To: The Food and Drug Administration and The 115th United States Congress

From: Thomas Bailey, Dana Nestor, Andrea Meindl, Chase Honeck and Emma Beins
Date: November 28th, 2017
Re: The High Cost of Prescription Drugs

Introduction
Drug prices in the United States have continued to rise at an alarming rate for many years. U.S.
consumers spend roughly twice as much on drugs compared to their European counterparts.
Between 2013 and 2015, net spending on prescription drugs rose by 20% in the U.S. Because of
this, the federal government has felt increased pressure to take action to regulate the drug
industry (Kesselheim, Avorn, Sarpatwari, 2016). The Food and Drug Administration (FDA) is
responsible for the regulation and protection of the publics health through ensuring the safety,
efficiency and security of human drugs (Gassman, A.L., M.D., Nguyen, C.P., M.D., Joffe, H.V.,
M.D., M.M.Sc., 2017). In 2007, Congress passed legislation aimed at expanding the FDAs
regulatory powers, particularly for monitoring the drug industry (Kraft, M., Furlong, S. 2015).
Proponents for increased regulation of the drug industry claim that consumers will benefit from
the lower prices, while critics claim that increased regulation will cut pharmaceutical revenues,
thus slowing down innovation. Moreover, the high costs affect accessibility and can lead to
trade-off choices that many patients must make in order to afford medication. Forgoing
medication could result in sickness or worse: death. Therefore, it is important to understand the
driving forces behind the exponential increases in drug prices, so that there is a foundation for
considering policy alternatives that will positively affect both the industry and patients (RAND
Corporation, 2008).

Drugs Defined
Before delving into the problem, it is important for the purpose of avoiding ambiguity that there
is a clear definition of generic and brand-name drugs, as they will be highlighted throughout this
report. First, brand-name drugs and their generic versions are equal in effectiveness. The FDA
states, You can take a generic medicine as an equal substitute for its brand-name counterpart
(https://www.fda.gov/drugs/resourcesforyou/consumers /questionsanswers/ucm100100.htm).
Second, according to Merriam Webster Dictionary, brand-name means, having a well-known
and usually highly regarded or marketable name (https://www.merriam-
webster.com/dictionary/brand-name). The same publication defines generic as, not being or
having a particular brand name (https://www.merriam-webster.com/dictionary/generic). Brand-
name drugs are generally sold by the original sponsor of the application for regulatory approval
(Kesselheim, Avorn, Sarpatwari, 2016). Brand-name drugs only make up 10% of the market, but
account for 72% of total drug spending because the majority of them treat rare conditions
(Kesselheim, Avorn, Sarpatwari, 2016). For example, Cerezyme, a medication used to treat
Gauchers Disease cost $150,000 per patient per year in 1991. In 2016 the price rose to over
$300,000 per year (Kesselheim, Avorn, Sarpatwari, 2016). In 2015, the price of Daraprim, used
to treat toxoplasmosis, rose by 5500% (Kesselheim, Avorn, Sarpatwari, 2016). The
pharmaceutical company was able to increase the price because there were no competitors
licensed to sell a generic version of this drug in the United States. Thus, the problem is not
isolated to a specific type of drug, and is affecting all markets.

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Background
In the United States, the healthcare system allows manufactures to set their own prices for drugs
that they produce. U.S. drug spending per capita far exceeds per capita spending in any other
country. This spending accounts for an estimated 17% of overall personal health care costs
(Kesselheim, Avorn, Sarpatwari, 2016). In 2013, U.S. per capita spending on prescription drugs
was nearly $858 compared to an average of $400 among 19 industrialized nations (Kesselheim,
Avorn, Sarpatwari, 2016). This discrepancy is driven largely by the price of name brand drugs,
unimpeded by nonexistent genetics, that in recent years have increasing at rates far beyond the
CPI. Looking at The United States prescription drug market, one will notice that there is no
official system in place to regulate prices (Kesselheim, Avorn, Sarpatwari, 2016). While rising
prescription drug pricing is a product of an increasing aging population and a greater use of
drugs in the healthcare system among all ages, a major part in the price hike in prescription
spending from 2010-2014 was a result of either a price increase of drugs or a higher percentage
of high-price drugs being prescribed by physicians, when comparable alternatives are available
at different costs (Kesselheim, Avorn, Sarpatwari, 2016).

Market exclusivity is the driving factor allowing manufacturers to set high drug prices. On
average, manufacturers retain exclusivity for 12.5 years after approval by the FDA. The U.S.
patent process affords exclusivity rights, but after these rights expire the availability of generic
drugs should create competition driving prices down. Access to these generics is usually delayed
using business and legal strategies, allowing prices to remain high (Sofer, 2016). In 2014, 33
new brand-name drugs were released on the market, only 8 of the drugs had a direct price
competitor at the time they were introduced. Because of this and other factors such as
competitors withdrawing from the market, drug manufactures are able to corner the market and
create monopolies on certain types of drugs allowing the manufacturers to control the price and
market. In a 6-month period a 500-pill bottle of doxycycline, an antibiotic, increased from $20 to
$1,849. (Waxman, Corr, Martin, Duong, 2017). Another drug that treats type 2 diabetes
increased 795% in a year (Lapointe, 2016). Many drug companies attribute excessive increases
to research and development costs. However, a JAMA report found that major pharmaceutical
companies only spend between 10%-20% of their income on research (Sofer, 2016).

Justifications
In addition to high prices that support past research and development manufacturers further
claim high prices are needed to continue with future research and development. Some economic
analysis contend that it cost $2.6 billion to develop a drug that makes it to market (Harris, R.
2017). However, there are factors that weigh against these justifications for such high prices. For
one, most of the important innovations that lead to drug development are done in academic
institutions and funded by grants from organizations such as the National Institute of Health.
Also, biotech start-ups may take early stage drug development research that was initially done in
academic institutions until the drug and company is bought by a larger company. Other
arguments claim that increased regulation of the industry will negatively affect the strength of
the industry. The pharmaceutical industry, however, has been one of the leading sectors in the
U.S. economy and continues to grow. Thus, there is little evidence to prove a high correlation
between drug prices and development cost; rather, drugs are priced in the U.S. solely based on
what the market will bear. (Kesselheim, Avorn, Sarpatwari, 2016)

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Why This is an Important Issue
The high cost of prescription drugs negatively affects patients treatments and health. As
prescription drug prices continue to rise, many patients that need such drugs are not able to
afford them resulting in failed or prolonged treatments. This leads to an inefficiency and negative
health outcomes and/or trade-offs. Some of the trade-offs of this problem are patients having to
choose between groceries and medication and/or depend on credit cards to finance medication. In
some cases senior citizens must defer retirement to a later age (Skinner, 2016). In an AARP
survey of 1,834 adults age 50 and older, more than half who reported not filling a prescription in
the past two years say cost is a factor (Sagan, 2016). Rising drug prices are changing the way
that physicians prescribe drugs. If a patient cannot afford to pay for a prescription a doctor will
not prescribe a drug. A consumer report survey showed that a fourth of all patients do not take all
of their prescriptions, either they skip doses or do not get the prescriptions filled to save money
which negatively affects the efficiency of the treatment (Lapointe, 2016).
Currently, there are only a few federal laws regulating the industry, allowing the drug
manufactures to control the market and the price of the drugs that they release. However, states
are getting involved and creating legislation of their own to combat this issue. Although it only
focuses on generic and off-patent drugs, the state of Maryland passed legislation that took effect
on October 1st. This legislation allows the Attorney General to step in if a drug's price rises by
more than 50% in a year. These drug manufactures can also face a penalty of $10,000 if they are
caught price gouging. Some states such as California have tried to pass legislation that would
limit the amount the state pays for certain drugs but industry groups paid over $100 million to
defeat the bill (Luthra, 2017). This is a national health crisis that, if not addressed, will
personally affect us within our lifetimes.

Conclusion
One of the most paramount policy issues the United States is facing today involves the rising
costs of prescription drugs. The United States drug spending per capita is worse than any other
industrialized country, yet federal laws are still limited to regulate the industry with no official
system in place to police prices. As a result, citizens treatments and health are at risk as access
to prescription drugs become scarcer with prices continuing to rise. To amplify the issue, major
pharmaceutical companies are spending only a minor ration of their exorbitant profits on
research, delaying possible improvement of medications and treatments themselves to help the
patients in need. The FDA is responsible for the regulation and protection of the publics health,
but are yet to succeed in establishing monumental reformations toward a more beneficial,
affordable system. All citizens must be aware and should care for this policy issue as prices will
continue to rise and all will be forced to pay- with either money or health.

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