Why Are Prescription Drugs So Expensive in the United States?

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Article Overview:

According to AARP, prescription drug prices in America are higher than anywhere else in the world.[1] It makes a popular talking point for politicians, but it hints at a bigger question: Why are prescription drugs so expensive in the United States? The answer speaks to a complicated cross-section between healthcare, regulation, the economy, and politics.

cost prescription drugs

The Prescription Monopoly

Harvard Medical School researchers writing in JAMA said that while a confluence of factors pushes prescription drug prices sky high, the primary contributor is the existence of “monopoly” rights for drug manufacturers, rights that are protected by the government.[2] The researchers looked at literally thousands of studies published over an 11-year period, to “simplify and explain what has caused America’s drug price crisis,” wrote TIME magazine.[3]

cost of prescriptions in usa

There were five key findings in the JAMA article that explain the exorbitant prescription drug prices in America. As explained by TIME, the first one is that drug manufacturers in the United States are allowed to set their own prices, which doesn’t happen anywhere else in the world. Part of the reason is that the United States does not have a fully integrated and implemented universal healthcare system. Countries that have a national health program (like Canada or the United Kingdom) have government bodies that either negotiate drug prices to affordable levels or that decide not to cover drugs if the manufacturers set prices that the government feels are excessive. Since there is no comparable entity in the United States, there is no such negotiation process, letting the drug companies set their prices unchallenged.

Drug manufacturers in the United States are allowed to set their own prices, which doesn’t happen anywhere else in the world

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In 2003 Congress prevented Medicare from negotiating drug prices

An attempt to give the government a say in the determination of drug prices was quashed in 2003 when a Republican-majority Congress prevented Medicare from negotiating drug prices. The Medicaid program, on the other hand, has to cover any drug that is approved by the Food and Drug Administration, whether or not a cheaper or equally effective generic drug is also available. The JAMA study noted that private insurers do not usually negotiate prices because the third-party pharmacy benefits managers like Express Scripts and CVS Health that administer prescription drugs often receive payments from drug manufacturers to move the market shares in their respective favors. In this way, the drug companies are not only unchallenged in their determination of drug prices, they game the system to ensure that no one else eats into their monopoly.

Generics and Brand-Name Drugs

The concept of a monopoly came up a lot in the JAMA research, specifically that the American system allows for the establishment of “government-protected monopolies” for certain drug manufacturers and their products, which shuts the door on generic products being introduced into the market to keep prices accessible.

Generic drugs are copies of name-brand drugs with exactly the same dosage, intended use, effects, side effects, risks, safety, and strength. In many ways, they are identical in all but name. Generic drugs are priced much cheaper than their more well-known counterparts, which leads many people to assume that they are not as good and to demand for name-brand prescriptions during their doctors’ visits. In reality, the FDA requires that both generic drugs and brand-name drugs have the same standards of safety and effectiveness.

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In many ways, generic drugs are identical in all but name

cost of generic drugs

The reason generic drugs are cheaper is because the manufacturers do not have to invest in going through the development and marketing of a new drug. When a drug company introduces a new product to the market, the process represents a significant expense related to the research, development, and promotion of the drug. The FDA grants a patent that gives the company the exclusive right to sell the drug for as long as the patent is valid. When the patent is about to expire, the drug company has the option of applying to the FDA for permission to make and sell a generic, brandless version of the drug. Without having to spend time and money on developing the drug from scratch, this allows other companies to sell the same chemical compound at a much cheaper cost. When different companies start to produce and sell the same type of drug, the competition can drive the cost of the drug down even further, but the FDA still mandates the same standards for both brand-name and generic drugs. Many companies create both generics and name-brand drugs; according to FDA estimates, half of the generic drugs on the market are made by the same companies that put out drugs that are household names.[4]

Gaming the Patent Game

In the interests of encouraging innovation, the American patent system allows drug manufacturers to stay on as the sole manufacturers of their drugs for a period of 20 years or longer. The FDA further grants those drug companies exclusivity for certain products, such as medications that are used in the treatment of rare diseases.

However, the researchers from Harvard Medical School found that some drug companies violate FDA rules by “slightly tweaking the nontherapeutic parts of drugs” like the pill coatings. When generic manufacturers sue the corporations for changing the formula, the corporations pay big “pay for delay” settlements, which helps them hold on to their monopolies longer.[5]

The JAMA article pointed out how much this manipulation contributes to the excessively high drug prices in America. Prices go down to 55 percent of the original brand-name cost when there are two generics on the market, and they go down to 33 percent of the original cost when there are five generics. Despite the FDA’s stance that generics and brand-name drugs be equivalent in every way, it suits the major drug companies to ensure that the generics are repressed as much as legally possible.

‘Jaw-Dropping’ $11 Billion

Another factor is that there are state laws and federal policies, sometimes drafted with well-meaning intentions, which have the effect of limiting how generic drugs can remain affordable. In more than half the country, pharmacists are legally required to obtain patient consent before switching prescriptions to a generic drug. In 2006, this step cost Medicaid $19.8 million for just one drug: a medication that targets high cholesterol and triglyceride levels, known as simvastatin in its generic form and marketed as Zocor. Pharmacists did not get patient consent to switch from Zocor to simvastatin, so Medicaid had to pay for the more expensive brand-name drug even though the functionally identical simvastatin was more expensive – hence, $19.8 million.

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Pharmacists did not get patient consent

The Harvard Medical School researchers noted that drug manufacturers usually point to the inherent research and development cost as a natural driver of high prescription costs, but this defense is not always valid. Several studies have found that the scientific research that culminates in the development of new drugs is funded by federal grants through the National Institutes of Health. On the occasions that the financing is done privately, it comes through venture capital, a form of private equity that is invested in projects that have a high element of risk but have demonstrated the potential for substantial growth and potential.[6] An example of this is sofosbuvir, a hepatitis C medication that was developed in academic laboratories and then acquired midway through its production by Gilead Sciences for a “jaw-dropping” $11 billion in 2011.[7] In 2015, two senators (a Democrat and a Republican) released a report that stated that Gilead Sciences charged more for its version of sofosbuvir than required in order to recover acquisition costs, clinical research expenses, and marketing.[8]

Protecting the Strength of the Drug Industry

In their JAMA article, the researchers from Harvard Medical School noted that the arguments made by drug corporations, about “maintaining high drug prices to protect the strength of the drug industry,” intentionally exaggerate the vulnerability of the drug market. In general, companies spend as little as 10 percent of revenue on research and development because the biotechnology and pharmaceutical sectors consistently rank among the “very best-performing sectors in the US economy.” The real reason, said the researchers, is that the prices for prescription drugs are based on what the market can bear.

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Companies spend as little as 10 percent of revenue on research and development

The researchers were not optimistic in their conclusion about how the prescription drug market can be fixed. The pharmaceutical lobby is too powerful and Congressional gridlock too politicized for legitimate and effective negotiation to be realistically possible. Even if the landscape were easier to navigate, it would be a very tough balancing act to improve regulation and strengthen oversight of patent protections while still welcoming innovation. Dr. Joshua Sharfstein, the Associate Dean for Public Health Practice and Training at the Johns Hopkins Bloomberg School of Public Health, told TIME magazine that the research presented in the JAMA article presented a high-level view of how the United States has “become an outlier when it comes to drug prices,” chiefly because there is no policy that will address the widespread challenges to the healthcare system that will emerge because of the cost of prescription drugs.