The Role of Prescription Drugs in Rising Health Care Costs

Middle aged man and women reviewing a prescription drug bottle.

Prescription medications are an essential part of health care. Advances in pharmaceutical technology have made it possible to extend life for millions of people and improve quality of life for millions more. But the high cost of prescriptions is driving up overall health care costs. As average annual increases for prescription drugs continue to outpace inflation, insurance carriers, health care providers, and policymakers are looking for better solutions.

A uniquely american issue: How U.S. drug prices compare

As with many aspects of health care, Americans pay more for prescription medications than people in comparable countries. A 2019 analysis by Peterson-KFF Health System Tracker showed that U.S. average spending per capita was $1,126. In 10 similarly developed countries, the average was less than half that at $552. A RAND Corporation analysis published in 2021 compared prescription drug prices in 32 countries and found that the U.S. prices were more than 2.5 times higher than average.

But that wasn’t always true. In 1980, the U.S. was about average in terms of per-capita spending at $53 a year. Our spending fell somewhere between Australia ($33) and France ($86). Then in the late 1990s and 2000s, U.S. pharmaceutical spending rose dramatically.

Insurance plans cover most of these costs — a key factor in rising health insurance premiums. But Americans also pay more out of pocket after those premiums than any other comparable nation. So what explains the high costs? Several different factors related to drug innovations, manufacturing, utilization, and procurement.

Medication innovations and drug prices

Between 2010 and 2019, the FDA approved an average of 38 new drugs each year, peaking at 59 new drugs in 2018. That was 60% higher than the yearly average from 2000 to 2009. 

Research and development (R&D) costs have also increased significantly. Adjusted for inflation, R&D expenditures in the 1980s totaled around $8 billion a year. In 2021, the 15 largest pharmaceutical manufacturers reported spending $133 billion on R&D. 

Pharmaceutical manufacturers are for-profit entities, which means drug prices have to cover all their costs and provide a return for investors. In addition to R&D, those costs include:

  • Operational costs (salaries, overhead)
  • Marketing and advertising
  • Manufacturing costs (raw materials, equipment)
  • Meeting testing and regulatory requirements
  • Transportation costs

When these research and manufacturing efforts pay off, manufacturers have a patented new drug they can sell to patients and providers. Biopharmaceutical manufacturers can also apply for drug exclusivity, which prevents other companies from making generic forms of the medication that are often sold at a lower cost. 

The average length of market exclusivity is more than 12 years. During that time, no other manufacturers can create or sell a competing form of the medication. The result is significantly higher prices for new drugs entering the market. Combined with the high rate of new drug approvals, exclusivity is pushing drug prices higher.

Old medications, new prices

While a lot of focus is on the high cost of R&D and drug innovation, there is another factor driving prices up is much simpler: pharmaceutical manufacturers are also continually raising prices on brand-name prescriptions and injectable medications. When a patent expiration threatens to put a dent in profits from high-performing medications or manufacturers face more competition from generic drugs, raising prices on other medications helps keep profits high. 

Companies may also raise prices simply because they can in situations where consumers have few or no alternatives. For example, the price of insulin almost tripled from 2002 to 2013. Between 2012 and 2016, it doubled again, according to the Health Care Cost Institute. There was no change in the lifesaving medication itself, patients were just paying more. 

Other increases have made national headlines, like in 2015 when Turing Pharmaceuticals acquired the company that made Daraprim, a standard antimalaria treatment for HIV patients. They changed the price from $13.50 a tablet to $750 — a 5,455% increase in a single day. The owner of the company was eventually convicted of securities fraud on unrelated charges. But the price of Daraprim did not change because there was no competition and no other option for patients at the time. It remained at $750 a pill until 2020, when the FDA approved the first generic version. 

The Daraprim situation garnered international attention for its brazenness, but it was not an isolated incident. AbbVie has increased the price of the top-selling drug in the world, Humira, 27 times (a total of 470%) since 2002. They have patent exclusivity through 2023 that prevents competitors from introducing generic drugs to compete.

Weighing the benefits of new medications against costs

With all the new medications that come to market, insurance carriers are tasked with figuring out which ones will provide enough benefits to patients to be worth the cost. Companies that develop medications that offer only marginal improvements over existing generic or lower-cost medications might not make the cut. 

This can be challenging for patients, who may believe that newer medications are the best option for treating their disease and become frustrated when an insurance policy doesn’t cover the new medication.

How prescribing habits and total usage affect prescription medication costs

Utilization rates for medications are also rising. Between 2009 and 2018, the average number of prescriptions per Medicare beneficiary increased by 13% from 48 to 54 per year. Medicaid patients saw an increase during the same time period from 7 to 11 prescriptions (57% higher) per year. 

Higher utilization is partly attributable to the number of patients with chronic health conditions. Today, more than 60% of U.S. adults have at least one chronic condition that requires prescription medication. Four in 10 adults have two or more chronic conditions, which usually require more prescriptions — or more costly specialty medications — to maintain their quality of life. People also tend to take more prescriptions as they get older. As the very large Baby Boomer generation ages, prescription usage is likely to continue rising.

Drug price negotiation

The Commonwealth Fund analyzed U.S. drug prices in comparison to other countries. One of their conclusions was that centralized price negotiations — something most other countries use when dealing with pharmaceutical purchasing — contribute to lower costs. 

In 2021, the U.S. House of Representatives passed H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act. The law would allow Medicare to directly negotiate drug prices. An analysis by the Centers for Medicare and Medicaid Services (CMS) predicted that it could reduce Medicare Part D spending by $117 billion between 2020 and 2029. Currently, Medicare allows private plans that it contracts with to negotiate their own drug prices with manufacturers. Any rebates and price concessions are kept secret, which allows prices to go up with little transparency or accountability.

How we’re addressing high prescription drug costs

Highmark Health knows the impact prescription drug price increases have on beneficiaries and plan administrators, and we’re working to alleviate those high costs by:

  • Collecting and analyzing data on the most effective medications.
  • Forecasting future drug utilization levels and costs to plan for potential changes.
  • Educating providers on prescribing habits that lower costs, such as prescribing generics over brand-name drugs when available.
  • Educating consumers on options to lower their direct costs, such as rebate programs or mail-order prescriptions.
  • Partnering with employers to share more information and increase transparency into drug coverage policies, costs, and utilization management strategies.

What else is driving health care costs?

High costs in health care are not exclusively the result of prescription drug prices. At Highmark Health, we’re looking at all the factors that contribute to rising costs.