US Drug Spending Increases Fourteen Percent

By John Gallagher,
International Business Assistant Editor
us drug spending

Drug pricing has been a hot topic this year especially after Martin Shkreli stole the headlines after raising the price of one of his drugs 5,000 percent.

There has been much debate over the morality of raising drug prices, especially in Shkreli’s case, where raising the price of what the New York Times described as a “decades old drug” provides little rationale outside of pure selfishness.

This month, IMS health, a leading global information and technology services company that services clients in the healthcare industry, released a report describing pricing trends in the drug industry.

The results showed large increases in the nominal amount spent on drugs, but after considering rebates and concessions offered to customers, the price increases were not nearly as extreme.

Spending on drugs in the United States increased 12.2 percent from 2014 to a total of $425 billion.

Although the sticker price may seem alarmingly high, consumers only paid $309.5 billion after price concessions and rebates from manufacturers.

As total amount invoiced grew 12.2 percent, the amount consumers actually paid (referred to in the report as “net price growth”) rose only 2.8 percent.

One factor affecting the amount spent on drugs is innovation, which tends to increase the amount spent on drugs by tapping new markets. It is important also to note that when patents expire and drugs come off the market, or competition for brands increases, costs are driven down.

In 2015, costs fell by $14.2 billion thanks to these factors, which was a much higher impact than what was seen in 2014, and less of an impact than the typical amount seen in the past 5 years.

However, last year’s modest price gains were somewhat of an anomaly compared to what drug prices have done this decade, as consumer costs have risen 25 percent since 2010.

The top selling drug Harvoni, a drug released by Gilead Sciences (NYSE: GILD) 3 years ago used to treat Hepatitis C, accounted for $14.3 billion of the $425 billion in total spending, treating 250,000 patients.

In its first year, the drug didn’t sell very well, but exponential increases in 2014 and 2015 drove Harvoni to be the top selling drug in the United States in 2015, edging out Humira.

Although Harvoni is one specific drug that took off, it reflects a larger trend in the pharmaceutical and life sciences industries of large breakthroughs providing effective treatments for previously untreatable diseases.

There are currently over 2,300 novel products and over 40 new active substances in the pipeline which will hit the market in the next five years.

One of which could be the next Harvoni; a revolutionary drug which provides a cure for a disease, thus contributing billions of dollars to drug spending.

Half of total spending growth was driven from medicines that have been on the market for less than two years.

This shows that the large increases in spending are not being largely driven by cases like Shkreli’s, where decades old drugs prices are rising, rather new drugs offering cures to previously untreatable diseases are being released, driving spending and revenues in the industry.

IMS Health sees the largest area of drug spending growth coming from the oncology industry, as oncology is the research area with the greatest activity.

Out of the $200 billion projected in spending growth by 2020, $91 billion is projected to come from the release of new medicines, with oncology receiving the largest share of the gains.

Although the pharmaceutical industry often gets a bad reputation for their pricing methods, 2015 was not a bad year in terms of price increases, and the money flowing into the industry seems to be making an impact in providing treatments for diseases ranging from cancer to hepatitis C.

A version of this article appeared in the Tuesday, April 26th print edition.

Contact John at
john.gallagher1@student.shu.edu

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