Why prescription drugs cost so much more in America
Quinn Nystrom is carrying the thing that saves her life in two large brown bags. The 32-year-old from Minnesota is one of a busload of diabetics who have made the journey from the US to a pharmacy in Canada to stock up on vital supplies of the drug insulin. Only minutes’ drive from the border, they are paying a tenth of what they would at home.
Outside the pharmacy in Windsor, Ontario, a crowd has gathered to show solidarity. Nystrom, who is wearing a grey T-shirt bearing the words “Insulin is a human right”, launches into an impromptu speech. The diabetes activist seethes as she tells them how, as a consequence of soaring drug prices, one in four American diabetics now rations their use of insulin.
“We know that our purchase today in this Canadian pharmacy was not a charity. Right?” she tells the onlookers. “We know that [the drugmakers] made a profit, though far less profit than they do from Americans. But what they’re doing to Americans is price-gouging us and they are holding us hostage. And people are dying. People are being forced to go to emergency rooms. People are having their legs amputated. They are going blind. They are having heart disease, liver damage. When does it stop?”
Inside the pharmacy, a white-haired man in a suit tells people he wants to make it stop. Bernie Sanders, US senator from Vermont and Democratic presidential candidate, has helped organise the trip with the activist group Insulin4All to highlight patients’ suffering.
He listens intently as a mother tells him how she shares one child’s insulin between her three diabetic kids (type 1 diabetes has a genetic element). Another woman tells him how she spent her twenties in and out of intensive care because of complications from rationing insulin.
The sky-high price of many drugs — and the increasing contribution expected even from insured patients — is a potent subject ahead of the 2020 US election. Sixty-two per cent of voters say healthcare is the most or the second most important issue for the future of America.
President Donald Trump knows this: at the last election, he pledged to bring down the cost of prescriptions. His opponents, too, see an opportunity to propose more ambitious plans as, three years into his term, Trump has not yet helped patients at the pharmacy counter.
Increasingly, politicians on both sides of the aisle are looking for solutions — to Canada and beyond. Patient “caravans” such as Insulin4All’s — the medical equivalent of a booze cruise — are currently allowed to bring back a three-month supply for personal use. But the president and a number of other candidates have proposed legalising mass importation from Canada, while some are also looking to peg US prices to those in other developed countries.
Sanders’s hair dances in the breeze as he begins his address to the gathering outside the pharmacy. He is adamant he would go further than stopgap measures that rely on pricing policies in other countries. If he becomes president, he would instruct his attorney-general to use antitrust laws to break up industry monopolies and end price fixing.
“Three huge drug companies, which made $14.5bn in profit last year, control 90 per cent of the insulin market,” he says, referring to insulin makers Eli Lilly, Sanofi and Novo Nordisk. “And as I think the patients here will tell you, it is an amazing coincidence that, year after year, prices go up and up and up at the same level for the same companies. So what you do is you throw these people in jail if they engage in price fixing.”
Drugmakers — often forgotten in countries where medicines are cheap — loom large in the lives of Americans like those on the trip. Kathy Segos from Indiana describes how their decisions have dictated her life. The insulin she buys for her son Hunter costs her $1,200 a month (until the family reach their “deductible”, an annual limit on out-of-pocket costs, after which the insurance pays the rest).
It is her household’s single-biggest expense — prioritised above everything else. She says she has sat in the dark when her electricity was cut off because she chose to pay for insulin to keep Hunter alive.
When Hunter discovered this, he tried to ration his insulin, affecting his performance at college. “It was pretty scary to know that your son felt that he was a burden to you,” says Segos, tears welling. “I will sacrifice everything I have to keep my child alive. Yet my son, through no fault of his own, his pancreas doesn’t work.”
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How politicians attempt to limit drug prices will dictate the way Segos — and many others — vote next year. “I grew up very conservative, a very straight-ticket GOP Republican girl. But when Hunter was diagnosed, my husband and I both changed our views a little bit,” she says. “I vote strictly based on healthcare: how are you going to fix this problem? Because he’s gonna be 23 next month, and he’s got his whole life ahead of him.”
Almost a quarter of American patients have trouble affording their prescriptions, according to a survey by health research institute the Kaiser Family Foundation. Some 43 per cent of US adults under 65 are on “high-deductible” plans, so their insurance only kicks in after they have spent thousands of dollars.
Drug prices have soared: America spent $334bn on prescription drugs in 2017, up 41 per cent from 10 years ago, according to National Health Expenditure data. The opaque US health system makes it hard to draw drug-by-drug comparisons with prices abroad. But the OECD estimates that the US spent about 47 per cent more per capita on prescription drugs than Canada in 2018 and 160 per cent more than the UK.
Some of the worst instances of price hikes have been well publicised, such as when so-called “pharma bro” Martin Shkreli increased the price of an Aids and cancer drug from $13.50 to $750 per pill. But more patients are affected by frequent smaller rises from big pharmaceutical companies. In the first quarter of this year, thousands of drugs rose by an average of 10 per cent, according to data compiled by RX Savings Solutions, which sells software that tracks pharmacy prices.
All over the world, drugmakers are granted time-limited monopolies — in the form of patents — to encourage innovation. But America is one of the only countries that does not combine this carrot with the stick of price controls.
The US government’s refusal to negotiate prices has contributed to spiralling healthcare costs which, said billionaire investor Warren Buffett last year, act “as a hungry tapeworm on the American economy”. Medical bills are the primary reason why Americans go bankrupt. Employers foot much of the bill for the majority of health-insurance plans for working-age adults, creating a huge cost for business.
In February, Congress called in executives from seven of the world’s largest pharmaceutical companies and asked them: why do drugs here cost so much? The drugmakers’ answer is that America is carrying the cost of research and development for the rest of the world. They argue that if Americans stopped paying such high prices for drugs, investment in innovative treatments would fall. President Trump agrees with this argument, in line with his “America first” narrative, which sees other countries as guilty of freeloading.
For the patients on the trip, the notion is galling: insulin was discovered 100 years ago, by scientists in Canada who sold the patent to the University of Toronto for just $1. The medication has been improved since then but there seems to have been no major innovation to justify tripling the list price for insulin, as happened in the US between 2002 and 2013.
Other drugs are more innovative — and their development undeniably expensive. According to Tufts University, the average is $2.6bn per drug, up 145 per cent in the past 10 years. Most drug candidates fail; those that do make it to later stages must go through expensive clinical trials. In support of the drug companies’ argument, one 2015 study found that for every extra $2.5bn a company made in sales, it produced one extra drug.
When the pharma executives testified before Congress earlier this year, they were also asked what kept them up at night. Many said it was the concern that the market would no longer allow them to make risky bets that could result in medicines that save lives. Kenneth Frazier, CEO of Merck, said: “What keeps me up . . . is the concern that we will not have a viable, predictable market that will allow people to continue to put the very large amounts of money up at risk for a very long period of time, in an attempt to find solutions to some of the hardest problems like Alzheimer’s.”
Discovering new drugs is getting harder, added Jennifer Taubert, executive vice-president at Janssen Pharmaceuticals, the drugmaking division of J&J. “The easy diseases have largely been solved. It gets harder and harder as we go after new treatments for ever more challenging diseases.”
Yet the biggest single funder of innovation in the US remains the government. In 2017, the US National Institutes of Health spent more than $32bn on research, compared with an estimated $71bn from all the members of PhRMA, the major pharmaceutical industry lobbying association.
One recent controversy concerned the high price of Truvada, an HIV-prevention drug, which many claim was developed largely as a result of taxpayer-funded investment. (The company, Gilead, denies this.) The case has led to questions about how the government can ensure that its research is used to create affordable medicines.
Andrew Witty, the former chief executive of GlaxoSmithKline, said last year that the “$1bn-plus” cost of developing a single drug was “one of the great myths of the industry” because it is an average of the money spent on drugs, including those that ultimately fail.
Ken Kaitin, director of Tufts Center for the Study of Drug Development, says that pharma companies do not factor in what they spent developing a drug when they come to price it. “In the vast majority of cases, the price of the drug is a reflection of value, the competitive landscape and the willingness of payers: what the market will bear,” he says.
Missing from the US landscape are authorities such as the National Institute for Health and Care Excellence (Nice) in the UK or the Patented Medicine Prices Review Board in Canada, which negotiate prices and consider value for money. By contrast, once the US Food and Drug Administration has approved a drug as safe and effective, insurers are faced with a simple decision: to pay up or not. They fear that if they do not, their business will be damaged by patients leaving their plans.
Where else is the money from high drug prices going? Major pharma companies make about twice as much in profit each quarter as they spend on R&D. And most spend significantly more on sales and marketing — particularly in the US, where TV advertising is allowed.
The industry is also spending more money on M&A and share buybacks. Increasingly, big pharma is outsourcing innovation to smaller biotechs, then buying the companies before they have a product on the market and using their own commercial machines to sell the drugs widely.
When they are not buying companies, they are often buying back shares. Unlike dividends, buybacks boost earnings per share, helping executives meet targets and bag bonuses. From 2006 to 2015, 18 major pharma companies spent $261bn on buying back shares, 57 per cent of what they spent on R&D, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell.
He says the drug companies and their lobbyists “are talking out of both sides of their mouth”. “Either the purpose of a drug company and the people managing it is to take the profits and reinvest them . . . to do drug development. That I have no problem with,” he says. “Or it is to distribute money to shareholders, which is in fact what they are doing.”
Inside Windsor’s Olde Walkerville pharmacy, where traditional brown medicine bottles line the shelves, 30-year-old Stephanie Odette from Michigan tells Sanders how it felt when she rationed insulin. “It’s like the world’s worst hangover. Except you didn’t drink anything,” she half-laughs.
Diabetic ketoacidosis is so life-threatening that it has landed Odette in intensive care 74 times in 10 years. Interrupting, Sanders sees the opportunity to highlight the “dysfunctionality” of the US healthcare system. “You’ve been forced to go to the hospital 74 times. I imagine at huge cost to the system,” he says. “How much money we spend on emergency-room care but somehow we can’t have affordable medicine in the United States.”
The US spends twice as much on healthcare per capita than economists would expect based on its income — and yet, it is ranked only 29th on a list of countries where most people survive treatable ailments, with Canada and the UK above it and Iceland at the top.
Darius Lakdawalla, a health economist at the University of Southern California, says that in terms of pharma spending, the argument that smaller countries are “freeloading” holds a certain amount of weight; as the largest market in the world, the US’s high prices inevitably subsidise some global innovation. “Let’s say we are talking about Belgium, as an example of a wealthy country, where there are relatively small market quantities. Drug manufacturers don’t have that much to lose if Belgium demands a lower price.”
But he calls the US system a “big hot mess”, where no one is incentivised to pay true value for money. “Pharma in this market can charge prices that are not at all aligned to value. They are all bundled together for consumers — and moreover, it’s often not the consumer buying, but the employer.”
Pharmaceutical companies point the finger at the pharmacy benefit managers who work for insurers. Each insurer has a list that shows which drugs it will pay for and in what order. Pharma companies want to be at the top of the list, so they pay rebates to PBMs to ensure good placements. The money is split with the insurers.
The drugmakers argue that rebates are the problem. They say that list prices look high but are rarely what an insurer or patient pays. People do pay list price, however, if they are uninsured, and they pay a proportion of it if their plan has co-insurance, requiring them to pay, for example, 20 per cent of prescription costs.
On the journey across the border, patients who have never met before share similar war stories of battling with insurance companies. Hunter Segos’s insurer refused to cover his insulin when he used a discount card the pharmacist had given him to try to make it cheaper.
Odette’s husband’s insurer will not pay for the type of insulin that her doctor says she needs, so she has to take other medicines to compensate for side effects. “I can get the insulin I was supposed to be on for three years for the first time today,” she says.
Insulin is unusual as it can be bought in Canada without a prescription. For every other drug, a US patient must get a Canadian prescription, either from a US doctor who is also licensed in Canada, which some are along the border, or a Canadian doctor who co-signs prescriptions.
President Trump is among the supporters of capping drug prices by outsourcing. He has said he is working on an executive order where the US would get the best prices in the world because of a “most favoured nation” status, as well as a more thoroughly outlined proposal to create an “international price index” for some drugs covered by Medicare. Sanders has written a bill to benchmark the prices of drugs to those abroad, even if they are paid for by private insurance.
Supporters of more importation from Canada say it would cut costs and stop bad actors such as Shkreli abusing monopolies. Gabriel Levitt, president of pharmacychecker.com, which helps patients verify that foreign pharmacies are licensed, says: “Drug companies and their backers in Congress will say importation is really importing drug-price controls but it’s much more than that: it is a way to crack open the market.”
There are downsides to either importing or pegging the price of drugs, especially for the other countries, where drugmakers seem unlikely to ship extra supplies. “I almost can’t comprehend what would happen if it actually got passed. It would be chaos and probably global chaos,” says Katie Gudiksen, a senior health policy researcher at UC Hastings in San Francisco.
Canadian authorities say they oppose any US plan that could cause shortages or a rise in costs in a country with only a tenth of the population of the US. A recent study suggested that any such measure is only likely to help US consumers modestly, while substantially hurting those in Canada. (Pharmaceutical companies are likely to be more aggressive in negotiations with smaller countries, if they will end up affecting prices in their biggest market.)
For Nystrom, mass importation from Canada would be a “cop-out”. “I don’t understand why we don’t force the drug companies to lower list prices or set up, like Canada did, a patented-medicine review board, to protect our citizens,” she says.
Such a revolution in US healthcare would be fiercely resisted. Drug prices have only risen since the last time Sanders led a trip to buy drugs in Canada, for women with breast cancer 20 years ago. Many of the diabetic patients on the trip — not all of them Sanders supporters — admired how long he has been fighting for patients. Now they are glad that high prices are finally an important electoral issue.
Focusing on healthcare helped the Democrats win back the House of Representatives at the midterms last year, and Democratic speaker Nancy Pelosi aims to capitalise by pushing through a bill to lower drug prices this autumn. Her plan might be scuppered — or supported — by the president, who not only wants to be seen to be cutting prices, but also wants to make sure he gets the credit.
While Trump wants to tackle high drug prices in isolation, Sanders has a much more radical plan for “Medicare-for-all” — the expansion to the rest of the population of the government-backed plan for seniors. Elizabeth Warren, another senator and presidential candidate, supports this. Warren also has a bill that would allow the government to manufacture generic drugs if faced with little or no competition, critical shortages or exorbitant prices.
Even more moderate Democratic party presidential candidates such as former vice-president Joe Biden, senator Amy Klobuchar and mayor Pete Buttigieg have railed against high drug prices. Both Biden and Klobuchar want to enable Medicare to negotiate drug prices — which, for many Americans, has long stunk of socialism.
In 1961, long before he became president, actor Ronald Reagan was hired by the American Medical Association to argue against “socialised medicine” in a radio recording, saying it opened the door for federal programmes invading freedom and, eventually, socialism.
“One of the traditional methods of imposing statism or socialism on a people has been by way of medicine,” he said. In contrast, having health insurance was seen as a matter of individual responsibility, says Nancy Tomes, a professor of history at Stony Brook University: “[The idea was] if you really had lived a good life, had some skills that the world values, you would never end up being in this position where you can’t afford healthcare.”
Fear of socialised healthcare remains a huge obstacle for US politicians who want to create a system where drug prices are negotiated — and where some drugs are not covered.
“In this country, we’ve used the inflammatory term ‘death panels’ to hamper, frankly, the discussion that needs to happen with regard to drug pricing,” says Andrew Lo, a professor of finance at MIT Sloan School of Management. The phrase was coined by former Republican vice-presidential candidate Sarah Palin a decade ago in opposition to Barack Obama’s Affordable Care Act. “The America I know and love is not one in which my parents or my baby with Down’s syndrome will have to stand in front of Obama’s ‘death panel’ so his bureaucrats can decide . . . whether they are worthy of health care,” Palin wrote on Facebook.
Public health systems outside the US do refuse to pay for some drugs. In some cases, this can be heartbreaking. For example, English patients with cystic fibrosis have been waiting for years for a deal between Nice and Vertex, a biotech company with a life-changing treatment with a US list price of $272,000 (it is available privately). But, sometimes, it can just mean opting for cheaper alternatives.
One analysis found that, from 2011 to 2016, Medicare spent $26bn on 134 drugs that were not covered by at least one of Australia, Canada or the UK, because they were not seen as being good value. “There is one silver bullet to fix all of this: do what the Canadians and Europeans do,” says Oner Tulum, an academic who studies the “financialisation” of the pharma industry.
But America’s cultural fear is still quietly reinforced by lobbying money from the healthcare and pharmaceutical industries. PhRMA calls price controls “egregious” and stresses how Americans get access to new medicines first. As politicians gear up to reform drug prices, pharma spending on lobbying hit an all-time high in the first half of 2019.
Two days after returning from Canada, Sanders took to the stage in Detroit to debate with other Democratic presidential candidates. He described the trip as a way to highlight the prices being charged by the “crooks who run the pharmaceutical industry in America today”.
For Sanders, drugmakers are also a symbol of the abuse of corporate power. “It’s not just the price-fixing and the corruption and the greed of the pharmaceutical industry. It’s what’s going on in the fossil-fuel industry. It’s what’s going on in Wall Street. It’s what’s going on with the prison industrial complex,” he railed.
Suerie Moon, a specialist in global health and drug pricing, says US companies no longer feel bound by “informal social norms” on prices, so they may continue to raise prices as long as they see their peers doing so. “We see some public outrage, political clans making noises. But, frankly, we haven’t seen regulation, so it is perfectly rational to say, ‘Well, if they are not regulating, why not?’” she says.
If politicians fail to go beyond slaps on the wrist to transform the system, Odette is considering a radical move of her own. She has put off having a baby because she’s scared of the costs of a high-risk pregnancy — and the extra bills if the baby inherits her type 1 diabetes. Her husband’s family came from Canada in the 1950s and he has dual citizenship. She fears it would break his grandparents’ hearts if they knew their descendants had moved back, nevertheless the couple are considering emigrating.
If they moved, Odette and her husband would not be far from their family outside Detroit — but it would be a different world for their health and, therefore, their finances. “You walk on the Detroit River and you look across the river and you know you are so close. Things could be so much better if people weren’t so greedy,” she sighs. “That your life doesn’t matter enough to them to not be so greedy is the hard part.”
Hannah Kuchler is the FT’s US pharma and biotech correspondent