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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Making Medicines
Affordable

A National Imperative

Norman R. Augustine, Guru Madhavan, and Sharyl J. Nass, Editors

Committee on Ensuring Patient Access to Affordable Drug Therapies

Board on Health Care Services

Health and Medicine Division

A Consensus Study Report of

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THE NATIONAL ACADEMIES PRESS
Washington, DC
www.nap.edu

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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This activity was supported by grants from the American College of Physicians, Breast Cancer Research Foundation, Burroughs Wellcome Fund, California Health Care Foundation, The Commonwealth Fund, Laura and John Arnold Foundation, Milbank Memorial Fund, and the Presidents’ Committee of the National Academies of Sciences, Engineering, and Medicine. Any opinions, findings, conclusions, or recommendations expressed in this publication do not necessarily reflect the views of any organization that provided support for the project.

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Suggested citation: National Academies of Sciences, Engineering, and Medicine. 2018. Making medicines affordable: A national imperative. Washington, DC: The National Academies Press. doi: https://doi.org/10.17226/24946.

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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The National Academy of Sciences was established in 1863 by an Act of Congress, signed by President Lincoln, as a private, nongovernmental institution to advise the nation on issues related to science and technology. Members are elected by their peers for outstanding contributions to research. Dr. Marcia McNutt is president.

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Consensus Study Reports published by the National Academies of Sciences, Engineering, and Medicine document the evidence-based consensus on the study’s statement of task by an authoring committee of experts. Reports typically include findings, conclusions, and recommendations based on information gathered by the committee and the committee’s deliberations. Each report has been subjected to a rigorous and independent peer-review process and it represents the position of the National Academies on the statement of task.

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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In memory of
Henri Termeer
1946–2017

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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COMMITTEE ON ENSURING PATIENT ACCESS TO AFFORDABLE DRUG THERAPIES

NORMAN AUGUSTINE (Chair), Former Chairman and CEO, Lockheed Martin Corporation

JEFF BINGAMAN, Former U.S. Senator, New Mexico

RENA CONTI, Associate Professor, Department of Pediatrics and the Department of Public Health Sciences, The University of Chicago

STACIE DUSETZINA, Assistant Professor, Division of Pharmaceutical Outcomes and Policy, Eshelman School of Pharmacy, University of North Carolina at Chapel Hill

MARTHA GAINES, Director, Center for Patient Partnerships; Distinguished Clinical Professor of Law, University of Wisconsin Law School

REBEKAH GEE, Secretary, Louisiana Department of Health

VICTORIA HALE, Founder and Former CEO, OneWorld Health and Medicines360

MICHELLE MELLO, Professor of Law, Stanford Law School; Professor of Health Research and Policy, Stanford University School of Medicine

ELISEO PÉREZ-STABLE, Director, National Institute on Minority Health and Health Disparities, National Institutes of Health

CHARLES PHELPS, University Professor and Provost Emeritus, University of Rochester

MICHAEL ROSENBLATT, Chief Medical Officer, Flagship Pioneering; Former Chief Medical Officer and Executive Vice President, Merck & Co., Inc.

DIANE ROWLAND, Executive Vice President, Henry J. Kaiser Family Foundation; Executive Director, Kaiser Commission on Medicaid and the Uninsured

VINOD SAHNEY, Distinguished University Professor of Industrial Engineering and Operations Research, Northeastern University; Former Senior Vice President, Blue Cross Blue Shield of Massachusetts and Henry Ford Health System

PETER SANDS, Research Fellow, Mossavar-Rahmani Center for Business and Government, Harvard John F. Kennedy School of Government; Research Fellow, Harvard Global Health Institute; Former CEO, Standard Chartered Bank PLC

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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HENRI TERMEER,1 Former Chairman, President, and CEO, Genzyme Corporation

REED TUCKSON, Managing Director, Tuckson Health Connections, LLC; Former Executive Vice President and Chief of Medical Affairs, UnitedHealth Group

ALAN WEIL, Editor-in-Chief, Health Affairs; Vice President for Public Policy, Project HOPE

Staff

GURU MADHAVAN, Project Director

FRANCIS AMANKWAH, Associate Program Officer

SYLARA MARIE CRUZ, Senior Program Assistant

DANIEL BEARSS, Senior Research Librarian

REBECCA MORGAN, Senior Research Librarian

PATRICK BURKE, Senior Financial Officer

SHARYL NASS, Director, Board on Health Care Services

Fellows and Consultants

JENNIE KWON, National Academy of Medicine Anniversary Fellow in Osteopathic Medicine; Assistant Professor, Washington University School of Medicine

STEPHEN MERRILL, Technical Consultant; Executive Director, Center for Innovation Policy and Senior Fellow in Innovation and Entrepreneurship, Duke University School of Law

ROBERT POOL, Editorial Consultant

BRENDAN SALONER, National Academy of Medicine Greenwall Fellow in Bioethics; Assistant Professor, Johns Hopkins Bloomberg School of Public Health

JONATHAN WATANABE, National Academy of Medicine Anniversary Fellow in Pharmacy; Associate Professor, University of California, San Diego, Skaggs School of Pharmacy and Pharmaceutical Sciences

Executive Assistant to the Committee Chair

LAURA AHLBERG, Lockheed Martin Corporation

__________________

1Deceased May 2017.
NOTE: See Appendix F, Disclosure of Conflicts of Interest.

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Reviewers

This Consensus Study Report was reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise. The purpose of this independent review is to provide candid and critical comments that will assist the National Academies of Sciences, Engineering, and Medicine in making each published report as sound as possible and to ensure that it meets the institutional standards for quality, objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process.

We thank the following individuals for their review of this report:

Henry J. Aaron, The Brookings Institution

Troyen Brennan, CVS Health

Gail H. Cassell, Harvard Medical School and Brigham and Women’s Hospital

Paul Citron, Formerly, Medtronic, Inc.

Robert Cook-Deegan, Arizona State University

Patricia M. Danzon, University of Pennsylvania

David E. Housman, Massachusetts Institute of Technology

Brent C. James, Intermountain Healthcare

Bernard Lo, The Greenwall Foundation

Mark McClellan, Duke University

Jennifer E. Moore, Institute for Medicaid Innovation

Neela Patel, Seattle Genetics

William M. Sage, The University of Texas at Austin

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Nirav Shah, Kaiser Permanente, Southern California

P. Roy Vagelos, Regeneron Pharmaceuticals, Inc., and formerly, Merck & Co., Inc.

Gail R. Wilensky, Project HOPE

Although the reviewers listed above provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations of this report nor did they see the final draft before its release. The review of this report was overseen by Harvey V. Fineberg, Gordon and Betty Moore Foundation, and Robert D. Reischauer, Urban Institute. They were responsible for making certain that an independent examination of this report was carried out in accordance with the standards of the National Academies and that all review comments were carefully considered. Responsibility for the final content rests entirely with the authoring committee and the National Academies.

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Synopsis

Over the past several decades the biopharmaceutical sector in the United States has been very successful in developing and delivering effective drugs for improving health and fighting disease. Indeed, many medical conditions that were long deemed untreatable can now be cured or managed effectively.

This success has come at a cost, however. Spending on prescription drugs has been rising dramatically, to the point that many individuals have difficulty paying for the drugs that they or their family members need. Drug costs are a significant part of the nation’s total spending on health care.

This report, Making Medicines Affordable: A National Imperative, from the National Academies of Sciences, Engineering, and Medicine recommends several strategies to tackle the rising costs of prescription drugs without discouraging the development of new and more effective drugs for the future.

This is a difficult challenge. There may be trade-offs between current drug affordability and new drug availability. Controlling drug costs too rigidly, for instance, could potentially reduce the expected profits of drug companies, and this could alter their decisions regarding major investments to develop new drugs.

Furthermore, the complex nature of the nation’s medical system—which includes patients, clinicians, hospitals, insurance companies, drug companies, pharmacists, pharmacy benefit managers, various government agencies, advocacy organizations, and many others—makes it very difficult to predict the precise effects of any specific policy changes. This is exacerbated by the fact that there is very little publicly available information

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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on the costs and profitability for the drug companies and various other participants in the system.

Nonetheless, there are a number of measures that can and should be taken to improve the affordability of prescription drugs for patients in the United States.

The federal government should consolidate and apply its purchasing power to directly negotiate prices with the producers and suppliers of medicines, and strengthen formulary design and management. The government should also improve methods for assessing the value that drugs provide and ensure that incentives to develop drugs for rare diseases are not extended to widely sold drugs. In addition, increased disclosure about the financial flows and profitability among the participants in the biopharmaceutical sector should be required.

Actions to continually foster greater access to off-patent generic drugs, which are usually much less expensive than branded products, should be taken. One way this could be accomplished would be to prevent the common industry practices that delay entry of generics into the market and extend market exclusivity of branded products. Another critical step is to speed up the review processes that are required of manufacturers to produce generic drugs, to ensure healthy competition and lower costs.

Also, various actions should be taken to eliminate incentives in the system that encourage clinicians and patients to prescribe or use more expensive drugs rather than less expensive alternatives that provide comparable results. One action would be to discourage direct-to-consumer advertisements for prescription drugs and to provide more useful information to patients about the potential benefits and costs of treatments, thereby reducing inappropriate demand for higher priced drugs.

Finally, insurance plans should be modified to reduce the financial burden that patients and their families currently experience when they need costly prescription drugs, and individual cost-sharing arrangements that are based on drug prices should be calculated as a fraction of the net purchase prices of drugs rather than the list prices from manufacturers. The government should also tighten qualifications for discount programs that have drifted from their original intent to help vulnerable populations.

Ongoing monitoring will be needed, but taking these steps should bring down the cost of prescription drugs while still enabling the continuing development of new drugs.

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Preface

Norman R. Augustine, Committee Chair

The amount of money Americans spend on health care today is equal to 18 percent of the nation’s gross domestic product. This commitment to health care as a fraction of the United States gross domestic product has increased steadily for the past 60 years, leading to what is also the highest per capita expenditure in the world. Today, roughly half of all Americans suffer from at least one chronic disease, many of which require continuing treatment with biopharmaceuticals, the topic of this report, Making Medicines Affordable: A National Imperative.

The trend of increasing spending on health care, including on biopharmaceuticals, is projected to continue for the foreseeable future as the baby boomer generation ages. No other nation in the world approaches the United States’ level of expenditure, yet various studies indicate that many nations have healthier populations. It is noteworthy that the better health of some nations is not a result of spending more to sustain health but instead reflects such factors as health-related choices made by their citizens (40 percent of premature deaths—i.e., before age 79—in the United States are attributed to unhealthy behaviors), and the emphasis that some governments place on public health practices that reduce the long-term costs of illnesses. According to the Organisation for Economic Co-operation and Development, the United States now ranks 25th in the world in life expectancy at birth. A recent study that ranks the quality of health care in various countries places the United States only modestly above the global average, in spite of the fact that U.S. health care expenditures exceed the entire gross domestic product of all but four other nations. On the other hand, various studies, including those conducted by the National Academies of Sciences,

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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Engineering, and Medicine, indicate that in the case of specific, serious illnesses, treatment outcomes tend to be more favorable in the United States than in many other developed countries.

Among the 10 nations with the largest gross domestic product, the World Bank reports that the United States spends about twice as much on health care as a fraction of gross domestic product as the average of the other nine. The nation with health care spending that most closely approaches that of the United States allocates about 7 percentage points less of its gross domestic product to that purpose. Placed in context, 7 percent of the U.S. gross domestic product would pay for the country’s entire primary and secondary education system, for two of its defense budgets, or for three of its public transportation and highway budgets. While it is clearly in the interest of the public to devote significant funds to health care, such spending is not without its opportunity costs.

Annual expenditures on biopharmaceuticals in the United States now exceed a half trillion dollars and account for nearly 17 percent of the nation’s personal health care bill (the occasionally quoted figure of 10 percent omits prescription drugs dispensed through hospitals and clinics). Furthermore, prescription drugs are among the fastest growing segments of health care spending—substantially exceeding over time the rate of inflation in the economy and the growth of family income. Administration, the most rapidly growing element of health care cost, accounts for more than three times the share devoted to this purpose in Great Britain. The Economist cites one large U.S. hospital as having more billing clerks than beds.

As the costs of hospital care, long-term care, ambulatory care, physician services, medical devices, and drugs have all escalated in recent years, insurance plans implemented benefit designs that attempt to preserve access to care yet keep health insurance premiums affordable by increasing copayments and deductibles, all of which have an impact on patient cost. Deductibles themselves have on average increased by a factor of 2.5 in the past decade. As with health care as a whole, biopharmaceuticals are critically important to the well-being of individuals and to the public at large. While few argue that the current situation is acceptable, virtually each newly proposed potential corrective measure has confronted opposition from one group or another.

An overarching moral issue remains unresolved in the United States: is access to health care—including prescription drugs—a fundamental human right? And if it is not, who is to decide, and based on what criteria, which individuals are to be denied access to the drugs and the care that they need? But if health care is a right, who is to pay its costs? And is this cost affordable not only to the individual but also to society as a whole, and does it represent the most appropriate allocation of the nation’s resources?

Some observers point out that even widely accepted “rights” (e.g.,

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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freedom of speech) have limitations placed on them. And there is the additional issue of how one balances the cost of drugs to today’s patients, a part of which pays for the development of new medicines, with the ability to create more capable medicines for future patients. Perhaps access to prescription drugs is not an individual right at all, but rather an obligation of society to the individual.

The complexity of these issues is noted in one study that found that the average price of an episode of treatment using anti-cancer drugs is $65,900 and results in an average survival benefit of 0.46 years (not quality-adjusted). Moreover, there are those instances when life extension far exceeds the median—a potential outcome of the utmost importance to the patient facing a major health care decision and to whom an effective drug may be priceless. Are these investments too little? About right? Too much? Answering such questions introduces considerations well beyond the realms of economics and scientific knowledge and requires entering the realms of morality, social justice, and, in many instances, politics.

The tension between the need for essential services and the ability of individuals and society to afford those services is reflected in the attention being devoted to the cost of biopharmaceuticals by the media, public, and political leaders—including both major candidates in the latest presidential election. A recent referendum in California (Proposition 61) that would have prohibited state agencies from paying more for prescription drugs than is paid by the U.S. Department of Veterans Affairs was defeated by voters in a highly contentious election. Media reports state that the pharmaceutical industry devoted approximately $110 million to a campaign for the proposition’s defeat. A principal argument of opponents was that passage of the law could cause prices to increase for veterans and some other state residents. On a national scale, OpenSecrets.com reports that in 2015, the Pharmaceuticals/Health Products industry ranked second among the 18 industries it evaluated in lobbying expenditures, devoting more than 50 percent more to this purpose than the third-place industry, closely behind the industry ranked first: hospitals and health professionals.

As the public debate over the cost of biopharmaceuticals has become increasingly contentious, criticism has been aimed at the sector as a whole, including insurance companies, regulators, hospitals, pharmaceutical firms, and intermediaries such as pharmacy benefit managers. Yet, a healthy biopharmaceutical enterprise, the source of a long history of life-enhancing and lifesaving accomplishments, is important for the nation’s well-being. Without the contributions of firms in this sector, supported by research funded by various agencies of the federal government, universities, private philanthropy, venture capital, and biopharmaceutical firms themselves, there would have been no vaccines for many deadly diseases, no statins,

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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and no cure for conditions such as hepatitis C. This is an industry that literally saves lives.

There is not enough accessible information to determine with certainty which segments of the biopharmaceutical sector are principally accountable for the rising cost of many pharmaceuticals; despite this, recent headlines suggest that the pharmaceutical manufacturers have borne the brunt of the blame. The following sampling of headlines illustrates both the intensity and the spread of the debate: “How Pharma Companies Use ‘Citizen Petitions’ to Keep Drug Prices High” (The Atlantic); “How to Stop Drug Price Gouging” (The New York Times); “Why Drugs Cost So Much” (AARP Bulletin); “Nonprofit Linked to PhRMA Rolls Out Campaign to Block Drug Imports” (Kaiser Health News); “The High Cost of Prescription Drugs in the United States. . . . Origins and Prospects for Reform” (JAMA); “Why Drugs Cost So Much” (The New York Times); “Defiant Generic Drug Maker Continues to Raise Prices” (The New York Times); “The Cost of Drugs for Rare Diseases Is Threatening the United States Health System” (Harvard Business Review); “Everyone Wants a Piece of the Drug Industry and It’s One Reason Prices Are Rising So Fast” (Business Insider); “More Than 80 Percent of Patient Groups Accept Drug Industry Funds, Study Shows” (The New York Times); “When the Patient Is a Gold Mine: The Trouble with Rare-Disease Drugs” (Bloomberg); “Pushy Pharma in Overdrive” (Business Week); “Insulin Prices Inflict Crisis on Diabetes” (USA Today); and “Big Pharma Quietly Enlists Leading Professors to Justify $1,000-per-Day Drugs” (Propublica).

Much of the criticism directed at biopharmaceutical firms stems from the sudden, large increases that have been observed in the price of certain prescription drugs. Public concern seemingly reached a tipping point when media reports cited the unanticipated increase in the price of a two-pack of EpiPens (used to administer epinephrine, a treatment for potentially fatal allergic reactions) from $160 to more than $600. Perhaps the most egregious case during the above period involved rights to the existing, non-patent-protected drug Daraprim (used in the treatment of severe infections) with a relatively small market (making it unattractive to potential competitors). The rights to Daraprim were purchased from its developer by Turing Pharmaceuticals, which promptly raised the drug’s price from $13.50 to $750 per tablet. Yet, another extreme example involved Biogen’s Synraza, used to treat neuromuscular diseases, that initially had a stated price of $750,000 for the first year’s dosage and $375,000 for each subsequent year. These are extraordinary examples, yet, coupled with lesser examples, they have had a sufficient impact on the health of citizens to attract sustained public attention and concern. A September 2017 survey of adult Americans’ priorities for the U.S. Congress through the end of the current year found lowering prescription drug prices to be highest ranked, above raising the

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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minimum wage, reducing the deficit, rebuilding the nation’s infrastructure, reducing taxes, or any of the other six issues considered.

A study conducted by the U.S. Government Accountability Office into the price of established generic drugs—that is, existing drugs no longer protected by patents—found that between 2010 and 2015 there were at least 315 instances when the price of generic drugs that were on the market throughout the duration of the study had sudden increases of 100 percent or greater. Of the 1,411 drugs considered in the study, a price increase of 500 percent or more was observed in 48 cases. On average, during the period covered by the study, the price of established generic drugs increased about four times the rate of inflation. However, when a basket of drugs of varying composition was considered—that is, including drugs entering or leaving the market during the period of the review—the average price declined because the drugs leaving the market during the particular period examined were more costly than those entering the market. Another study, this one by Memorial Sloan Kettering Cancer Center, found that the median monthly cost of cancer drugs at the time of U.S. Food and Drug Administration (FDA) approval increased from approximately $1,500 in 1965 to $150,000 in 2016, stated in constant 2014 dollars.

The burden of high-priced drugs often falls disproportionately on vulnerable elements of the population, in spite of government, industry, and charitable efforts to alleviate its impact. For example, the Kaiser Family Foundation reports that in 2015, about 20 percent of Americans did not fill at least one prescription due to affordability considerations, while others rationed the drugs that they did acquire. Two-thirds of personal bankruptcies in the United States have been attributed entirely or in part to the cost of medical care as a whole.

For most U.S. business sectors the pressure of competition is the dominant force in controlling prices and, to the extent that competition is present, the biopharmaceutical industry is no exception. Yet, if firms that have invested heavily to introduce new products were to be immediately confronted with competitors not having made such investments, there would be little motivation or justification for conducting research and innovating. In recognition of the importance of encouraging innovation, the U.S. Constitution provided the U.S. Congress with the authority “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” That is, in exchange for undertaking the research and development needed to introduce new products, the government can, and does, grant patents to firms and individuals and provides them with what is in effect sole-source position in the market for a specified period of time. This protection under the patent laws makes it practicable for the biopharmaceutical industry to develop new drugs. Indeed, the industry, especially its

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Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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smaller firms, devotes a higher fraction of revenues to research and development (currently about 19 percent) than other major U.S. industrial sectors.

Only about one-tenth of 1 percent of the country’s gross domestic product is currently being devoted to basic biomedical research, the foundation of future preventions and treatments. Furthermore, the federal government has been significantly reducing its investment in biomedical research while at the same time industries that indirectly support the biopharmaceutical sector, responding to market pressures for short-term returns, have also been reducing their investment in research (but not development). As a result, the United States has fallen to seventh place in its overall investment in basic research as a fraction of gross domestic product. Continuation of this trend is highly likely to diminish the potential to prevent and treat diseases suffered by future patients.

Research and development is the lifeblood of the biopharmaceutical industry and its contribution to health care. It is an extremely costly, risky, and prolonged endeavor, one consequence of which is the financial cyclicality experienced by firms in the sector as major new developmental products succeed or fail and as the temporary patent protection provided those that do succeed, expires. The canonical statement about the cost of a new drug—“the first pill can cost more than $1 billion while the second costs only a dime”—captures an important truth: new drugs are exceptionally expensive to develop and failures are commonplace. Nearly 9 out of 10 new drugs entering clinical trials fail, yet the cost of the efforts to develop those drugs must be borne by someone.

When the period of patent exclusivity for a drug expires, companies other than the developer are free to introduce copies—known as generics—into the market. These products represent 89 percent of all prescriptions written and 24 percent of the total cost of all prescription drugs. When generics enter the market, experience shows that the price of the original patented product frequently drops precipitously as the developer seeks to compete with the new, lower-cost entrants—or forfeits some or all of the market. As but one example, the price of Lipitor, a widely used anti-cholesterol drug, dropped from $3.29 per unit to 11 cents when its patent protection expired. Historically, the greatest pricing concerns have focused on on-patent drugs; however, major price increases for generic drugs have become increasingly common as more than half of existing generics are now produced by a single supplier.

An implicit trade-off exists when setting drug prices—investments in research and development can increase the cost of current drugs, but failure to make investments in research and development will ultimately limit the number of new, improved drugs with which to treat future patients. Biopharmaceutical manufacturers often point to the need to fund research and development as the principal justification for what many see as high prices.

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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As has been noted, such funding is critically important, but drug prices do not map one-to-one onto a firm’s investment in research and development (R&D). There are business choices to be made among numerous potential allocations of resources, including the accrual of profits, employee (usually executive) compensation, sales and marketing expenditures, dividends, lobbying, share repurchases, etc. A study published by the Institute for New Economic Thinking, reported by The New York Times, concluded that during a recent 10-year period drug companies in the Fortune 500 expended 11 percent more on share repurchases and dividends than on R&D. Another study concluded that manufacturers, on average, devoted more to marketing than to R&D. Thus, reductions in price can, but do not necessarily need to, result in curtailing R&D.

Reflecting, among many other considerations, the relatively high risks confronted by biopharmaceutical firms, these entities on average achieve greater net profit margins than firms in most other industrial sectors, as various studies have shown. For example, a study reported by Forbes found that during the period examined companies producing generics had an average 30 percent net profit margin, while major biopharmaceutical manufacturers were reported to realize an overall 25.5 percent net margin, placing them first and third, respectively, among all sectors considered in the study.

Another study, conducted at the University of Southern California’s Leonard D. Schaeffer Center for Health Policy and Economics, concluded that in 2015, brand (on-patent) manufacturers averaged a 28 percent margin and generic manufacturers averaged 16 percent, placing the two segments highest and fourth highest, respectively, among the 26 industrial sectors considered. The study also pointed to the substantial costs to the consumer that it attributed to profits in the drug distribution system (i.e., not by the developer/manufacturer), that were determined to consume about one of every five dollars spent on prescription drugs.

Evidencing both the cyclical nature of the U.S. pharmaceutical industry and its financial growth over time, U.S. companies listed among the world’s 15 largest pharmaceutical firms by revenue realized a 5-year rate of growth in market capitalization that exceed the rate of growth in market capitalization of the S&P 500 by more than one-fourth and a 10-year rate of growth that exceeded that of the S&P 500 by more than a factor of two.

It is particularly difficult to determine the profitability of intermediary firms in the biopharmaceutical business chain, let alone to assess the appropriateness of that profitability. Many of these entities are, for example, owned by parent firms or are privately held and make little detailed financial data publicly available.

Market forces that typically promote innovation while also providing price-controlling pressures have worked quite effectively in most U.S. indus-

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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trial settings, raising the question of why they seem to be far less effective in the prescription biopharmaceutical arena. The answer resides in the fact that this particular market has important features that distinguish it from most other markets.

First, before making a purchase of a prescription drug, the purchaser (patient) generally must obtain permission of a third party (nominally a registered physician) before being allowed to make the purchase. The decision as to what basic product to buy is made not by the buyer but rather by another party. Second, largely because of safety considerations, the pharmaceutical industry is particularly highly regulated. Concerns about a particular drug can take years to resolve—thereby consuming a substantial portion of the period of patent protection. (Recognizing this, patent durations have, under certain circumstances, been extended for several classes of biopharmaceuticals.) Third, in the biopharmaceutical market, the principal party directly paying the bill, in part or in its entirety, is usually not the consumer but rather an insurance firm, the government, or some other “third-party” payer such as an employer or union. Fourth, unlike most industries, biopharmaceutical firms are largely protected from foreign competitors because of safety considerations. As but one example, a recent Knowledge Ecology International study of the drug Zinbryta found that it costs at least three times more in the United States than in other high-income nations. Fifth, and most important, unlike the products of more traditional firms, pharmaceuticals can be indispensable to the purchaser—even critical to preserving life. As such, their producers bear an exceptional burden of responsibility not attributed to most businesses.

Under these circumstances the U.S. biopharmaceutical enterprise has evolved into a supremely complex amalgam of regulators, developers and manufacturers, retailers, insurers, wholesalers, physicians, employers offering benefits, and intermediaries, including organizations referred to as pharmacy benefit managers. The role of the latter is to support the overall pharmaceutical enterprise, providing such services as negotiating prices, establishing formularies (lists of drugs to be covered by insurance), and handling administrative functions. Further complicating this already rather arcane process, some smaller pharmacies have joined together to employ their own form of intermediaries that operate between themselves and the intermediary pharmacy benefit managers. In addition, some pharmacy benefit managers operate their own mail-order and retail pharmacies. Not surprisingly, the system is rife with potential conflicts of interest.

Lying at the heart of this complex, and arguably having the least influence among its participants, is the patient—the raison d’etre for the existence of the enterprise.

Further complicating this Gordian situation is the fact that many of the transactions among the above entities are treated as business secrets,

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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making it extremely difficult, if not impossible, for outsiders to “follow the money.” Similarly, it is difficult, if not impossible for those outside the biopharmaceutical enterprise to ascertain with confidence the relative impact on cost to the patient of the manufacturers and the pharmacy benefit managers, although a few efforts to do so have been undertaken. The former of course bear a much greater degree of risk and demand for capital than the latter and might therefore be expected to exhibit greater net margins, but reliable data are scarce. Curiously, the pricing algorithm for some pharmacy benefit managers is based not on the services provided but rather on the value of the products that are processed.

The opacity of financial transactions in the biopharmaceutical enterprise is magnified by the practices of selectively, and usually confidentially, granting discounts, awarding rebates, and creating subsidies. When challenged regarding apparently high costs, participants commonly point to other participants as the source of the problem, as is suggested by the following sampling of recent media headlines: “Drugmakers Point Finger at Middlemen for Rising Drug Prices” (The Wall Street Journal); “Gilead Executive Says Pharmacy Benefit Managers Keep Prices High” (Bloomberg); “Drug Lobbyists Battle Cry Over Prices: ‘Blame the Others’” (The New York Times); “In the Debate Over Rising Drug Prices, Both Drugmakers and PBMs Claim Innocence” (Biotech and Pharmaceuticals).

Various practices, some initiated by the government and some simply tolerated by the government, have magnified the challenges confronted by those who would seek to reduce the cost of biopharmaceuticals while not undermining innovation. Such practices include precluding key government entities from negotiating the prices of the pharmaceuticals for which they pay; extending patent-protected periods when minor changes are made to a drug’s design or even to its packaging (a practice known as “evergreening”); permitting developers to deny potential generic competitors access to the supplies of patented drugs they need to establish “equivalence” (a necessary requirement of the FDA); permitting large backlogs of drug approval requests to accumulate; permitting terms of transactions—for which the government pays 80 percent of the cost (above a specified threshold in the case of Medicare Part D)—to be held in secrecy; and tolerating a particularly dubious practice wherein firms pay potential generic competitors to defer entry of their products into the market (“pay-for-delay” settlements). In one recent example of such creativity, Allergan, a manufacturer of an established drug that was threatened by a patent challenge, transferred the rights to the drug, in exchange for an upfront payment and royalties, to a Native American Mohawk Tribe, presumably to escape jurisdiction of the conventional patent resolution process.

It should be noted that the FDA is taking action to ameliorate some of these problems that reside within its purview. Nonetheless, the complexity

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of the biopharmaceutical system makes it rife for exploitation. A number of states, responding to inaction at the federal level, are now legislating their own cures, the potential result of which will likely be a collection of inconsistent, conflicting, and overlapping laws and regulations.

Further compromising competitiveness, three distributors now control 85 percent, and three pharmacy benefit managers possess a 73 percent share of the pharmaceuticals market. With regard to on-patent drugs, the patent holder (usually the developer/manufacturer) has a de facto 100 percent market share.

A seemingly relevant quotation attributed to various sources states, “Every system is perfectly designed to get the result it gets.”

Within this complex, technologically sophisticated, often nontransparent environment, manufacturers set the list price for the drugs they produce. These firms themselves confront a compound dilemma. First, they are part of the nation’s free enterprise system and must therefore compete for talent and money in the same human resources and capital and debt markets as any other publicly held entity. Furthermore, because of the time it takes to generate sufficient evidence to obtain safety and efficacy approval for a new drug from regulators, companies are generally left with a limited number of years of protection remaining before the patent protection of a specific drug expires and a generic competitor unburdened by R&D and other related costs can enter the market. (This is somewhat less of a concern in the case of producers of biologics because of the extended period of market protection that has been granted to their products in recognition of the especially prolonged development and approval periods associated with such products.) Prices must therefore be set sufficiently high during this relatively narrow window of protection to compensate for much of the one-time costs incurred in developing a drug, as well as to provide a competitive profit as demanded by the company’s shareholders. When Kymriah, Novartis’s new drug treatment for leukemia entered the market priced at $475,000, STAT reported, “The $475,000 price tag is much less than Wall Street expected and might disappoint some investors who hoped for a premium on such a complex drug.” And as noted, products newly entering the market must bear an allocation of the very substantial costs associated with products that fail to reach the market. Of primary importance, and as also previously noted, it cannot be disregarded that biopharmaceutical firms bear the heavy responsibility of providing a product that can be indispensable to the well-being of individuals and to the public at large.

The task of creating suitable pricing algorithms has not surprisingly proven to be relatively intractable, particularly given the number of parties that can affect the price of a drug to the consumer. Four general approaches for solving this conundrum have gained particular attention.

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The first of these is most commonly used in other product areas, that is, “what the market will bear.” Critics have argued that in the case of biopharmaceuticals (at least in situations bereft of competition) moral considerations make this an untenable strategy because of the critical public need that such products and their producers serve. A second approach, pricing biopharmaceutical products at a level that generates profits commensurate with the returns from alternative investment opportunities that demand comparable commitments of capital and acceptance of risk, suffers from being a form of price-control that effectively places a limit on the incentive to create new products. A third alternative, used to some extent in other developed countries (which generally also use single-payer systems), is referred to as “value-based pricing,” that is, pricing based on cost-effectiveness considerations. While the latter approach is extremely attractive conceptually, “value” can be difficult to determine in the case of biopharmaceuticals. For example, what is the “value” of 1 year of human life, even if quality-adjusted? Additionally, cost-effectiveness calculations, even if of perfect fidelity, suffer from the fact that various parties may embrace very different criteria for decision making based on those calculations. For example, a government may seek the most cost-effective solution, an insurer may desire the least costly solution, and a patient may simply want the most effective solution. A number of countries have used versions of value-based pricing in insurance benefits design and formulary definition with reasonably wide acceptance, but not without some concern over the credibility of the value analyses and the potential denial of certain drugs to some patients. Finally, a fourth option is for government to set a price, or de facto price (e.g., by establishing a maximum reimbursement), by which producers must abide. In so doing, the benefits of a competitive, incentivized free market are largely forfeited.

Despite the challenges in implementing value-based pricing, it has attracted an increasing number of adherents. In what is among the simpler versions of value-based pricing—based on future (discounted) cost avoidances—many practical complications still arise, some because the original investor is rarely the same party as the eventual beneficiary of the costs that are avoided. A related approach is to establish a price based on the apparent superior effectiveness of a new drug as compared with that of existing treatments. This, however, can once again lead to inconclusive debates over the value of a human life in economic terms and, in cases when more than one disease or more than one treatment is involved, as happens with some regularity, how the benefit is to be allocated among the various treatments. Nonetheless, where direct comparisons can in fact be made between the efficacies of two drugs there can be significant opportunities to generate cost savings. For example, a recent article in JAMA Internal Medicine cites research on Progestin that indicates no statistically significant dif-

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ference in efficacy between a branded prepackaged drug and a compounded version of the same drug having identical active ingredients, yet the former costs $11,000 per full treatment and the latter $200.

Several of the models addressed above, or derivatives thereof, could be adopted by, or imposed on, the U.S. biopharmaceutical enterprise. However, each of these would represent a substantial departure from the structure that actually exists today and which over the years has generally served patients well. These alternative models include the government setting prices (as with public utility industries in the United States); or setting limits on reimbursement (the latter being more common in the pharmaceutical sectors of other developed countries); or having the government pay for R&D but retain the rights to the resulting products (as is fairly common in the U.S. defense sector). Many developed nations have implemented single-payer systems (i.e., the government pays), in part because of their apparent simplicity, while other developed nations have adopted a hybrid form of this model wherein the private sector provides basic coverage that is backed by a government-funded safety net.

This report seeks to address the market failures that currently permeate the biopharmaceutical sector, including the lack of competition due to distortions in the application of the patent protection process; concentration throughout the supply chain; limitations on foreign competition; the imbalance between the negotiating power of suppliers and purchasers; the opacity of prices; the lack of information on product efficacy; the separation among decision makers, payers, producers, and consumers; and the convoluted structure of the supply chain.

The considered view expressed in Making Medicines Affordable is that in the case of the United States, changes made within the current system, even though those changes will be demanding, are likely to better serve the nation. Simply stated, bitter pills are sometimes necessary for providers as well as for consumers.

There are few observers who argue that the status quo is acceptable. Should the package of corrective measures offered herein, or comparable ones offered elsewhere, be determined, for one reason or another, to be ineffectual, the remaining realistic choices would be either the status quo or a system embracing substantially increased government sponsorship and control. In the latter instance, plausible choices include various combinations of single-payer (government) insurance accompanied by government price regulation, in one form or another.

The overarching conclusion driving the recommendations presented in Making Medicines Affordable is that consumer access to effective and affordable medicines is an imperative for public health, social equity, and economic development and that this imperative is not being adequately

Suggested Citation:"Front Matter." National Academies of Sciences, Engineering, and Medicine. 2018. Making Medicines Affordable: A National Imperative. Washington, DC: The National Academies Press. doi: 10.17226/24946.
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served by the biopharmaceutical enterprise as it functions today. Simply stated, the current system is not sustainable.

While none of the committee members who contributed to the preparation of this report would likely agree with every word it contains, each of the recommendations offered enjoys the support of a substantial majority of the members and some enjoy unanimous support. In those instances where disagreement among the members could not be adequately resolved, dissenting views and commentaries have been provided as footnotes and in Appendixes A and B. The lack of unanimity among the committee members on certain issues largely reflects the considerable effort that was devoted to including individuals possessing diverse expertise and experience in the committee. It also reflects the reality surrounding the complex topic of balancing the affordability and the availability of prescription medicines.

In the end, drugs that are not affordable are of little value and drugs that do not exist are of no value.

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Making Medicines Affordable: A National Imperative Get This Book
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Thanks to remarkable advances in modern health care attributable to science, engineering, and medicine, it is now possible to cure or manage illnesses that were long deemed untreatable. At the same time, however, the United States is facing the vexing challenge of a seemingly uncontrolled rise in the cost of health care. Total medical expenditures are rapidly approaching 20 percent of the gross domestic product and are crowding out other priorities of national importance. The use of increasingly expensive prescription drugs is a significant part of this problem, making the cost of biopharmaceuticals a serious national concern with broad political implications. Especially with the highly visible and very large price increases for prescription drugs that have occurred in recent years, finding a way to make prescription medicines—and health care at large—more affordable for everyone has become a socioeconomic imperative.

Affordability is a complex function of factors, including not just the prices of the drugs themselves, but also the details of an individual’s insurance coverage and the number of medical conditions that an individual or family confronts. Therefore, any solution to the affordability issue will require considering all of these factors together. The current high and increasing costs of prescription drugs—coupled with the broader trends in overall health care costs—is unsustainable to society as a whole.

Making Medicines Affordable examines patient access to affordable and effective therapies, with emphasis on drug pricing, inflation in the cost of drugs, and insurance design. This report explores structural and policy factors influencing drug pricing, drug access programs, the emerging role of comparative effectiveness assessments in payment policies, changing finances of medical practice with regard to drug costs and reimbursement, and measures to prevent drug shortages and foster continued innovation in drug development. It makes recommendations for policy actions that could address drug price trends, improve patient access to affordable and effective treatments, and encourage innovations that address significant needs in health care.

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