The number crunchers at IMS Health Holdings (NYSE:IMS) dig into prescription drug spending data every year to determine just how much Americans are forking over on pharmaceuticals. They found that payers spent a whopping 12.2% more on medicine in 2015 than they did in 2014. Specifically, IMS Health estimates that total U.S. spending on prescription medicine clocked in at $425 billion last year. What's behind this surge in drug spending? Read on to find out.
Game changing, at a cost
Over the past decade, advances in the understanding of DNA and how DNA relates to disease has led to the creation of ever more personalized medicines that work better and are safer for patients to use. Among the most promising of these medicines are next-generation therapies for common diseases, such as hepatitis C and cancer. For example, years of research and billions of dollars in R&D resulted in Gilead Sciences (NASDAQ:GILD) developing Sovaldi, a therapy that prevents the hepatitis C virus from replicating and thus, offers patients the chance for a functional cure for the first time.
In the U.S., there are nearly 3 million people who are diagnosed with hepatitis C, and last year, hundreds of thousands of them were treated by regimens that include Sovaldi. As a result, the number of liver transplants and life-threatening cases of liver disease caused by hepatitis C is expected to fall.
That's great news for patients, but it's taken a big toll on healthcare payers, including insurers. Despite discounts typically offered to insurers, next-generation hepatitis C drugs can still cost roughly $50,000 per year. Similarly, next-generation cancer drugs known as immunotherapies are making big inroads in patient treatment, but they're doing so at a steep price.
Bristol-Myers Squibb's (NYSE:BMY) Opdivo, for example, won FDA approval for use in advanced melanoma patients in late 2014 after clinical trials showed that nearly a third of treated patients saw their tumor shrink. Since then, Opdivo has won the green light for use in lung cancer and kidney cancer, and with dozens of trials still underway, industry watchers think Opdivo, which shuts off cancer cells ability to block the body's immune system, could become a backbone cancer therapy.
That's remarkable because it could provide much-needed new hope to patients who might otherwise succumb to their disease. However, Opdivo's price tag, and the price of other similar therapies, has cancer care providers nervous that cancer drug prices have gotten out of hand.
For instance, Leonard Saltz of the highly regarded Memorial Sloan Kettering Cancer Center expressed grave concerns last summer over trends in cancer drug prices. When he did, he singled out the eye-popping costs that could be associated with combination therapies that include Opdivo, which has a six-figure annual price tag.
Saltz said that while he wants to have drugs like Opdivo available, he worries that high drug costs could keep these drugs out of the hands of some patients. Opdivo can cost more than $12,000 per month and that kind of sky-high pricing could create barriers to access, especially if insurers charge patients ever higher copays to receive it.
Exorbitant prices for drugs like these are far more the rule than they are the exception. IMS Health's data shows that drug prices for all specialty medicines grew far more quickly last year than they did for other prescription drugs. Last year, specialty drug spending rose 21.5% to $151 billion, and that means that specialty drugs now account for 36% of all drug spending, up from 24% in 2010.
Last year's increase in drug spending was smaller than the 14.2% growth witnessed in 2014, but even at this slower pace of growth, patients should be nervous. Consider this point, a 10% increase in prices per year translates into a doubling of prices roughly every seven years.
Drugmakers are quick to point out that the headlines can overstate the real cost of medicine because most drugs are sold at steep discounts to the list prices that are used to calculate total spending. However, even when IMS Health ran the numbers to include those discounts, spending on medicine still increased by 8.5% to $310 billion in 2015. If that rate were to continue, then drug spending would still double in 8.5 years.
Admittedly, developing increasingly complex medicine isn't cheap and 90% of drugs studied in clinical trials end up in laboratory waste bins rather than on pharmacy shelves. Clearly, drugmakers need to know that a payday is on the other side if they're to continue taking on the risk associated with all those clinical failures.
However, drugmakers need for profit has to be balanced against the risk of creating high hurdles that limit access to high cost drugs. Even greater breakthroughs in medicine are on the horizon, and if that drives drug spending higher, you can bet it's going to translate into even greater out-of-pocket costs for patients.
Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. 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.