There are few expenses rising faster for Americans than the cost of prescription drugs. According to actuarial and consulting firm Milliman, prescription drug costs are expected to advance by 13.6% in 2015, the fastest rate of inflation in more than eight years. This is also well above the rate of wage growth most workers are experiencing, which is putting a lot of pressure on consumers and insurers.
Just how much does the average consumer pay for prescription drugs? That's a question recently addressed by the nation's largest pharmacy-benefits manager (PBM), Express Scripts (NASDAQ:ESRX). PBMs are the middlemen of the prescription drug industry in that they connect drug innovators and insurers, negotiating the best possible deals. Thus, examining Express Scripts' data for tens of millions of members should give us the most all-encompassing look at how much the typical American pays each year in prescription drug costs.
Here's how much the average American spends on prescription drugs
Based on the company's findings from 2013 through 2014, among 31.5 million insured Americans, the average American's annual prescription drug tab is $1,370. Since insurance does help to cover some (or all) of the cost of prescription drugs, the average out-of-pocket expenses for these insured members ended up being only $185. Put another way, the average American had to cover 14% of the cost of their prescription medicines from 2013 through 2014.
But for some people things are far from average. The rise of specialty medicines, such as cancer drugs, hepatitis C drugs, multiple sclerosis pills, and inflammatory-focused drugs, is crushing consumers' pocketbooks, as well as the margins of health-benefit providers.
Express Scripts points out that the top 5% of spenders in prescription drug costs were responsible for more than three-fifths (61%) of the country's total medication expenses -- and that's just the half of it. Express Scripts also finds that more than a half million Americans spent in excess of $50,000 on prescription medicine in 2014, and more than 100,000 people's prescription drug spending surpassed $100,000.
Express Scripts' research suggests that about 60% of the highest-spending members are baby boomers, with a third of the $100,000+ spenders being treated for at least 10 conditions (yes, 10!) within the past year. Roughly 60% were also taking a minimum of 10 different prescription drugs.
What prescription medicines are responsible for these rising costs?
What specific culprits are behind these high costs? We don't have to look much further than hepatitis C drugs for a big clue.
Gilead Sciences' (NASDAQ:GILD) Sovaldi and Harvoni, along with AbbVie's Viekira Pak, are huge advances in the treatment of HCV compared to the prior standards of care. As recently as 2011, the cure rate for HCV was about as good as the flip of a coin, and it came with nasty treatment side effects that could include flu-like symptoms, rashes, and anemia. Today's treatments from Gilead Sciences and AbbVie can cure 90% or more of patients, and the side effects are minimal in many instances.
However, these effective cures come with hefty price tags. Gilead's Sovaldi and Harvoni cost $1,000 and $1,125, respectively, per pill. Thankfully, it's a once-daily treatment -- but the standard 12-week treatment course can still run (at a wholesale level) $84,000 or $94,500.
Multiple sclerosis drugs, such as Biogen's (NASDAQ:BIIB) Tecfidera, are also to blame for high spending levels. This decade has given rise to improved efficacy and convenience for MS patients in the form of pills for their disease. Biogen's Tecfidera has been galloping since its launch, and it very well could reach $4 billion in annual sales in 2016. However, its wholesale cost of $55,000 is quite the burden on consumers with high-deductible health plans and insurance companies. Tecfidera's safety profile is practically unmatched, safely securing its roughly 20% MS market share, which means Biogen could turn to price increases to drive growth as market saturation kicks in.
Even specialized cancer drugs are to blame. The rise of cancer immunotherapies has given physicians a way to supercharge a patient's immune systems to more effectively and efficiently fight cancer. As you might have imagined, the cost for this new cancer-fighting technology is astronomical. Merck's Keytruda and Bristol-Myers Squibb's Opdivo run $150,000 and $143,000 per year, respectively. It's possible a label expansion of these drugs could lower their costs, but given their effectiveness thus far I wouldn't hold your breath.
High prescription costs may become more common
In recent months Congress has taken a hardline stance with the way select drug developers price their products, leading some people to believe that prescription drug reform could be around the corner. Unfortunately, with the way the system is currently set up, the likelihood of change seems minimal, meaning high prescription drug costs may become even more common.
There are some simple fundamentals behind why U.S. prescription costs are so high. Prescription drug demand in the U.S. is higher than anywhere in the world, we have no true universal health plan, we have a higher standard of living than most countries (which means U.S. consumers can presumably afford higher costs), and we offer drug innovators a period of exclusivity during which they face no copycat competition.
Yet there's even more. Drug developers also need to make up the costs of failed clinical studies (only one in 5,000 preclinical studies will make it to pharmacy shelves as an approved product, according to Medscape), they have marketing costs to cover, and they spend vigorously to defend their patent rights. All of these costs are factored into the price of prescription drugs.
Perhaps the most damning factor of all is that most insurers and PBMs accept the prices offered by drug developers without much fight. Even Express Scripts, which has taken a hardline stance against some drugs by excluding them from the approved formulary list, excludes very few products. With around 4,000 approved drugs, Express Scripts' 2016 formulary list excluded just 80, or about 2%. Excluding drugs based on excessive price also means PBMs and insurers run the risk of ticking off their member bases. If members don't have access to perceived-to-be-superior drugs, they'll leave the network -- and that's potentially bad news. This tight rope means drug developers have most of the power when it comes to pricing.
Long story short, get ready to open up your wallet, because prescription drug inflation shows next to no signs of slowing.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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