Drug acquisition costs and expenditures in the US continue to be a major concern for health policymakers, providers, payers, and patients as we head into 2022. Based on 2020 or the latest available data for 40 industrialized countries, the US ranks highest in health spending as % GDP and health spending per capita. As a portion of these costs, US pharmaceuticals account for 12.6% of US health spending. Total nominal spending on medicines in the U.S. rose from $195B in 2002 to $539B in 2020. The US has the highest pharmaceutical spend per capita and the next highest pharmaceutical spending as % of GDP (except for Bulgaria.)
Overall, US pharmaceuticals cost 2.56x higher than in 32 other countries. Brand name drugs are 3.44x higher. Unbranded (generic) drugs account for 84% of drugs sold in the US by volume but account for only 12% of US expenditures for drugs. Generic drugs have only a slightly lower cost in the US compared to most other countries.
As noted in the most recent US House of Representatives Oversight Committee Report, the issue of drug expense was described as “unsustainable, unjustified and unfair.” While the committee’s Democrats and Republicans disagreed on the primary causes of this categorization (manufacturers vs. ”middlemen” e.g., Prescription Benefit Managers), the report highlights once again the overriding concern regarding drug prices in the US.
Sources: Statistica 2021;
What does the global pharmaceutical pipeline look like?
The number of drugs in the pharma R&D pipeline has more than tripled from 5,995 molecules in 2001 to 18,582 molecules in 2021. The most recent average growth rate has been about 4.76% which is half of the previous 12 months’ rate of 9.62%. The molecules within the pipeline stages consist of 55% Preclinical; 30% Phase 1 & 2; 5% Phase 3 Clinical Trials. Early-stage development saw the majority of growth in the pipeline from 2020 to 2021 at +6.0%, +6.4%, and +2.0% respectively while Phase III rose +0.9%. The total number of oncology clinical trials is greater than the next three therapeutic categories combined.
The largest therapeutic category increase during the past year (2020-21) was 22.4% for Anti-Infectives, largely due to the COVID19 pandemic. Still, despite the development of over 550
molecules to address the novel coronavirus, oncology, biotech and neurology molecules still make up the top pipeline volumes, followed by anti-infectives, GI/Metabolic molecules and product reformulations. Oncology drugs account for almost 40% of the global drug pipeline, with breast, colorectal and pancreatic cancers targeted the most.
Targeted rare diseases more than doubled in seven years from 2013-2020. Expedited reviews are up 576% in the same timeframe 50 to 338. There has been an explosion of gene therapy (biotech) molecules in the pipeline since 2015 rising from 300 agents in 2001 to 1,700 agents in 2021, a 467% increase. Gene therapy molecules now account for almost 10% of the R&D pipeline. However, non-biotech molecules still account for the majority (58%) of the R&D pipeline. Injectable drug formulations increased to 60% of the R&D pipeline, while oral formulations decreased to 28%, roughly a 2% swing from 2020-21.
Novartis, Roche and Takeda led the 2020 R&D pipeline development with 200 or more molecules in the pipeline each, followed closely by BMS, Merck Pfizer, Johnson & Johnson Abbvie, Astra Zeneca and Sanofi, each with more than 140 molecules each. However, the top 10 & 25 pharma companies comprise a decreasing percent of the R&D pipeline with only approximately 5% and 10% respectively of the global pipeline. A total of more than 5,000 companies are represented in the pipeline with 20% of the companies having only one or two drugs each.
US companies account for 55% of the R&D pipeline; China is second only to the US nationally; the rest of the Asia Pacific countries combined is slightly larger than China. The UK, Germany and the rest of Europe, followed by Canada, France, Japan and Central & South America / Africa round out the top 10 countries. But, approximately 46 % of Active Pharmaceutical Ingredient (API) for US medications is manufactured outside of the US. The European Union, India, and China provide almost all of the non-US API utilized for US manufacturing and/or imported US finished pharmaceutical products produced overseas.
Overall, the US accounts for the largest funding for global life sciences innovation. Although the US produces about 22% of the global GDP and accounts for 4% of the world’s population, it accounts for 44% of global biomedical R&D expenditures and its domestic pharmaceutical market about 40% of the global market. Of the top 10 national pharmaceutical markets worldwide in 2020, the US revenue market share was 46%.
Sources: Pharmaprojects® January 2021; Citeline Informa Pharma Intelligence; Avalere Health, LLC; Center for Drug Evaluation and Research, US Food & Drug Administration; https://www.statista.com/statistics/245473/market-share-of-the-leading-10-global-pharmaceutical-markets/
What is the projected economic impact on the US healthcare industry?
Looking ahead to 2024, CMS expects total US spending on healthcare to grow $1.4 trillion, from $3.6 trillion in 2018 (the most recent available data) to $5 trillion in 2024. Hospital care, professional services (physicians, dentists, and other healthcare professionals), outpatient prescription drugs, and healthcare administration costs comprised over 75% of total healthcare costs in the United States in 2018 and projected for 2024. Specifically, hospital care is expected to grow $461.3 billion, professional services by $337.3 billion, outpatient prescription drugs by $110.1 billion, and government administration/healthcare administration costs by $109.7 billion.
Approximately 50-55 new drug molecules are forecast to be introduced to the marketplace per year and are estimated to contribute about $133 billion to drug cost growth through 2025. Specialty medicines now account for 53% of spending, up from 27% in 2010 and primarily driven by growth in autoimmune and oncology therapies.
Net prices for currently marketed brand name products are expected to decline between 0 and 3% per year through 2025, primarily due to increased competition between manufacturers and aggressive contracting strategies by payers.
What cost reduction or other financial approaches to lowering drug costs are being utilized?
Several developed countries in the world have focused their strategies on reducing or mitigating pharmaceutical pricing through requiring the submission of cost-effectiveness analysis for drug approvals, price controls on innovator product introductions, capping annual price increases, mandating the use of generics, and implementation and enforcement of anti-monopoly laws. The ongoing and most recent discourse in Washington, DC during the past few years on controlling pharmaceutical pricing would strongly suggest that these types of measures will continue to face significant adoption challenges in the US.
Instead, the US efforts over the past few decades have been focused on reducing drug costs through bundling of payment services for both acute and outpatient treatment costs, including drug therapy, implementation and expanded use of the 340B program and reducing restrictions on drug importation. More recently, discussions have focused on increasing US-based API production, reversing the ACA Medicare negotiation prohibition and restricting drug price setting/increases to various international price indexes. Further, approximately half of the states, frustrated by the lack of national action on this issue have enacted laws focused on reducing drug prices. Unfortunately, these laws have a little direct effect on the actual acquisition price of a drug, but rather focus on volume purchasing, PBM transparency, coupons, importation, etc.
As a result, the focus on reducing drug expenditures for payers and providers in the US has been reliant on optimizing generic utilization, implementing restricted drug use criteria, step therapy and prior authorization processes, and volume-based contracting strategies. While these strategies will continue to be important in the future, they must be augmented by additional cost reduction and reimbursement realization strategies for hospitals, health systems and IDNs to improve an organization’s financial results concerning pharmaceutical expenditure performance.
Increased utilization of biosimilars can be a significant source of drug cost savings for the acute care setting but must be carefully assessed for use in the outpatient setting to minimize any net margin reductions due to differing reimbursement methodologies and rates from the originator / branded drug. A significant focus on enhanced pharmacy supply chain contracting and operational strategies are also essential for optimal financial performance.
- Financial Risk-Based Models
- Health Outcomes-Based Models
- Mortgage Models
- Subscription / Netflix Models
- Indication Specific Pricing Strategies
In addition, pharmacy supply chain and operational initiatives such as Consolidated Services Centers can be designed and leveraged to support optimizing a healthcare organization’s cost reduction strategies.
As noted previously, strategies that not only impact the acquisition cost of the drug but as well the reimbursement side of the equation, particularly in the outpatient setting, are a critical element of a successful pharmaceutical expense management strategy. These include critical analysis, design and implementation of Specialty Rx programs, Alternative Outpatient Infusion Sites of Care, Home Infusion programs and robust Revenue Cycle Management programs.
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