How do U.S. drugs come to cost more? Let us count the ways

For a couple of years, GlaxoSmithKline ($GSK) CEO Andrew Witty has been assuring investors that the company's big-selling lung drug Advair would be tough for generics makers to knock off, even after the drug went off patent. And he's been right, at least so far. In fact, generics giant Teva Pharmaceutical Industries ($TEVA) said last week that it doesn't foresee launching its planned copy 'til 2015.

That fact is just one among many conspiring to drive up the cost of asthma treatment. As The New York Times reports, allergy pills, asthma inhalers and nasal sprays cost beaucoup bucks in the U.S. One Advair Diskus inhaler runs $250 in the U.S., at retail prices. In France, $250 buys 7 Advair inhalers. For another $250, a U.S. allergy patient gets two bottles of the steroid nasal spray Rhinocort; a Romanian patient would get 51 bottles for the same price.

Why the disparity in drug prices? It's a question asked repeatedly, and the specific answers are multifarious and complex. The Times offers plenty of detailed explanation, so check it out. Here's our scaled-down assessment.

In Advair's case, the Diskus device is the difficult-to-copy part. While the FDA might approve a different sort of inhaler with the Advair active ingredient in it, generic drug-substitution rules require precise copies for pharmacists to hand over a knockoff versus a brand. So, drugmakers use delivery devices and time-release drugs to extend the life of a brand in the face of generic competition.

Sometimes, companies simply discontinue off-patent drugs to try to force patients to switch to a newer, higher-priced version, just as Warner Chilcott ($WCRX) did earlier this year when it pulled the contraceptive Loestrin 24 Fe, hoping to steer women to Lo Loestrin Fe instead. Long-used drugs such as the gout treatment colchicine and the preterm-birth preventer hydroxyprogesterone turned into high-priced brands under an FDA program designed to incentivize clinical trials for old meds and promote standardized versions of them. That's how Takeda's Colcrys and KV Pharmaceuticals' Makena each hit the market at prices many multiples of their previously generic cost.

But there's a simpler, overspreading reason: Politics. In other countries, where healthcare is the province of the state, governments negotiate lower drug prices. The U.K. has an agency, the National Institute for Health and Care Excellence (NICE), that assesses new drugs for cost-effectiveness and can reject them for routine use by the National Health Service. Other countries often follow NICE's decisions. Still others have their own price-setting mechanisms; Germany's new, strict assessment rules, for example, have frustrated drugmakers to the point that a few won't launch new drugs there.

In the U.S., government health programs are forbidden from rejecting new drugs on cost grounds. Medicare is forbidden from negotiating drug prices; when the idea came up as part of the Affordable Care Act debate, it was summarily rejected in Congress. At the same time, a move toward comparative-effectiveness studies--which would put rival drugs or treatments through trials to determine which work better--was decried. That idea turned into the notorious "death panel" protest.

Part of this was, of course, a result of pharma lobbying. As the Times points out, drugmakers and other health-products firms spent $250 million on lobbying last year. The industry made a deal with Congress and the president for the ACA bill, promising some steep Medicare rebates and agreeing to a slate of fees--but those concessions were considered preferable to price negotiation, drug reimportation, the loss of a tax deduction on DTC advertising, or any of the other suggestions bandied about at the time.

But the pharma lobby isn't only to blame. Politicians amped up the rhetoric--did we mention "death panels"?--when healthcare reform was under debate. The U.S. citizenry is quick to demand the power to make its own choices about healthcare, notwithstanding the fact that this freedom of choice leads to higher costs. Americans also want immediate access to new drugs, even if they're pricey. And the mere suggestion of the U.S. government throwing its weight around on drug prices stirs up talk of socialism. The pharma lobby doesn't have to look far for support in fighting that idea. In the U.S., the so-called free market is trusted to regulate drug prices, despite the fact that the healthcare market is far from transparent, with byzantine pricing mechanisms and costs that vary wildly region by region, pharmacy by pharmacy and even patient by patient. The usual supply/demand/pricing relationships don't apply at the consumer level.

Drugmakers face mandatory rebates on Medicare and Medicaid business, but the only real prospect for market-based arm-twisting on drug prices lies with private payers. And the worm may be turning there, even for Advair. In its latest national formulary, set up for 2014, Express Scripts ($ESRX) excludes 44 drugs and several other healthcare supplies from coverage. Patients have to pick a different, approved brand, or a generic, depending. Advair Diskus is one of the products that won't be covered. Neither will Rhinocort Aqua.

- read the NYT story (sub. req.)

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