skipped doses altogether due to cost.

Well, that sounds like a big problem. And you know what? A lot of Americans realize that. A recent Harvard political poll in January found that 80% of Americans think that lower prescription drug prices should be the top, Bro, the top priority of Congress. I know. That's surprising!

Robert Brokamp: But I can understand why.

Southwick: Well, I can, too, with this sort of research. Joining us today in-studio is Leigh Purvis. She's the director of health services research at AARP's Public Policy Institute. Leigh, thank you for joining us!

Leigh Purvis: Thank you so much for having me!

Southwick: Before we get into the research and why we brought you here, why don't you tell us a little about yourself. How did you come to be at AARP and what do you do for them?

Purvis: I am actually a tried and true local, which not very many people can say here in D.C. I grew up in Springfield, Virginia and so politics were kind of in the water. I happened to find myself interested in health policy. Long story short, I started working on prescription drug stuff and here I am.

Brokamp: A proud graduate of the University of Mary Washington...

Purvis: I am.

Brokamp: ... which is a lovely little school in Fredericksburg.

Purvis: It is, and I also went to George Mason, which is in Fairfax. Like I said, tried and true local. Didn't get far but given what I do, this is probably the only place I can really do it.

Brokamp: That's true.

Southwick: So I guess you were just a glutton for punishment if you wanted to get into healthcare policy. Maybe all policy is hard and difficult.

Purvis: Yes, I think it's safe to say that, but lately healthcare policy has been particularly punishing.

Southwick: Yes.

Brokamp: It has been somewhat controversial over the last several years.

Southwick: There's obviously a lot of reasons why we are dealing with this rising cost in prescription drugs. It's very complicated. There are a lot of opportunities to get outraged, but I think what gets Americans upset the most is knowing that people in other countries pay so much less. Apparently in the U.S., the world's top 20 medicines are, on average, 3 times higher than in Britain. Like, "Oh, man! People in the UK are paying so much less for drugs!"

Purvis: And the exact same drugs. That's the other thing that people really need to understand, is it is literally the exact same product, but they're paying substantially less for it.

Southwick: Let's try to unpack this because this is obviously not going to be very easy. Let's talk about how the system works in America. Let's say I'm a drug company. I got my drug approved. It's a great drug. The FDA, I guess is like, "OK, cool. Now you get to sell it." Do I then just start selling it? Is it that easy? It looks like it's that easy.

Purvis: It is. You put it on the market and then the next question is who's going to cover it and how they're going to cover it. And our healthcare system, as you probably know, is remarkably complicated. There are some programs, like Medicaid, that pretty much have to cover it.

Then there's private coverage where they actually make decisions about which drugs they cover. You may see some people paying more than others. You may see people with different cost sharing, but the reality is in the U.S. system, generally once you get a drug on the market, it is going to be covered.

Southwick: Then what happens in other countries? I'm a drug company. My drug works. I'm ready to sell it. Hey, Denmark, here's my drug. Actually, let me not name any country specifically. Unnamed country, here's my drug.

Purvis: Unnamed country, yes. There are a few more steps before you actually have the drug on the market. Some countries will take a look at the new product and compare it to existing products and see whether it's better. Some may look at the efficacy of the drug and say, "You know what? This price just does not work for what this drug actually offers." So there's some decisions made at that very high level before they decide whether and how to cover the drug.

I'm sure you've seen it in the news, lately. There are some countries that just said, "You know what? We're not going to cover it." Then they get into some very public fights with the drug company about what's going to happen next. Is the drug company going to drop their price? Are people in that country just not going to have that drug? And again, it's a very public discussion, let's say, that takes place.

Southwick: Because drug companies, then, will come back and say, "Well, if you're not going to pay these prices for our drugs, then you're going to stifle our ability to innovate, because we're going to take all this profit and we're going to put it back into our business. We're going to make better innovations to give you a better life, and if you're not going to buy our drug at our prices, you're stifling innovation." Right? Is that the main argument that drug companies make?

Purvis: Pretty much, yes. It is an argument that if you don't give us what we want, then you will not have drugs to cure the things that you want to cure. There are a lot of questions about the validity of that argument.

For example, if you look at all the patents that have been given out over the past several years, 75% of them are for things that already existed in the drug space, so they're for recycling, repurposing existing drugs. I'm not sure we really qualify that as innovation under a normal definition, so sometimes it's good to push them as to what they actually mean by innovation, because if we're just getting recycled products, we're not getting a whole lot for that and we're being asked to pay a lot for them.

Southwick: I read an article that basically said that in the U.S. we spend so much more on these drugs than other countries that we are, essentially, the country subsidizing the whole industry worldwide. How true is that?

Purvis: We are definitely spending a lot more on the same product. We have a lot more people using them, too, but the reality is we're paying much higher prices. What's fascinating is that drug companies have admitted that they are still making a profit in those other countries, which means our prices could come down and they would still be making a profit here. They really are "profiteering" here. That's the term that's often used. They're just making so much money and the question is whether it's justified.

Brokamp: It's an interesting question because at The Motley Fool we're investors, so when we buy a stock we are personal owners of that company and we want them to be profitable. We want them to make money and we appreciate innovation and all that.

On the other hand, we also believe that generally we'd like our portfolio to reflect our values and we think that our companies should be doing good for the world and there is no question that the pharmaceutical industry is among the most profitable in the world.

Purvis: They absolutely are! There is a lot of money swirling around in that particular part of the market. I think the question really rises when you're talking about people's health. There's profit coming at the expense of people's health and that is really where organizations like AARP get engaged in the sense that we're seeing so much money flowing to the companies. At the same time, we're hearing from our members that they can't access the drugs that they need, and that, obviously, is a huge problem.

Southwick: It's almost like other countries treat drugs as a utility as opposed to a profit center or companies that should be making a lot of profit.

Purvis: Yes. The drug companies are behaving completely rationally in the sense of the incentives we've put before them. They will, and can, make a whole lot of money by pricing their products incredibly high; but again, the question is whether these are things that people have a right to access to maintain their health and the questions are really being raised now.

Southwick: We're one of the few podcasts that would be like, "Well, what about the shareholders?" I was reading an article about a pharma executive for Nostrum Laboratories. He defended his decision to raise the price of an antibiotic to more than $2,000 -- it was a 404% increase -- arguing that there was a moral requirement to sell the product at the highest price. It's been a drug that's been around since the 1950s to treat bladder infections. He doubled-down on this unpopular opinion by siding with Martin Shkreli, the guy who famously raised...

Brokamp: Yes, the "pharma-bro."

Southwick: ... the price of AIDS and cancer drug from $13 to $750 per tablet because -- and this is, again, this guy from Nostrum Laboratories saying -- "he had to reward his shareholders." I'm so torn by that as an investor. And that's also the case you see in other places.

I was reading lots of articles and I kept stumbling across this guy that I used to work with, Craig Garthwaite. He's in a lot of these articles. I assume you're familiar with him and probably run into him all the time. He's usually on the side of business, but his whole argument was that a venture capitalist is going to want to invest in something that's going to be more profitable, so if a pharmaceutical company isn't going to be profitable then they're not going to get the money to invest. Then again it's back to not having innovation and everyone dies. Sadly, it's true.

I don't know what the balance is supposed to be between profit and doing good in the world, so let's maybe move on to talking about some of the policy solutions that are getting thrown around.

Purvis: There are a ton of ideas floating around. Some of the more popular ones are things like "secretarial negotiation", which is allowing Medicare to negotiate. Right now it doesn't negotiate prescription drug prices, which seems a little interesting given that there are 40 million-plus people in Medicare Part D. There are around 50 million in Medicare broadly. It's a lot of people, and the fact that Medicare doesn't negotiate on behalf of its beneficiaries seems a little strange.

We're also hearing a lot of talk about "importation," which is going back to talking about how other countries pay so much less. There's talk of either importing the drugs and paying the lower prices from those other countries or in some way importing the price and not the product and just saying we're going to "reference price" and base our prices on the prices of other countries.

We're also hearing some things that we really didn't talk about, even a few years ago. Things like jumping into the patent system and reforming how patents are handed out. Or changing the type of exclusivity that drug companies get when they first come on the market. Really just playing with how much time they get a monopoly period. There are some concerns that those monopoly periods are being abused, for lack of a better way of putting it, and so trying to find a way to limit the amount of time that brand name drug companies can stay on the market and charge monopoly prices.

Southwick: What's your opinion? What do you think is the best possible solution? It's so easy.

Purvis: It's so easy! The things that we are particularly focused on are ones that would really maximize competition in the market. Making sure that generics enter the market as quickly as possible, because that really is when you start seeing some price reductions for the generics that are competing on price.

We're also very interested in Medicare negotiation. We obviously represent that demographic and we want to make sure that Medicare beneficiaries have access to the drugs that they need and also make sure that the Medicare program spending doesn't get completely out of control, which unfortunately is what we're seeing right now.

We're also interested under Medicare in an "out-of-pocket cap." Right now Medicare Part D, which are the private plans that cover drugs you pick up at the pharmacy, has a cap but it's not a hard cap. You actually continue paying even after you enter catastrophic and we have some people who are paying $10,000 a year for their prescription drugs and we always like to point out that Medicare beneficiary median income is just over $26,000 per year. You're talking about spending that nobody can really keep up with, much less someone with a relatively limited income.

A lot of ideas on the table and we are certainly interested in taking a look at whoever's bringing something forward.

Brokamp: What about a situation where a company has the patent on the drug. They're the only folks providing this, so there really is no competition. And even if Medicare or anyone else could negotiate, they'd say, "Fine, who else are you going to turn to?" And some of those drugs, in one article I was reading, are up to tens of thousands of dollars up to $1 million a year depending on the drug.

Purvis: Yes and that is where it gets complicated, because you don't want to disincentivize companies from coming up with those types of cures. We want those innovative cures. So there is a very fine balance between maintaining innovation and making sure those products are affordable.

Something a lot of people are interested in is just looking at the prices generally. So when you have that single-source drug come on the market, have some idea as to whether or not the price is justified. Right now it seems like a lot -- well, all -- of these companies come on the market with prices that seem to balance between maximizing profit and making everyone very upset.

And unfortunately that's what has happened, where $2.1 million is the new high-water mark. Back in the 1990s, drugs that cost $10,000 were unthinkable and now we're, again, over a $1 million. So we really have seen some movement in what we consider outrageous, and we've never really stopped to think about whether or not those prices were justified in the first place.

So there's a lot of interest in trying to get behind the curtain and ask, "How much did you spend developing this drug? How much does it actually cost to bring this drug to the market?" Right now we don't know. And then start having a conversation of how much value it would bring to the patients who are using it and then think about the price, as opposed to just building on what may be a very broken pricing model that we have right now.

Brokamp: We're talking about things like Medicare, the government, and the role of pricing. What is the government's role in innovation? I don't know the answer to this, but how many drugs are developed by the government, whether at NIH or at universities with government grants?

Purvis: That is a great question and a lot of people don't know this. All of the innovative drugs that have been coming on the market lately have their origins in taxpayer-funded research, so they play a very outsized role in developing those compounds that are ultimately developed into drugs. Drug companies will take them from that point forward and go through the clinical trial process and the FDA approval process.

But that basic science is really being funded by taxpayers, which makes paying these high prices that much more, let's say, unjustified for the people, because they've already paid once and now they're paying remarkably high prices later.

Southwick: I'm a fairly young, healthy person. Knock on desk.

Brokamp: Formica, maybe?

Southwick: Formica. I don't know what this is. So prescription drug costs aren't really on my mind, but it's probably in my best interest to anticipate that this is going to be a pretty big cost center in my retirement potentially. What can people my age do, if anything, to prepare or anticipate how this is going to impact us in the future?

Purvis: The first thing I want to make clear, because this is something we think is really important to convey to people, is that even if you are young and healthy, you are already paying for prescription drugs. You're either paying for it at the pharmacy counter if you are taking a drug or you're paying for it through your health insurance premiums, or your cost sharing. What your deductible looks like. All of that is driven by what the plan is paying for a prescription drug.

And then, of course, you presumably pay taxes, so your taxes are going toward prescription drugs, as well. The thing we really like to drive home is that prescription drug prices and price trends are already affecting you no matter what, so this is an issue that should matter to you regardless of whether you're taking a drug.

In terms of preparing, again, you're kind of looking at the trends and if they just continue unchanged, you will be talking about drugs that, on average, are tens of thousands of dollars, and a lot of times people take drugs on a chronic basis. So it's not a one-time cost. You're seeing people that are facing these costs every single year for the rest of their lives.

So honestly, again, looking at the trends, I don't think you can prepare enough financially for the drug prices that we're seeing right now. Nobody wants to have to make the trade-off that we're starting to see already where people are just saying, "You know what? I'm going to go without." We're seeing that with cancer patients. There are people not treating cancer because of the cost. That, again, if the average price goes up is going to become more and more common and yes, you cannot have enough money in the bank.

One story that really struck me was that a public official was out and said, "We're toast if someone manages to cure Alzheimer's," because if it costs anywhere from $100,000 to $1 million and you've got hundreds of millions of people that could potentially be affected by that condition; that, alone, could dwarf the amount of money we spend on all prescription drugs right now.

So it is kind of scary, frankly, when you think about the fact that you will, at some point in your life, no longer be earning from a job and you have to find a way to cover the costs associated with these drugs in perpetuity.

Southwick: What about people who are getting closer to retirement and have to start thinking about things like Medicare?

Purvis: I think the most important thing that any Medicare beneficiary can do is look at their Medicare Part D plan every single year, because they change considerably from year-to-year in terms of what drugs are covered, how they're covered, whether there's going to be a prior authorization. Whether you're going to have some other form of utilization management. What your cost sharing is going to be. Will it be a flat co-pay? Will it be co-insurance, will you pay for a percentage of the drug cost?

It really matters, so the one thing I think that people can really do to prepare themselves is get a better idea of what the Medicare Part D plan market looks like and make sure that whatever drugs you are taking will be covered and covered in a way that makes sense to you once you enter the plan.

Southwick: At The Motley Fool we're a pretty savvy bunch of people who I would say are more on the frugal side than not. I was surprised to hear that our generic drug usage was actually really poor. Isn't that crazy?

Brokamp: Well, I think part of that is people get their prescription from their doctor or nurse practitioner, and they don't really question it. And they don't say, "Oh, is there a generic version of this?" They're just like, "Oh, this must be the right one for me."

And then what you do is you go to the closest pharmacy, not appreciating the fact that actually prices do vary. That's one of the things anyone can do, is check the prices in your area as to where you're going to get the best deal.

Purvis: Absolutely. The No. 1 thing that you should be doing with your healthcare provider is having an open conversation about all the drugs that you are on. There's a pretty good chance that either there's a generic or something that may be less expensive. You need to have those conversations. You can have it at the doctor's office. You can have it with your pharmacist, as well. But that is incredibly important and probably the easiest way to get some savings is to find out what else might be available to treat your condition.

And then like you said, there can be some great variation in terms of what pharmacies are charging for a given drug. So if you're in a position where you are paying full price for the drug, it can definitely make sense to look around and see where you can get it for the lowest price. That said, if you have cost sharing, you also may be running into something else we've been seeing a lot lately, which is your payer may have a preferred pharmacy where your cost sharing is lower than it would be if you went to a non-preferred pharmacy. So lots of different things to keep an eye on in terms of reducing your out-of-pocket costs.

Brokamp: A couple of the websites that I found in my research that will help you determine the prices in your area and where to get a good deal are GoodRx.com, WeRx.org, Blinkhealth.com, and RxSaver.retailmenot.com. I've not personally used any of these, but I learned about GoodRx from Seth Jayson, our colleague who's been on the show and he uses it for his dog.

That's something that's become increasingly "popular." People are using more and more ... for the dog, so you can get discounts at all these places. It basically says how much this drug will cost at various places in your ZIP code, but also might offer up a coupon. In some cases paying cash with the coupon is going to be a better deal than using your insurance.

Purvis: Absolutely. It pays to shop around. You have to be savvy about this. There are a lot of different moving parts in this particular part of the world between cost sharing, and the price, and coupons, and whether there is a generic available. Is there a therapeutic equivalent available? There are a lot of different things to keep an eye on, which is why it's important to talk to your healthcare provider to make sure that you are hopefully getting the lowest cost option available.

Brokamp: My dad recently complained to his doctor about how much his prescription cost, and so what they did is they applied directly to the manufacturer. They did the first paperwork, then they sent my dad some paperwork. He had to fill in some more paperwork and he got a huge discount.

Purvis: Yes, the manufacturers do have programs to help patients who can meet their eligibility criteria. Word to the wise on that one, though. There's a lot of variation in terms of what the eligibility criteria are, and it can be a complicated process. But we've found some manufacturers for which the eligibility criteria are different from drug to drug. So it can be a complicated, difficult process to get through, but if it's the difference between you being able to take a drug you need and not, it's definitely a good option.

Brokamp: A couple of other common tips that people will hear. One is paying for 90 days instead of for 30 days. You'll often get a discount. Or buying something like 20 mg if you only need to take 10 mg and then you cut them in half with the scoring. That always sounded a little dicey to me, so I'm curious on your take on cutting your pills in half.

Purvis: That's something that's a little outdated in terms of the advice. I think people are moving away from that because there is so much potential for human error and you really don't want to take chances with that. Our recommendations typically fall along the lines of talking to your healthcare provider. Check out some programs that are available for people who have lower incomes. The kind of things that can push you toward someone who can help you navigate the system a little bit better.

Brokamp: Some of what you're suggesting are basically policy issues. Where do people go to find out how to be involved with that and to encourage their congresspersons to take some action on that?

Purvis: There are a lot of groups that are heavily engaged on this issue right now. A lot of consumer focus groups. You, of course, can also go to AARP. We're actually engaged in a campaign we just launched in March called Stop Rx Greed and have a whole part of our website that's completely devoted to this issue in trying to push forth policy options that we support. That's at AARP.org/Rx. Again, this is an issue that's resonated with a lot of different groups.

Another is Patients for Affordable Drugs. They've been heavily engaged on this as well. And we're also involved in a campaign for sustainable drug pricing, which also is heavily engaged. So there's a lot of different groups out there. I think honestly you could just open the paper and you could get a good idea of who's involved. It's definitely an issue that's resonating with a lot of consumers these days.

Southwick: I'm reading that the Kaiser Family Foundation also did a survey asking what people felt they were most in favor of in order to keep prescription costs down, and one of them is ending the tax break given to drug companies for their advertising spend.

Purvis: Yes.

Southwick: Now I'm angry all over again! This is like 12b-1 fees but for prescription drugs. What is that about?

Purvis: And we're one of two countries that even allow that type of advertising to take place. But yes, that is definitely an option that's been on the table. Why should drug companies get a tax break for advertising to consumers and potentially pushing them to take drugs that they don't need.

Southwick: Oh, man! That makes me almost mad of how much England is paying for drugs. Do you have any parting advice for our listeners as we wind down here?

Purvis: I think the most important thing is when you are prescribed an expensive drug, you do have options. You just need to have an open conversation with your healthcare provider. And if you really want to do something about it, come look at AARP's website. Join our campaign. We are welcoming all takers and are very interested in making sure that this is an issue that is addressed.

Southwick: And that website again is...

Purvis: AARP.org/Rx.

Southwick: Wonderful!