Rising drug costs caused by price hikes, not new innovations

Drug prices are a top concern among American consumers and the Trump administration, but the main cause of rising costs has not been fully determined in previous studies. Now, a study published in Health Affairs suggests prices are impacted by the emergence of new drugs in addition to the inflation of existing products.

In other words, drug prices are going up not just because of new innovations in medications, as the pharma industry frequently cites, but because the industry is pricing existing products higher. Furthermore, higher costs are not reflective of improved value for patients. 

“These estimates demonstrate the important contribution of existing product price inflation on the rising cost of drugs and lend support to policy efforts aimed at controlling price inflation,” Inmaculada Hernandez, lead author and assistant professor of pharmacy and therapeutics at the University of Pittsburgh, et al. wrote of the study’s findings. “This is particularly important because in the current value-based landscape, increasing drug costs attributable to new products can sometimes be justified on the basis of improved outcomes."

From 2013 to 2015, drug prices rose annually about 10 percent––more than six times the rate of inflation, the researchers noted. The study examined pricing data from First Databank and pharmacy claims from the University of Pittsburgh Medical Center (UPMC) Health Plan from 2005 to 2016.

Cost increases across all drug classes were faster than inflation, the study found, with increases highest for oral specialty drugs and lowest for oral generics. This was true despite oral generics having the smallest changes as a class.

Oral generic prices increased more than double the rates of general inflation during the study period. By comparison, specialty drugs, which have previously been hailed as the culprit of high drug prices, saw price increases 13 times the rate of inflation, according to the study.

Overall, existing generics tended to decrease the average costs of generic drugs, but new generics were more expensive than existing products, researchers noted.

“Rising generic costs were largely driven by the entry of new products, which is not unexpected because in 2008-16 numerous blockbuster brand-name medications lost patent protection,” Hernandez and colleagues wrote. “This strong contribution of new generics explains why average costs of generics increase over time, even though competition inherent in the generic market should theoretically drive prices down.”

The rising costs of brand-name drugs were driven by inflation in the price of existing drugs that were widely used. For specialty drugs, rising costs were mostly due to a new product entering the market, as well as existing product price inflation.