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Why prescription drugs cost so much

The high cost of cancer drugs recently prompted top oncologist Dr. Leonard Saltz to publicly call for limits. "These drugs cost too much," he told thousands of his colleagues at the American Society of Clinical Oncology annual meeting. Many cancer drugs debut with a price tag of $10,000 a month according to an analysis from staff at Memorial Sloan Kettering Cancer Center.

The country’s largest pharmacy benefits manager, Express Scripts, estimates 576,000 Americans had prescription drug costs above $50,000 last year, up 63% from the year before. The number of patients with costs of $100,000 or more nearly tripled.

Express Scripts put the impact of these costs on payers in the U.S. at $52 billion a year, a number they call unsustainable. They find insurers foot most of the bill but say the costs pressure health insurance premiums and taxpayer-funded government healthcare programs like Medicaid.

Two-thirds of spending for patients with six-figure drug bills went to medications for cancer, hepatitis C and compounded therapies.

So what exactly goes into determining a drug’s price, leading to a price tag in the tens or even hundreds of thousands of dollars? 

“First you need to look at the time and cost it takes to develop a medicine, test it, get it approved by regulators, and ultimately bring it to patients," Robert Zirkelbach tells us. Zirkelbach is a senior vice president at the organization, PhRMA, which represents U.S. biotech companies. "You also have to look at the value these medicines provide to patients, the healthcare system and to society broadly." 

Developing and winning approval for a new prescription drug is estimated to take more than a decade and cost nearly $2.6 billion dollars, according to Tufts Center for the Study of Drug Development. That figure factors in the money and time spent on drug development. It also factors in the failures: Data show only 12 percent of medicines that go to clinical trials ever make it to patients.

But details are hard to pin down. We contacted Gilead (GILD) and Merck (MRK) -- two companies with breakthrough drugs carrying high price tags -- and they wouldn’t give us specifics on how they arrive at a drug’s price. Gilead's hepatitis C drug Harvoni is priced at $94,500 for a 12-week course, and Merck's melanoma cancer drug KEYTRUDA costs about $12,500 a month. 

There can also be differing opinions on value and different drug prices based on geography.

Last year’s breakthrough hepatitis C drugs from the company Gilead brought in more than $12 billion in sales in 2014. The first to debut, Solvadi, was one of the best-selling drugs in the world, according to trade publication Genetic Engineering and Biotechnology News (GEN).

In the U.S., a 12-week course of Gilead’s drug Harvoni is $94,500. It’s predecessor, Sovaldi costs $84,000. But in Europe, the price varies by country. Gilead says negotiations are based on factors like the size of the population in need of treatment and the price of standard treatments. Gilead also has a tiered pricing policy for countries, based on income. In a low-income country like India, the drug can cost $900 for the 12-week course of therapy. That’s less than the cost of a single Sovaldi pill in the US. And generics have already been launched in some developing countries.

It's hard to pin down what the "value" of prescription drugs are in the U.S. An independent organization, Institute for Clinical and Economic Review, found that a course of Harvoni would need a much lower price, between $34,000 and $42,000, to allow all patients to be treated while keeping short-term costs from rising too much for the health care system to handle.

Competition does help bring down prices, as it gives insurers negotiating power. When a competitor to Gilead’s hepatitis C treatment came to market in December, Express Scripts was given leverage to say no to Gilead and negotiate a significant discount with the other drug’s maker, AbbVie (ABBV). That will amount to a billion dollars in savings this year, according to the company. Also, Gilead has revealed it will discount its hepatitis C drugs in the US this year by an average of 46%, more than double last year’s discount average.

“And then eventually all those medications come off patent and the price drops dramatically, freeing up resources to pay for breakthrough medications for patients," says Zirkelbach of the way the country's healthcare system works. 

But even with discounts, generics and coverage from insurance, Americans struggle with the rising costs of medication. Three in five personal bankruptcies are due to medical bills according to one estimate. And more than 25 million Americans will skip their prescription drugs or delay refills to save money.