Snapshot of the American Pharmaceutical Industry

The passage of the Affordable Care Act has been profitable for pharmaceutical companies in the U.S., with more Americans now having access to prescription drugs. But as this article explores, there are many complexities inherent in the drug industry that need to be addressed moving forward.

The past few decades have been especially profitable for the American pharmaceutical industry, even more so since the passage of the Affordable Care Act, also known as Obamacare. As of the spring of 2015, Obamacare had expanded insurance coverage to an additional 16.9 million Americans who were previously uninsured, reveals a RAND Corporation study. As a result, a much larger pool of people now has access to the medications they need for acute and chronic conditions, according to Aaron S. Kesselheim, M.D., J.D., M.P.H., Associate Professor of Medicine at Harvard Medical School and Director of the Program On Regulation, Therapeutics, And Law in the Division of Pharmacoepidemiology and Pharmacoeconomics at Brigham and Women’s Hospital. This growth in the insured population has contributed to increases in overall health care spending in the U.S., in part due to rapid increases in spending for prescription drugs. This paper explores the key factors contributing to these increases and looks at the role of the pharmaceutical industry within the broader health care field.

The Role of the U.S. Pharmaceutical Market

The United States is the worldwide leader in per capita prescription drug spending, representing between 30 and 40 percent of the worldwide market. Many global pharmaceutical companies also have a presence in the U.S. Further, a paper written by Arthur Daemmrich for the Harvard Business School reports that in 2007, 40 percent of the worldwide total of approximately 6,500 drugs in clinical development were originated in the U.S. Yet while the nation has long been on the forefront of biomedical research, its foothold in this area has recently been weakening. In fact, a recent study published in JAMA reports that the rate of research funding growth in the U.S. has slowed, and research for new treatments has declined recently. In addition, the authors point out that in recent years the financial commitment made by the National Institutes of Health (NIH) to biomedical research to develop new treatments has been disappointing in scope due to budget cuts, inflationary losses, and increases in development costs. From FY 2003 to FY 2015, the NIH budget for research decreased by 22 percent. In FY 2016, Congress increased its commitment in this area slightly, adding an additional 5.9 percent, but most experts agree that more resources are needed. Therefore, if trends don’t continue to pick up in this area, the U.S. could be at risk for continuing to see a reduction in NIH-funded research output in the not-too-distant future.

In 2007, 40 percent of the worldwide total of approximately 6,500 drugs in clinical development were originated in the U.S.

This is a problem, according to a 2015 study published by Kesselheim and his co-authors in Health Affairs, because a majority of transformative pharmaceutical innovation emerges directly from publicly-funded science.

Pharmaceutical Distribution Chain

“The pharmaceutical supply process through which medications travel to patients is multi-faceted, involving a number of stakeholders,” says Elizabeth Seeley, MS, PhD, Adjunct Lecturer in Health Policy and Management at the Harvard T.H. Chan School of Public Health.

In addition to NIH research, pharmaceutical manufacturers and biotech companies play a significant role in the early phases of discovering new drugs. These companies then undertake the development and approval process with the Food and Drug Administration (FDA) to bring the medicine to the U.S. marketplace.

“Once the drug is approved, then begins the marketing process to make the drug available for patients,” Seeley says. The drugs move from manufacturers to wholesalers, the middlemen that provide the drug to the pharmacy or retailer who sells it to the end user.

In the U.S., the majority of the pharmaceutical wholesaler business is concentrated in a few companies that hold the majority of the market share.

Other key players in this distribution chain are the Pharmaceutical Benefit Managers, or PBMs. Health insurance companies such as Blue Cross and Blue Shield outsource the prescription benefit to PBMs to handle all of the details, such as creating the formularies, corresponding co-pay levels and discount and rebate arrangements.

Pricing Matters

“In the U.S., we allow price negotiations, discounts, and rebates,” Seeley says. What this means in layman’s terms is that there are different prices for the same drug, depending on who is paying the bill. These rebates and discounts are all confidential. “Everyone talks about the high price of drugs in the United States but there is little transparency on how much is really being paid by each purchaser,” she says. Further complicating matters is that, in order to secure the passage of the ACA, the Obama administration agreed that Medicare would not negotiate the price of drugs, and therefore reimburses at some of the highest prices. Since then, a number of politicians have proposed allowing Medicare to use its market power to negotiate lower drug prices, although Congress has yet to pass such a provision. Through the Medicaid Drug Rebate Program, state Medicaid agencies are entitled to rebates on medications for their beneficiaries. The Veterans Administration has even greater latitude to negotiate drug prices through the Federal Supply Schedule, although the covered population represents only one percent of the total population in the U.S.

In order to secure the passage of the ACA, the Obama administration agreed that Medicare would not negotiate the price of drugs, and therefore reimburses at some of the highest prices. Since then, a number of politicians have proposed allowing Medicare to use its market power to negotiate lower drug prices, although Congress has yet to pass such a provision.

The U.S. Pharmaceutical Industry’s Products

Specialty Drugs

There has been much focus in the past few years on specialty drugs in the U.S., which are drugs that are available in very limited supply, require special handling, and/or come with a very high price tag. Until recently, such specialty drugs were restricted to treatments for rare diseases like multiple sclerosis, so the extent of their usage, and the impact of the high price, was controlled. However, today the specialty drug designation also applies to new, and highly expensive, drugs available to treat common conditions like hepatitis C as well, thereby having a much larger impact on overall pharmaceutical spending.

Brand Name and Generic Drugs

Use of generic drugs has also increased in recent years. Brand-name drugs refer to drugs that are marketed by a pharmaceutical company (or companies in the case of co-branded drugs) that owns the patent. That company gets regulatory exclusivity from the FDA as well as 20-year patents, which both contribute to the drug’s market exclusivity, during which time the manufacturer can sell the drug at high prices to recoup their investment and make a profit. Estimates from industry-funded economists suggest that drug development may cost as much as$2.558 billion per drug, but these estimates are based on non-transparent data and use assumptions highly favorable to the industry, so the actual number is probably much smaller. Note that a study conducted by York University researchers found that pharmaceutical manufacturers in the U.S. spend nearly twice as much on marketing their products than they do on research and development. In addition, much research and development investment from large manufacturers are spent on incremental improvements to existing products.

When the market exclusivity on a branded small-molecule drug (which refers to most traditional pharmaceutical drugs) ends, other companies may produce generic versions of the drug. Generic drugs contain the same active ingredients, strength, and dosage as the branded drug, and are approved by the FDA as bioequivalent to the brand-name version. Studies show that generic drugs are clinically equivalent to brand-name drugs. Generic drugs are usually also much less expensive than branded medications. In fact, once six or more generic manufacturers are in the market for a particular drug, that drug can cost 90 percent less than the original branded medication.Generic drugs currently account for 8 out of 10 prescriptions filled, and that number will likely continue to rise in the coming years as more patents on brand name drugs expire.

Over-the-Counter Medicines

There is also a large market in the U.S. for over-the-counter (OTC) medicines. Drugs for conditions like allergies and heartburn that required prescriptions in the past are now available for OTC sale. This makes them easier to access for consumers but also means that people often pay more for these medications, since OTC drugs are not covered by insurance, Seeley says. There can also be questions regarding dosing, how to use properly, and recommended length of time for use for best results when people self-medicate.

The Biotech Field

Biotechnology companies make up another sub-sector of the pharmaceutical industry that works to bring new treatments to the market. While traditional small-molecule drug companies use synthetic ingredients to create medications, biotechnology drugs are usually proteins manufactured in a living system, such as an animal or a plant. Biotechnology drugs are usually highly expensive. Generic versions of biotechnology drugs are not available, although in 2010 the U.S. developed a regulatory pathway to encourage production of so-called “biosimilar” drugs that should act in clinically equivalent ways to the original biotechnology drug. Dozens of biosimilar drugs are now in widespread use in Europe, leading to some cost-savings, although not nearly at the level of generic small-molecule drugs.

Personalized Medicines

One of the latest developments in the pharmaceutical field is its growing focus on using genetics and genomics in the biomedical sector to better understand the development of different diseases and individual risk factors, and to develop a more personalized approach to treatment for each patient, called targeted therapy. “At this point, the number of targeted therapies is growing but they are still a minority of treatments overall,” Kesselheim says. He and many other experts are hopeful that personalized treatments will become more prevalent in the next few years because they offer the hope of enhanced drug efficacy. In addition, advanced technological capacities are beginning to make it possible for companies to mine and analyze data on specific conditions, which may lead to new—and much needed—treatments in the future.

Challenges for Patients

The high cost of drugs in the U.S. poses some problems from the patient perspective; despite having increased access to prescription drug coverage, not everyone can afford the co-pays or co-insurance for their medicines today. As a result, medicine non-compliance is a serious problem in the nation.

“If there are high-cost prescriptions that people can’t afford, there could end up being a serious public health issue,” Kesselheim says. Some pharmaceutical companies try to head off this situation by offering programs that aim to make needed drugs accessible to low-income people, but these programs often do not reach a large audience and may have numerous eligibility requirements restricting entry.

Further complicating the relationship between the pharmaceutical industry and patients is the fact that drug manufacturers in the U.S. are allowed to market their products directly to patients, which can inform patients about available therapies but is also proven to contribute to over-prescribing of the advertised drugs. Such practices add to the overall amount of national drug spending, since many of these drugs can be quite expensive.

Public Opinion

Recent studies by the Kaiser Family Foundation (KFF) reveal that the U.S. public wants drug prices to be better controlled. For instance, three-quarters of respondents to a June 2015 Kaiser survey on this topic reported feeling that pharmaceutical companies cared more about profits than they did about patients, while close to 75 percent of the respondents said they felt prescription drugs are too expensive. While Democrats and Republicans are historically on different sides of the fence when it comes to policy preferences, many people from both parties today seem to agree on this issue: more price regulation or innovations in pharmaceutical payment will be important for the future of the health care field and for the well-being of patients. Further, there has been much talk about the fact that even as the health care organizations throughout the nation are rising to the pressures to tighten their costs, the pharmaceutical industry has not yet been touched by the growing move to adopt value-based care. Nonetheless, Seeley points out that small pockets of the pharmaceutical industry have begun to experiment with individual pay-for-outcome contracts.

Many people from both parties today seem to agree on this issue: more price regulation or innovations in pharmaceutical payment will be important for the future of the health care field and for the well-being of patients.

This trend is one that may continue, and may also increase, in the future, as the focus on value and quality in health care continues to expand, influencing pharmaceutical manufacturers to seek new ways to protect their territory within the continually changing field.

Liz Seeley is a faculty member in Preparing for What’s Next in U.S. Health Reform at Harvard T.H. Chan School of Public Health.