Why the Recent Price Rise in Prescription Drugs is Not as High as Expected

In the start of the year most pharmaceutical firms have introduced price increases to many of their prescription drugs. Many drug makers, such as Pfizer, AbbVie and Allergan PLC, have all posted price increases on 1376 drug products in total, and counting, for the new year, with an average price increase of 5% on last year. There are expected to be more price rises announced over the next few weeks as other large firms, such as Amgen and Merck, haven’t yet posted their new prices for 2020.

The US pharmaceutical company Pfizer announced the average price rise of 6% to their prescription drugs. In total the firm has increased the prices of just less than a third of its products, with 40 medications rising more than 9% and the highest price rise being as much as 15% for some prescription drugs.  Furthermore, Swiss drug maker Novartis has raised prices on just under 30 drugs, with most of these increases in the range of 5-7%.

So what has spurred this increase in price? For Pfizer, as they have reported, it is due to an increase in cost of ingredients used in the drug production and engineering. However, the firm have said that they expect no growth in revenue from the higher prices in the US in 2020, despite this price increase. This is due to the rise in rebates they pay to pharmacy benefit managers to secure placement on insurers’ drug list. Also, according to Novartis, whilst it is raising the list prices of about 7% of its U.S. medicines, after discounts and rebates to commercial and government payers it expects a net price decrease of 2.5% in 2020.

These price rises are part of the drug makers core business model and firms have said they signify business as usual. The fundamental problem with the pricing system in pharmaceutical firms is that, as they are often monopolies, they have pricing power and are thus able to set prices as they wish.

There is also the aspect of medical inflation to take into account. Other large pharmaceutical firms such as Merck and Sanofi have reported that although they have introduced price rises this year, they aim to keep the increases parallel to the rate of medical inflation and hoped to help patients gain equal access to healthcare.

But the industry did not choose to introduce huge increases of more than 100% as seen in some previous years. The general price increase in prescription drugs has steadily declined over the past 6 years, with an average increase of 12% in 2014, 8% in 2018 and then down to 6% in 2019. So why is this the case?

Experts have been reporting that the causes of these small increases are to encourage a wider formulary coverage from insurers (prescription drugs which are covered by insurers). Furthermore, with these slightly lower increases than before, manufacturers have ensured that they will not have to go through as much scrutiny, saving the firms time and money.

On the other hand, soaring healthcare costs for U.S. consumers, and prescription drug prices in particular, are anticipated to be a core debate topic in the upcoming 2020 presidential campaign. Prescription drug prices are higher in the United States than in most developed countries, making the country one of the world’s most lucrative market for manufacturers. The nation’s healthcare spending is expected to rise by 5.5% annually until 2027, at which time the United States will be spending $6 trillion annually on care, equating to just under 20 percent of the national GDP.

It will be interesting to see how this year plays out with the American presidential election and the relationship drug prices. Will the prices continue next year after the election or will the policies in the presidential candidates’ manifestos really help solve this pricing crisis?


By Hermione Scott

Sector Leader: Nicolas Bouchez

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