Prescription drugs are an effective treatment option used by hundreds of millions of people a day. In fact, according to the Food and Drug Administration, there are over 20,000 different prescription drug products available to consumers. Some drugs are groundbreaking curative therapies, while others are new variations of old formulas.
The prices of these various therapy options can range from $1 to millions of dollars per course of treatment, with a drug’s status in the FDA approval process contributing to its cost. This page explores different types of drugs, their approval processes and related state strategies to promote the accessibility and affordability of drugs.
New medicine creation is heavily funded by the National Institutes of Health, primarily for early research and proof of concept. Private-sector companies take on the larger risk of bringing these innovations over the finish line.
Innovator, or brand-name, drugs are products sold by a single manufacturer under a specific name. Some studies suggest the average cost to develop a single brand name drug is $985 million, however the top lobbying group for branded drug manufacturers, the Pharmaceutical Research and Manufacturers of America, estimates the cost at $2.6 billion. Moreover, it takes between 10 and 15 years to bring a single drug to market, with less than 12% of medicines in development receiving FDA approval. Because of the high cost of drug development, brand-name drugs are typically more expensive.
Before any prescription drug can be sold in the U.S. it must first receive FDA approval. For a branded drug to receive FDA approval the manufacturer must complete clinical trials to demonstrate standards of safety, quality and efficacy. Drugs approved through the traditional pathway use established clinical benefit, such as longer life expectancy, to meet these criteria.
Drugs treating certain serious conditions and filling an unmet medical need may receive an accelerated approval, which allows them to be marketed before clinical trials are completed. Unlike the traditional pathway, the accelerated approval process uses surrogate endpoints—a laboratory value, biomarker or other measure—to predict clinical benefit. Drugs approved through this pathway must still complete confirmatory trials at a later date.
Once a brand-name drug receives approval from the FDA, the manufacturer is granted exclusive marketing rights, or exclusivity. During an exclusivity period a new drug does not face generic competition. This allows the manufacturer to generate revenue to recoup the cost of developing the product.
The length of exclusivity varies but is generally five years for a new drug application or seven years for a drug with an “orphan” designation. Orphan drugs treat rare conditions that affect 200,000 people or fewer in the U.S. Other designations include breakthrough therapy, fast-track, priority review, and qualified infectious disease. These pathways shorten the time for FDA review, and some award additional market exclusivities, as in the case of orphan and qualified infectious disease designation. Drugs can have all, some or none of these designations.
A new drug can also be granted a patent from the U.S. Patent and Trademark Office, but the manufacturer must submit patent information with a new drug application to the FDA before approval. Under U.S. patent law, the term of a new patent is 20 years. A new drug can have exclusivity, a patent, both a patent and exclusivity, or neither.
Some states require more transparency about how drug manufacturers set brand-name prices. Laws in some states, including California, North Dakota, Oregon and Virginia, require manufacturers to report launch price information. Other states further mandate justifications for those prices.
States have also pursued utilization management policies, which are often used as a cost-containment strategy by health plans and pharmacy benefit managers, known as PBMs, particularly for high-cost medicines. This can be done through a variety of mechanisms such as:
- Nonmedical switching—when a patient is switched from one medicine to a different product for nonmedical reasons.
- Prior authorization—when a health care provider must obtain approval before administering or prescribing a medication.
- Step-therapy—when a patient is required to use less expensive treatment options before “stepping up” to more expensive treatments.
As of 2021, over two-thirds of states have laws addressing one or more of these tools.