In recent weeks, a widely publicized editorial in the journal Blood (25 April 2013, doi:10.1182/blood-2013-03-490003), signed by over 100 leading cancer specialists from more than 15 countries, castigated drugmakers for promoting an unsustainable pricing strategy and highlighted the plight of a growing cadre of leukemia patients who no longer can afford to pay for their treatments. Meanwhile, price tags for drugs entering the US market continue to skyrocket. In the past few months alone, NPS Pharmaceuticals' Gattex, Vertex's Kalydeco, Raptor Pharmaceutical's Cystagon and Aegerion's Juxtapid have all been listed at prices greater than $200,000 a year. To make matters worse, in the United States, most of this price inflation is being passed on directly to patients, leading to financial hardship. Although industry programs exist to reduce copayment costs or provide discounts, companies need to do more to prevent patients from falling through the cracks.

Last year, the United States spent almost 18% of its gross domestic product on healthcare—in contrast, Europe spent only 6.9%. Although prescription medicines are just one of many drivers of spiraling US costs, they are increasing twice as fast as other healthcare services. Spending on cancer treatments continues to grow at double-digit rates annually. Of 12 cancer drugs approved last year, 11 cost >$100,000 per annum. Similarly, since 2005, global orphan drug sales have escalated almost 10% annually to reach $86 billion in 2011. Two extreme cases are Alexion Pharmaceutical's Soliris and UniQure's Glybera gene therapy, a year's supply of which cost $440,000 and $1,000,000, respectively.

These are eye-popping numbers. And yet in many cases, new drugs addressing unmet needs or offering major advances in patient outcomes do warrant high price premiums. Such premiums are needed to ensure that manufacturers recoup their investment in R&D and receive sufficient profits to encourage further funding of innovative drug discovery. In addition, only a very small portion of drugs actually sell at the full wholesale list price in the United States.

Unfortunately, companies also seek price premiums for drugs that have only marginal benefits. And the current outrage about high prices for new drugs actually misses the point. Industry's dirty secret is that the greatest contributors to increases in US spending are not new drugs, but year-on-year price increases for older drugs.

A recent report from John Borzilleri of equity management firm GRT Capital (http://www.reducedrugprices.org/read.asp?news=6725) goes so far as to suggest that blatant “anti-competitive pricing practices,” fueled by “massive price increases on many older drugs,” have led to the meteoric growth in drug spending. Citing the multiple sclerosis (MS) market, Borzilleri notes that the average annual list cost of therapy for Biogen's Avonex, Merck's Betaseron, Merck AG's Rebif and Teva's Copaxone has increased by an astounding 400–500% since 2006; in comparison newer MS drugs have hardly increased in price at all.

Why has the US 'free-market' system been so poor at controlling pricing? Unlike most other nations, the majority of the US population relies on for-profit insurance companies to provide access to drugs. On top of the 100 or so private plans, there is a separate healthcare system for seniors (Medicare), veterans, military personnel, Native Americans, end-stage renal failure, under 16 in a poor family and those working in the federal government. This diffuse system leads to poor coordinated uptake of comparative effectiveness evidence and an asymmetry of information among payers that drug companies exploit.

To coordinate prescriptions, insurance firms work with pharmacy benefit managers (PBMs) who negotiate behind closed doors with drugmakers not only drug pricing but also what volume they will sell. Any proceeds from drug sales above the negotiated levels go back to PBM profits. Perversely, revenues and profits at PBMs in recent years have been increasingly dependent on ramping up drug prices because there is no competition for pricing from their client base, the insurance companies.

If the US system offered good levels of coverage to its consumers, the current discussion about drug pricing would be academic. But the fact is that insurance companies pass on rising prices to patients in the form of higher insurance premiums and deductibles, additional coverage exclusions or limits, and increasing copayments. In 2006, one-quarter of cancer patients reported that they had used up all or most of their savings paying for care; a study in 2011 reported that 2% of cancer patients were driven into bankruptcy by their illness and its treatment. According to the Pharmacy Benefit Management Institute, around half of insured US patients are now responsible for 30% of their drugs' costs through copayments.

Thirty percent of a single $100,000 drug is a crippling burden. And many patients take more than one drug. Sooner or later popular outrage about this situation is going to overflow. And it will not be insurance companies or PBMs that take most of the blame. It will be drug companies—the ones setting prices so high in the first place.

One proactive step industry can take to address the problem is to bolster and expand the co-pay assistance programs that they already offer to patients. But pricing strategist Rafi Mohammed on the Harvard Business Review blog (http://blogs.hbr.org/cs/2013/05/solving_the_100000_cancer_drug.html) believes they can go much further. He suggests companies could give themselves a win-win situation—expanding access and concurrently growing their revenues—by implementing a more comprehensive access (differential pricing) scheme that would provide many more individuals with discounts based on an assessment of their income, family size and other drug costs.

This journal hopes that industry organizations and company management give this and other initiatives serious consideration. Failure to act now will mean growing public anger at spiraling drug prices. Ultimately, the resulting backlash may make it increasingly difficult for companies to launch novel, lifesaving products into the world's most important market at the price premiums they warrant.