Vol. 268 December 15, 2021 Why Some Drugs Cost So Much.

December 16, 2021

“The $56,000 price per patient for ADUHELM (aducanumab) is a rational manufacturer response to an irrational insurance system.”
– NEJM, Nov. 25, 2021

Medicare is prohibited by law from negotiating with drug manufacturers over drug prices, even though health insurance companies can.  Health insurance companies seemingly do it annually as suggested by the volume of changes in their formularies every year. Also, drug companies justify the high price of new drugs by citing their large research and development costs. In recognition of that cost, new drugs are be patented for about ten years before cheaper generic drugs, identical in potency and effect to the brand name drugs, can be marketed. Both the inability of Medicare to negotiate and patent protection from competition contribute to the high price of new drugs. A recent analysis shows that the “system” (the regulatory and market environment) actually incentivizes inflated new drug prices. (1)

The peer reviewed analysis examines the $56,000 price per patient for the new Alzheimer’s disease drug, aducanumab or Aduhelm  , recently given “accelerated approval” by the FDA. Aduhelm is a physician-administered drug (given by intravenous infusion) manufactured by Biogen, but the insights into its pricing can give us clues about the price setting for other drugs.

Health insurance companies sometimes set their reimbursements levels for hospital and provider services and procedures fairly close to Medicare reimbursement levels, ie. the Medicare reimbursement serves as an implicit standard for the reimbursement by a private health insurance plans. The exact opposite is true for physician-administered drug prices. Medicare reimbursement (the price) for physician-administered drugs is based on the average on what private insurer plans pay, called the average sales price (ASP). The higher the price paid by private insurance, the higher the ASP, and the more Medicare must pay the manufacturer for the drug.  The manufacturer is incentivized to set a high price for the health insurance plan in order to jack up what Medicare has to pay.

By keying Medicare reimbursement to the ASP , Medicare leaves the complex comparison of new drug benefits as compared to existing drugs and the political volatility of evaluating whether its price is worth it to the private health insurance companies. Other countries have successfully used public or semi-public agencies to do those assessments (NICE in the U.K.) The Institute for Clinical and Economic Review (ICER in the U.S.) gave a negative evaluation of Aduhelm benefits and cost.

Providers (hospitals and office-based physicians) buy the infusion drugs from the pharmaceutical company (the “acquisition ” price) and then file for a higher reimbursement from the insurance company, retaining the differential as revenue. Medicare usually reimburses the provider up to 6% above the acquisition price. Hospital markup of the acquisition price can be up to 100%. Any reduction of the manufacturer’s price would lower provider revenue and “might dampen the provider’s use of the drug.”

Even though the evidence for the clinical efficacy of Aduhelm is inconclusive, competing drug companies will begin to market similar brand name drugs (not “generic drugs”) because of the FDA’s rapid “accelerated approval”. The “therapeutic competition” between drug brands will NOT lead to price competition because Medicare will still pay 80% of any price differential.  The patient shares only 20% of the drug price and that percentage is the same for low cost as for high cost drugs. So there is little incentive for a drug company to reduce its price in order to compete, and there is little incentive for the patient to choose a lower priced drug.

According to the author of this analysis these inflationary incentives of our current system of drug pricing could be reduced by:

  1. giving Medicare the authority to use its size and expertise to negotiate drug prices with the drug manufacturers.
  2. changing the Medicare infusion drug (physician-administered) reimbursement formula so it does not incentivize inflated prices by the providers.
  3. replacing the ASP method by accepting independent agency assessment of benefit and cost of new drugs as compared to existing drugs.
  4. revamping patient cost-sharing to encourage patient’s choosing of the lower cost drug.

Here’s a nutritional tip, too late for Thanksgiving, but just in time for Christmas and New Years.

The reason you have room for that piece of pie á la mode after grazing for an hour or so on hors d’oeuvres and then packing away a full dinner is the “variety effect” or “sensory specific satiety”; our bodies have different limits for different foods. The variety effect excites your appetite for the sweet dessert even after you stuff in all that meat and stuffing. Consider it an “evolutionary adaptation that allows us to balance our diets even without any nutritional knowledge.” It works up to about 1500 calories at one sitting. Over that and your gut releases a nausea-producing hormone. (2)

1. , “Lessons for Drug-Pricing Reform,” James C. Robinson, Ph.D., M.P.H., New England Journal of Medicine, 385:22, 2017-19,  November 25, 2021,
2. “Room for Dessert?”, Barbara Rolls, Director of Human Ingestive Behavior, Penn State, as reported in NYTimes, December 7, 2021, D6

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