GAO Report to Congress: Industry Changes Affect Drug Pricing

The US Government Accountability Office (GAO) reports that retail drug spending accounted for about 12% of total personal healthcare service spending in the United States in 2015, up from about 7% through the 1990s.

The amount consumers spend on prescription drugs has nearly doubled since the 1990s, and much of the increase is due to the price of expensive brand-name drugs. The US Government Accountability Office (GAO) reports that retail drug spending accounted for about 12% of total personal healthcare service spending in the United States in 2015, up from about 7% through the 1990s. The GAO report, “Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals,” was written at the request of Representative Elijah Cummings, D-Maryland, and Senator Bernie Sanders, I-Vermont, and examines how trends in the pharmaceutical industry play a role in drug prices.

Market pressures, such as rising research and development (R&D) costs, fewer drugs in development, and competition from generics have driven structural changes in the industry that have affected drug prices, the GAO report shows the following:

  • Large drug companies increasingly used acquisition to obtain access to new research. Drug industry profit margins and merger and acquisition (M&A) deal values increased. The number of reported M&As generally held steady during the period, but the median disclosed deal value increased. The GAO found that drug company mergers can have varied impacts on innovation as measured by R&D spending, patent approvals, and drug approvals and some studies on these mergers have found a negative impact on innovation.
  • Having fewer competitors in the drug industry is associated with higher drug prices, especially for generic drugs.
  • Pharmaceutical and biotech sales revenue increased from $534 billion to $775 billion (about 45%) between 2006 and 2015, and 67% of drug companies increased their annual profit margins during the same period—with margins up to 20% for some companies in certain years.
  • Among the largest 25 companies, the annual average profit margin fluctuated between 15% and 20%. (By comparison, the annual average profit margin across non-drug companies among the largest global 500 companies fluctuated between 4% and 9%.)
  • Drug industry spending for R&D increased from $82 billion in 2008 to $89 billion in 2014, though federal spending for biomedical research—primarily funded through the National Institutes of Health (NIH)—decreased 3.8% from $27 billion in fiscal year 2008 to $26 billion in fiscal year 2014.
  • In addition to grants, several federal tax provisions provided incentives for industry R&D spending, including the orphan drug credit for companies developing drugs for rare diseases, which increased more than 5-fold from 2005 to 2014. It is noteworthy that the recently passed tax reform bill cut the tax credit for companies developing orphan drugs in half.
  • The largest 10 drug companies had about 38% of the industry’s sales revenue in 2014. However, market concentration was higher for narrower markets, such as for certain drugs in the same therapeutic class. Concentration, which can be measured by share of sales, provides a basic indication of the competitiveness of companies in an industry or specified market level within an industry. High market concentration is associated with higher drug prices, GAO found.
  • The total number of new drugs approved for the US market fluctuated between 2005 and 2016, ranging from 179 to 263 drug approvals annually. Novel drugs—innovative products that serve previously unmet medical need or help advance patient care—accounted for about 13% of all approvals each year. Biologics and orphan drugs accounted for growing shares of drug approvals, reflecting market and policy incentives to invest in these areas, according to experts GAO interviewed. 

  • Biosimilars will moderate prices for biologic drugs, but not to the same extent as traditional generics do because they are more costly to manufacture and may be less consistently substituted for the brand-name drug. “More time and research will be needed to understand the effects given the small number of biosimilars on the market,” the report concludes.
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