From 2008 to 2021, the price of prescription medications has increased 20% per year.
Having worked in healthcare most of my life, very little surprises me. But four years ago, I was shocked by the unfiltered honesty of one drug-company CEO.
Asked to explain why he raised the price of an antibiotic by more than 400%, Nirmal Mulye, CEO of Nostrum Laboratories, told the Financial Times: “I think it’s a moral requirement to make money when you can … to sell the product for the highest price.”
The product Mulye mentioned wasn’t a new medication. He was talking about nitrofurantoin, a drug first created in 1953 to treat bladder infections. It sits on the World Health Organization’s list of essential medicines.
Mulye’s defense of a 400% drug price increase as a “moral requirement” made him an instant villain in an industry already teeming with unpopular chief executives. But moral or immoral, Mulye’s most important contribution to the national debate on drug pricing was his transparency. He opened up the industry playbook and let the whole world take a look.
This article, part of a series on breaking the unwritten rules of healthcare, details how biopharma companies continue to ratchet up drug prices and generate outsized profit margins year after year—and what can be done about it.
The rule: Drug-company CEOs must maximize drug prices
Price escalation is the name of the game for drug manufacturers. From 2008 to 2021, the price of prescription medications has increased 20% per year. By contrast, the rate of overall inflation for that same period ranged from 0.2% to 6.7% per year.
Of course, it’s not uncommon for U.S. industries to try to raise prices and maximize profits. But no other industry does it as consistently or effectively—or with such a meaningful impact on human life—as the pharmaceutical sector.
In the past two years, nearly half of all new drugs have debuted above $150,000. Profit-wise, one research group found that biopharma companies have earned an average gross profit margin of 77% for the past 18 years—that’s 39% higher than the rest of the S&P 500. All in, the 35 largest drug companies earned a cumulative revenue of $11.5 trillion over that period.
How did they do it? Four tactics have proven most effective.
Tactic 1: Promote new drugs directly to patients
If you watch live TV then you’re subjected to scores of ads for new medications like Dupixent (allergies), Rybelsus (glucose), and Humira (arthritis). That trio topped the charts with more than $60 million in combined ad spending last year. Drug companies pump millions more dollars into drugs promotions among patient advocacy groups and their members.
For drug companies, there are only two requirements to execute this tactic: find a new drug and spend lavishly on marketing. There’s nothing in the playbook that states that the newly approved medication needs to be better than an existing drug.
Tactic 2: Tinker with or acquire an existing drug
In the early 1920s, Type 1 diabetes was a death sentence for patients whose bodies couldn’t produce enough insulin. That was until a group of Canadian researchers discovered a way to extract insulin from the pancreas and purify it, giving people with the disease a way to regulate their blood-glucose levels. By the late ‘70s, Genentech had invented a laboratory process to manufacture (rather than extract) insulin. A trio of drug companies have taken over the market. Rather than creating new medications, they’ve chosen to make minor adjustments to the insulin molecule and sell it as a new, high-priced, patent-protected, brand-name drug.
Although it costs these companies an estimated $10 to produce a vial of insulin, they charge $334 to $1,000, according to a 2020 Kaiser Family Foundation report. That’s more than triple what insulin cost a decade ago.
Some companies, rather than modifying existing drugs, simply acquire them from others. Gilead’s $11 billion purchase of Sovaldi, an effective Hepatitis C medication from Pharmasset, is one notorious example. Following the acquisition, the company tripled the planned price to $1,000 per pill, generating over $10 billion in sales its first year.
Tactic 3: Influence U.S. drug policy
Eli Lilly, Novo Nordisk and Sanofi—the “big three” insulin makers—spend millions on lobbying and campaign contributions each year.
Since the 2020 election cycle, U.S. drug makers have contributed more than $115 million to politicians and spent another $756 million on lobbying. Their money has effectively protected their interests. Although 8 in 10 Americans say drug prices are unreasonably high, Congress has consistently voted to extend generous patent protections for drug makers.
Today’s laws give drug companies 12 years of market exclusivity for high-priced biological medications (including gene therapies, vaccines, and other complex compounds) and 20 years of total patent protection. But that’s the floor for patents. The ceiling is much higher because drug companies aggressively use existing law to prolong patents. The 12 top-selling medications in the United States have an average 71 patents each, providing 38 years of added monopolistic market control.
What’s more, Congress has prohibited the federal government from negotiating lower prices on behalf of Medicare and Medicaid patients, forcing Americans to pay nearly twice as much for the same drugs as people in other countries.
Tactic 4: Minimize market competition
Eventually, even the most generous patent protections come to an end and companies must face the potential for generic competition. That’s when major drug manufacturers shift tactics from influencing policy to crushing the competition.
There are a number of legal and semi-legal approaches drug companies use to game the system and maintain market control.
One is called pay-for-delay, a deal in which drug companies agree not to compete for a set amount of time. This keeps generic medicines off the shelf and keeps prices for brand-name drugs high. According to an FTC study, these anticompetitive deals cost taxpayers $3.5 billion in higher drug costs every year.
Another competition-crushing approach is called the “authorized copycat.” By law, the first generic to market is given six months of exclusivity. However, just before their patent expires, companies with brand-name drugs sell their own medication as a generic under a different name. They price it similar to the medication they already sell, thus maintaining huge profitability for another half year.
Perhaps the most brazen approach is stonewalling. That is, biologic drug companies keep monopolistic market control by refusing to cooperate with generic manufacturers. For a generic manufacturer to gain approval, they must prove to the FDA that their drugs work similarly to the brand-name version. To do that, they must complete clinical trials with half the participants taking the current biologic and the other have taking the biosimilar. When brand-name manufacturers refuse to give these generic companies samples of their medication, testing and FDA approval can be delayed for years. And there’s nothing anyone can do about it.
Breaking the rule of drug pricing
Outside of requesting and buying generics whenever applicable, there’s little patients can do, themselves, to bring down exorbitant drug prices. American laws have long tilted in the drug companies’ favor and there’s no sign that will change—not unless Congress decides to act. To break the drug industry’s unwritten rules on pricing, lawmakers must pass policies voters can rally behind.
- Require drug manufacturers to justify prices. Once drug companies are given monopolistic patent protection, they aren’t required to justify the price of a new drug. Congress could require pharma companies to validate prices either by demonstrating a medication’s efficacy or R&D dollars spent. Until then, pharmaceutical companies will continue to overprice drugs that underachieve.
- Eliminate patent loopholes. As a condition for granting a patent, congress could more tightly regulate the duration of market exclusivity and prohibit brand-drug manufacturers from taking advantage of the six-month protection window for the first generic to market.
- Let the U.S. government negotiate Medicare drug prices. In a global economy, forcing our nation to pay double other countries harms our businesses and citizens.
When it comes to the cost of drugs in the U.S., Americans aren’t getting what they pay for. Today, the scales are tipped powerfully in favor of drug manufacturers (and the Pharmacy Benefit Managers or PBMs that act as middlemen). Employers and patients are paying the price. To improve the health and financial well-being of our nation, the scales need to be rebalanced.