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What's the Future of Drug Pricing?

How innovation and the U.S. consumer are disrupting pricing in the healthcare industry.

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January 4, 2019

The cost of drugs in the U.S. has long been a controversial topic as out-of-pocket expenses for consumers have risen sharply for patients in recent years. At the same time, innovation in areas such as cancer treatment is signaling a new direction for the industry. The J.P. Morgan Research team gives their view on the debate over how to make medicine more affordable and why the consumer will be the biggest disruptor to the healthcare industry in 2019.

The Pricing Debate

The rising cost of medicine for U.S. consumers came back into focus in 2018, as President Trump’s administration unveiled a broad policy proposal to tackle drug prices, helping to reignite the debate of how much patients are being asked to pay for their prescriptions. Meaningful reform is a long-term project and the current administration has acknowledged that a comprehensive overhaul of the system will not take place anytime soon. But while regulatory change may be a slow process, consumer awareness on the cost of healthcare is on the rise as more and more patients are selecting their plans directly. At the same time, the pharmaceutical industry is also trying to rely less on pricing and more on innovation and new drugs to boost growth, so an industry shift is gradually underway.

The current system in the U.S. involves a list price and a net price for drugs. A growing number of patients are being exposed to the list price (before rebates or discounts) for a variety of reasons, including the growth of high deductible plans, ultimately making medicine much more costly for consumers. “More and more individuals in the U.S. now have some part of their healthcare expense exposed to the gross price, meaning out-of-pocket expenses have increased quite aggressively over the last few years," said U.S. Major and Specialty Pharmaceuticals Senior Analyst at J.P. Morgan, Chris Schott. Drugmakers have been criticized for this increase in out-of-pocket expenses for patients and in an effort to improve their reputation and minimize risk, they are increasingly focused on keeping net price increases low.


The list price is the price a manufacturer establishes for a product, or in most cases the original selling price before discounts and rebates are applied. Those exposed to the list price include patients without insurance or those with high-deductible plans.


The net price is the final number after discounts are negotiated. It is the actual amount drugmaker recoups from selling their product, once all the fees to various stakeholders including wholesalers, payers, Pharmacy Benefit Managers (PBMs) are taken out.

Created with Sketch. In 2019 and going forward, prices are set to basically be flat. But we’re expecting the industry to grow volumes in the range of 3-5% annually, driven by innovation and new products. Chris Schott Senior Analyst, U.S. Major and Specialty Pharmaceuticals, J.P. Morgan

“Historically, going back 20 years, growth might have been 50% price, 50% volume. In the more recent past, almost all top line growth came from price, so in some cases negative volume and price was the only thing driving growth. The model we’re seeing today is evolving. In 2019, prices are set to basically be flat. We’re expecting the industry to grow volumes in the range of 3-5% annually, driven by innovation and new products, so we’re in a far more sustainable place now than five years ago,” Schott said.

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More Drugs on the Market

This move from price-driven to innovation-driven growth is also being supported by an uptick in Food and Drug Administration (FDA) product approvals. Drugmakers spend billions of dollars every year on research and development (R&D) of new drugs, with many of those drugs failing to pass rigorous FDA tests to get to market. For much of the last decade, the FDA approved around 20 to 25 new products per year according to J.P. Morgan data. In the last two years, between 40 and 50 new drugs have been approved annually and approvals are expected to stay around this level for the foreseeable future. Breakthroughs in key areas such as oncology and immunology and gene therapy in the biotech industry are also opening up previously untapped markets for drugmakers. “We are witnessing scientific breakthroughs in areas such as immuno-oncology, where the body’s immune system is used to fight off cancer. That has probably been the biggest breakthrough in my sector in the last 40 or 50 years and is dramatically able to improve outcomes for patients who didn’t have treatment alternatives in the past,” Schott said.

Created with Sketch. VS. 45 PER YEAR Expected FDA approvals 25 PER YEAR in the last 20 years

Source: J.P. Morgan

The Rise of the Consumer

The way consumers are making healthcare decisions, the plans they go for and how they use services are also changing the face of the industry. Healthcare is rising as a percentage of household expenditures and patients are becoming increasingly selective in the services they use, with cost, quality and convenience becoming key deciding factors.

“For 2019 we believe the consumer will be the biggest disruptor in healthcare. As the cost of care rises and the number of employers offering high deductible health plans (HDHPs) continues to grow, patients will continue to be involved in making decisions on how to allocate their healthcare dollars,” said Head of Healthcare Technology and Distribution at J.P. Morgan, Lisa Gill.

Over 70% of Americans are covered by employer-sponsored healthcare and 45% of the employer market is enrolled in a high deductible health plan, according to the National Center for Health Statistics, meaning the power of the consumer is not going away.

Created with Sketch. Over 70% Americans are covered by employer-sponsored healthcare 45% of the employer markets is enrolled in a HDHP

Source: National Center for Health Statistics

Retail pharmacy chains such as CVS and Walgreens with integrated pharmacy, clinic and lab services in the same place are benefitting from heightened consumer awareness, thanks to their pricing, access and branding. Demographics are also changing the face of healthcare consumerism as most millennials and Gen Xers would rather use mobile or browse and book online for services than make an appointment in person or over the phone. Digital care or “telehealth” is a relatively unexploited pocket of the industry but is expected to grow as younger consumers search out healthcare services. Both CVS Health and Walgreens have rolled out virtual appointment plans and continue to expand their digital offerings. “Telehealth is virtually untapped today, but we expect utilization to increase with consumer demand, as it helps to solve two key issues: Lack of access to care and rising costs. In our view, we expect the next generation of healthcare offerings to be tailored to consumers in their most desirable settings, retail and home,” said Gill.

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