• <div class="header-image" style="background-image: url(/live/image/gid/4/2611_Header_V6N2_web_4.rev.1518551584.jpg);">​</div><div class="header-background-color"/>

The Pharma Conundrum: Pharmaceutical Spending Increase Drivers and Policy Solutions

March 23, 2017

National spending on pharmaceutical drugs, while not the largest component of national health expenditures, has come under scrutiny from politicians on both sides of the political spectrum. Several high-profile controversies over drug pricing hikes have been the subject of public ire, and fingers are often pointed toward pricing as the culprit for increased spending on drugs. Yet pricing is not the only culprit: examined here are possible explanations for increasing pharmaceutical spending, along with an evaluation of several policy proposals.

Pharmaceutical spending in the United States comprises approximately ten percent of national health expenditures, and its share is expected to increase [1].

Increasing pharmaceutical spending is often a hot topic in political and policy discourse, and likely draws attention because copayments for drugs reflect a very tangible component of cost-sharing for patients [2]. Often, the discussion on national drug spending is prompted because of specific instances of drastic drug pricing increases, such as the acquisition and subsequent price hike of Daraprim by Martin Shkreli-led Turing Pharmaceuticals, or of Isuprel and Nitropress by Valeant [3].

These pricing hikes can result from acquisitions of older drugs, or from the traditional pharmaceutical pipeline for developing new drugs. This process can take over 11 years, and is estimated to cost anywhere from $800 million in 2003 [4] to $2.6 billion in 2016 [5]. The drug pipeline involves discovery, research and development, clinical trials, FDA approval [6], and then a patent-protected or exclusivity period in which the drug is protected from generic entry. The manufacturer can exercise more discretion over pricing during this “monopoly” period. If a drug is successful, this pricing strategy often serves to cover a manufacturer’s failed ventures (as less than one in ten drugs that enter clinical trials make it to market [20]); profits from successful drugs are often directed back toward research and development.

<p>(<strong>Image:</strong> Percent of national health expenditures going toward prescription drugs <strong>Source:</strong> Kaiser Family Foundation)</p>

(Image: Percent of national health expenditures going toward prescription drugs Source: Kaiser Family Foundation)

The publicized political discourse around pharmaceutical spending often focuses on drug pricing. The executive branch has expressed a vague desire to bring down drug costs by fostering more competition [7]. Other high-profile proposals to drive down prices include plans to increase drug importations [8]. Yet multiple factors, beyond only pricing, are contributing to increases in pharmaceutical expenditures.

<p>(<strong>Image:</strong> Average annual growth rate of prescription drug spending per capita <strong>Source:</strong> Kaiser Family Foundation)</p>

(Image: Average annual growth rate of prescription drug spending per capita Source: Kaiser Family Foundation)


Drivers Behind Spending Increase

Increasing List Prices

Increases in the invoice (list) prices of drugs are a modest culprit contributing toward increased spending, with invoice prices increasing 12.4% in 2015. However, the effect of increasing list prices is tempered by rebates that drug manufacturers provide to insurers – for example, accounting for rebates, drug prices increased on net only by a modest 2.8% in the same year. This reflects a shift in market practices from previous years – negotiations with manufacturers are becoming more effective at slowing net price increases [9].

Manufacturers, however, are still averse to slowing down increases in list prices – they cite concerns about such practice hampering research and development. In addition, even if rebates are offered, this practice allows them to negotiate higher prices with payers each year [10].

Decreasing Number of Patent Expiries

A drug patent expiry ends a manufacturer’s “monopoly” pricing period and allows generics to enter the market, which drives down the price of the drug. However, in recent years, the number of expiries have fallen; in turn, it has not decreased spending as much as in past years, thus contributing to the spending rise [1].

Specialty Medicines

The significant driver of the spending increases originates from spending on specialty medicines, which are used to treat complex, chronic, or rare conditions, including cancer, HIV, hepatitis, and autoimmune diseases. These specialty medicines drove over 70% of the increases in overall drug spending between 2010 and 2015, and comprise quite a large portion of yearly drug expenditures (36% in 2015) [11]. The utilization of specialty drugs is increasing, and is expected to reach $400 billion by 2020 [21].

Spending on specialty medicines can present an ethical policy dilemma, as a responsible balance must be achieved between innovation and cost containment.

<p>(<strong>Image:</strong> Total yearly spending on specialty drugs (billions), and breakdown by type <strong>Source:</strong> IMS Health)</p>

(Image: Total yearly spending on specialty drugs (billions), and breakdown by type Source: IMS Health)

Proposed Policy Solutions

“Let Medicare negotiate drug prices” and Medicare Part D

One commonly cited proposal is to allow the Medicare program, America’s social insurance program for citizens over age 65, to bid with drug manufacturers for lower prices, closer to the way the Veterans Administration contracts with drug companies [16].

This could occur with a “bully pulpit” strategy, in which the Secretary of HHS would negotiate specifically with drug manufacturers for expensive drugs, pressuring them to lower their prices. One merit of this approach, making it an attractive target, would be to target and drive down the prices of the aforementioned expensive specialty drugs. However, this approach would have to be limited to a few specialty drugs, due to administrative difficulties (the Secretary can only negotiate with, and put pressure on, so many drugs in a given year). In addition, the Secretary would need specific leverage to pressure companies to decrease prices beyond a general power to negotiate, otherwise, savings would be modest [12].

What is often overlooked is that the private Prescription Drug Plans (PDPs) who provide the plans for Medicare Part D, Medicare’s drug coverage program, do in fact negotiate with drug manufacturers. They do this through formularies, which are lists of medications that the PDPs will cover. Drug manufacturers will drive down prices in order to be included on PDP formularies, so that they can gain access to the Medicare market of patients. PDPs are limited in their leverage, however, as Part D requires them to cover certain drugs in “protected classes” regardless of price [17].

Policy plans were made to remove these protected classes, but patients raised serious concerns about coverage being adversely affected [18]. However, other more nuanced proposals regarding Part D exist. One proposes that Medicare should require manufacturers to provide rebates for drugs covered under Part D for low-income patients, projected to save $137 billion over 10 years [19]. Another would be for Medicare to create a public Part D program to compete with PDPs, and create its own formulary, to hopefully generate savings [19].

Value-Based Pricing

A solution proposed by drug manufacturers as an alternative to further slowing invoice price increases, is “value-based pricing”, where manufacturers offer rebates to insurers if the drug is not effective [13]. The arrangement was proposed in earlier years but did not take off due to issues in tracking outcomes. Nonetheless, it has become popular in Canada and European countries with single-payer systems, for diseases such as cancer where reliable outcome metrics exist [23].

The solution has caught momentum in the US recently, fueled by the entries of new, expensive drugs designed to treat diseases for which older, cheaper generics already exist, and the increasing ability to reliably measure outcomes. Some difficulties would arise in adoption due to the patchwork nature of US health insurance, along with issues identifying appropriate drugs for value-based arrangements and how best to measure outcomes [23].

Importation – “It’s cheaper in Canada!”

This proposal, which suggests drugs approved for use in other countries such as Canada should be allowed to be imported into the United States, has a broad populist appeal. Proponents, including those in Congress, cite that often, list prices for protected drugs in the United States are much higher than in other countries, and that importation would foster competition and lower prices [14].

However, according to an HHS report, importation would only decrease total pharmaceutical spending negligibly, perhaps by 1%. There are three primary reasons for this: firstly, much of the savings from the list price would be captured by intermediaries who ship the drugs, secondly, many drugs are inappropriate for importation, and thirdly, the foreign supply of drugs would not insufficient to meet domestic demand [15]. As such, though the concept is attractive, the complexity of importation mitigates any savings from a quasi-free market, increased competition model.

Strengthening Generic Drug Presence

Still other policy proposals aim to increase generic drug presence, through a variety of means, including increasing the differential between copayments for generic drugs and brand drugs, with the idea of encouraging utilization of generic drugs. Others include decreasing brand drug exclusivity periods to bring generics to market faster (which might be an attractive option in line with the executive branch’s commitment to competition), or to ban “pay-for-delay” agreements, where brand drug manufacturers seek to extend their exclusivity period by paying generic manufacturers to keep the generic drugs off the market [19].

Targeting Utilization of Specialty Drugs

HHS negotiations on specialty drugs remains only an idea, but current strategies do exist - payers have been using a number of strategies to attempt to manage and decrease utilization of specialty drugs by patients, though management proves difficult. Strategies include placing specialty drugs on the plan’s highest formulary tier (where out-of-pocket costs are largest for patients), step therapy (where patients are required to try and fail with lower-cost drugs before the plan will allow a specialty drug) and prior authorization (where a physician must document the patient’s need for the specialty drug) [21].

Other policies proposed to target specialty drugs in particular mirror aforementioned plans, and look to implement value-based pricing structures where appropriate, shorten exclusivity periods and limit patent abuse, and increasing clinical data transparency so providers can make informed decisions when prescribing [22]. Increased pricing transparency has also been suggested but not extensively researched, and the CBO only suggests modest effects [12].

Concluding Remarks

The pharmaceutical space is complex, with a variety of manufacturers and payers. Spending increases are being driven by a multitude of factors, and policy going forward will likely involve a more nuanced, piecemeal approach.


   [1] http://kff.org/slideshow/what-are-the-recent-and-forecasted-trends-in-prescription-drug-spending/

  [2] https://meps.ahrq.gov/data_files/publications/st413/stat413.pdf

  [3] https://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

  [4] https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/76xx/doc7615/10-02-drugr-d.pdf

  [5] http://csdd.tufts.edu/news/complete_story/tufts_csdd_rd_cost_study_now_published

  [6] https://www.fda.gov/drugs/resourcesforyou/consumers/ucm143534.htm

  [7] https://www.washingtonpost.com/news/wonk/wp/2017/02/03/what-ceos-say-happened-in-trumps-closed-door-meeting-with-big-pharma/?utm_term=.e54c3183846e

  [8] https://www.washingtonpost.com/news/wonk/wp/2017/02/28/bernie-sanders-takes-another-swing-at-big-pharma-with-bill-to-allow-drug-imports/?utm_term=.c191684f9aa1

  [9] http://www.imshealth.com/en/about-us/news/ims-health-study-us-drug-spending-growth-reaches-8.5-percent-in-2015

  [10] https://www.nytimes.com/2016/04/27/business/drug-prices-keep-rising-despite-intense-criticism.html

  [11] http://www.imshealth.com/en/thought-leadership/quintilesims-institute/reports/medicines-use-and-spending-in-the-us-a-review-of-2015-and-outlook-to-2020

  [12] https://www.cbo.gov/sites/default/files/110th-congress-2007-2008/reports/06-05-pricetransparency.pdf

  [13] https://www.bloomberg.com/news/articles/2017-02-06/big-pharma-s-offer-to-trump-discounts-when-drugs-don-t-work

  [14] http://www.businessinsider.com/members-of-house-and-senate-introduce-drug-importation-bill-2017-2

  [15] https://archive.hhs.gov/importtaskforce/Report1220.pdf   [16] http://www.commonwealthfund.org/publications/blog/2016/may/drug-price-control-how-some-government-programs-do-it

  [17] http://kff.org/medicare/fact-sheet/the-medicare-prescription-drug-benefit-fact-sheet/

  [18] http://www.latimes.com/business/hiltzik/la-fi-hiltzik-medicaire-negotiate-20170111-story.html

  [19] http://kff.org/report-section/section-2-medicare-payments-to-plans-and-providers/#PrescriptionDrugs

  [20] https://www.fda.gov/ScienceResearch/SpecialTopics/CriticalPathInitiative/CriticalPathOpportunitiesReports/ucm077262.htm

  [21] http://www.pewtrusts.org/~/media/assets/2015/11/specialty-drugs-and-health-care-costs_artfinal.pdf

  [22] https://www.ahip.org/wp-content/uploads/2015/07/IssueBrief_SpecialtyDrugs_7.9.15.pdf

  [23] http://knowledge.wharton.upenn.edu/article/value-based-drug-pricing/ 

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.


  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>