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. 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. 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. 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. 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. 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. 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. 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.) 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. 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. 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.) 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. 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. 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. We provided a draft of this report to drug policy experts, who provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested parties. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix IV. 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. 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. 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. John E. Dicken at (202) 512-7114 or Dickenj@gao.gov. 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. 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.

Summary: 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. 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.