# Medication costs

Medication costs, also known as drug costs are a common health care cost for many people and health care systems. Prescription costs are the costs to the end consumer. Medication costs are influenced by multiple factors such as patents, stakeholder influence, and marketing expenses. A number of countries including Canada, parts of Europe, and Brazil use external reference pricing as a means to compare drug prices and to determine a base price for a particular medication. Other countries use pharmacoeconomics, which looks at the cost/benefit of a product in terms of quality of life, alternative treatments (drug and non-drug), and cost reduction or avoidance in other parts of the health care system (for example, a drug may reduce the need for a surgical intervention, thereby saving money). Structures like the UK's National Institute for Health and Clinical Excellence and to a lesser extent Canada's Common Drug Review (a division of the Canadian Agency for Drugs and Technologies in Health) evaluate products in this way.
Medication costs can be listed in a number of ways including cost per defined daily dose, cost per specific period of time, cost per prescribed daily dose, and cost proportional to gross national product.
A November 2020 study found that more than 1.1 million senior citizens in the U.S. Medicare program are expected to die prematurely over the next decade because they will be unable to afford their prescription medications, requiring an additional $17.7 billion to be spent annually on avoidable medical costs due to health complications.

## Definition

Medication costs can be the selling price from the manufacturer, that price together with shipping, the wholesale price, the retail price, and the dispensed price.
The dispensed price or prescription cost is defined as a cost which the patient has to pay to get medicines or treatments which are written as directions on prescription by a prescribers. The cost is generally influenced by a financial relationship between pharmaceutical manufacturers, wholesale distributors and pharmacies. In addition to the financial relationship, each nation has different systems to control the cost of prescriptions. In the United States, a pharmacy benefit manager, a third-party organization, such as private insurances or government-run health insurances will implement cost containment programs, such as establishing a formulary, to contain the cost. In the United Kingdom, the government negotiates an overall cap on drugs bill growth with the pharmaceutical industry. In addition a government agency, the National Institute of Health and Care Excellence (NICE) assesses cost effectiveness of individual prescription drugs pricing. The National Health Service also may negotiate direct with individual pharmaceutical companies for certain specialised medicines, as well as running competitive procurements for generic drugs and for patented medicines where there is more than one drug available for a condition. Prescription costs are a regular health care cost for the sick and may mean economic hardship for the underprivileged. With healthcare insurance, the patient in the U.S. pays a co-pay (the amount the patient must pay for each drug or medical visit), a deductible (the amount the patient has to pay before the insurance starts sharing the cost) and co-insurance (the amount the patient has to pay after deductible) for prescription costs. After reaching the out of pocket maximum, the insurance company will pay 100% of the prescription cost. The amount the patient has to pay depends on the healthcare insurance plan the patient has.
As of 2017, prescription costs range from just more than 15% in high income countries to 25% in lower-middle income countries and low income countries.$^{:418}$

## Factors

Drug costs in different countries :
| Drug | US | Canada | UK | Spain | Netherlands |
| Etanercept | $2,225 | $1,646 | $1,117 | $1,386 | $1,509 |
| Celecoxib | $225 | $51 | $112 | $164 | $112 |
| Glatiramer | $3,903 | $1,400 | $862 | $1,191 | $1,190 |
| Duloxetine | $194 | $110 | $46 | $71 | $52 |
| Adalimumab | $2,246 | $1,950 | $1,102 | $1,498 | $1,498 |
| Esomeprazole | $215 | $30 | $42 | $58 | $23 |
Pricing any pharmaceutical drug for sale to the general public is daunting. Per Forbes, setting a high ceiling price for a new drug could be problematic as physicians could shy away from prescribing the drug, because the cost could be too great for the benefit. Setting too low of a price could imply inferiority, that the drug is too "weak" for the market. There are many different pricing strategies and factors that go into the research and evaluation of a future drug's price with whole departments within US pharmaceutical companies like Pfizer devoted to cost analysis.
This chart shows discrepancies in drug pricing in different countries.

### Marketing expenses

A study has placed the amount spent on drug marketing at 2-19 times that on drug research.

### Research and development

Much research, needed to create drugs is done by the public sector. In addition, pharmaceutical companies also do much research prior to producing medications. The table shows research and development statistics for pharmaceutical companies as of 2013 per Astra Zeneca.
| Pharmaceutical company | Number of drugs approved | Average R&D spending per drug (in $ Millions) | Total R&D spending from 1997 to 2011 (in $ Millions) |
| AstraZeneca | 5 | $11,790.93 | $58,955 |
| GlaxoSmithKline | 10 | $8,170.81 | $81,708 |
| Sanofi | 8 | $7,909.26 | $63,274 |
| Roche Holding | 11 | $7,803.77 | $85,841 |
| Pfizer | 14 | $7,727.03 | $108,178 |
| Johnson & Johnson | 15 | $5,885.65 | $88,285 |
| Eli Lilly & Co. | 11 | $4,577.04 | $50,347 |
| Abbott Laboratories | 8 | $4,496.21 | $35,970 |
| Merck & Co Inc. | 16 | $4,209.99 | $67,360 |
| Bristol-Meyers Squibb Co. | 11 | $4,152.26 | $45,675 |
| Novartis | 21 | $3,983.13 | $83,646 |
| Amgen Inc. | 9 | $3,692.14 | $33,229 |
Severin Schwan, the CEO of the Swiss company Roche, reported in 2012 that Roche's research and development costs in 2014 amounted to $8.4 billion, a quarter of the entire National Institutes of Health budget. Given the profit-driven nature of pharmaceutical companies and their research and development expenses, companies use their research and development expenses as a starting point to determine appropriate yet profitable prices.
Pharmaceutical companies spend a large amount on research and development before a drug is released to the market and costs can be further divided into three major fields: the discovery into the drug's specific medical field, clinical trials, and failed drugs.

#### Discovery

The process of drug discovery can involve scientists determining the germs, viruses, and bacteria that cause a specific disease or illness. The time frame can range from 3–20 years and costs can range between several million to tens of millions of dollars. Research teams attempt to break down disease components to find abnormal events/processes taking place in the body. Only then do scientists work on developing chemical compounds to treat these abnormalities with the aid of computer models.
After "discovery" and a creation of a chemical compound, pharmaceutical companies move forward with the Investigational New Drug (IND) Application from the FDA. After the investigation into the drug and given approval, pharmaceutical companies can move into pre-clinical trials and clinical trials.

#### Trials

Drug development and pre-clinical trials focus on non-human subjects and work on animals such as rats.
The Food and Drug Administration requires at least 3 phases of clinical trials that assess the side effects and the effectiveness of the drug. An analysis of trial costs of approved drugs by the FDA from 2015 to 2016 found that out of 138 clinical trials, 59 new therapeutic agents were approved by the FDA. These trials have a median estimated cost of $19 million US dollars.
* Phase 1 lasts several months and aims to assess the safety and dosage of the drug. The purpose is to determine how the drug affects the body.
* Phase 2 lasts several months to two years and aims to assess the efficacy and side effect profile of the drug.
* Phase 3 lasts 1 to 4 years and aims to continue assessing and monitoring the efficacy and side effects of the drug. Phase 3 aims to determine the risks and benefits of a drug to its intended patient population.
* Phase 4 trials occur after the drug is approved by the FDA and aims to continue monitoring safety and efficacy of the drug.
Of these phases, the phase 3 is the most costly process of drug development. A single phase 3 trial can cost upwards of $100 million. It accounts for about 90 percent of the cost to pharmaceutical companies to develop a medication.

#### Failed drugs

The processes of "discovery" and clinical trials amounts to approximately 12 years from research lab to the patient, in which about 10% of all drugs that start pre-clinical trials ever make it to actual human testing. Each pharmaceutical company (who have hundreds of drugs moving in and out of these phases) will never recuperate the costs of "failed drugs". Thus, profits made from one drug need to cover the costs of previous "failed drugs". The cost of failure in R&D constitutes about 60% of all development costs. It emphasizes the importance of success rates as a key driver of R&D productivity. The average costs for studies are estimated at $30 million, $70 million, and $310 million for Phase I, II, and III, respectively.

#### Relationship

Overall, research and development expenses relating to a pharmaceutical drug amount to the billions. For example, it was reported that AstraZeneca spent upwards on average of $11 billion per drug for research and developmental purposes. The average of $11 billion only comprises the "discovery" costs, pre-clinical and clinical trial costs, and other expenses. With the addition of "failed drug" costs, the $11 billion easily amounts to over $20 billion in expenses. Therefore, an appropriate figure like $60 billion would be approximate sales figure that a pharmaceutical company like AstraZeneca would aim to generate to cover these costs and make a profit at the same time.
Total research and development costs provide pharmaceutical companies a ballpark estimation of total expenses. This is important in setting projected profit goals for a particular drug and thus, is one of the most necessary steps pharmaceutical companies take in pricing a particular drug.
A 2022 study invalidated the common argument as is for high medication costs that research and development investments are reflected in and necessitate the treatment costs, finding no correlation for investments in drugs (for cases where transparency was sufficient) and their costs.

### Stakeholders

Patients and doctors can also have some input in pricing, though indirectly. Customers in the United States have been protesting the high prices for recent "miracle" drugs like Daraprim and Harvoni, both of which attempt to cure or treat major diseases (HIV/AIDS and hepatitis C). Public outcry has worked in many cases to control and even decide the pricing for some drugs. For example, there was severe backlash over Daraprim, a drug that treats toxoplasmosis. Turing Pharmaceuticals under the leadership of Martin Shkreli raised the price of the drug 5,500% from $13.50 to $750 per pill. After denouncement from 2016 presidential candidates Hillary Clinton and Bernie Sanders, Martin Shkreli said he would reduce the price but later decided not to.
With the recent trend of price gouging, legislators have introduced reform to curb these hikes, effectively controlling the pricing of drugs in the United States. Hillary Clinton announced a proposal to help patients with chronic and severe health conditions by placing a nationwide monthly cap of $250 on prescription out-of-pocket drugs.
Research for a drug that is curing something no one has ever cured before will cost much more than research for the medicine of a very common disease that has known treatments. Also, there would be more patients for a more common ailment so that prices would be lower. Soliris only treats two extremely rare diseases, so the number of consumers is low, making it an orphan drug. Soliris still makes money because of its high price of over $400,000 per year per patient. The benefit of this drug is immense because it cures very rare diseases that would cost much more money to treat otherwise, which saves insurance companies and health agencies millions of dollars. Hence, insurance companies and health agencies are willing to pay these prices.

### Public policy

Policy makers in some countries have placed controls on the amount pharmaceutical companies can raise the price of drugs. In 2017, Democratic party leaders proposed the creation of a new federal agency to investigate and perhaps fine drug manufacturers who make unjustified price increases. Pharmaceutical companies would be required to submit a justification for a drug with a “significant price increase” within at least 30 days of implementation. Under the terms of the proposal, Mylan's well-publicized price increase for its EpiPen product would fall below the criteria for a significant price increase, while the 5000% overnight increase of Turing Pharmaceuticals Daraprim (pyrimethamine) would be subject to regulatory action.

### Patents and monopoly rights

One of the most important factors that determine the cost of a drug is the availability of competing drugs and treatments. Having two or more manufacturers producing drugs for the same disease tends to reduce costs.
Patent laws give pharmaceutical companies the exclusive right to market a drug for a period of time, allowing them to extract a high monopoly price. For example, U.S. patent law grants a monopoly for 20 years after filing. After that period, the same product from different manufacturers - known as generic drugs - can be sold, usually resulting in a substantial price reduction and possible shift in market share. Two patents that are commonly used are process patents and drug product patents. Process patents only provide developers intellectual claim to the methods in which the product was manufactured, so a competitor can make the same drug by a different method without violating the patent.
In some cases, a new treatment is more effective than an older treatment, or a given drug may work better than competitors for only some patients. The availability of an imperfect substitution erodes prices to a lesser degree than would a perfect substitute.
Some countries grant additional protections from competition for a limited period, such as test data exclusivity or supplementary protection certificates. Additional incentives are available in some jurisdictions for manufacturers of orphan drugs for rare diseases, including extended monopoly protection, tax credits, waived fees, and relaxed approval processes due to the small number of affected patients.

### Transparency

The process of creating drugs to testing them to selling them is a long process. Aside from the costs for research and trials, many consumers are unaware of the process of the drug supply chain. There are many middlemen and companies that buy and sell the drugs. This includes "drug manufacturers, drug wholesalers, pharmacies, and payers." Big Pharma's influence in the policies and regulations regarding drug patents and prescription costs, protects pharmaceutical companies from having to be transparent about where the money goes and who those high prices benefit, including Pharmacy Benefit Managers. Transparency between drug manufacturers and sellers increases accountability between producers and consumers and allows for patients to know more about what they are paying for. Prescription Drug Price Locators allow for patients to learn of more cost-effective sellers and find discounts that will benefit them.
In an effort by the U.S. Department of Health and Human Services (HHS) to regulate drug price transparency in television advertising in 2019, the HHS saw a resistance to change against legislation. Although what the HHS sought to change was a step in the right direction for drug price transparency, Federal Judge Amit P. Mehta ruled in favor of the pharmaceutical industry. The ruling was based on the inability to give the HHS such power to enact such legislations. Policymakers have a lot to take into account when regarding the issue of transparency, as there are many middlemen involved in the selling and buying of prescription drugs.

## Effects on consumers

When the price of medicine goes up the quality of life of consumers who need the medicine decreases. Consumers who have increased costs for medicine are more likely to change their lifestyle to spend less money on groceries, entertainment, and routine family needs. They are more likely to go into debt or postpone paying their existing debts. High drug prices can prevent people from saving for retirement. It is not uncommon for typical people to have challenges paying medical bills. Some people fail to get the medical care they need due to lack of money to pay for it. In low and middle income countries up to 90% of people pay for medications out of pocket. A November 2020 study by the West Health Policy Center stated that more than 1.1 million senior citizens in the U.S. Medicare program are expected to die prematurely over the next decade because they will be unable to afford their prescription medications, requiring an additional $17.7 billion to be spent annually on avoidable medical costs due to health complications.
The effects of high prescription costs on consumers also affects their long-term health and overall life expectancy. When properly used, a medication can benefit a patient and cure their disease. When a patient cannot afford to pay for their medication, they lose out on the optimal benefits of proper and adequate dosages. High prescription costs don't just affect patients in the short run, but also deteriorates their overall quality of life, as they are exposed to chronic illnesses that could have been prevented by that first prescription. Evidence from studies indicates that insulin therapy as a treatment for patients with high glucose levels that are not yet diabetic, leads to a decrease in insulin resistance, which benefits patients.