The money and politics of prescription drugs: What you need to know

Reviewed by Alina Shrourou, B.Sc. (Editor)May 8 2019

If there's one area of health care where Republicans and Democrats might strike a deal, it's prescription drugs.

President Donald Trump has floated a plan to cut drug prices. Democratic and Republican ideas abound in Congress, where lawmakers have put more than 40 bills on the table. In 2018, 39 states passed 94 laws targeting pricing and costs. Florida's House recently approved a move backed by the state's Republican governor to allow imports from Canada. So far, Vermont is the only state to take that step.

Why do prescription drugs draw so much attention? Because millions of Americans rely on them, and 8 out of 10 say the cost is “unreasonable.”

America spends about $460 billion a year on these drugs, roughly as much as the combined revenues of the top three car makers.

That spending flows mainly in two ways: retail drugs sold at pharmacies, and drugs provided by doctors and other clinicians at hospitals, outpatient clinics and long-term care centers. Retail drugs account for about 10% of all health care spending. The doctor-administered drugs add about another 6% to 7%.

Tracking the money challenges the savviest of analysts. Between the drugmakers and the patients lie an array of middlemen, who end up masking the true prices through discounts to one another and rebates to patients.

Here are a few benchmarks to help you navigate the realm of prescription drugs.

Out-Of-Pocket Costs

With all the focus on affordability, it's worth noting that about a third of all retail prescriptions come at no cost to the patient. Another half have an out-of-pocket cost of under $10. In recent years, the average out-of-pocket cost has fallen from about $10 to a bit over $8.

There are several reasons, including company rebates, better drug cost protections through the Affordable Care Act, and greater use of generic drugs, which are cheaper than brand-name drugs protected by patent.

But just because the pressure has eased on average doesn't mean the financial burden isn't intense for the relative few. A small number of people and prescriptions accounted for a huge share of the estimated total out-of-pocket costs of $57.8 billion in 2017.

The Federal Bill Grows

Even if most individuals are cushioned from rising drug prices, taxpayers, through the federal government, are not. Spending skyrocketed after the Medicare Part D prescription drug benefit took effect in 2006 and has continued to rise rapidly since.

U.S. Drug Prices Are Higher

One reason states such as Florida are interested in importing drugs from Canada is many drugs are cheaper there. The Commonwealth Fund, a New York-based health policy group, compared a basket of common drugs (of the retail sort) in the United States and several other countries. Using the American cost as a benchmark of 100, it calculated the cost in Canada, the United Kingdom, France, Germany, Switzerland and Australia.

Germany was the closest match to the American price tag, but Canada, the U.K. and Australia were all about half the cost.

Other studies reached the same general result. The U.S. Health and Human Services Department looked at the top 27 Part B drugs (physician-administered drugs) and found that for 20 prices were higher in the United States. A Canadian-American research team looked at spending on primary care drugs in America and 10 other nations, including all of the ones in the Commonwealth study. It found U.S. spending was about twice as high as the average elsewhere.

Broadly, the United States spends more on drugs because prices for many drugs are higher, and patients, usually on the advice of a doctor, take newer, high-cost drugs.

Follow The Money

One of the reasons the prescription drug market poses a challenge to lawmakers is because it has many moving parts. On the payer side, there are patients, the government and employers. On the receiving end are drugmakers, wholesalers, health care plans, pharmacies and pharmacy benefit managers, which are firms that negotiate prices on behalf of payers.

The money moves around a lot, but policy analyst Allan Coukell at the Pew Charitable Trusts modeled the flow among all the players to estimate how much money ended up with each one. For 2016, the drugmakers were the top gainers, with $204 billion (on the retail side), but the pharmacies also did well with about a quarter of the total.

Lobbying

Ever since the passage of the Medicare Part D prescription drug benefit, pharmaceutical companies have invested heavily in lobbying. There was a spike in 2009 as Congress debated the Affordable Care Act, but after a short dip, spending rose again and now stands at $281 million, about where it was nearly a decade ago.

No industry group spends more on lobbying — by a long shot. The insurance industry came in a distant second at $158 million on lobbying last year.

The drug industry can't ignore the big proposals in Washington that could change the landscape, said Georgetown University researcher Jack Hoadley.

Both Democrats and Republicans, including the White House, have bills to peg American prices to prices in Japan and Europe.

There are bills to let the government negotiate directly with drug companies to reduce prices in the Medicare program. Among the public, that approach enjoys broad bipartisan support, with 80% of Republicans and 90% of Democrats in favor.

“The fact that the administration, congressional Republicans and Democrats are all talking about drug prices is putting all stakeholders on edge,” Hoadley said.