Cost of Medicines in Context

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Innovations in the pharmaceutical and biotech industry are bringing amazing changes in the lives of the common people. Debilitating diseases, like hepatitis C, cancer, HIV, etc. are no longer considered as incurable, as new medicines are entering the market that are being proved as effective for fighting these diseases and increasing the longevity of the patients. Over 7,000 medicines are also under development around the world, mainly targeting diseases like neurological and immunological disorders, cancers, diabetes, cardiovascular diseases, HIV/AIDS, mental health disorders, etc.

In order to research and develop a new medicine, on average, it takes more than $2.6 billion and 10 years. In 2013, it was identified that biopharmaceutical sector represented 17% of all domestic R&D funded by US businesses, which accounted for the single largest share of all US business R&D.

Table 1: Share of Total US Business R&D by industry, 2013 (Source: PhRMA analysis of National Science Foundation Data)

However, according to an estimate by IMS Institute for Healthcare Informatics (March, 2016), the net price growth of brand medicines slowed in 2015, mainly due to discounts and rebates negotiated by payers.

Table 2: Brand Medicine Net Price Growth

Again, it has also been found that prescription drug prices fall significantly over time. In order to bring new treatments to patients, pharmaceutical companies invest a lot in pioneering research, and so the prices are higher initially. In course of time, these medicines become available as lower cost generic copies.

Table 3: How Prescription Drug Prices Fall Significantly Over Time (Source: IMS Analysis for PhRMA, May 2015)

Role of Medicine Use in Overall Healthcare Expenditure

Medicines can be immensely helpful for patients in order to avoid expensive hospital services. Thus, improved medication adherence is associated with reduced total healthcare use and costs. Each year, at least $213 billion can be saved by U.S. healthcare system if it is possible to ensure responsible use of medicines, as claimed by IMS Institute for Healthcare Informatics in 2013. They further suggested that this can be possible if attention is given to six key areas: nonadherence, misuse of antibiotics, delayed evidence-based treatment practice, suboptimal generic use, medication errors, and mismanaged polypharmacy.

The overall impact of medication adherence on total healthcare spending is quite significant. It has been found that adherence reduces average annual medical spending of a patient by $8,881 in congestive heart failure, $4,413 in diabetes, $4,337 in hypertension, and $1,860 in dyslipidemia.

Costs of Medicines and Healthcare Spending

In the U.S., the costs of medicines are not the major deciding factors of the amount of total spending in healthcare. According to the projection of national health expenditures (NHE) by the Centers for Medicare & Medicaid Services (CMS), prescription drug spending is making up approximately 9.5% of total health spending each year from 2013 through 2023. In 2015, the total expenditures on prescription drugs were $324.6 billion, comparing to the total healthcare spending of $3.2 trillion in the U.S. However, the major contributors of healthcare spending are hospital costs and the spending on physicians and clinical services. In 2015, the hospital expenditures were $1,036 billion and Physician and clinical services expenditures were to $634.9 billion.

It is also projected by CMS that the growth in other health care services will be five times of total medicine spending growth through next decade. The 10-year cumulative increase of spending in prescription medicines will be $390 billion, whereas this spending increase on other healthcare services will be $2,044 billion during this time period. This shows that expenditure in medicine is not going to be the main contributor of healthcare cost in America.

The data provided by insurers also reveals that medicines are not the main driver of premium increases. Hospital and professional costs consist of 56% of total premium increase, which is $25.26.

Table 4: Average Dollar Increase in Monthly Premium by Category, 2016 (Source: Avalere Health)

Furthermore, nearly 9 Out of every 10 prescriptions in U.S. are filled with generics.

Table 5: Generic Share of Prescriptions (Source: IMS Health)

At the same time, it has also been identified that the average cost to develop an approved medicine has more than doubled over the past decade. This is mainly due to increased regulatory burdens and trial complexity, expanded research burden for meeting payer demands, and increased focus on areas where failure rates are higher.

Table 6: Cost for Developing New Medicine (Source: CSDD)

In order to address the concerns regarding the costs of prescription drugs, some effective steps should be taken. For instance, the drug discovery and development processes need to be modernized. Furthermore, consumers should be engaged and empowered, value-driven healthcare system should be promoted, and market distortions should be taken care of. All these will be needed to minimize the existing concerns regarding the costs of prescription drugs in the U.S.

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