Why One Drug Costs $295K a Year
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`Published January 24, 2013 LearnVest
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`There is now an approved prescription drug that costs $295,000 a year.
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`Let’s digest this for a moment. A prescription drug that costs twice as much as a college
`education. Every. Single. Year.
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`And it’s not an outlier. Gattex, which is prescribed for short bowel syndrome, is the fourth drug
`approved in 2012 that’s priced above $200,000 per patient, per year.
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`The market for high-priced drugs meant to treat rare diseases, such as Gattex, is growing at a
`faster rate than the overall drug market. But even excluding these Rolls Royce drugs for
`uncommon diseases, brand-name pharmaceutical prices have risen faster than inflation.
`According to Express Scripts, a pharmacy benefits manager, brand-name meds increased more
`than 13% from September 2011 to September 2012.
`
`You know, because they were just so cheap to begin with, right?
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`How Consumers Can Even Afford a $300,000 Drug
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`The reason why Gattex is priced so high sheds light on how the market for pharmaceuticals
`works–that’s to say in a way that hardly makes sense.
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`CFAD Exhibit 1068
`CFAD v. NPS
`IPR2015-00990
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`Gattex is considered an “orphan drug,” which has been a booming section of the
`pharmaceutical industry in the past decade. Targeting rare diseases is not only profitable, but
`it can even be seen as philanthropic. The current treatment for short bowel syndrome can cost
`well over $100,000 a year, and additional costs may run as high as $500,000. Gattex may allow
`patients to return to work and earn an income, amounting to a significant improvement on
`their quality of life. Ostensibly, Gattex costs as much as any other drug to develop, but short
`bowel syndrome is a rare disease, so the market will be very small–and hence why its maker,
`NPS Pharmaceuticals, priced it so high.
`
`This said, no patient will have to pay out of pocket for it. Instead, the drug will be covered by a
`patchwork of insurance, coupons and charitable organizations. Commercial insurers will pay
`for part of the drug, around 70%. The remaining co-pay will be covered by NPS
`Pharmaceutical’s co-pay assistance plan or–in the case of Medicare patients–by rare disease
`organizations that get funding help from NPS Pharmaceuticals. About 15% of patients who
`can’t pay anything will get it for free. (NPS’s team of marketers work personally with everyone
`who wants to use the drug.)
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`RELATED: The Cost of a Chronic Illness
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`Until this strategy was picked up (and encouraged by a 1983 law), drug companies had no
`incentive to find cures for rare diseases with tiny markets. Now they do. According to a survey
`released on Thursday, drug companies are shifting away from developing drugs for common
`diseases toward doing so for orphan diseases. In 2011, they invested $50 billion of their own
`money into research targeted to rare disease medicine–at the end of that year, 1,800 such
`drugs were being tested on patients.
`
`So you can understand why the Rolls Royces of the drug world are expensive. But what about
`the Hondas–the everyman’s drugs that many people need?
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`How Pharmaceutical Companies Make Money
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`When you shell out $295,000 for a drug, you’re not paying for the chemical compounds in it,
`but the research, development and grueling approval process for the drug.
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`Estimates vary on how much each drug costs from inception to clinical trials to approval to
`selling, but the consensus is that it’s in the billions, which doesn’t account for drugs that never
`even make it to market. To recoup these costs, drug companies get a patent on the drug, giving
`them an (arguably deserved) monopoly. The profits on that high-priced drug in turn help fund
`development of future meds.
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`But, wait, there’s more (cid:171)
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`The Pay-for-Patent Scheme
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`Eventually, the patent will expire, and a generic manufacturer or several can make and sell it
`for pennies on the dollar. To prolong its patent on a brand-name drug, a company will tweak
`the formula to “reset” the patent, so it can keep producing the drug exclusively for a few years
`longer. In theory, generic companies can challenge these tweaks in court, so they can start
`manufacturing the drug themselves, but it’s an expensive legal process.
`
`To make it easier for everyone (except consumers), pharmaceutical companies pay generic
`makers to withhold cheaper versions from the market. For example, Bayer paid $400 million to
`generic drug makers to keep the generic version of the antibiotic drug Cipro off the market until
`2003, when Bayer’s patent expired.
`
`A 2011 Congressional Budget Office report estimated that a Senate bill to outlaw these
`payments (now stalled) would lower drug costs in the United States by $11 billion, as well as
`save the federal government $4.8 billion over 10 years, since it would be able to pay for generic
`versions for Medicare and Medicaid patients.
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`There is still hope: A court case challenging these types of payments is up before the Supreme
`Court on March 25th.
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`America, Land of the Expensive Scripts
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`In many countries, governments have instituted price controls to keep medicine more
`affordable for their citizens. But, in the U.S., drug companies are free to raise prices as they see
`fit.
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`Zola P. Horovitz, Ph.D, a pharmaceutical and biotechnology industry consultant, told the
`authors of the Freakonomics blog, “Most people do not realize that when a prescription is paid
`for in the U.S., the payer (the patient, his or her insurance company, or the government) is
`subsidizing the cost of that same prescription in most countries outside the U.S.”
`
`She claims that companies–whether American or Norwegian or anywhere else–have to offload
`the full price almost exclusively onto Americans, while patients in other countries get a
`discount. In November, India moved to bring more “essential” drugs, like HIV medication,
`under price controls. And China clamped down on prices just last week.
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`So couldn’t the U.S. do the same? Not likely, since developing new drugs would no longer be
`profitable, and pharmaceutical research and development would drastically drop.
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`The War of the Coupons and Co-Pays
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`Generics have always been a cheap and safe alternative, and in the past year, their price has
`even dropped 22%. (Here’s a helpful tip: Costco almost always has the lowest generic drug
`prices.) But even when generics are plentiful, pharma companies have another trick to get you
`to buy brand-name drugs: coupons.
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`Let’s say that you need a prescription to treat cholesterol. Your doctor gives you two choices:
`Drug Brand Name or Drug Generic. They do the same thing, but Drug Brand Name costs more
`–$500 versus $100. The insurance company, which is covering most of the cost, obviously
`wants you to get the cheaper version. So it will charge you a co-pay of $50 for Drug Brand
`Name, and a co-pay of $10 for Drug Generic. You pick Drug Generic, the insurance company
`pays less and everyone is happy–except for Drug Brand Name’s maker.
`
`In response, pharmaceutical companies have started providing consumers with co-payment
`cards and coupons that bring the price of the brand name drug’s co-pay below that of the
`generic version. So now there’s no reason not to get Drug Brand Name. The pharmaceutical
`company picks up the $40 difference, and the insurance company gets stuck paying the
`remaining $450 for your designer drug.
`
`According to IMS Health, an information company that tracks the pharmaceutical industry, use
`of co-payment cards, coupons and other discounts has more than tripled since mid-2006. As
`you can imagine, health insurers and consumer groups say this is one big reason why insurers
`have been raising rates. (People on Medicare don’t get coupons because it’s considered an
`illegal kickback.)
`
`RELATED: How the Government Spends Your Precious Tax Dollars
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`A 2011 study by the Pharmaceutical Care Management Association, which represents
`companies that administer pharmacy benefits, estimated that discount cards and coupons will
`increase prescription drug costs nationally by $32 billion over the next decade. The
`Pharmaceutical Care Management Association has argued that each one percentage point
`decrease in the “generic drug dispensing rate raises the amount that employers, unions, state
`governments and consumers spend on prescription drugs by $3 billion annually.” So
`consumers do eventually get the bill for these pricier versions–and then blame insurers and the
`government for it.
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`Defenders of coupons say, in some cases, generic alternatives aren’t exactly the same or aren’t
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`available at all (like in the case of the $295,000 Gattex), and patients may do better on the
`brand name version. If they can’t afford a higher co-pay, they might scrimp on doses or not
`take the medication.
`
`Because of these arguments, Massachusetts–the only state banning drug coupons–lifted its
`ban last summer. Over the next two years, the state will analyze whether health care costs rise
`after the lifting of the coupon ban, whether patients are more faithful about taking their
`medications and whether there are changes in the use of generic versus brand-name drugs.
`Depending on what they find, they will decide whether to reinstate the ban.
`
`One solution that some insurers have employed is step therapy, which requires patients to try
`the most cost-effective and safe methods before moving on to more expensive or risky options.
`The Future of Pharmaceutical Pricing
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`Things aren’t looking rosy for consumers or drug companies.
`
`In 2011, industry executives at the Reuters Health Summit said that some drug prices have
`sharply increased because too few new drugs are being approved–pharmaceutical companies
`are having trouble coming up with those next blockbuster drugs–and patents on others are
`expiring. Essentially, they know their revenue is about to plummet, so they’ve jacked up prices
`to bring in as much money as they can before current patents expire.
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`Drug companies also blame rising prices on a 10-year, $80 billion excise tax on brand
`pharmaceutical companies under the Affordable Care Act. (This is one of several taxes meant
`to raise revenue to implement the legislation.) Obamacare did save seniors money on
`prescription drugs through coverage, but it hasn’t done anything to bring down drug prices.
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`RELATED: 6 Shocking Denials for Health Insurance Companies
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`If the Supreme Court strikes down the practice of paying to keep generics off the market, it
`could let loose a lot of overdue generics on the market, saving consumers money. (Although
`others might just get locked up in expensive legal battles among drug manufacturers.)
`However, it doesn’t look like high prices for brand name drugs are going anywhere anytime
`soon.
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`All we can say? Give the generic a try.
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`URL
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`http://www.foxbusiness.com/features/2013/01/24/why-one-drug-costs-25k-year.html
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