ACA & The New Normal

What's Driving Retail Drug Costs?

Academy of Actuaries Examines Drivers of Increasing Retail Prescription Drug Costs and Options to Address Them

WASHINGTON—In a new issue brief, the American Academy of Actuaries’ Prescription Drug Work Group identifies the drivers of prescription drug costs—projected to be the fastest-growing health care spending category and to consistently outpace other categories—as well as their impact on health care payers and options for public policymakers to help address the expected increases.

According to the issue brief, “Prescription Drug Spending in the U.S. Health Care System: An Actuarial Perspective,” the major drivers of the expected cost increases include disproportionate use of costlier drugs that may not be more effective, increased dosage and unit costs, overutilization of drugs, delays in the introduction of generic drugs, regulatory and market structures that do not exist in or operate differently from other countries that have lower costs, and other factors.

Rapidly increasing prescription drug costs have significant effects for a broad swath of stakeholders in the health care system, including insured health plan members, government programs, the uninsured, insurers, government, and other payers. Public policy approaches that could help lower retail prescription drug spending include outcome-based reimbursements, pricing transparency, reference pricing, and benefit plan modifications.

Excerpts from  the ‘Prescription Drug Spending…’ report

U.S. Paying More Than Other Nations for Pharmaceuticals

A large disparity exists between the prices of drugs in the United States compared with other countries. Assigning an index value representing the cost of a basket of prescription drugs to compare prices across countries showed the index values ranged from 95 in Germany to 46 in the United Kingdom, reflecting that U.S. retail prices for commonly prescribed drugs were 5 percent to 117 percent higher than prices in the other six countries included in the study. Prices for patented brand-name drugs are about 18 percent lower in Japan, and cancer drug prices are 20 percent to 40 percent lower in Europe.8 Several causes have been identified as contributing to higher U.S. prices.

  • Lack of a central negotiating authority. In Canada and many European countries, it is common for the government to take responsibility for transactions with pharmaceutical companies. However, others believe these savings may be difficult to realize in the United States, especially because there is a ban on a federally required formulary.9 The federal government cannot negotiate prices for any populations other than Medicaid beneficiaries and military veterans. The commercial populations are subsidizing the low cost in these negotiated areas.
  • Access to all approved drugs. The U.S. public and its health care system prioritizes accessibility and opportunities for coverage to all FDA-approved drugs to treat a condition. The U.S. health system uses tools such as cost-sharing and formulary to try to drive utilization to lower-cost alternatives but rarely completely eliminates coverage for a high-cost drug with no alternative. In contrast, other countries limit access to drugs where value is not, in their estimation, demonstrated to be significantly better than alternatives. Some state Medicaid programs are moving in this direction, creating state mandated preferred and non-preferred drug lists, where sometimes less than half the drugs in a particular therapeutic category are available without prior authorization.
  • Greater ability to pay. Prices may be higher due to the ability of U.S. health insurers to absorb those prices. Some patients are largely shielded from the high cost of these drugs due to mandated limits in insurance out-of- pocket costs. In addition, a large portion of the drug development and research processes are absorbed by the American payer as a result of their ability to pay.
  • Regulatory environment. The FDA must review all of the clinical trials and determine if the drug is safe, effective, and its benefits to users outweigh its risks, which can take longer and cost more than reviews by other nations. Furthermore, the United States has requirements for patent and exclusivity periods. The general term for a new patent, which the FDA requires to be submitted for new drugs, can be up to 20 years. Similarly, the FDA can grant exclusive marketing rights for drugs that meet certain statutory requirements for varying periods (e.g., seven years for orphan drugs) that may or may not run concurrently with the patent period.10 An example of this is the seven-year exclusive marketing rights granted to orphan drugs (drugs for treatment of rare diseases).

Leading health actuaries representing the Academy discussed the topic at a briefing for policymakers and the news media on March 9, 2018, on Capitol Hill.

U.S. retail prices for commonly prescribed drugs were 5 percent to 117 percent higher than prices in the other six countries included in the study

The issue brief, developed by the Academy’s Prescription Drug Work Group, is available on the Academy website at under the health section accessible via the “Public Policy” tab.




About the American Academy of Actuaries
The American Academy of Actuaries is a 19,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.