RELATED: Dayton man lead plaintiff in drug lawsuit alleging price-gouging
Consumers are kept hidden from this secret world of drug pricing, which is shrouded in layers of complexity that often confound the principles of basic economics. For example, the Food and Drug Administration approves dozens of new drugs each year — the 45 in 2015 was a 19-year high. But despite increased competition for the most common drugs on the market, prescription drug prices continue to rise faster than all other types of health care services, according to the Centers for Medicare and Medicaid Services.
The American public spent $324 billion on prescription drugs in 2015, a 168 percent increase since 2000. While insurance masks some of these increases, the cost to the consumer comes in a variety of ways, from higher insurance premiums, higher deductibles and more cost-sharing.
Higher prices also impact the uninsured or those taking medication a health plan won’t cover. And everyone pays for higher prices through government subsidized health plans.
More than 40 million people are enrolled in Medicare Part D prescription plans, which paid out more than $18 billion in 2015 on just the top five most expensive drugs.
Public fed up
The development of new and better drugs has an immeasurable benefit to Americans. Health care has shifted toward prevention, and innovative drugs to treat more diseases have been a big part of that. An expensive drug that prevents an even more expensive surgery or a stay in a nursing home is arguably a win, said Marc Sweeney, founding dean of the School of Pharmacy at Cedarville University.
But critics say drug makers are taking advantage of the public’s ignorance about pricing as well as government incentives meant to spur innovation to reap big profits at the expense of the American people.
“The American people should not be forced to choose between filling a prescription or making their monthly mortgage payment,” Sen. John McCain said in a statement last year announcing the bipartisan FAIR Drug Pricing Act, which would require drug makers to publicly disclose information on planned price increases. “Transparency leads to accountability, and it is past time that mantra applied to the skyrocketing cost of prescription medication.”
Many Americans are demanding changes. In a September Kaiser Family Foundation poll, 82 percent of the respondents favored giving Medicare — the federal government’s insurance program for seniors — new authority to negotiate prices with drug companies. Seventy-eight percent supported limiting the amount companies can charge for high-cost drugs. And 86 percent said they want more transparency on how drug companies set prices.
READ MORE:3 reasons prescription drugs cost so much
“If you’re a consumer, how would you ever know what something is supposed to cost?” said Gary Rutherford, a pharmacist and co-founder of the Columbus consulting firm, Health Plan Data Solutions.
Pharmacist Kyle Fields counts pills at Waynesville Pharmacy, Dec. 2, 2016. The rising cost of prescription drugs has become a hot political topic with both sides of the aisle calling for changes. KATIE WEDELL/STAFF
To give consumers better information on which to make their health care decisions, this newspaper examined two big drivers in how prescription prices are set: specialty drugs and pharmacy benefit managers, the so-called middlemen in the pricing structure. Although their roles are not widely understood, both have great influence over what you pay at the drug counter.
The following three examples show why specialty drug prices have generated so much ire from lawmakers and the public.
>>Mylan, manufacturer of the EpiPen, came under fire from consumers and Congress early this year because the cost of the anti-allergy drug injectors has risen more than 400 percent in a decade. A two-pack of EpiPens has a list price of more than $600.
>>The CEO of Turing Pharmaceuticals, Martin Shkreli, earned the nickname "Pharma bro" in 2015 after making dismissive remarks about the 5,000 percent increase in the cost of Daraprim, a parasite-fighting drug used by cancer and HIV patients. Part of Shkreli's explanation for the price increase was "I'm a capitalist." He was later indicted on charges of securities fraud.
>>Multiple Sclerosis patients have seen the cost of their medication go up from about $10,000 per year when the first-generation drugs were introduced in the 1990s to $60,000 per year today, according to a 2015 study. Newer drugs are entering the market with a cost 25 to 60 percent higher than existing options.
RELATED: Why different drug prices at different pharmacies?
Even with government subsidies, some drug prices are out of reach for those who need them.
In 2015 Medicare Part D, the federal government’s prescription program, spent more than $500 million on prescriptions for about 3,000 patients of the drug Aston Martin takes: H.P. Acthar Gel. The drug has the highest annual spending per user of any medication covered by Part D, or more than $162,000 per user annually. Despite that subsidy, Medicare patients still pay an average of $8,000 a year out-of-pocket for the drug.
There are many reasons for the rising costs of these specialty drugs, known as biologics in the industry. They range from a lack of competition due to the small number of potential users, the cost of researching, developing and producing the drugs and, some suspect, intentionally inflated pricing.
Miami Township resident Abigail Martin holds her son Aston, 22-months, whose medication to treat potentially deadly seizures was $180,000 for an eight-week treatment. KATIE WEDELL/STAFF
In some cases, reform efforts have had unintended consequences too, such as when the government granted exclusivity to some drug makers to provide more incentives for developing drug treatments for rare diseases — a designation some pharmaceutical companies used to drive profits by raising prices and expanding the number of diseases treated with these so-called orphan drugs.
Industry advocates say the high cost of developing drugs is responsible for prices that may seem out of whack. The industry says the average cost for developing a new drug and getting it through the FDA approval process is $2.6 billion.
In explaining Mylan’s price hikes on its EpiPen product in September, CEO Heather Bresch told Congress the company must invest heavily in R&D to create hundreds of new products a year.
“This year, for example, we will spend approximately $1.2 billion on R&D and manufacturing facilities, or roughly $3 million per day,” she testified, arguing the company’s 600 plus products have reduced U.S. health care costs by approximately $180 billion over the last decade.
MORE:Latest health news on DaytonDailyNews.com
Improvements in the EpiPen have also cost the company more than $1 billion over eight years, she said. And the majority of consumers, she said, pay less than $50 out of pocket for the product.
But health plan sponsors say high sticker prices get absorbed into overall health care costs, and get paid by the consumer eventually. Specialty drugs account for a third of all prescription drug spending by private and public health plans.
"They have an average cost that's 22 times higher than a conventional medication," said Brian Lehman, manager of pharmacy benefits and policy for the Ohio Public Employees Retirement System, which provides health benefits to nearly 200,000 Ohio retirees and beneficiaries.
“Our specialty drug spend is projected to be 50 percent of our overall spend in 2018,” Lehman said. “That means half of the premium is tied into drugs that are used by just one to two percent of the people.”
To hear pharmacy benefit managers tell it, drug prices would be a lot higher if those companies weren’t negotiating discounts for health plans.
But critics say their opaque tactics are actually a driving force behind price increases. It’s a complex system and few people know just how influential these pharmacy benefit managers are.
In this Feb. 4, 2016 file photo, pharmaceutical chief Martin Shkreli speaks on Capitol Hill in Washington during the House Committee on Oversight and Reform Committee hearing on a decision by his former company, Turing Pharmaceuticals, to significantly raise the price of the anti-parasitic medication Daraprim. (AP Photo/Susan Walsh, File)
Pharmacy benefit managers, or PBMs are huge companies that handle prescription drug claims on behalf of health plans throughout the country, including in Ohio. In theory, they use the millions of patients they represent as leverage, giving preferred status to a drug on health plan formularies that determine which drugs are most likely to be prescribed. In exchange, the drug companies give rebates to the pharmacy benefit managers.
VIDEO:How do drug prices get set?
Pharmacy benefit managers say they save employers about 30 percent annually on their prescription drug costs because of their collective buying power and rebates negotiated with drug makers.
But not everyone agrees. Anthem Inc. filed a lawsuit last year against its pharmacy benefit manager, Express Scripts, alleging breach of contract.
Anthem, one of the nation’s largest health benefit companies with 38 million members, alleges that Express Scripts charged the company an inflated price on certain drugs and then offered a lower price directly to Anthem’s customers in an effort to squeeze out Anthem.
“(Express Scripts Inc.) seeks to compete unfairly against Anthem by continuing to charge inflated prices to Anthem, which allowed ESI to undercut Anthem’s prices when competing for (administrative services only) employer group business and Medicare Part D prescription benefits,” the lawsuit says.
Some Anthem patients are also suing Express Scripts, claiming they are the ones who ultimately suffered damages due to the alleged pricing scheme.
Kyle Fields, president of the Waynesville pharmacy benefit management company ApproRX, and a critic of some in the industry, said pharmacy benefit managers have a hand in how drugs are priced, which drugs get covered and even which pharmacy lands in an individual consumer’s network.
“Pharmacy benefit managers are one of the largest yet unknown industries in the United States,” he said. “You think of Pepsi, Coca-Cola, and Home Depot and you think, ‘Wow those are gigantic companies.’ But there’s one PBM out there that’s bigger than all three combined, yet nobody really knows what a PBM is.”
Three PBMs — Express Scripts, CVS Health and Opitmum RX, a division of UnitedHealth Group — control about 70 percent of the market. The Fortune 500 list gives a sense of their enormous size. UnitedHealth Group and CVS Health are numbers six and seven on the list, while Express Scripts shows up at number 22. J.P. Morgan Chase, Boeing and Microsoft all trail Express Scripts on the Fortune list.
Some argue that the rebates the pharmacy benefit managers receive don’t actually save money for consumers because manufacturers factor that cost into their pricing structure.
“It’s payoffs,” said Antonio Ciaccia of the Ohio Pharmacy Association. “I would argue that rebates are definitely inflating the cost of drugs.”
‘They don’t have a competitor’
Although competition hasn’t lowered the price of some drugs, a lack of competition is a factor in the huge markup for drugs like H.P. Acthar Gel, the anti-seizure medication prescribed to Aston Martin.
“There’s one company that makes it,” said his mother. “They don’t have a competitor.”
H.P. Acthar Gel is known as an orphan drug, or a highly-specialized medication used to treat one or a handful of rare conditions affecting fewer than 200,000 patients.
The profit margins on these drugs are so slim — and the demand so small — there is little incentive for companies to develop cheaper generics, industry experts say. That means families often have little choice but to pay up. After all, if a life is at stake, not getting the drug is hardly an option.
Aston Martin is one of those patients whose life is at stake. His spasms, if left untreated, could cause developmental delays and even death. He was having 50 to 100 small seizures a day before the treatment, and is now down to just a few a day.
In this Wednesday, Sept. 21, 2016, file photo, Mylan CEO Heather Bresch holds up EpiPens while testifying on Capitol Hill in Washington, before the House Oversight Committee hearing on EpiPen price increases. On Friday, Oct. 7, 2016, Mylan agreed to pay $465 million to settle Justice Department allegations that it overbilled Medicaid for its life-saving EpiPen allergy injection. (AP Photo/Pablo Martinez Monsivais, File)
Legislation passed in the early 1980s was aimed at ensuring the flow of life-saving drugs that offer little profit potential.
In 1983 Congress passed the Orphan Drug Act. Under the law, the FDA can offer incentives, such as giving a 50 percent tax credit for research and development and granting seven years of exclusivity to companies that develop orphan drugs. During that seven-year period, no competing drugs, generics or biosimilars can be approved, paving the way for a company to own the market, at least for a time.
The hope was the incentives would discourage companies from pulling away from developing medications a small number of desperately need. To that end, the law has been successful. In fiscal year 2016, companies took advantage of the tax credits to the tune of $1.75 billion, according to the U.S. Department of the Treasury.
But the exclusivity agreements have been controversial. Some argue pharmaceutical companies have taken advantage of the exclusivity period — and lack of competition — to both raise prices and expand the number of diseases treated by the government-protected orphan drugs. Because the law makes no restrictions on how many times manufacturers can seek orphan drug status, they can return to the FDA with the same drug again and again, testing for use against different rare diseases and potentially getting another seven years competition free.
INVESTIGATIONS:Read more from the I-Team
In some cases, drugs that did not have orphan status had dramatic price increases after getting exclusivity. A Kaiser Health News investigation released this week found more than 70 of the nearly 450 drugs the FDA has approved as orphans — including H.P. Acthar Gel — were originally mass market drugs that received orphan status late in their life cycle.
H.P. Acthar Gel was developed in the 1950s and at one time cost about $40 a vial. But after being granted orphan drug status in 2003, the price has skyrocketed. First one company and then another raised prices on the drug, which has had its exclusivity extended through 2017. The current manufacturer, Mallinckrodt, has applied to extend it again to treat other diseases.
Despite some of the problems, Lehman said the Orphan Drug Act of 1983 is responsible for the type of research and development that has saved lives.
“It’s been wildly successful in bringing products to people who have rare diseases,” he said.
In his first press conference after being elected, President Donald Trump called for a new "bidding procedure" for buying drugs, saying the pharmaceutical industry and its power lobbyists are "getting away with murder."
“We’re the largest buyer of drugs in the world and yet we don’t bid properly,” Trump said.
Just what will change, and how quickly, is not clear, however. Medicare as a single entity currently cannot negotiate with pharmaceutical companies, though Sen. Bernie Sanders, I-Vt., has vowed to introduce legislation to open that door.
Sen. Bernie Sanders (D-VT) (L) and Sen. John McCain (R-AZ) arrive arrive on the West Front of the U.S. Capitol on January 20, 2017 in Washington, D.C. Sanders has vowed to introduce legislation to allow Medicare to negotiate directly with pharmaceutical companies in an effort to lower prices. (Photo by Win McNamee/Getty Images)
Proponents say giving the federal government the ability to negotiate on behalf of millions of Medicare beneficiaries would provide better leverage than the pharmacy benefit managers are currently able to get, particularly for high-priced specialty drugs for which there is no competition.
But critics — pharmacy benefit managers among them — argue that private plans already negotiate the best deals available. Express Scripts represents 85 million members on 3,000 different health plans, according to spokesman Brian Henry. That’s double the number of people on Medicare prescription plans.
There’s also concern that pharmaceutical companies would reduce their investment in research and development if government negotiation held down the prices they could charge.
Other suggested reforms have to do with the FDA approval process.
"How a drug moves its way through, that process is a mystery to everyone and adds time and expense to the process that I think isn't benefiting anyone," said Kevin Schlotman, vice president at Cincinnati-based Benovation, a health plan administration firm.
OPERS’ Lehman says the entire pricing structure should be changed from a pay-per-pill model to one that is value based. Under that model, if a drug doesn’t have a good outcome for the patient, the manufacturer gets paid less, he said.
In testimony before Congress in 2015, Lehman also urged support for the development of drugs that would compete with specialty drugs — just as generics do with other brand-name medications.
Many argue that more transparency is needed.
The FAIR Drug Pricing Act — sponsored last year by McCain, Sen. Tammy Baldwin, D-Wisc., and Rep. Jan Schakowsky, D-Ill. — would force companies to file a report justifying why a price increase of more than 10 percent on certain drugs is necessary. The report would also document the amount of profits from sale of a drug.
U.S. Senator John McCain co-sponsored a bill last year aimed at making prescription drug pricing more transparent. The bill did not move past the committee stage. (Photo by Saul Loeb - Pool/Getty Images)
The bill did not move past the committee stage.
Cedarville’s Sweeney understands the concerns over high drug prices but says the public needs to put them in context.
If someone has a disease that currently sends them the hospital four to six times per year, their cost to manage that condition is likely more than $100,000 annually, he said.
“So you come out with a drug that prevents that hospitalization and it costs $40,000. Well when you look at it just drug to drug you say that’s very expensive,” he said. “But if $40,000 saves your overall medical plan $100,000, well then that’s a good deal.”