This document discusses several factors contributing to the high cost of healthcare in the United States, with a focus on prescription drug pricing. It notes that spending on prescription drugs has risen rapidly in recent decades and that pharmaceutical companies have high profit margins. Other key drivers of rising healthcare costs mentioned include chronic diseases like diabetes, spending on hospital services and medications to treat diseases, and health risk behaviors. The document also examines proposals to lower drug costs and the debate around pharmaceutical industry practices like drug price increases, marketing spending, mergers and acquisitions, and shareholder profits.

1. Prescription
Drug
Pricing
The Debate
Richard Meyer
Online Strategic Solutions
2018

2. Why does
US
healthcare
cost so
much?
• More than half of the total spending increase was due to
price and intensity increases, which contributed $583.5
billion to the $933.5 billion total increases.
• Diabetes was the condition with the greatest increase in
spending, rising by $64.4 billion between 1996 and 2013.
Most of this money went to pharmaceuticals prescribed
to treat it.
• Spending on ambulatory care, which includes ER and
outpatient hospital services, also played a role in
increased overall costs. Annual spending on ambulatory
care swelled from $381.5 billion in 1996 to $706.4 billion
in 2013. This increase, about $324 billion, was higher
than any of the other five types of care analyzed.
• Another key driver of the total increase in health care
expenditures between 1996 and 2013 was spending on
pharmaceutical drugs. For example, $44.4 billion of the
total $64.4 billion increased expenditure for diabetes was
spent on medications meant to treat, as well as to
prevent, the disease.
Source: http://www.cnn.com/2017/11/07/health/health-care-spending-study/index.html

3. Estimates suggest that Rx drugs will continue to represent a larger portion of overall
health spending

4. Spending on prescription drugs has risen rapidly over past decades

5. We share the blame
for high healthcare
costs

6. Health Risk Behaviors
that Cause Chronic
Diseases
• Health risk behaviors are unhealthy behaviors you can
change. Four of these health risk behaviors—lack of exercise
or physical activity, poor nutrition, tobacco use, and drinking
too much alcohol—cause much of the illness, suffering, and
early death related to chronic diseases and conditions.
• In 2015, 50% of adults aged 18 years or older did not meet
recommendations for aerobic physical activity. In addition,
79% did not meet recommendations for both aerobic and
muscle-strengthening physical activity.
• About 90% of Americans aged 2 years or older consume too
much sodium, which can increase their risk of high blood
pressure.
• An estimated 36.5 million adults in the United States
(15.1%) said they currently smoked cigarettes in
2015. Cigarette smoking accounts for more than 480,000
deaths each year. Each day, more than 3,200 youth younger
than 18 years smoke their first cigarette, and another 2,100
youth and young adults who smoke every now and then
become daily smokers.

7. The Cost of Chronic
Diseases and Health Risk
Behaviors
• Eighty-six percent of the nation’s $2.7 trillion annual
health care expenditures are for people with chronic
and mental health conditions. These costs can be
reduced.
• The total estimated cost of diagnosed diabetes in 2012
was $245 billion, including $176 billion in direct
medical costs and $69 billion in decreased productivity.
• Medical costs linked to obesity were estimated to be
$147 billion in 2008. Annual medical costs for people
who were obese were $1,429 higher than those for
people of normal weight in 2006.
• For the years 2009–2012, economic cost due to
smoking is estimated to be at least $300 billion a year.

8. Nearly Half of Cancer Cases
Are Within our Control
• In a study published in CA: A Cancer Journal for
Clinicians, researchers led by Dr. Farhad Islami at the
American Cancer Society analyzed national cancer
data and calculated how much of cancer cases and
deaths can be attributed to factors that people can
change. These included smoking, exposure to
second-hand smoke, being overweight or obese,
drinking too much alcohol, eating red and
processed meats, eating too few fruits and
vegetables, not exercising, exposure to ultraviolet
radiation through activities like tanning and six
cancer-related infections (including HPV).
• Among more than 1.5 million cancers in 2014, 42%
were traced to these factors, as well as 45% of
deaths in that year.
• The latest data suggest that the decline might be
even steeper if people address some of their risky
behaviors that contribute to cancer.

9. The costs of obesity
in the US
• The medical care costs of
obesity in the United States are
high. In 2008 dollars,
these costs were estimated to
be $147 billion.
• The annual nationwide
productive costs of obesity
obesity-related absenteeism
range between $3.38 billion
($79 per obese individual) and
$6.38 billion ($132
per obese individual)

10. Even though prescription drugs
account for $.12 of every
healthcare dollar drug companies
have been under attack

11. High price tags for medicines are about
to come under continued pressure
• Data on federal spending on programs for the poor and the
elderly show that last year $9.2bn was spent on a single
medicine—Harvoni, which cures Hepatitis C.
• A survey by Kaiser Family Foundation Health Tracking Polls says
77% of people think drug costs are unreasonable.
• Almost three-quarters of those taking medicines can afford to pay
for their prescription. That still leaves millions struggling to afford
them, and means that drug pricing will remain contested.
• With many pharma firms buying in drugs, rather than developing
them in-house, there is a strong case that drug prices currently
have more to do with the cost of deal making than the cost of
innovation.

12. POTUS’s
plan to
lower costs
will not
work
• The president’s plan, which he called the
“most sweeping action in history to lower the
price of prescription drugs”, lacks potency.
• Many of Mr. Trump’s suggestions need
legislation, which is unlikely now.
• Mr. Trump also repeated an argument beloved
of pharmaceutical companies—that foreigners
are to blame for America’s high prescription-
drug prices. Even if this proves possible it
would not cut Americans’ drugs bills by a cent.
• That is because the price of drugs would
remain at what the market will bear.
• Put another way, prices would continue to be
largely set by pharma companies.
• If America really wanted cheaper drugs, it
would copy what European countries do, and
refuse to buy drugs that do not offer good
clinical value for money.

13. Drug prices are
increasing
• According to a new IQVIA report, U.S.
cancer drug spending climbed to almost
$50 billion last year, about twice the
$24.8 billion spent in 2012.
• Median U.S prices for new
therapies climbed above $160,000 last
year, more than double the median
$79,000 launch price in 2013.
• By 2022, payers and patients will be
shelling out $90 billion to $100 billion on
cancer therapies in the U.S., fully half the
$180 billion to $200 billion in spending
expected worldwide that year, the report
said.

14. Dug Companies: Delaying
Competition
• Makers of brand-name drugs called
out by the Trump administration for
potentially stalling generic
competition have hiked their prices
by double-digit percentages since
2012 and cost Medicare and
Medicaid nearly $12 billion in 2016,
a Kaiser Health News analysis
found.
• Drug companies that may have
engaged in what FDA Commissioner
Scott Gottlieb called “shenanigans”
to delay the entrance of cheaper
competitors onto the market have
indeed raised prices and cost
taxpayers more money over time.
• A KHN analysis found that 47 of
these drugs cost Medicare and
Medicaid almost $12 billion in
2016.
Source: https://medcitynews.com/2018/05/drugmaker-shenanigans-delaying-cheaper-competitors/

15. Drug
Company
Profit
Margins
• Pharmaceutical companies have some of the highest
profit margins in the world, a distinction that has earned
the industry criticism from both politicians and
consumers, who often complain about the high prices of
prescription drugs.
• Revenues and profit margins in the industry are on the
rise. "pharmaceutical and biotechnology sales revenue
increased from $534 billion to $775 billion between 2006
and 2015,". "Additionally, 67 percent of drug companies
increased their annual profit margins during the same
period—with margins up to 20 percent for some
companies in certain years." Spending on research and
development increased as well, to $89 billion in 2014,
from $82 billion in 2008.
• The average net profit margin for drug companies,
including pharmaceuticals and biotech, was about 12.5
percent to 14 percent, according to a January 2018 study
by New York University’s Stern School of Business.
• Many companies have margins far greater than that.
Gilead Sciences and Amgen are among the most
profitable drug makers, with net margins of about 35 to
45 percent.
Source: November 2017 report by the U.S. Government Accountability Office

16. Medicare drug prices
soar at 10 times rate of
inflation
• The prices of the 20 most commonly
prescribed brand-name drugs for seniors
have risen nearly 10 times more than the
annual rate of inflation over the past five
years, according to a congressional
report said.
• "Soaring pharmaceutical drug prices
remain a critical concern for patients and
policymakers alike," the report
concluded. "Over the last decade, these
significant price increases have emerged
as a dominant driver of U.S. health care
costs -- a trend experts anticipate will
continue at a rapid pace."
Source: https://www.hsgac.senate.gov/media/minority-media/breaking-brand-name-drugs-
increasing-at-10x-cost-of-inflation-mccaskill-report-finds

17. Pharma
industry’s
return on
R&D
investment
falls sharply
• The world’s 12 biggest drug companies are making a
return of just 3.2 per cent on their research and
development spending this year — down from 10.1
per cent in 2010, according to Deloitte’s annual
survey of pharma R&D investment.
• At the same time the average cost of bringing a drug
to market has soared to a record $2bn from $1.5bn in
2016 and $1.2bn in 2010, when the professional
services firm launched its pharma survey.
• Technological advances such as automation and
artificial intelligence have the potential to improve
R&D productivity.
• A group of four younger and slightly smaller biotech
companies which Deloitte added to the survey in
2015 — Celgene, AbbVie, Biogen and Gilead — far
outperformed the top 12. Their average return rose
to 11.9 per cent in 2017 from 9.9 per cent in 2016.
• These smaller companies do not have the legacy
infrastructure of the bigger pharma companies. Their
performance is a combination of the way they focus
on value and their ability to act more nimbly.

18. R&D versus
Marketing
• Americans spent
$329.2 billion on
prescription drugs in
2013.
• That works out to about
$1,000 per person in the
U.S.
Source:
https://www.washingtonpost.com/news/wonk/
wp/2015/02/11/big-pharmaceutical-companies-
are-spending-far-more-on-marketing-than-
research/?utm_term=.0907759f5209

19. Humira, the best-selling
prescription drug in the
world
• The price of Humira, an anti-
inflammatory drug dispensed in an
injectable pen, has risen from
about $19,000 a year in 2012, to
more than $38,000 today, per
patient, after rebates, according to
SSR Health, a research firm.
• That’s an increase of 100 percent.
• Humira, which accounted for
nearly two-thirds of AbbVie’s
$25.6 billion in revenue in 2016.
• The industry has argued that high
American prices are needed to
fund drug development, but
a 2016 study published by the
Journal of the American Medical
Association found “no evidence of
an association between research
and development costs and prices;
rather, prescription drugs are
priced in the United States
primarily on the basis of what the
market will bear.”

20. Pharma mergers
result in fewer
new medicines
• Pharma company mergers are
reducing the number of new
medicines coming to market.
• Yale and London Business
School researchers determined
that 5% more drugs would
become available each year if
not for what they refer to as
"killer acquisitions.”
• Companies are shown to be
less likely to continue
development of acquired drugs
than of in-house projects.
Particularly when the acquired
product could compete with an
in-house effort.
Source: https://www.axios.com/killer-
acquisitions-pharma-1527263682-
03398c78-1a50-475e-9784-
9623ec104c02.html

21. Mergers lead to
cuts in R&D
• “They are cutting quite deep in R&D and
it is not clear if the amount of money
they are saving is going to be beneficial
or harmful,” said John Rountree, a
partner at pharmaceutical strategy
consulting firm Novasecta.

22. Pharma and the new
tax rebates…
• U.S. Sen. Tina Smith wants the
pharmaceutical companies to tell her what
they plan to do with the cash the quintet will
realize from the Tax Cuts and Jobs Act.
• Axios reported that top pharmaceutical
companies have announced significant so
called 'buybacks,' which benefit shareholders
by driving up the value of their stock.
• This suggests that pharmaceutical companies
have used these tax breaks to enrich
investors, a decision that comes at the
expense of lowering the price of prescription
drugs, investing in research and development
that could lead to new cures, or passing
along savings to consumers."
Source:https://www.thestreet.com/story/14510651/1/senator-asks-
big-pharma-what-they-will-do-with-cash-from-tax-cuts.html

23. It’s all about
Maximizing
Shareholder Value
• From 2006 through 2015, the 18 drug companies in
the Standard & Poor’s 500 index spent a combined
$516 billion on buybacks and dividends.
• This exceeded by 11 percent the companies’
research and development spending of $465 billion
during these years.
• Two examples are Gilead Sciences, which
spent $27 billion on buybacks versus $17
billion on research, and Biogen Idec, which
repurchased $14.6 billion in stock and spent
$13.8 billion on research and development.
• The key cause of high drug prices, restricted access
to medicines and stifled innovation, is a social
disease called ‘maximizing shareholder value, ’”
• Pharma CEO’s have made Wall Street their number
one customer at the expense of patients.

24. Profiting
from
healthcare
• With health-care firms making excess profits of $65bn a
year. Surprisingly, the worst offenders are not
pharmaceutical firms but an army of corporate health-
care middlemen.
• The excess profits of the health-care firms are equivalent
to $200 per American per year, compared with $69 for
the telecoms and cable TV industry and $25 captured by
the airline oligopoly.
• As the drug industry has come back down to earth, the
returns of the 46 middlemen on the list have soared.
Fifteen years ago they accounted for a fifth of industry
profits; now their share is 41%. Health-insurance
companies generate abnormally high returns, but so do
the wholesalers, the benefit managers and the
pharmacies. In total middlemen capture $126 of excess
profits a year per American, or about two-thirds of the
whole industry’s excess profits. Express Scripts earns
billions while having less than $1bn of physical plants and
no disclosed investment in R&D. This year the combined
profits of three wholesalers that few outsiders have
heard of are expected to exceed those of Starbucks.
Source: https://www.economist.com/news/business/21738934-it-not-pharmaceutical-companies-which-firms-profit-
most-americas-health-care-system

25. The Difference between
List Price and Net Price?
• The reality is very few people actually
pay the list price, and the amount of
money actually received by the drug
company – the net price – is typically
much lower.
• Discounts vary, but can result in
significant discounts of as much as
50% or greater depending on the
program. When the government is the
payer, the vast majority of purchases
have mandated rebates and discounts of
significant amounts.
Source:https://www.drugcostfacts.org/prescription-drug-costs

26. Medicare and drug prices: The
future?
Let Medicare Negotiate
Prescription Drug Costs for
Consumers
• Numerous thought leaders
are calling for allowing
Medicare to negotiate
prescription drugs for
Americans 65 and older.
• “There is growing
consensus to allow
Medicare, the largest
purchaser of prescription
drugs, to negotiate on
price“
This will help bring prices
down tremendously.”

27. PBM’s:
Villain’s or
Partners?
• PBMs are able to negotiate prices through both
upfront discounts and rebates following sales.
• The new treatments for hepatitis C are a good
example. A curative drug was approved a few years
ago but was incredibly expensive. When a second
curative treatment emerged, Express Scripts told the
first manufacturer that it would not put its drug on
Express Scripts formulary unless the company
lowered the price to that of the second drug. The
PBM advertised this negotiation as an example of its
benefit to patients.
• The higher the price of the drug, the higher the PBM
fee at the pharmacy. So they don’t have an incentive
to drive upfront prices down as much as they can.
They are taking fees based on the list price, but the
net price that the PBM is paying for the drug is much
lower than that because of rebates.
• Pharma companies now anticipate steep discounts
and rebates when they set their list prices. As a
result, they set list prices higher so that the eventual
negotiated price will be as high as possible.

28. PBM’s: Increasing
the costs?
• PBMs quietly became an integral part of the
pharmaceutical supply chain following the
passage of the Medicare Modernization Act in
2003.
• PBMs have become a cause for alarm because
it’s alleged they drive up drug prices and
interfere with patients’ access to medications.
• In 2015, Express Scripts, the largest PBM-only
company in the U.S., reported a profit of more
than $660 million, from sales exceeding $25
billion.
• How PBMs operate has remained mostly hidden.

29. About those
rebates…
• Prescription drug
manufacturers dole out
billions of dollars in rebates
every year, but these savings
don't usually trickle down
directly to consumers.
• Like most things in America's
health care system, it's
exceedingly difficult to know
just how much a medication
costs or what different
players in the supply chain
pay or earn along the way.
• Insurers received $89 billion
in rebates, reducing their
spending on prescription
drugs to $279 billion in 2016,
according to estimates from
Altarum. (This doesn't
include the portion of the
rebate that pharmacy benefit
managers keep, which isn't
disclosed.)

31. Then there are
administrative costs
• Despite efforts to control healthcare costs,
the U.S. is still spending about twice as
much as other high-income countries on
medical care, according to a new JAMA
report.
• Administrative costs accounted for 25
percent—or more than $200 billion—of
total hospital spending in the United
States.
• The U.S. is also spending much more on
pharmaceutical costs. The U.S. spending
on pharmaceuticals per capita was $1,443
compared to $466-$939 for the others.

32. Costs of
hospital
stays
• Hospital stays are expensive — adding up to
more than $384.5 billion a year in the US,
according to recent data. The average
hospital stay costs over $10,000, but the
amount varies widely depending on the
medical condition.
• Medicare covered 46% of that cost, with
Medicaid pitching in 17%. Private insurance
paid for 28% of the cost, while 5% went to
patients who were uninsured.

33. How to Lower
Health Care Costs
Give Patients and Health Care Consumers More
Information
• It can, for example, cost 600 percent more to have a
colonoscopy in one location than another. The problem
is that patients usually don’t know about local price
variations because they’re generally not given cost
information by health care providers or insurers.
Lower the Number of Medical Tests for Patients
• Dr. Atul Gawande, a surgeon, writer, public health
researcher, mentioned a study of more than 1 million
Medicare patients asking how often they received one
of the 26 tests or treatments that were “widely
recognized to be of no benefit or to, in fact, be of
outright harm.” Up to 42 percent of patients received
unnecessary tests in one year, Gawande said. His
mother was one of them.

34. In summary…
1. There are a lot of reasons for the high cots of
healthcare and prescription drugs.
2. Our healthcare system is layered in secrecy
with too many layers between patients and
quality care.
3. Pharmaceutical companies raise prices on
existing medications too much and have
made shareholders their primary customer.
4. PBM’s are coming under fire but many have
promised to pass on drug rebates to
consumers.
5. Our own poor health is also costing us
billions of dollars in preventable disease.
6. It’s going to take a concerted effort to lower
healthcare costs.