Tuesday, December 1, 2015

Drug Prices

Just today, the Wall Street Journal ran yet another front-page article on how much more expensive prescription drugs are in the United States than in the rest of the world.

Here are some price comparisons from other recent reports. 

Cymbalta, an oral medication for anxiety and depression.

Monthly cost in the U.K.   $46
Monthly cost in the U.S.  $161 - $349, depending on the health plan

Gleevec, a game changer in the treatment of chronic myeloid leukemia.

Monthly cost in New Zealand $989
Monthly cost in Canada $1,141
Monthly cost in the U.S. $5,482 - $11,007

Nexium, an acid reflux treatment formerly advertised on U.S. television with no description of the symptoms it cured.  You may remember:  "Ask your doctor if the purple pill is right for you."

Monthly cost in the U.K. $42
Monthly cost in the U.S. $200 to $400

Price Differentials

I could go on and on.  U.S. prices for the world’s 20 top-selling medicines are, on average, three times higher than in Britain, according to an analysis carried out for Reuters.  This is not uncommon.

The simple fact is that U.S consumers pay much more for drugs than citizens of any other country. 

There are a number of reasons for this.  One (which I will discuss tomorrow) is a cynical new pharmaceutical company model.

Another, more important reason is that pharmaceutical companies are willing to sell drugs for much, much lower prices to other first-world countries.

Business Model

Developing useful drugs is time-consuming and expensive.  For a pharma company, the path from design through engineering through large-scale testing to FDA approval can cost $300 million or more.

Given that most promising research does not prove out, companies must attempt to develop several or more products with the hope that one successful one will pay for the development of all of them. (Think of all the times we've read that breakthroughs were near in the treatment of Alzheimer's Disease.)

Once a drug is developed, its company has a 20-year patent to make back the money it has invested.  (The 20-year clock starts running before drug trials and FDA approval; this means the actual exclusivity period before generic equivalents can be released can be as short as 10 or 12 years.)

Drug companies set their own prices in the U.S., but many other countries have government-run programs whose administrators work to control costs.  Their tactics include delaying adoption of newer, more expensive (and presumably more effective) drugs and also demanding much lower prices than those that prevail in the U.S.   

A recent study concluded that the 5-year survival rate for all cancers is 40 percent higher for men and 13 percent higher for women in the U.S. than in Europe. Researchers have attributed the higher cancer survival rates in the U.S. to greater availability of advanced treatment options. According to another study by Tufts University, 73 percent of medicines were made available in the United States before being released in Europe. 

Effectively, American consumers fund all pharmaceutical research by paying higher costs that also generate virtually all pharmaceutical company profits.

How Drug Prices are Set

In our market economy, drug companies set prices.  Some of the best new medications come with very high prices indeed.  

Many who clamor for a single-payer system would like the government to set drug prices, but Congress has forbidden Medicare, our old-age health program, even to negotiate prices with drug companies.  

I understand why people don't like this idea, but in practice I do not see how it could work. Seniors use many more pharmaceutical products than younger Americans; Medicare is such a big part of the total U.S. market that expecting drug companies to "negotiate" with it sounds unrealistic.  

(It would be like me negotiating with a hungry lion for a package of hamburger at the meat counter. Effectively, Medicare would set prices.  It also would create incentives for rent-seeking pharma companies to try to influence the Medicare policy makers -- think of the New York legislature or U.S. financial officials' back-and-forth stints between federal agencies and Goldman Sachs/Citibank.)

I do have one thought about legislation that might improve the system.  What if drug companies were required to set U.S. prices no higher than average of all prices paid by other first-world countries?  Maybe add a five-percent U.S. vig, but no more.

This would force the pharmaceutical companies to negotiate with European and Japanese health systems instead of accepting take-it-or-leave-it offers.  It also would require other wealthy countries to pay their share of drug development instead of leaving it just to the Americans.  

Seems fair to me.

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