It's becoming more of a stretch than ever to use the terms "affordable" and "healthcare" in the same sentence -- at least according to a new report released by AARP in late February.
AARP has tracked the cost of prescription drug prices, particularly those most commonly used by older Americans, paying specific interest to the rate of price inflation for branded drugs, specialty drugs, and even generic products, for each year between 2005 and 2013. Because its data is lagging, we often don't get transparent results that can be pored over until a year or two after the fact.
Seniors may struggle to foot this average drug bill
The findings in this year's Rx Price Watch Report, which covers prescription drug costs for older Americans in 2013, finds that average annual prescription drug costs as a whole -- meaning branded, specialty, and generic drug costs all rolled up into one -- hit $11,341 in 2013. How does this compare with previous years? Have a look for yourself:
That's right: Prescription drug costs more than doubled (+104%) between 2006 and 2013, and they're up a whopping 174% since 2005. It would be no surprise whatsoever to find out that prescription drug prices for seniors have tripled in the decade between 2005 and 2014, though we'll have to wait until next year to find out if that's the case.
Rising prescription costs are particularly worrisome since the average monthly Social Security benefit in 2013 was just $1,294, which works out to $15,526 per year. Furthermore, the median income of a Medicare beneficiary in 2013 was roughly $23,500. Put another way, prescription drug costs paid out of pocket for older Americans could gobble up 73% of their Social Security benefits. This makes affording proper medical care difficult, and could result in seniors foregoing medicines that could be beneficial to their health simply because of cost.
Why prescription drug prices are soaring
What's the culprit for rising prescription drug prices? According to AARP, we're seeing two major factors in play.
1. Blame newly approved branded and specialty drugs
AARP's report blames the rising costs of relatively new branded and specialty drugs for more than offsetting the drop in generic drug prices. Brand-name drug prices rose 12.9% in 2013, which was slightly ahead of the 10.6% increase for specialty drug prices. On a comparable basis, generic drugs, which account for about seven out of eight prescriptions written, saw their prices fall by 4%, and inflation only increased by 1.5% in 2013.
But, there's a big difference in price between branded drugs and specialty drugs, a category defined in the study as covering treatments for complex, chronic conditions that require special handling -- drugs like those used to treat cancer or hepatitis C, for example.
Though branded drug costs have soared by an average of roughly 7% to 12.9% between December 2005 and December 2013, the average annual cost for a prescription was $2,960 in 2013. By contrast, the average annual cost for a specialty therapy was $53,384 -- more than 18 times higher than annual branded drug costs. Specialty drugs account for just 1.2% of all prescriptions written, but they tally nearly 18% of total prescription drug expenditures on an annual basis. For added context, generic drugs cost older Americans an average of just $283 annually in 2013.
One glaring example in the specialty drug arena is Gilead Sciences' hepatitis C treatment portfolio of Sovaldi and Harvoni. Harvoni is the dominant of the two, since it's geared to treat the most common genotype of hepatitis C. It's a once-daily pill that costs $1,125 per pill at the wholesale level and typically must be taken for a 12-week treatment course. Harvoni proved largely effective and safe in clinical trials, but even at wholesale prices, it would set back the typical patient $94,500! Some HCV patients who aren't treatment-naïve and have liver cirrhosis are recommended to take Harvoni for 24 weeks, which would double the wholesale treatment cost to $189,000.
We can also find plenty of examples of new cancer therapies pushing the envelope on price. Merck's Keytruda and Bristol-Myers Squibb's Opdivo are two revolutionary immunotherapies that work by first suppressing cancer's ability to hide from a patient's immune system, then kicking the immune system into high gear to eliminate those cancer cells. Each therapy has a handful of indications under its belt, but the annual wholesale price tag for Keytruda is $150,000, and for Opdivo it's $143,000.
Moreover, it should be noted that all of these therapies were approved after December 2013, so the AARP study doesn't include their potentially frightening impact on average drug prices -- but we'll be seeing it show up in the coming years.
2. Blame the rising cost of existing branded and specialty drugs
The other issue that we're seeing, based on the AARP's findings, is that generic drug prices are falling at a slower pace, and that the prices being charged for prescription drugs that have been on the market for years and are aimed at treating chronic conditions are rising at a more rapid pace.
The AARP has been tracking drug price trends for eight years, and 397 of the 622 drugs it's following have been on pharmacy shelves for the entire time. Cumulatively, the average price increase for these products between December 2005 and December 2013 is 81% -- more than quadruple the 18.4% general inflation rate over the period. Of these 397 prescription drugs on the market since 2005, 300 of them treat chronic conditions. These 300 drugs cost older Americans an average of $11,870 in 2013 -- up 174% from $4,336 in 2006.
Put simply, price hikes on treatments for chronic conditions that have been on the market for a significant number of years are largely the cause of accelerating prescription drug inflation.
For example, Jazz Pharmaceuticals' Xyrem, a drug approved to treat narcolepsy, was priced at just $2.04 per 1-milliliter dose back in 2007. By early 2014, the price tag on Xyrem had been pushed to $19.40 per 1-milliliter dose. This works out to an 841% price increase over the course of seven years.
Of course, it isn't just Jazz racking up big profits from price increases on drugs approved long ago. Between 2007 and 2013, Eli LIlly raised the price on diabetes drug Humulin by more than 350%, and Mylan hiked the price for its EpiPen, which treats anaphylaxis, by more than 220% over the same time span.
Can anything stop this trend?
You might be wondering if there's anything that can be done to slow down prescription drug price inflation. The truth is that there's no clear resolution. A number of solutions have been proposed, but there's nothing concrete that's a surefire fix.
For example, presidential hopeful and current Democratic Party front-runner Hillary Clinton offered a prescription drug reform plan in September that would cap the amount that insurers can make Americans pay out-of-pocket for prescriptions, and also allow the federal government to negotiate with drug companies on price (mainly as a benefit to Medicare). Using the federal government to negotiate on price, or simply capping prescription drug prices, as we've seen done in other global markets, seems to be among the most popular suggested solutions.
But, the downside of just telling drugmakers that an arbitrary price is the reimbursement ceiling is threefold. First, it likely would reduce drugmakers' drive to innovate. Conditions that don't have a large enough patient pool could be passed over by drugmakers when it comes to research and development.
Secondly, it removes a substantial portion of profits for U.S. drugmakers. These profits help subsidize care in emerging and underdeveloped nations. In other words, pharmaceutical companies might be less willing to operate in poorer countries if their U.S. profitability drops.
Finally, we could see lost jobs in the United States. Drug developers call the U.S. home, among other reasons, because of its lax policy on drug pricing (and the high demand for pharmaceutical products). If price regulations increase, developers may respond by moving their operations overseas.
Emphasizing generics may also be an answer. Generic drugs are expected to grow in importance over time in the United States. The issue is that we're seeing instances of specialty generics arising, or seeing generic drugs hit the market with minimal competition. The result has been more stable pricing rather than the pattern of declining prices we've come to expect with generic drugs on an historical basis. Exclusivity also causes a problem. Generics can't enter a market when patent exclusivity provides branded and specialty therapies upwards of a decade of protection.
It's unclear at this point if there are any quick fixes for rapidly rising drug costs, but one thing is clear: The next president of the United States is going to have to tackle prescription price inflation head on. As consumers and investors, you'll want to keep your eyes peeled and your ears to the ground for any new proposals on Capitol Hill.
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.
The Motley Fool owns shares of and recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.