How Can Inflation Impact the Cost of Medicines

29th September 2022

Increasingly high inflation rates are having a major effect on the pharmaceutical market around the world. Raw material prices are rising, impacting profits for most pharmaceutical companies. More of the same is anticipated for the remaining 2022 quarters.

The pharmaceutical industry’s regulatory bodies tightly control prescription and over-the-counter medicine prices like in Meds for Less. Pharmaceutical firms, however, are coming under growing scrutiny regarding their medicine prices. Inflation’s high rate is the primary reason for this pressure on prices.


Reasons for Price Increases

High energy and food prices and supply chain bottlenecks are to blame for the dramatic inflation rise. The conflict between Russia and Ukraine and the associated increase in energy costs have increased the cost of virtually all consumer goods. In addition, the stringent lockdowns implemented in various Chinese cities to battle the COVID-19 outbreak have caused numerous logistical problems, leading to a spike in freight prices. The sum of these contributors has a major impact on inflation.

Pharmaceutical businesses are under increased pressure to maintain affordable prices in light of the recent increases in the cost of production caused by strict government regulations of medicine prices.

National pricing and reimbursement authorities in the European Union determine medicine prices. The fact that these costs could drop much more in light of the current circumstances is cause for serious alarm.

GlobalData reports that, except for the United States, the average price of branded medications in major pharmaceutical markets like Japan, Germany, Australia, Spain, and France has decreased by 2 and 9 percent between 2017 and 2021.

The European pharmaceutical sector is looking to the EU’s health ministers for help with the region’s high drug prices. As stringent pricing restrictions and inflation threaten the availability of medicines, the Medicines for Europe Executive Committee is appealing for support.

The committee wrote in a letter that there are serious worries about the cost of manufacturing pharmaceuticals because of the high inflation rate of over 7% throughout Europe. For example, the energy cost has risen by 30% to 65%, logistics by roughly 500%, and the cost of raw materials has increased by 50% to 160%.

In addition, the committee stated that it is challenging for manufacturers to function in a climate that combines high-cost inflation with regulations that consistently lower prices. They petitioned EU health ministers and commissioners to help change the EU medication pricing mechanism and create more sustainable measures to aid the industry in reducing the effect of rising costs.

Companies like Viatris, J&J, Bayer, and GlaxoSmithKline highlight the impact of price increases on their operations. Inflation-related price increases were a major contributor to 2022 Viatris’ lower-than-anticipated profitability. And in March, Bayer’s CEO Werner Baumann noted the “growing inflationary pressure and unpredictability of global supply chains across industries” during the company’s quarterly conference call.


Leverage Purchasing to Reduce Expenses

Companies can still find ways to cut costs even though supply-chain disruptions, commodity shortages, and record-high inflation are all on the rise.

Organizations can maximize business value in the pharmaceutical industry by collaborating with pharma consulting firms, exchanging best practices, optimizing resource use across the enterprise, and looking beyond simple spend KPIs.

In addition, businesses can use indirect procurement as an internal crisis response resource and expand their analysis to include data beyond expenditure analytics.

By seizing these chances, the pharmaceutical industry may lessen inflation’s effects and maintain reasonable product prices.


How Does Inflation Affect The Costs of Drugs?

Due to changes in exchange rates and currency devaluation, prescription medicine prices may be indirectly impacted by inflation. In particular, the retail prices of some of the most popular brand-name prescription pharmaceuticals continue to rise at a rate that is twice as fast as inflation.

The prices of 50% of the pharmaceuticals in Medicare Part D plans rose faster than inflation between 2018 and 2019, according to a blog post by the Commonwealth Fund. Their respective makers raised the average price of nearly 900 brand-name medications by 4.2% in 2021.

Drug prices are primarily affected by two factors. Insuring competitive markets is one. An individual medicine’s price tag is influenced dramatically by the level of competition present in the pharmaceutical industry. Steven Lucio, the senior partner of pharmacy solutions at Vizient, told PharmaNewsIntelligence that the initial price of new pharmaceuticals is the second major barrier and one that remains more difficult to address.

New medicine prices significantly impact overall healthcare cost growth, and striking a fair trade-off between these two factors is essential. However, the prohibitive cost of medicines presents an insurmountable obstacle.

New drug development to treat illnesses for which there are no adequate medicines should be rewarded. The problem, as Lucio put it, is that most diseases for which innovation is urgently called for are pretty severe and, in many cases, highly specialized.

He explained that the first launch pricing is exceptionally costly because of the severe condition, the vulnerability of the patient population being treated, and the utilization of novel technology.

Let’s look at the current discussion surrounding Aduhelm, a medicine created by Biogen to treat Alzheimer’s disease. The annual cost of this drug is $56,000, and it’s expected to add more than $73 billion to the U.S. health care bill by 2028.

However, many clinicians have chosen not to offer the medication because of the uncertainty around the drug’s clinical efficacy. For instance, in March of this year, according to the findings of a futility analysis by an external data monitoring committee, Biogen halted its engagement and emerged trials.

The results of the trials showed that a monthly infusion of Aduhelm was no more effective than a placebo at preventing memory loss and cognitive decline. As a result, the committee decided that it was highly improbable that the trials would succeed in their principal aim.

Competition in the pharmaceutical industry has a major impact on price reductions. On the contrary, drug price inflation is either eliminated or much reduced when there is substantial competition, primarily upon the drug’s initial arrival into the market. However, companies will raise prices once or twice a year without competition. As the day of a product’s loss of exclusivity draws near, the price tends to rise dramatically.


Affordability and Its Determinants

Various factors work together to determine the cost of prescription medications in the United States. In this chapter, we will look at the several reasons that contribute to the rising prices of prescription medications:

  • Exorbitant costs at first, with regular price hikes afterward.
  • Unsatisfactory levels of rivalry once market exclusivity disappears.
  • Market concentration, health insurance, and the absence of price-control solid incentives.
  • Buyers and sellers have unequal bargaining power.
  • Costs associated with R&D, advertising, and other commercial operations.
  • Plans for insurance coverage with high deductibles and copayments for patients.
  • Poor results from government initiatives designed to lower healthcare costs, such as patient support programs.
  • Uncertainty about potential side effects of medications due to a lack of information.


The Price Regulations

The United States patent law and health insurance systems are comparable to those of other affluent nations. However, unlike in most other countries, the United States government does not have the power to regulate the prices pharmaceutical companies can charge for prescription drugs. The United States lacks a uniform system of national regulation for drug prices, in contrast to the majority of other developed nations (WHO, 2015).