IntroductionThe increasing cost of prescriptions drugs in the United States has increased concern for patients, prescribers, insurance companies and policymakers.
In 2015, people were outraged when Turing pharmaceuticals increased the price of Daraprim, a 62-year old drug used to fight a life threatening parasitic infection, from $13.50 to $750 per pill (Pollack). Similarly, people were angry when the price of insulin tripled between 2002 and 2013 and the price of EpiPen-a 4 decade old lifesaving allergy medication-had a price hike of 500 percent since 2007 (AARP bulletin). Pharmaceuticals claim that the high prescription prices are a result of the money spent on research and development (R&D) and used to stimulate innovation. However, there is more at play than what one is led to believe. These prescription prices are skyrocketing for consumers in America because of complex healthcare system, limited competition, and increased spending on marketing – not because of increased spending on R&D. As a result of these rising prescription prices, Americans are paying more out-of-pocket for prescriptions and are experiencing increasing financial constraints. Healthcare SystemsWhen compared to European markets, the US is paying several times more for the same drug than countries like Britain.
In fact, “U.S. prices for the world’s 20 top-selling medicines are, on average, three times higher than in Britain” (Hirschler).
One of the main reasons for this is that unlike the rest of the industrialized world, the United States’ capitalistic approach allows pharmaceutical companies to set their own price for a given drug. The insurance companies and hospitals then buy the drugs for their individual consumers and negotiate their own prices with pharmaceuticals-causing an unregulated variety of pricing for prescriptions. However, in the UK, their National Health Service (NHS) program, funded by taxpayer money, purchases drugs for the entire country’s supply. They negotiate the prices to make it affordable to all UK citizens. They determine if the price demanded by the manufacturer is excessive based on the benefits it provides. And since there is only one buyer, pharmaceutical sellers are more sensitive to how much their customers are willing to pay in countries like the UK since the negotiation can determine whether the drug will be sold in the market or not (Kounang). National health insurance systems, like the United Kingdom’s NHS, allow for streamlined negotiations and lowered pricing for drugs.
Monopoly When pharmaceuticals create new medications, they get a monopoly on the drug until their twenty-year patent expires. This allows the pharmaceutical companies to set the price as high as they want and change it whenever they feel necessary. Since these companies are profit-driven, they often try to make as much money as possible within that twenty year period. For example, “Last February, the price of Evzio, an auto-injected drug that is used to treat opioid overdose, jumped to over $4,000 — from just $690 in 2014 — just as demand for the medicine was quickly rising” (AARP Bulletin). And since these drugs are protected by a patent, it is completely legal for pharmaceuticals to hike the price up as much as the market can handle. The patent also prevents other companies from creating generics-giving these pharmaceuticals a monopoly on their product. As soon as generics hit the market, “drug prices decline to approximately 55% of brand-name drug prices with 2 generic manufacturers making the product, 33% with 5 manufacturers, and 13% with 15 manufacturers” (JAMA). Seeing as to how much money the pharmaceuticals lose when generics hit the market, they try to prevent generics from entering the market for as long as possible because as soon as generics become available, consumers forget about brand loyalty and go for the cheapest option possible.
Marketing vs. Research and DevelopmentOne of the main reasons pharmaceuticals cite to justify their prescription prices is the large research and development (R&D) costs. However, the research and development cost is something that is taken into account before and while developing the drug. Moreover, a study done by Global Data shows that 9 out of the top 10 pharmaceutical companies actually spend far more on marketing the drugs then developing them. For example, Johnson and Johnson spent about $17.5 billion on marketing compared to the $8.2 billion it spent on R&D. Similarly, Pfizer spent $11.
4 billion on marketing compared to the $6.6 billion it spent developing its drugs (Anderson). Pharmaceuticals understand that physicians hold the true power to writing prescriptions to their patients, which is why most of the marketing is targeted towards them. In fact, these pharmaceuticals “spent more than $3 billion a year marketing to consumers in the U.S. in 2012, but an estimated $24 billion marketing directly to healthcare professionals” (Swanson). Pharmaceutical companies persuade doctors to prescribe their drug by providing free samples of their drugs, free lunches, and sometimes cash bonuses. While this may not seem like much, this marketing tactic has actually shown to be very effective in persuading doctors to prescribe certain medication.
Therefore, while drug companies claim to be making up for their huge research and development costs, it’s not very clear what their price is based on. Most are likely trying to earn back the money they have spent on marketing and increase their profit margin.Economic ImpactsAs a result of exorbitant pricing for prescription drugs, Americans have seen a rise in out-of-pocket prescription costs and increased financial constraints. Many argue that they are healthy and aren’t affected by rising pharmaceutical prices but that is not necessarily true. “High prescription drug prices affect everyone. Even if patients are fortunate enough to have good health care coverage, higher prices translate into higher out-of-pocket costs, premiums and deductibles. And greater spending by taxpayer-funded programs like Medicare and Medicaid are eventually passed along to all Americans in the form of higher taxes, cuts to public programs or both” (AARP).
This increase in out-of-pocket costs often leads to “high rates of bankruptcies, and 10-25 percent of patients either delay, abandon or compromise treatments because of financial constraints” (Kantarjian). So not only is the rising prescription cost affecting the pharmaceutical industry, but it is also affecting the overall American economy as well with increased bankruptcy and decreased spending. ConclusionPharmaceutical companies are profit driven. Once generics are released to the market, the pharmaceutical companies make a significantly less amount of money. In fact, as the number of generic products grows, the price of the brand name drug declines as well.
Therefore, pharmaceuticals try to make as much profits as possible within the twenty-year period of their patent.