Simon Says: It’s All Relative When it Comes to Drug Costs

June 7, 2017 Tami Simon

Albert Einstein, whose theory of relativity changed the study of physics forever, climbed to the top of the highest mountain to get close enough to talk to God. Looking up, he asked the Lord, “God, what does a million years mean to you?” He was surprised to receive an answer at once! The Lord replied, “A minute.” So Einstein asked, “And what does a million dollars mean to you?” The Lord replied, “A penny.”  Then Einstein asked, “Can I have a penny?” The Lord replied, “In a minute.”

Total 2016 spending in the United States on prescription drugs hit $323 billion, a 4.8% increase over the prior year, according to QuintilesIMS Institute, a global healthcare research firm.

Now, while that increase is more than double compared to the 2.1% increase in the Consumer Price Index, it’s sharply less than the whopping 8.9% rise in prescription drug spending in 2015 compared to 2014.

Fewer cases of Hepatitis C and the use of rebates and other price breaks from manufacturers have affected drug costs. However, a more significant factor holding down prescription drug cost increases last year was more competition due to expirations of patent protection for certain brand-name drugs. Of these expired drugs, 80% to 90% become generics, and some studies find that generics make up more than 88% of total prescriptions in the United States but only 28% of total drug costs. So put down that Crestor!

More market competition and drug pricing scrutiny are expected to continue during the next few years and to keep price increases at more modest levels.

Employers and insurers can also do more to keep cost increases under control.

One obvious approach for employers: take a look at your prescription drug plan design as a way to encourage cost-effective behavior. For example, does the plan offer financial incentives for employees to opt for generic drugs rather than more expensive brand-name products?  If so, is that incentive great enough?

Also, what approaches do employers have involving expensive specialty drugs to better control costs? For example, how specialty drugs are administered can have a significant impact on costs.  Infusion at an outpatient hospital can cost 75% more than infusion in a physician’s office.

Cost-effective drugs are not a nice-to-have.  People need them to live.  While I’m all in favor of capitalism, a pill simply shouldn’t cost a person $1,000 when the price to make it is nowhere near that amount. Employers, politicians and the pharmaceutical industry need to work together to design the right incentive structure for creating fair market pricing of drugs that help treat and heal people while supporting cutting-edge research and development, technology development and healthy business growth.

About the Author

Tami Simon

JD, Global Practice Leader, Knowledge Resource Center

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