Rising drug prices dramatically outpace inflation, squeezing retirees

For retirees, general inflation is already a challenge. But according to new research, drug prices are rising much faster than that.

A recent study by AARP, the nonprofit seniors advocacy group, found that America's most expensive medicines have outpaced inflation by a long shot. The top 25 costliest drugs covered by Medicare, AARP found, have increased in price by an average of 226% since they entered the market.

"This report really solidifies the impact of drug companies' relentless price increases year after year," Leigh Purvis, the study's author and AARP's prescription drug policy principal, said in a statement. 

For 24 of those 25 drugs, these price increases have left inflation in the dust. The insulin brand Lantus, for example, came on the market in 2000. Over the 23 years since then, lifetime general inflation — as measured by the CPI-U, or Consumer Price Index for All Urban Consumers — has been 71%. The price of Lantus, meanwhile, has increased by 739%.

Other examples abound. Since the arthritis drug Humira came out in 2002, general inflation has been 66%, while the price of Humira has gone up 562%. Since the psoriasis medicine Enbrel was introduced in 1998, prices in general have risen by 85%. The price of Enbrel, meanwhile, has shot up by 701%.

Why have drug prices risen so much faster than inflation?

"There's one reason: Because they can," said Mary Johnson, a Social Security and Medicare analyst at The Senior Citizens League. "The Department of Veterans Affairs and Medicaid both have the authority to negotiate drug prices. It is only Medicare that has not had the authority to negotiate."

In Johnson's view, this lack of bargaining power has allowed the cost of medicine to rise unchecked. That puts a lot of pressure on American retirees, who face the challenge of living off their savings as their health issues typically increase in old age.

But under the Inflation Reduction Act, one part of this calculus will soon change. The 2022 law allows Medicare to negotiate with pharmaceuticals over some of their most expensive drugs — though not right away. Negotiations began this year and will continue in 2024, but the haggled-down prices won't come into effect until 2026.

READ MORE: 5 ways the Inflation Reduction Act could change life for retirees

In the meantime, retirees are not completely on their own. In its current form, Medicare Part D is designed to make sure seniors only pay 25% of their prescription drug costs. (Plus, one important measure of the Inflation Reduction Act has already kicked in: a cap on the price of insulin at $35 per month.) 

But even 25% of a drug's price can be overwhelming, if the drug is expensive enough. The cost of a month's worth of Enbrel, for example, is $14,099. A quarter of that is $3,525.

"These are huge costs," Johnson said. "It can be really dangerous for people who are relying on some of these drugs for their life."

To cope with these expenses, seniors need to strategize — and that's where financial advisors can help. Nicholas Bunio, a wealth manager at Retirement Wealth Advisors in Downingtown, Pennsylvania, has learned this from working with one of his clients, who takes six different medicines.

"Picking a good health plan is key, and helping clients with that is key," Bunio said.

In his client's case, navigating the labyrinth of Medicare and health insurance helped to reduce costs. Of Medicare's four components — A, B, C and D — only the first is mandatory. The other three are optional, and in some cases can be replaced by a private insurance plan — sometimes called a "Medigap" policy.

READ MORE: Battle of Part B: The long, messy history behind Medicare's lower premiums

"Picking Medigap over Part C, plus a good drug plan, was crucial," Bunio said.

In addition, Bunio recommends planning for health care costs long before the client's retirement. When it comes to medicine, that means factoring in price increases that go far beyond general inflation.

"If I know a client has health issues, I can easily add this as a line item in their plan and inflate it by two to five times inflation," Bunio said. "That way, while not perfect, at least it's something."