| Lesson 11: Why Are Prescription Drugs So Darn Expensive? |
The problem with the price of prescriptions is not that they're too expensive. The problem is the unrealistic
expectations of patients. People think of drugs as just pills, many of which have been sitting on shelves in our
pharmacies for decades, not costing much. Some of them had been discovered in plant life. Some had been
invented rather cheaply. But the modern prescription medicine, while sometimes not as effective as the older
ones, is nonetheless a piece of state-of-the-art technology. It's design is more sophisticated and expensive than
any gadget you can buy at Sky Mall. It takes an average of 5 years to design a drug and another 5 to study its
safety and effectiveness. Add 12-18 months to get FDA approval. A Tufts University study in 2003 estimated
R&D (research and development) cost of $897 million to develop one drug.* After that, the drug company has
about 20 years of patent protection to try to make their minimum profit margin. (See Lesson 9).
In addition, when you buy a drug, you're not just paying for its R&D. You're also paying for the R&D of all
the drugs that didn't work out and weren't approved. You're also paying for the massive lawsuits that result
from drugs that didn't work out after they were approved. You're also paying for people in other countries to
get cheaper drugs. 13 out of 15 countries in Western Europe, as well as Canada, directly regulate prescription
drug prices.** (See Lesson 10). The pharmaceutical company has to make up the difference somewhere and
they do it in the United States.
If the U.S. passes price control on prescription drugs, one of two things will happen:
1. The government will be forced to relax regulation and tort law in order to allow drug companies to cut
R&D costs. This will result in more dangerous drugs.
More likely #2. Pharmaceutical companies will stop making new drugs. The companies that don't close will
make old generics. There has already been a trend in this direction. Many of the "new" drugs that these
companies now sell are just combination pills: They take two old drugs, glue them together, paint a racing
stripe on it and give it a new name.
Prescription drugs are also expensive because of pretending. (See Lesson 2). Medicare and Medicaid allow
many Americans to pretend that their drugs are free. *** This relieves the consumer from the job of shopping.
Consumerism without shopping raises prices in 2 ways:
1. The consumer doesn't ask "Do I need this drug?" Price competition then vanishes and the drug price fails
to fall to its actual value.
2. The consumer doesn't ask "Do I need any of these drugs?" When we buy anything else, right down to a
pack of gum, we instinctively and subconsciously conduct a cost/benefit analysis where we ask "Is it worth the
money?" When we don't have to, then demand rises artificially.
What's the answer to all this? Simple. If you think you must have the latest, greatest chemical gadget that
might make you live a little bit longer than the older ones, then pay for it. Don't burden the tax-payer. You
can also pass the message on to your Canadian neighbors.
* Tufts Center for Drug Development, Journal of Health Economics, Volume 24, Issue 5, September 2005, Pages 1034-1044
** New England Journal of Medicine, 9/30/4
*** There is a case that can be made that this is also caused by the flat co-pay system used by many private insurance plans. The
difference is that abusers of that system ultimately pay with rising premiums if they can afford them; or cheaper, more sensible plans if
they cannot.
expectations of patients. People think of drugs as just pills, many of which have been sitting on shelves in our
pharmacies for decades, not costing much. Some of them had been discovered in plant life. Some had been
invented rather cheaply. But the modern prescription medicine, while sometimes not as effective as the older
ones, is nonetheless a piece of state-of-the-art technology. It's design is more sophisticated and expensive than
any gadget you can buy at Sky Mall. It takes an average of 5 years to design a drug and another 5 to study its
safety and effectiveness. Add 12-18 months to get FDA approval. A Tufts University study in 2003 estimated
R&D (research and development) cost of $897 million to develop one drug.* After that, the drug company has
about 20 years of patent protection to try to make their minimum profit margin. (See Lesson 9).
In addition, when you buy a drug, you're not just paying for its R&D. You're also paying for the R&D of all
the drugs that didn't work out and weren't approved. You're also paying for the massive lawsuits that result
from drugs that didn't work out after they were approved. You're also paying for people in other countries to
get cheaper drugs. 13 out of 15 countries in Western Europe, as well as Canada, directly regulate prescription
drug prices.** (See Lesson 10). The pharmaceutical company has to make up the difference somewhere and
they do it in the United States.
If the U.S. passes price control on prescription drugs, one of two things will happen:
1. The government will be forced to relax regulation and tort law in order to allow drug companies to cut
R&D costs. This will result in more dangerous drugs.
More likely #2. Pharmaceutical companies will stop making new drugs. The companies that don't close will
make old generics. There has already been a trend in this direction. Many of the "new" drugs that these
companies now sell are just combination pills: They take two old drugs, glue them together, paint a racing
stripe on it and give it a new name.
Prescription drugs are also expensive because of pretending. (See Lesson 2). Medicare and Medicaid allow
many Americans to pretend that their drugs are free. *** This relieves the consumer from the job of shopping.
Consumerism without shopping raises prices in 2 ways:
1. The consumer doesn't ask "Do I need this drug?" Price competition then vanishes and the drug price fails
to fall to its actual value.
2. The consumer doesn't ask "Do I need any of these drugs?" When we buy anything else, right down to a
pack of gum, we instinctively and subconsciously conduct a cost/benefit analysis where we ask "Is it worth the
money?" When we don't have to, then demand rises artificially.
What's the answer to all this? Simple. If you think you must have the latest, greatest chemical gadget that
might make you live a little bit longer than the older ones, then pay for it. Don't burden the tax-payer. You
can also pass the message on to your Canadian neighbors.
* Tufts Center for Drug Development, Journal of Health Economics, Volume 24, Issue 5, September 2005, Pages 1034-1044
** New England Journal of Medicine, 9/30/4
*** There is a case that can be made that this is also caused by the flat co-pay system used by many private insurance plans. The
difference is that abusers of that system ultimately pay with rising premiums if they can afford them; or cheaper, more sensible plans if
they cannot.