Brand-Name Prescription Drug Pricing: Lack of Therapeutically Equivalent Drugs and Limited Competition May Contribute to Extraordinary Price Increases
Published: 2009-12-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The growing cost of brand-name prescription drugs--FDA-approved drug products that typically have patent protection--is a concern for patients, payers, and providers of health care--particularly when price increases are large and occur suddenly. A 2008 congressional hearing by the Joint Economic Committee drew attention to some small market prescription drugs that had an extraordinary price increase--a price increase of 100 percent or more at a single point in time. GAO was asked to examine extraordinary price increases for brand-name prescription drugs. Specifically, GAO examined the: (1) frequency of extraordinary price increases for brand-name prescription drugs from 2000 to 2008, (2) characteristics of the brand-name prescription drugs that had extraordinary price increases, and (3) factors that contributed to the extraordinary price increases experienced by these brand-name prescription drugs. To determine the frequency and characteristics of the brand-name prescription drugs that experienced an extraordinary price increase, GAO reviewed drug pricing and other data from a pharmaceutical industry compendium. To illustrate the factors that may contribute to extraordinary price increases, GAO developed case studies of six brand-name prescription drugs identified from the analysis of drug pricing data. These brand-name prescription drugs were selected based on factors including price, and the percentage and number of price increases.
section_title: What GAO Found
paragraphs: From 2000 to 2008, 416 brand-name drug products--different drug strengths and dosage forms of the same drug brands--had extraordinary price increases. These 416 brand-name drug products represented 321 different drug brands. The number of brand-name drug products that had these extraordinary price increases represents half of 1 percent of all brand-name drug products. The number of extraordinary price increases each year more than doubled from 2000 to 2008 and most of the extraordinary price increases ranged between 100 percent and 499 percent. Almost 90 percent of all brand-name drug products that had an extraordinary price increase sustained the new higher price--by either having another increase in price or remaining at the increased price. More than half of the brand-name drug products that had extraordinary price increases were in just three therapeutic classes--central nervous system, anti-infective, and cardiovascular. These therapeutic classes include drugs used to treat conditions such as fungal or viral infections, and heart disease. About half of the extraordinary price increases were for brand-name drug products that were purchased from drug manufacturers or wholesalers, repackaged, and resold in smaller packages to health care providers such as hospitals or physicians. However, some drug repackagers serve a niche in the drug market, and therefore may have a small share of the market in a therapeutic class. The majority of all extraordinary price increases were for drugs priced less than $25 per unit; however, a full course of treatment for some of these drugs could total several thousand dollars. Based on interviews with experts and industry representatives, a lack of therapeutically equivalent drugs--both generics and other brand-name drugs used to treat the same condition--and limited competition may contribute to extraordinary price increases. The limited availability of therapeutically equivalent drugs may result from patent protection and market exclusivity, and the size of the market for a given drug. Patent protection and market exclusivity temporarily limit competition and thereby allow a drug company to recoup research and development costs and earn a return on its financial investment. Two of six case study drugs that had extraordinary price increases were patented at the time of the extraordinary price increase. The transfer of the rights to a drug and corporate consolidations among drug companies may result in fewer drug options and contribute to extraordinary price increases, according to experts. For example, the rights to four of the case-study drugs were obtained by a new drug company, and two of these drugs had an extraordinary price increase shortly after the rights to the drugs were purchased. Finally, experts and industry representatives noted that unusual events--such as disruptions in production due to shortages of raw materials--and other factors, including manufacturing issues, may also contribute to some extraordinary price increases.

section_title: Letter
paragraphs: The growing cost of brand-name prescription drugs can be a burden on  patients, payers, and providers of health care—particularly when price  increases are large and occur suddenly. Controlling rising prescription  drug prices helps to ensure that patients can afford medically necessary  and sometimes life-saving medications, and to moderate costs for  hospitals and third-party payers such as insurance plans and state and  federal governments. However, a hearing held in July 2008 by the Joint  Economic Committee drew attention to certain prescription drugs that  recently had an extraordinary price increase—a price increase equal to  100 percent or more at a single point in time.
Drug manufacturers may consider several factors when setting prices for  brand-name prescription drugs, including a drug’s patent status and  market exclusivity. Patents and market exclusivity may provide a limited  period of protection from competition, thereby allowing a drug company  to recoup research and development costs and earn a return on its  financial investment. Drug manufacturers may obtain patents or patent  extensions from the U.S. Patent and Trademark Office. In addition,  independent of a drug product’s patent status, the Federal Food, Drug, and  Cosmetic Act authorizes various periods of market exclusivity for drug  products.
In this report, GAO studied extraordinary price increases for brand-name  prescription drugs. Specifically, we examined (1) the frequency of  extraordinary price increases for brand-name prescription drugs from  2000 to 2008, (2) the characteristics of the brand-name prescription drugs  that had extraordinary price increases, and (3) the factors that contributed  to the extraordinary price increases experienced by these brand-name  prescription drugs.
To determine the frequency of extraordinary price increases, we reviewed  the average wholesale price (AWP) for all brand-name prescription drugs  in Thomson Reuters’ Red Book, and identified all extraordinary price  increases—a unit price increase of 100 percent or more at a single point  in time—from 2000 to 2008. Red Book includes drug prices for each  package size (for example, 30, 60, or 100 tablets) and dosage form (for  example, tablet or injection) of a brand-name drug. We report the  frequency of extraordinary price increases in two ways—by drug brand  (or drug label name as recorded in Red Book) and by brand-name drug  product. For the drug brand frequencies, we counted an extraordinary  price increase if the price of any version of a brand-name drug increased  by 100 percent or more at a single point in time. For brand-name drug  products, we counted each extraordinary price increase for each  version—drug strength and dosage form—of the brand-name drug  separately. For example, if both the 1mg and 5mg tablet versions of a drug had extraordinary price increases, we categorized this as one drug brand  increase, and as two brand-name drug product increases (one for each  version of the brand-name drug). The frequencies of extraordinary price  increases reported include brand-name drug products that were  repackaged for resale to health care providers such as hospitals or  physicians. To identify the characteristics of brand-  name drug products that had an extraordinary price increase, we used Red  Book data on therapeutic class and price.
To identify the factors that may contribute to extraordinary price  increases, we interviewed drug policy experts; academic researchers; state  and federal government officials; consumer advocates; insurance company  representatives; and representatives from hospital, health insurance, and  retail pharmacy associations. To illustrate the factors that may contribute  to extraordinary price increases, we developed case studies of six  different brand-name drugs from different drug companies identified from  our analysis of Red Book data. Each brand-name drug that was active in  the market as of December 31, 2008 and that had an extraordinary price  increase was eligible for selection for the case study. To achieve variability  in the characteristics of the brand-name drugs reviewed for the case study,  our selection was based on several factors, including a drug’s price, the  level of the percentage increase, whether the drug had more than one  extraordinary price increase between 2000 and 2008, availability of the  drug from multiple sources, and permanence of the price increase. To gain  an understanding of the market and other dynamics leading to the  extraordinary price increase experienced by each brand-name drug in our  case studies, we interviewed representatives of the companies that  manufacture and distribute these brand-name drugs, and obtained  information about each drug company’s business strategy from the  companies’ Web sites, annual and quarterly reports, and other resources.  (See app. I for a detailed description of our scope and methodology.)
We reviewed the Red Book data file to assess its reliability. This review  involved an assessment of the variables in Red Book to identify incorrect  and erroneous entries or extreme outliers. We compared a random sample  of the pricing data reported in Red Book with pricing data in another drug  pricing compendium. Based on this review, we determined that the data  used in this report were adequate for our purposes.
We conducted our work from October 2008 through December 2009 in  accordance with all sections of GAO’s Quality Assurance Framework that  are relevant to our objectives. The framework requires that we plan and  perform our engagement to obtain sufficient and appropriate evidence to  meet our stated objectives and to discuss any limitations in our work. We  believe that the information and data obtained, and the analysis  conducted, provide a reasonable basis for any findings and conclusions in  this product.
subsections: section_title: Background
paragraphs: Extraordinary price increases for brand-name drugs can lead to  substantially higher drug spending for public and private insurance plans,  hospitals, and other providers that cover prescription drugs. Patients may  also face higher out-of-pocket costs and reduced access to medically  necessary and sometimes life-saving drugs. In addition, extraordinary  price increases for brand-name drugs may contribute to overall drug  spending, which has increased an average of about 10 percent a year since  2000. As reported during the Joint Economic Committee hearing, a small  but growing subset of drugs have had very large and sudden price  increases since 2000, raising questions about the competitiveness of the  prescription drug marketplace.
subsections: section_title: Overview of Brand-name Drugs
paragraphs: Brand-name drugs are drug products that have received FDA approval and  typically have patent protection. After the patent and any applicable  period of market exclusivity expires, these drugs are still considered  brand-name drugs, but other drug companies may develop a generic  equivalent—a similar drug that contains the same active ingredient,  strength, dosage form, route of administration, and intended use. The  FDA reviews and approves both brand-name and generic prescription  drugs.
Brand-name drugs may be supplied to health care providers from  companies other than a drug’s manufacturer. For example, brand-name  drugs may be repackaged from large drug inventories into smaller  packages, and sold by a repackaging company using a unique national  drug code (NDC). Repackagers include health maintenance organizations,  pharmacies, and private companies. Repackagers are required to follow  FDA guidelines, such as registering annually with the FDA and labeling  drugs under the same brand name. Repackagers may obtain prescription  drugs from wholesalers, and sell the repackaged drugs to health care  providers such as hospitals or physicians who then dispense them to  patients. Proponents of repackaged drugs believe that they offer  convenience to patients and may reduce medication errors. However,  some experts suggest that repackaging drugs may unnecessarily increase  drug prices and profits. Repackagers may assign AWPs for repackaged  drugs that differ from the AWP suggested by the drug’s manufacturer.
section_title: Patents, Market Exclusivity, and Orphan Drugs
paragraphs: Patents and market exclusivity protect prescription drugs by limiting  competition for a set period of time. A drug manufacturer may seek a   20-year patent on various aspects of its new chemical entity from the U.S.  Patent and Trademark Office. Once a patent is granted, other drug  manufacturers are excluded from making, using, or selling the patented  formula during the life of the patent. Companies that develop new brand- name drugs generally obtain a patent on the active ingredient used in the  drug. Patents may be granted for other properties of a brand-name drug,  such as its formulation and composition, and/or method of use. After  receiving a patent on a brand-name drug, drug companies typically seek  approval from the FDA for use of the drug to treat certain indications.
Market exclusivity may be granted for approved drugs and is independent  of the rights granted by a patent. The Federal Food, Drug, and Cosmetics  Act authorizes various periods of market exclusivity for drug products.  Generally, market exclusivities prevent the FDA from approving any  application for a competing drug compound for a stated period of time.  These exclusivities may relate to new chemical entities (5 years),  previously approved drugs with a new application that is based on new  clinical studies (3 years), generic drugs (180 days), drugs tested for use  in children (6 months), and orphan drugs (7 years). Market exclusivity  and patent protection may run concurrently.
The Joint Economic Committee hearing in July 2008 identified certain  brand-name drugs which treat rare diseases that experienced  extraordinary price increases. Incentives are available for drug companies  to develop innovative drugs for rare diseases (orphan drugs). In addition  to the 7-year market exclusivity status, these incentives may include tax  incentives of up to 50 percent of the cost of clinical research, and a waiver  of FDA fees. Research grants are also available through the FDA for the  development of drugs used to treat rare diseases or conditions.
section_title: Drug Market Trends
paragraphs: According to experts, the drug industry’s traditional business model is  changing. In the past, large drug companies conducted research and  development on several drugs, with the goal of releasing one or more  “blockbuster” drugs that treat a large population and can earn billions of  dollars. Recently, drug companies have increasingly focused on specialty  drugs that target niche markets, or a smaller population of people with a  narrow indication or medical condition. According to experts and industry  representatives, the pace of consolidation among drug companies through  mergers and acquisitions and transfers of drug ownership rights has  increased. Fewer companies producing and marketing drugs can lead to  greater market domination among certain companies and less  competition. In addition, large drug companies have purchased other drug  companies that specialize in manufacturing drugs targeting niche  populations or drugs in similar therapeutic classes.
section_title: Setting Prescription Drug Prices
paragraphs: According to some economists, the usual mechanisms that enforce market  discipline may not work in the same manner in the health care market. In  most markets—automobiles, for example—consumers are expected to be  conscious of the price of goods. If a company raises the price of its goods,  consumers would likely purchase fewer goods, causing the company’s  revenues to decline. However, health care providers influence demand  because they typically act on behalf of patients, who may remain unaware  of drug costs. If the patient is insured and their medical bills are paid by a  third-party payer, then demand may not be significantly influenced by  changes in price to the extent that it might be in other markets. Some price  restraint may be provided by pharmacy benefit managers and health plans  that use drug formularies to negotiate price rebates on brand name  prescription drugs.
According to industry representatives and experts, drug companies may  consider several issues when setting the price of a drug. These include:   (1) the perceived value of a drug relative to its competitors, such as its  ease of use; (2) the unique characteristics of a drug, such as its novelty, the  frequency of administration, and safety; (3) the cost of therapeutically  alternative drugs and alternative therapies, such as surgery, medical  devices, and existing drugs; (4) the disease treated; (5) the size and  characteristics of the patient market; (6) research and development,  manufacturing, and marketing costs; (7) the willingness of customers to  pay for the drug; and (8) the amount of reimbursement for the drug from  third-party payers. To mitigate high drug prices some companies subsidize  the price of some of their brand-name drugs through a patient assistance  program to low-income uninsured or underinsured patients.
section_title: Federal Oversight
paragraphs: While prescription drug pricing in the private sector is not subject to  federal regulation, drug companies are subject to antitrust enforcement.  The Federal Trade Commission (FTC) and the U.S. Department of Justice  (DOJ) enforce federal antitrust laws that prohibit activities such as  mergers and acquisitions that may substantially reduce competition or  create a monopoly. Companies are required to notify the FTC and DOJ of  certain pending mergers, also known as the pre-merger notification  program. In addition, the FTC has authority to investigate and take action  against unfair methods of competition affecting commerce, including in  the drug industry. Price fixing agreements between businesses, certain  monopolies, and other anticompetitive conduct are subject to review and  enforcement action. FTC officials indicated that the FTC has not brought a  case against a drug company for charging extraordinarily high prices  because such activity is not expressly prohibited by federal law, and  because high drug prices in the absence of anticompetitive behavior are  not per se illegal. The FTC has challenged anticompetitive patent  settlements between brand-name and generic drug manufacturers. For  example, FTC officials indicated that the agency has filed cases  challenging “pay-to-delay” settlements in which a brand-name  manufacturer shares a portion of its future profits with a potential generic  competitor in exchange for an agreement to delay marketing the generic  prescription drug.
Finally, drugs must be manufactured in accordance with FDA regulations  called good manufacturing practices, and the FDA inspects manufacturing  facilities before a drug can be approved. Good manufacturing practices  are designed to ensure the safety and quality of drug products and lay out  minimum standards for the facilities and equipment used in manufacturing  drug products. All drug manufacturers—including companies that acquire  the rights to a drug from another manufacturer—are required to comply  with good manufacturing practices.
section_title: More Than 400 Extraordinary Price Increases Occurred for Over 300 Drug Brands from 2000 to 2008
paragraphs: Between 2000 and 2008, 416 brand-name drug products representing   321 drug brands had extraordinary price increases. Most often, these  extraordinary price increases ranged from 100 percent to 499 percent, but  in a few cases were 1,000 percent or more.
subsections: section_title: From 2000 to 2008, 416 Extraordinary Price Increases Occurred for 321 Different Drug Brands
paragraphs: From 2000 to 2008, 416 brand-name drug products representing 321 drug  brands had an extraordinary price increase. A number of these 321 drug  brands had two or more extraordinary price increases between 2000   and 2008. The number of brand-name drug products that had these  extraordinary price increases each year trended upwards, more than  doubling from 2000 to 2008; however, they represent about half of   1 percent of all brand-name drug products. (See table 1 for the frequency  of extraordinary price increases.) Most brand-name drug products that  had an extraordinary price increase sustained the new price after the  extraordinary price increase occurred. For example, following the  extraordinary price increase, about 87 percent of the brand-name drug  products remained at the increased price, or had another increase in price,  and only 13 percent had a decrease in price.
A number of these brand-name drug products had more than one  extraordinary price increase. For example, 21 of the 416 brand-name drug  products had more than one extraordinary price increase between 2000  and 2008, and 9 of those 21 brand-name drug products had more than one  extraordinary price increase in the same year. The 416 brand-name drug  products were sold by 91 drug companies, and 12 of these 91 drug  companies sold brand-name drug products that had more than one  extraordinary price increase between 2000 and 2008. Furthermore, 4 of  these 91 drug companies sold brand-name drug products that had more  than one extraordinary price increase within the same year. (See app. II  for a list of brand-name drugs that had an extraordinary price increase.)
section_title: While Most Extraordinary Price Increases Were Less Than 500 Percent, Some Increases Were 1,000 Percent or More
paragraphs: Most extraordinary price increases—for 357 of the 416 brand-name drug  products with extraordinary price increases—ranged from 100 percent to  499 percent. Overall, the median increase for brand name drug products  was about 158 percent. However, some brand-name drug products had  very large extraordinary price increases. For example, 26 brand-name drug  products had extraordinary price increases greater than 1,000 percent—a  tenfold increase. The largest extraordinary price increase for brand-name  drug products was about 4,200 percent. (See table 2 for the frequency of  extraordinary price increases by percent increase.) In addition, 7 brand- name drug products had extraordinary price increases of 500 percent or  more multiple times from 2000 to 2008.
section_title: Most Brand-name Drug Products with Extraordinary Price Increases Were in Three Therapeutic Classes, Cost Less Than $25 Per Unit, or Were Repackaged
paragraphs: Brand-name drug products that had extraordinary price increases shared  similar characteristics including therapeutic class, cost, or packaging.  While extraordinary price increases occurred in 20 therapeutic classes,  more than half of the increases fell into 3 therapeutic classes—central  nervous system agents, anti-infective agents, and cardiovascular agents.  Most extraordinary price increases were for brand-name drug products  costing less than $25 per unit. Depending on the condition treated and  length of treatment, the full cost of treatment for a drug could total several  thousand dollars. More than half of all extraordinary price increases were  for repackaged brand-name drug products.
subsections: section_title: Three Therapeutic Classes Accounted for More Than Half of the Extraordinary Price Increases
paragraphs: While extraordinary price increases for brand-name drug products  occurred in 20 therapeutic classes, the majority of the drugs—  52 percent—that had extraordinary price increases fell into 3 therapeutic  classes—central nervous system, anti-infective, and cardiovascular  drugs.
Central nervous system—126 brand-name drug products had  extraordinary price increases. Central nervous system drugs include  sedatives an or anxiety.  d antidepressants, and are typically used to treat depression    Anti-infective—55 brand-name drug products had extraordinary price  increases. Anti-infect bacteria, or viruses. ive drugs are used to treat infections caused by fungi,    Cardiovascular drugs—35 brand-name drug products had extraordinary  price increases. Cardiov used to treat the heart. ascular drugs such as anti-arrhythmia agents are  The remaining 17 therapeutic classes comprised 192 brand-name drug  products that had extraordinary price increases. (See ta of extraordinary price increases by therapeutic class.)
section_title: Brand-name Drug Products Priced Less Than $25 Per Unit Accounted for Most of the Extraordinary Price Increases
paragraphs: Ninety-six percent of brand-name drug products that had extraordinary  price increases cost less than $25 per unit prior to the price increase.  Overall, brand-name drug products that had an extraordinary price  increase ranged in price from $0.01 per unit to $5,400 per unit prior to the  price increase. The median price of the brand-name drug products that  had an extraordinary price increase rose from $1.66 per unit before the  increase to $4.70 per unit after the increase. (See table 4 for the  frequency of extraordinary price increases by price level.)
It is important to note that the unit price of a drug is only one factor in  determining the cost of a full course of treatment for a medical condition.  Other factors affecting cost include the total number of units prescribed  and the duration of the treatment. For example, the full cost of treatment  for a drug that is priced less than $25 per unit could total several thousand  dollars or more. One of the drugs we reviewed that is used to treat a rare  cancer cost $390 for a full course of treatment prior to the extraordinary  price increase. After two extraordinary price increases, the full cost of a  course of treatment rose to more than $3,000.
section_title: Repackaged Drugs Accounted for More Than Half of the Extraordinary Price Increases for Brand- name Drug Products
paragraphs: More than half of the brand-name drug products that had extraordinary  price increases were repackaged—that is, purchased from drug  manufacturers or wholesalers and resold in smaller packages to health  care providers such as hospitals or physicians. (See table 5 for frequency  of extraordinary price increases for repackaged and nonrepackaged  drugs.) Almost all the extraordinary price increases for repackaged drugs  appear to have originated from the company that repackaged the drug  rather than from the company that manufactured the drug. Specifically,  95 percent of repackaged drugs had an extraordinary price increase  without a corresponding extraordinary price increase by the drug’s  manufacturer for the identical nonrepackaged drug. However, some drug  repackagers serve a niche in the drug market and therefore may have a  small share of the market in a therapeutic class.
Almost one-fifth of the 91 companies that sold brand-name drug products  that had extraordinary price increases were repackagers. The four  companies with the greatest number of brand-name drug products that  had an extraordinary price increase were repackagers—ranging from 26 to  51 brand-name drug products per repackaging company. About 99  percent of repackaged drugs cost less than $25 per unit. The median  price of repackaged drugs that had extraordinary price increases rose  from $2.14 per unit to $5.39 per unit after the increase.
section_title: Lack of Therapeutically Equivalent Drugs and Limited Competition May Contribute to Extraordinary Price Increases for Brand- name Drugs
paragraphs: Based on interviews with experts and industry representatives, we found  that a lack of therapeutically equivalent drugs—generics and other brand- name drugs used to treat the same condition—and limited competition  may contribute to extraordinary price increases. According to these  experts and industry representatives, the availability of few therapeutically  equivalent drugs may result from patent protection and market exclusivity,  and the limited size of the market for a given drug. Experts noted that the  transfer of drug rights and corporate consolidations may limit competition  among drug companies, resulting in few drug options. The experts and  industry representatives also noted that unusual events—such as  disruptions in production due to shortages of raw materials—and other  factors may also contribute to some extraordinary price increases.
Limited Availability of Therapeutic Equivalents: Experts we interviewed  said that drugs without therapeutic equivalents—in some cases due to  patents or a limited market size—may be more likely to have an  extraordinary price increase. Experts and industry representatives also  reported that competition within a therapeutic class of drugs may be  limited by (1) patents for a new drug, such as patents for the active  ingredient; (2) patents for existing drugs that have been modified by, for  example, changing a drug’s active ingredient, strength, or delivery  mechanism; and (3) market exclusivity protections. Patents and market  exclusivity may limit the entry of other prescription drugs into the market.  An expert also noted that no single factor leads to extraordinary price  increases, rather a combination of several factors likely contributes to  these extraordinary price increases.
Two of our six case study drugs had patent protection at the time of the  extraordinary price increase. (See app. III for a summary of the  characteristics of the case study drugs.) One drug had a method-of-use  patent and was the only FDA-approved drug available to treat an acute  illness affecting infants and young children. The other drug was under  patent at the time of its extraordinary price increase, and was sold by a  licensed repackager that purchased the drug from wholesalers.
In addition, experts and industry representatives we interviewed reported  that small market drugs, such as orphan drugs or drugs for rare diseases,  may lack therapeutically equivalent drugs, and thus may be prone to  extraordinary price increases. When the target patient population or  market for a drug is relatively small, there may be little financial incentive  for potential competitors to enter the market and offer competing drugs.  Two of the drugs we examined in our case studies treat rare diseases.  These drugs did not have generic equivalents at the time of their  extraordinary price increases; however, the drug companies reported the  availability of other drugs that treat similar conditions. Both drugs had  more than one extraordinary price increase—one of the drugs had two  price increases that were each more than 1,000 percent, and the other had  extraordinary price increases in 2 consecutive years.
Representatives of the manufacturer for one of these drugs reported that  their company’s business model is based almost solely on sales from the  drug that had the extraordinary price increases. This drug is currently  approved for several dozen indications, and the company is funding  research on other uses for the drug. The second company reported that its  business model is structured around facilitating the development of drug  products for rare diseases. The company provides financial support to  researchers developing new drugs for rare diseases and obtains the rights  to the drugs created by these researchers. The company considered their  financial support for developing other rare disease drugs when  determining the price of their drug. Furthermore, a representative of this  company stated that it had obtained other drugs that were discontinued by  a prior owner and then reintroduced the drugs onto the market. Both of  these drug companies market specialized drugs that treat rare diseases.
Transfer of Drug Rights, Corporate Consolidations, Mergers, and  Acquisitions: Experts and industry representatives we interviewed  reported that transfers of drug ownership rights and consolidations among  drug companies have increased. These transfers and consolidations may  limit competition as companies that may offer competing prescription  drugs in a therapeutic class merge or sell their rights to a drug, potentially  leading to extraordinary price increases for drugs. Fewer drug companies  competing in a therapeutic class may lead to fewer prescription drugs  being developed and sold within that class. Industry representatives and  experts reported that larger drug companies are acquiring drugs from  smaller drug companies that conduct drug research. Notwithstanding  potential FTC or DOJ review, drug companies may still acquire  competitors that offer similar drugs, potentially leading to market  domination in a therapeutic class. The rights to four of our case study  drugs were obtained by a new drug company, and two of these drugs had  an extraordinary price increase shortly after the rights to the drugs were  purchased.
Unusual Events: Extraordinary price increases were also attributed by  industry representatives and experts to the occurrence of unusual events,  such as disruptions in the production of a drug due to shortages of  necessary raw materials or the added costs to renovate outdated drug  production plants. For example, a drug in our case study was purchased  from a drug company that was suspending production of the drug. The  company that purchased this drug reported investing millions of dollars  transferring and upgrading the manufacturing equipment, processes, and  testing methods required to make the drug. The drug’s manufacturer  attributed the first of two extraordinary price increases to compensating  for the drug’s production expenses and other costs. Prior to the company’s  purchase of the drug, it was sold only in limited quantities through a  patient advocacy group. Another drug from our case study was  purchased by a company that spent several years trying to identify a  technical partner capable of processing the drug’s active ingredient, which  was difficult to manufacture because of its cytotoxic nature and the  limited quantity of drugs produced. The company’s representative stated  that due to the unique challenges of producing the active ingredient of the  drug, two companies were involved in manufacturing and packaging the  drug. As a result of changes made in manufacturing the drug, the company  reported investing several million dollars upgrading its manufacturing  equipment and processes in order to meet updated FDA regulations. This  company considered its investment to produce a stable supply of the drug  when pricing the product.
Other Factors: Representatives of the drug companies we reviewed for our  case studies reported that they considered other factors when determining  the price of their drugs. For example, one expert noted that extraordinary  price increases may occur because a drug manufacturer updates the price  of a drug after obtaining new information about certain demand and  supply factors affecting the drug. Three of the drug companies reported  that their products were difficult to manufacture. These companies  employ third-party manufacturers that produce the drugs. One of these  companies said that its drug was very toxic, and since its manufacturing  equipment was used to make other drug products, the equipment must be  decontaminated after each batch is produced. These drug companies  factored in these additional costs when they raised the price of their  products.
Some of the drug companies we reviewed revised the price of their brand- name drugs to bring them in line with the prices of what they regarded as  similar drugs. One company reviewed the estimated annual cost of several  orphan drugs when determining the price for its drug, which treats a rare  disease. Three companies reviewed various drug products and priced their  drugs in line with these drugs. This pricing strategy led, in part, to these  drugs experiencing an extraordinary price increase. An official from one of  these companies reported that the drug was underpriced, and the  company increased the price of the drug based on the prices of competing  drug products used for similar medical conditions. Some of the drug  companies considered the financial solvency of their drug product and  company, and their fiduciary responsibility to their shareholders when  determining the price of their drug.
In some cases, representatives of drug companies cited the quantity of free  or low-cost drugs donated through their patient assistance program and  the level of rebates paid to the Medicaid program as factors that they  considered when raising the price of their brand-name drugs. Two drug  companies said that the level of rebates paid to the Medicaid program was  a factor for their drugs’ extraordinary price increases. The companies  reported that they charged a higher retail price for their drugs, in part, to  account for the large financial outlays to patient assistance and  government programs. One company said that Medicaid beneficiaries  represent a large portion of the patient population that uses their drug  product. This company’s representatives stated that over half of its drug  sales were targeted to their patient assistance program for low-income,  underinsured, or uninsured individuals or were reimbursed under  Medicaid and therefore subject to rebates. These companies reported that  they offered patient assistance programs that provide a large volume of  free prescription drugs to patients who meet established criteria. The  programs also provide financial assistance to insured patients who face  financial hardship from paying copayments or coinsurance.
section_title: Expert Comments
paragraphs: We provided a draft of this report to drug policy experts, who provided  technical comments that we incorporated as appropriate.
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section_title: Appendix I: Scope and Methodology
paragraphs: In this report we address the following objectives: (1) the frequency of  extraordinary price increases for brand-name prescription drugs from  2000 to 2008, (2) the characteristics of the brand-name drugs that had  extraordinary price increases, and (3) the factors that contributed to the  extraordinary price increases experienced by these brand-name drugs.
To determine the frequency of extraordinary price increases, we reviewed  the average wholesale price (AWP) for all brand-name drugs in Thomson  Reuters’ Red Book, and identified all extraordinary price increases—a  unit price increase equal to 100 percent or more at a single point in time  from 2000 to 2008. We calculated the percent change in unit AWP recorded  in the Red Book for each 11-digit national drug code (NDC-11). For  example, where a NDC-11 had three unit prices reported in Red Book from  2000 to 2008 (unit price at point 1, unit price at point 2, and unit price at  point 3), two data records were created. One record contained the percent  change in unit price from point 1 to point 2, and the other record  contained the percent change from point 2 to point 3. We identified  extraordinary price increases by selecting only records (NDC-11s) with a  percent change of 100 percent or more.
Drugs sold in different package sizes—for example, 30, 60, or 100 tablets— have different NDC-11 codes. Each NDC-11 record captures the label name  of the drug which includes the dosage form of the drug. Because a brand- name drug may have several NDC-11 codes for different package sizes, we  identified the number of brand-name drug products that had an  extraordinary price increase by their NDC-9 code, which represents the  manufacturer and drug name, and strength. Where more than one package  size of the same brand-name drug had an extraordinary price increase, we  selected the package size with the highest extraordinary price increase.  We counted an NDC-9 with different package sizes that had an  extraordinary price increase on the same date only once. In this report, we  use three terms to refer to the brand-name prescription drugs recorded in  the Red Book. Drug brand refers to the label name of a brand-name  prescription drug; brand-name drug product refers to the different  products of the same drug brand. Otherwise we use the term brand-name  drug or drug when we do not need to distinguish between drug brand and  brand-name drug product. We report the frequency of brand-name drugs  that had extraordinary price increases by (1) drug brand (drug label name  as recorded in Red Book), and (2) brand-name drug product (NDC-9  code). The frequencies of extraordinary price increases reported by brand- name drug products (NDC-9) include the same drug brand sold in different  strengths and dosage forms (e.g., a 1mg or a 5mg tablet). The frequency of  extraordinary price increases reported includes brand-name drug products  that were repackaged by a distributor for resale to health care providers.  (See app. II for a list of the brand-name drugs that had extraordinary price  increases.) To identify the characteristics of brand-name drugs that had an  extraordinary price increase, we used Red Book data on therapeutic class  and price.
To identify the factors that may contribute to extraordinary price  increases we interviewed drug policy experts; academic researchers; state  and federal government officials; consumer advocates; insurance company  representatives; and hospital, health insurance, and retail pharmacy  associations representatives. To illustrate the factors that may contribute  to extraordinary price increases, we developed case studies of six drugs  from different companies identified from our analysis of Red Book data.  Each brand-name drug (NDC-11) was eligible for inclusion as a case study  if it was active in the market as of December 31, 2008, and had an  extraordinary price increase. To achieve variability in the characteristics  of the drugs reviewed for the case study, selection was based on several  factors, such as the (1) unit price, (2) percentage increase in price, (3) year  of increase, (4) number of increases, (5) availability from multiple sources,  (6) orphan drug status, and (7) permanence of the price increase.
We also interviewed representatives of the companies that manufactured  and distributed the case study drugs about the market dynamics leading   to the drugs’ extraordinary price increases. We gathered information on:  (1) the characteristics of each drug, such as its patent and market  exclusivity status, indication, volume, and utilization; (2) corporate  business and marketing strategy for each drug; (3) factors that influenced  the extraordinary price increase; and (4) agreements with the makers of  drugs in the same therapeutic class. Some information provided by the  representatives during these interviews is considered proprietary. As a  result, the names of the participating companies and brand-name drugs are  not identified. (See app. III for information on each of the drugs from the  case studies.) Information was also obtained from drug companies’ Web  sites, annual and quarterly reports, and other resources.
We systematically reviewed Red Book to assess its reliability. The review  involved an assessment of the frequencies of all numeric and date  variables in Red Book to identify incorrect and erroneous entries or  extreme outliers. We compared a sample of the pricing data for brand- name drugs that had extraordinary price increases reported in Red Book  with pricing data contained in another drug pricing compendium and  found a high degree of concurrence between the prices recorded in both  data sources. Based on this review, we determined that the data used in  our report were adequate for our purposes. We conducted our work from  October 2008 through December 2009 in accordance with all sections of  GAO’s Quality Assurance Framework that are relevant to our objectives.  The framework requires that we plan and perform our engagement to  obtain sufficient and appropriate evidence to meet our stated objectives  and to discuss any limitations in our work. We believe that the information  and data obtained, and the analysis conducted, provide a reasonable basis  for any findings and conclusions in this product.
section_title: Appendix II: Brand-name Prescription Drugs with an Extraordinary Price Increase, 2000 to 2008
paragraphs: Using Thomson Reuters’ Red Book, we calculated the change in average  wholesale price (AWP) and identified all unit price increases equal to 100  percent or more at a single point in time from 2000 to 2008. (See app. I for  more information.) Based on this analysis, we identified the label names of  drugs that had extraordinary price increases by their NDC-9 code. AWP  records in Red Book are reported by the drug manufacturer and published  in Red Book. In some cases, when drug manufacturers do not report AWP,  Red Book calculates AWP from other drug pricing benchmarks provided  by drug manufacturers. GAO did not audit the drug pricing information  reported to Red Book by drug manufacturers nor the calculations  performed by Red Book to fill nonreported AWP data. Some of the drugs  on this list were repackaged, or nonrepackaged, while other drugs were  both repackaged and nonrepackaged. In a few cases, drugs were removed  from the list because changes in the recorded package size led to errors in  the calculated change in unit prices. See table 6 below for the label names  of brand-name prescription drugs that had an extraordinary price increase  between 2000 and 2008.
section_title: Appendix III: Characteristics of Case Study Drugs
paragraphs: To gain an understanding of the market dynamics leading to extraordinary  price increases for brand-name drugs, we developed case studies of six  brand-name drugs identified from our analysis of Red Book data. Selection  for inclusion as a case study was based on several factors including price,  the level of the percentage increase, whether the drug had more than one  extraordinary price increase between 2000 and 2008, availability of the  drug from multiple sources, and the permanence of the price increase. See  table 8 for characteristics of the drugs selected for the case studies.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
paragraphs: John E. Dicken at (202) 512-7114 or Dickenj@gao.gov.
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Martin T. Gahart, Assistant  Director; N. Rotimi Adebonojo; Rashmi Agarwal; George Bogart;   Kristin Helfer Koester; Martha Kelly; Yesook Merrill; Giao N. Nguyen;  Daniel Ries; and Timothy Walker made major contributions to this report.
section_title: Related GAO Products
paragraphs: Medicaid Outpatient Prescription Drugs: Second Quarter 2008 Federal  Upper Limits for Reimbursement Compared with Average Retail  Pharmacy Acquisition Costs. GAO-10-118R. Washington, D.C.:   November 30, 2009.
Prescription Drugs: Overview of Approaches to Control Prescription  Drug Spending in Federal Programs. GAO-09-819T. Washington, D.C.:  June 24, 2009.
Medicare Part D Prescription Drug Coverage: Federal Oversight of  Reported Price Concessions Data. GAO-08-1074R. Washington, D.C.:  September 30, 2008.
Prescription Drugs: Trends in Usual and Customary Prices for Drugs  Frequently Used by Medicare and Non-Medicare Health Insurance  Enrollees. GAO-07-1201R. Washington, D.C.: September 7, 2007.
Prescription Drugs: Oversight of Drug Pricing in Federal Programs.  GAO-07-481T. Washington, D.C.: February 9, 2007.
Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices  Used by Other Countries and U.S. Private Payers and Federal Programs.  GAO-07-358T. Washington, D.C.: January 11, 2007.
Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper  Limits for Reimbursement Compared with Retail Pharmacy Acquisition  Costs. GAO-07-239R. Washington, D.C.: December 22, 2006.
Prescription Drugs: Price Trends for Frequently Used Brand and  Generic Drugs from 2000 through 2004. GAO-05-779. Washington, D.C.:  August 15, 2005.
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns  about Rebates Paid to States. GAO-05-102. Washington, D.C.: February 4,  2005.
Medicaid: States’ Payments for Outpatient Prescription Drugs.   GAO-06-69R. Washington, D.C.: October 31, 2005.
Federal Employees’ Health Benefits: Effects of Using Pharmacy Benefit  Managers on Health Plans, Enrollees, and Pharmacies. GAO-03-196.  Washington, D.C.: January 10, 2003.
Prescription Drugs: Expanding Access to Federal Prices Could Cause  Other Price Changes. GAO/HEHS-00-118. Washington, D.C.: August 7,  2000.