How Inflation, Competition, Biosimilars Affect Prescription Drug Costs
Inflation drives up prescription drug prices, but biosimilars and competition can reduce costs.
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- As the inflation rate continues to rise, the healthcare industry — like every other industry — is taxed with extraordinarily high costs. Rising drug prices have caused increased healthcare expenditures and out-of-pocket costs. To manage these rising prices, the United States pharmaceutical supply chain has been leveraging the value of competition and biosimilars to drive drug prices down.
“There are two big drivers on drug costs. One is ensuring competition. The price of a drug is greatly impacted by the extent to which there is competition. The second big challenge that remains more difficult to address is the initial price of new medications,” Steven Lucio, senior principal of pharmacy solutions at Vizient, told PharmaNewsIntelligence in an interview.
The drug pricing landscape is a convoluted field littered with policies, complicated terminology, and nuance. To properly understand the drug landscape, it is critical to have a foundational understanding of the language associated with drug pricing in the US.
Inflation
The US Department of Labor defines inflation as “the overall general upward price movement of goods and services in an economy.” Inflation is widely understood and experienced by the general public as the prices of available goods increase.
A less-understood facet of inflation is its impact on prescription drug costs. For example, retail prices for some of the most widely used brand-name prescription drugs continue to increase twice as much as inflation.
Americans are well acquainted with the idea that income does not always keep up with inflation, financially compromising the population and healthcare affordability. Drug costs and insurance premiums, which were already too high to manage, continue to rise, and drug price negotiations become even more complicated as inflation rates do.
An article published by the Commonwealth Fund notes that, between 2018 and 2019, half of the drugs covered by Medicare Part D plans had a higher price increase than inflation.
Inflation Reduction Act
In an attempt to manage the effect of inflation on the cost of living, including healthcare costs, President Biden signed the Inflation Reduction Act (IRA), which caps prices on certain drugs.
“The Inflation Reduction Act ended the Trump rebate rule, which would have essentially eliminated the anti-kickback exemption for drug makers and pharmacy benefit managers (PBMs) to engage in pay-to-play. So that means that the status quo of allowing competition to inflate the prices of drugs to create larger and larger rebates and concessions will continue to be the field of play,” explained Antonia Ciaccia, CEO of 46brooklyn Research, in an interview with PharmaNewsIntelligence.
According to an article by the University of Southern California School of Public Health, there are two main goals of the IRA: reducing beneficiary cost-sharing and premiums and reducing prescription drug costs. The act provides negotiation provisions for certain Medicare coverages.
Information from the Centers for Medicare and Medicaid Services explains that Medicare Part B drugs refer to a class of selected drugs that a licensed healthcare professional administers, including vaccines, infusions, and other prescription drugs. Conversely, Medicare Part D benefits include a prescription drug plan that covers self-administered medicines and medical supplies, including biologic drugs, with some exclusions.
KFF notes that the IRA does a few different things for drug pricing, including the following:
- Penalizes drug companies that have average sales prices (ASP) for Part B drugs or the average manufacturer price (AMP) for Part D drugs increase faster than the rate of inflation by requiring inflation rebates
- Place caps on insulin copays and out-of-pocket costs
- Delay implementation of the Trump administration’s drug rebate rule
- Expand benefits
- Requires the federal government to negotiate the maximum fair price for Medicare Part B and Part D drugs
Under this new act, the US Department of Health and Human Services (HHS) is responsible for negotiating drug prices with drug manufacturers, pharmacies, and more on behalf of Medicare beneficiaries.
Beyond these impacts, the IRA sets a timeline for the negotiation process. “It creates differential triggers for when negotiation can occur. For small molecule products, it's nine years after patent exclusivity lapses. And for complex biologics, it's 13 years,” explained Ciaccia. “So, think of it from a drug maker's perspective. Suppose I'm being told that my drugs might be subject to negotiation in 9 years versus 13 years, depending on the type of product I'm bringing to market. In that case, any financial incentive I had to bring more small-molecule drugs to market will be minimized. I will have a magnetic pull toward those complex biologics, and we’ll have another 4 years to soak money out of the system.”
Competition
In addition to using policy to manage inflation and keep drug prices low, a competitive marketplace that promotes innovation can also reduce drug spending.
“It is important to reward the continued investment in new drug development to treat conditions without adequate therapies. The challenge is that most diseases where innovation is critically needed are severe and frequently extremely specialized,” Lucio stated.
“Given the severity of the disease, the vulnerability of the patient population treated, and the use of novel technologies, the initial launch prices are extremely high,” he continued.
Competition among certain drugs, especially at market entry, reduces the impact of inflation on drug prices. Conversely, a lack of competition allows drug manufacturers to approve regular price increases, with extremely high increases as the loss of exclusivity nears.
To incentivize drug development, the FDA grants market exclusivity and patent eligibility to drug developers after FDA approval, preventing other manufacturers from developing generic forms for the drug. In the biologic space, the equivalent to generic medicines is biosimilar competitors, which mimic the biologic.
Biosimilar Competition
The biosimilar marketplace has expanded dramatically in recent years, providing alternatives to many expensive brand-name biologic drugs.
“At this point, there is likely nothing more critical to lower drug prices than encouraging biosimilar consideration and adoption,” Lucio stressed. “Biosimilars offer a large opportunity in cost savings, and continuing to support the biosimilar pathway and limiting excessive patenting as a strategy to prevent competition are steps the government has and can continue to take in managing drug costs.”
Biosimilar competition is a significant factor in reducing drug prices. According to a Vizient analysis, biosimilar products and adoption have saved the US healthcare system $12.6 billion from 2014 to 2022. With a highly anticipated biosimilar boom as more companies launch biosimilar alternatives and providers adopt them, many experts project even more future savings.
Drug Shortages
Beyond addressing inflation, competition, and other economic factors, industry leaders must also acknowledge how the pharmaceutical supply chain impacts the marketplace. Throughout the COVID-19 pandemic, issues in the pharmaceutical supply chain were highlighted, as many drugs and medical products experienced a shortage. To date, drug shortages continue to be of concern, making many drugs that are in short supply a commodity.
Even with negotiated prices, patients are struggling to access necessary medications.
“Just as competition is critical to keep drug prices from getting excessively high, it is also essential to ensure that the availability of critical drugs is uninterrupted, especially the duration of shortages that predated the pandemic and were worsened by COVID,” Lucio concluded.
Lucio and his team recently launched the End Drug Shortages Alliance (EDSA). The EDSA collaborates with providers, suppliers, advocacy, and other stakeholders committed to ending drug shortages by promoting increased transparency, improved quality, and enduring access to sustainable suppliers of essential medications.
Many healthcare professionals and providers have called on industry leaders, congress, government officials, and public health experts to address this challenge by strengthening the domestic supply chain and reducing reliance on imports.
While prescription drug costs remain challenging for the US healthcare system, leaders and stakeholders must navigate inflation, competition, and shortage issues to deliver patient care.
