Limited Drug Competition Is a Prescription for Extreme Price Increases

Given that pharmaceutical companies have been accused of hiking drug prices ahead of the passage of health care reform, perhaps nobody will be surprised to learn that the industry has a history of passing big price bumps on to their customers. Even so, the magnitude will no doubt raise an eyebrow or two: The Government Accountability Office has found that between 2000 and 2008, the prices for 321 different brand-name drugs soared from 100% to more than 2,000%.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The GAO on Monday released a report from December in which federal investigators examined brand-name prescription drugs that had undergone extraordinary price increases equal to 100% or more at a single point in time.

The GAO found that from 2000 to 2008, 416 drug products (which in some cases include multiple dosages of a single drug) had such extraordinary price increases. Most often, these extraordinary price increases ranged from 100% to 499%, but in a few cases, prices were raised by 1,000% or more and in nine cases, the prices soared by over 2,000%. The number of extraordinary price increases each year jumped from 28 in 2000 to 71 in 2008.

It's important to note that the 416 products whose prices rose so rapidly represent just half of 1% of all brand-name pharmaceuticals. However, the list includes some well-known drugs such as Adderall, used to treat ADHD among the non-repackaged brand-name drugs. And among the repackaged drugs are other well-known names, including insomnia drug Lunesta, cholesterol drugs Zocor and Lipitor, antidepressants Effexor, Paxil and Prozac, Abilify for schizophrenia, epilepsy drug Topamax, pain relievers Lyrica and Vicodin and hypertension drug Novarsc.

More than half of the brand-name drug products that had extraordinary price increases were in just three therapeutic classes: central nervous system, including sedatives and antidepressants; anti-infective drugs; and cardiovascular. While the majority of all extraordinary price increases were for drugs priced less than $25 per unit, the GAO notes that a full course of treatment for some of these drugs could total several thousand dollars. The report refers to the case on one rare cancer drug which cost $390 for a standard full course of treatment. "After two extraordinary price increases," the GAO notes, "the full cost of a course of treatment rose to more than $3,000."

Lack of Competition Is a Key Factor

The GAO found several causes for the increases. First, in some cases there was a lack of therapeutically equivalent drugs on the market -- both generics and other brand-name drugs used to treat the same condition -- due to patent protections for new drugs. Similarly, by extending patents for existing drugs that have been modified, and receiving market exclusivity rights, drug manufacturers have been able to limit competition. For example, Abbott Laboratories (ABT) has managed to keep TriCor under protection for several decades now.

Second, the size of the market for a given drug can reduce competition. Third, the transfer of the rights to a drug and corporate consolidations among drug companies may result in fewer drug options and contribute to extraordinary price increases.

Fourth, more than half of all extraordinary price increases were for repackaged brand-name drug products, meaning third parties firms, which purchased drugs from manufacturers or wholesalers and resold them in smaller packages to health care providers, were the cause of the price hikes. Finally, unusual events -- such as disruptions in production due to shortages of raw materials -- and other factors may also contribute to some extraordinary price increases.

Overall Drug Prices Are Rising, Too

In response, the Pharmaceutical Research and Manufacturers of America (PhRMA), said in a statement that "the GAO report focuses only on a small number of selected brand medicines rather than the entire prescription drug market." In addition, "Today, prescription medicines account for only 10% of health care spending – the same as it was back in 1960."

But that may be debated. Last year, for example, overall wholesale prices of brand-name drugs rose 9%, even as the Consumer Price Index fell. Another report recently found that consumers paid roughly double in 2006 for prescription drugs compared to what they paid in 1996. And drug companies have certainly been accused of hiking prices in anticipation of the passage of the health care reform plan now being reconciled by the House and Senate. Some drug makers, meanwhile, may also be hiking their prices in anticipation of looming "patent cliffs": Their best-selling drugs will soon be open to generic competition, but their research and development pipelines hold too few promising new drugs to replace the pending lost revenue.

Regardless, the $315 billion pharmaceutical industry will have a hard time finding many sympathetic ears. Senate Democrats and the Obama administration have already agreed to an $80 billion, 10-year pact that would require pharmaceutical firms to pay millions of dollars annually in taxes, and make concessions to help reduce prices for some seniors in Medicare. But since the pact could also limit future concessions from the industry, it has also raised much criticism.

This story was updated on Jan. 13, 2010 to include some of the drugs that have seen prices soar rapidly.
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