Why do prescription drugs cost so much?

Whether they lean blue or red, citizens of this country are alarmed about the rising costs of their prescription drugs. A May 2019 bulletin from the American Association of Retired Persons, hardly a radical organization, found that prices had simply gotten “out of control.” The average annual cost of a brand-name drug more than tripled from 2006 to 2017.

Does this mean that the owners of the mom-and-pop drugstore where I get my prescriptions filled is stashing away obscene profits? Hardly. For the cause of this situation, AARP looked directly at the companies who manufacture our drugs. “In a world of strong patent laws and limited regulation of pricing, for-profit pharmaceutical companies have extraordinary power to charge what they want for the medicines they offer,” says the report, and they do not hesitate to use that power.

As a result, U. S. patients pay far more for the same prescription drug than patients in other countries. For example, in 2015 the prescription drug Humira – used to treat autoimmune diseases like rheumatoid arthritis — cost $3431 per month in the United States but just over 1/4 of that — $982 per month — in France. Advair — used to treat asthma — cost $310 per month in the U. S. and $38 per month in Germany.

How can our prices be so much higher? In a free-market system such as ours, isn’t it the case that if someone charges much more for a product than it costs to make and market it, consumers will turn to a competitor who will charge a more reasonable price, and the price-gougers will go out of business?

The AARP bulletin explores a number of reasons why this does not happen; this column focuses on just three.

Evergreening: To justify the enormous cost of developing, testing, and bringing a new drug to the market, the manufacturer is granted a patent that gives it a twenty-year monopoly on selling that drug to the public. When that patent expires, manufacturers of what we term “generic” drugs are allowed to produce competing, less expensive versions of the original drug.

But patents holders have found that they can “evergreen” patents that are about to run out by making relatively minor changes to the drug (changing dosage schedules, for example). Evergreening extends the life of the patent and so delays, often for many years, the introduction of competing drugs. Using this tactic, the manufacturer of Crestor (a leading cholesterol drug) succeeded in keeping generic competitors off the market for an additional 14 years. Evergreening is common; more than 70% of the roughly 100 best-selling drugs extended their protection against generics at least once. Some companies with expiring patents have even paid generic manufacturers — 300 million dollars in one well-known case — to delay bringing lower-priced drugs to the market.

Prohibiting the U. S. Government from negotiating the cost of prescription drugs: In a free market, a potential buyer of large numbers of prescription drugs could use its enormous negotiating power to keep drug prices as low as possible. The governments of most other industrialized countries do this. But the people who administer America’s Medicare program are expressly forbidden from negotiating the lowest possible price for the drugs they purchase.

Denying consumers access to those markets where other governments have negotiated lower prices: A fundamental characteristic of a free market is the consumer’s ability to shop for the best possible price for the product she wishes to buy. The AARP Bulletin estimates that if American consumers were allowed to buy their prescription drugs in Canada, they would save on average about 33% on their drug costs. U. S. manufacturers know that if their drug is available in Canada for 2/3 the U. S. price, customers will buy that drug in Canada at the lower price — unless they lower the U. S. price so it remains competitive. Drug manufacturers did not want to lower their prices, so they used their lobbyists to get the government to forbid consumers from shopping in Canada. Any U. S. business that tried to make Canadian drugs available to American citizens, either through on-line pharmacies or by purchasing the drugs cross-border, would now be violating the law.

Many of our elected officials are well aware of their constituents’ outrage over high drug prices, and several bipartisan bills have been introduced to Congress. The Trump administration has announced its own blueprint. All contain promising strategies. Future columns from the Health Care Task Force will describe these and other potential solutions.

Baird Tipson is a member of the Gettysburg Democracy for America.