Why Are Drug Prices So High In America?

Gilead’s COVID-19 Treatment Remdesivir is priced at $354 in India, but $3,120 in the US.

There was some controversy surrounding the California-based pharmaceutical company Gilead’s recent reveal of its intended prices for Remdesivir, an antiviral medication approved for emergency use on COVID-19 patients.

High drug prices have long been a source of contention among politicians and consumers alike in the US, who believe Big Pharma — the large pharmaceutical corporations — generally operate in a sinister way that goes against public good and is rather driven solely by profits.

Gilead announced that Remdesivir would be sold to developed countries’ governments for $390 a vial — which means the standard treatment cost would be $2,340 for five days (with a double dose on the first day). They also announced a partnership with producers in 127 lower-income countries so that they can make a generic version of the drug at a lower cost during the pandemic. Drugmakers in India have announced that their price would be no more than $66 a vial, with some suggesting $59 a vial, making the total treatment cost available for as low as $354.

But when it comes to the US, Gilead’s announcement of two separate prices laid bare the fragmentation of the healthcare system itself. The US is the only country where Gilead set two separate prices, which vary depending on who’s paying. The price for the US government is the same as for all other wealthy, developed countries — $390 a vial — but the price for US private insurance companies, hospitals, Medicare and Medicaid is $520 a vial, a total treatment cost of $3,120.

That price may seem shockingly high, but independent analysts expected the total treatment cost to be in the $4,000 region.

Why so high?

Gilead’s rationale for the price was that the treatment decreases hospital stays by 4 days, so what would normally cost the US government/insurance providers upwards of $12,000 in hospitalization fees, would now be a lower cost of “just” $3,120. And the reason they have to charge more for private insurers is because the US government expects to get a price that’s at least 30% less than it would cost privately. Gilead wanted to charge the US government the same price as all other wealthy, developed countries, so they opted to increase the cost to US private insurers by 33%.

Most notably, Gilead has all the leverage when setting the prices — Remdesivir is without competition, and the whole world needs it. The US also doesn’t have the same bargaining process that other developed countries, such as Australia or Germany, have. Essentially, pharmaceutical companies in the US can bring drugs to market at any price they wish with little to no pushback once the drugs are safe and effective. Still, major insurance companies often haggle for discounts and seldom ever pay the list price for drugs.

But how much do the patients pay?

For those not insured, the US government has agreed to reimburse hospitals for their treatment costs. And the out-of-pocket cost an insured person would have to pay to access this treatment would depend on their insurance provider and policy. It’s not uncommon for people to not even know the actual cost of their treatment since they only owe a small copay and the insurance pays for the bulk of it.

And therein lies the problem.

When insurance companies or governments are stepping in to cover costs, this allows for drug manufacturers to overcharge for new drugs and even randomly increase the price of old drugs with little to no notice.

This most famously happened in 2015 with the HIV medication Daraprim, whose cost rose from $13.50 a pill to $750 a pill overnight, causing outrage among patients and politicians. However beyond merely getting infuriated at the price increase, Daraprim is seldom discussed now, 5 years later, and it still costs $750.

Anger towards drug prices is often short lived past the announcement of the price because people still have access to the drugs through insurance or through a cheaper generic alternative.

Carlos del Rio, co-director of the Emory Center for AIDS Research stated in an interview once that he had a patient with a tapeworm infection who needed the drug albendazole. It cost $300 a pill to be taken twice a day for over a month. The patient’s insurance simply paid the ridiculous cost. The same medication was found to be available by del Rio in Mexico for $19 for 10 pills.

The disparity between drug prices and what consumers actually pay out-of-pocket for the drug is what keeps Big Pharma setting sky high prices, and increasing them ever so often.

In 2014, the list price for a Sanofi brand of insulin called Lantus increased nearly 50%, even though it had already been on the market for over a decade. But the average net price, or what consumers pay, for Lantus has actually decreased in recent years.

One might think, so long as patients can access the drugs they need, perhaps the high price the insurance companies have to pay doesn’t matter. But part of what makes US insurance policies so expensive is the unnecessarily high drug costs that lead to higher premiums. High drug prices also affect uninsured patients, underinsured patients and patients with high deductible insurance plans, who all have to opt for cheaper, alternative, less effective treatments instead. Some patients even skip prescriptions entirely if they can’t afford it.

What leads to drug costs being so high specifically in the US?

The US is exceptional in that it does not regulate or negotiate the prices of new prescription drugs when they come onto market. Other countries will task a government agency to meet with pharmaceutical companies and haggle over an appropriate price. The US allows drugmakers to set their own prices for a given product — and allows every drug that’s proven to be safe come onto market.

If drug prices in the US were mandatorily lowered, there’s a catch.

Investors pour money into drug research because they expect that when a treatment, vaccine or cure for a disease is found, the cost of said drug would offset the cost of the research. So part of what makes drug prices exorbitantly high is to keep pharmaceutical companies as competitive investments versus tech start-ups and other possibly profitable venture capital investments. It’s the price of innovation.

Drug manufacturers know that if they create a safe drug, they can set a higher price for it in the US, where wealthy insurance covers the cost, to offset the lower prices for the drugs offered in developing countries where they are most needed at a low cost.

Also, the lax regulation practices in the US means they don’t reject new experimental treatment options like other developed countries do. So there are many drugs available in the US, albeit at high costs, that simply aren’t even available in other developed countries.

That is, it’s possible for a patient in the US to access a rare, expensive, life-saving cancer treatment, whereas a patient in Australia can’t because their government would refuse to pay for it to bring it to the Australian market.

Regulating prices means Americans would be losing access to the wide range of drugs available on the US market.

The US Veterans Health Administration, which does negotiate drug prices, gets drugs that are usually 40% cheaper than what Medicare pays. But it also covers fewer products.

Right now, America’s exceptionally high drug prices help subsidize the rest of the world’s drug research. If the US stopped paying the higher prices, it would likely mean fewer dollars spent on pharmaceutical research — and less progress developing new drugs for Americans and everybody else.

So when it comes to regulating drug prices, there remains a trade-off. If the US mandatorily makes medications cheaper, more Americans would have more access to drugs, but could also expect a decline in research and development of new drugs.

There would also have fewer biotech firms starting up, or companies deciding it’s worth bringing a new drug to market.

So the solution would need to involve a way to continue to support the high cost of research and innovation in the drug market, while also allowing for drugs to be more accessible to those of all income levels.

While it’s no silver bullet, so far the best solution has been insurance — the very reason drug prices can be set so exorbitantly high in the US in the first place. So perhaps the conversation about drug prices should address the premiums, deductibles and copays that affect consumers accessibility to drugs even more so than the drug prices themselves, and how to make insurance more affordable and accessible to all.