Why are Prescription Drugs so Expensive in the U.S.?

The cost of prescription drugs in the U.S. became an issue of concern after the CEO of Turing Pharmaceuticals, Martin Shkreli, increased the per-pill price of Daraprim – used to treat patients suffering from toxoplasmosis – from $13.50 to $750. Shkreli pledged to reduce the price, but the announcement of the 5,000 percent markup has led Americans to reconsider just how expensive their medication is, and why that might be.

Americans do indeed spend more than those in other advanced countries – on average, $1,000 more per year. This figure is not necessarily a reflection of Americans’ longevity, but rather an indicator of a higher price tag on our drugs: Americans pay approximately 50 percent more for patented drugs than other patients in the developed world.

The acid reflux pill Nexium, for instance, costs $200 in the United States, $60 in Switzerland, and $23 in the Netherlands.

In some cases, the price differences are extreme. Gleevec, a drug for cancer patients marketed by Novartis, costs a patient in the U.S. $106,000 a year compared to $32,000 in the U.K. Its generic, imatinib, costs $8,000 a year in Brazil.

By one estimate, Americans would save nearly $100 billion per year if they paid what patients in other advanced countries spend on prescription drugs. In many of these countries, the government purchases the drugs and thus has enhanced bargaining power: companies that refuse to lower their prices risk losing out on large markets for their products.

Today, many Americans cannot afford to fill their prescriptions. In 2012, one report found that 50 million Americans did not have a prescription filled because of cost concerns.

Pharmaceutical companies justify these high prices by pointing out that years of expensive research and development (R&D) have gone into the process of designing and testing these drugs. While most patents have a duration of 20 years, in some cases, clinical trials can be so lengthy as to allow for only a few years in which the company can make a profit – through charging higher prices – before the patent expires and more affordable generics flood the market.

According to an estimate by the trade group, the Pharmaceutical Research and Manufacturers of America (PhRMA), the cost of developing a drug brought to market is approximately $1 billion.

This figure, however, is in dispute.

A study by two researchers, Donald Light and Rebecca Warburton, found, upon further scrutiny of how that number was calculated, that a more accurate estimate is $55 million. Writing for Forbes, Matthew Herper arguedthat the true cost is even higher than PhRMA’s $1 billion figure: when the cost of R&D for failed drugs is factored into the mix, he reports, drug companies spend nearly $4 billion for every approved drug.

Yet critics of the drug companies’ claim point out that much of the early research and development is conducted by the federal government – 84 percent to be exact, primarily through the National Institutes of Health (NIH).

In 1998, the Boston Globe published its findings after investigating who shares the cost – and who reaps the benefits – of pharmaceutical research. It found that the government subsidized 45 of the 50 top-selling drugs and that the manufacturers of these drugs turned a healthy 14 percent profit.

“The government spending helps bring new drugs to the public,” the paper’s Spotlight Team determined. “But taxpayers often end up paying onerous prices at the pharmacy for medicine their tax dollars helped to create.”

Moreover, critics note that pharmaceutical companies rarely disclose precisely how much they do spend on research and development. And in cases where the statistics are known, they show that R&D is not as burdensome as the industry claims.

According to Steven Brill, the author of America’s Bitter Pill, the drug company Grifols had, in 2011, a net operating profit of 27.4 percent after all of its expenses – including sales, management, and R&D – were accounted for.

Finally, as evidence that R&D is not as costly as the industry claims, a look at the top ten drug manufacturers in 2013 revealed that nine of them spent more money on sales and marketing than on research and development. The largest, Johnson & Johnson, spent $17.5 billion on sales and marketing and $8.2 billion on R&D.

As a large part of their sales strategy, drug companies approach physicians to inform them about their products and to persuade them to prescribe their drugs to patients – sometimes resulting in prescriptions that benefit the company and physicians but are not always in the best financial interest of patients or consumers as a whole.

To protect their profits, which are perhaps the highest among all major industries, the pharmaceutical industry also devotes a significant amount of money to lobbying in Washington – more than $200 million annually since 2007.

In 2003, for example, when Congress created Medicare Part D, the law did not allow the program to import comparable, more affordable drugs, and it also moved more than 6 million Americans from Medicaid into the program, which went into effect in 2006.

Most significantly, the law also does not allow Medicare Part D to negotiate drug prices in the way that Medicaid and the Veterans Health Administration do. It is estimated that the federal government would save $15 billion per year if the government negotiated prices with drug makers.

The legislator primarily responsible for writing the bill, Billy Tauzin (R-La.), later went on to join the drug industry’s most powerful lobbying organization, PhRMA.

As PhRMA’s president, Tauzin was behind the scenes in mid-2009 when the White House and top lawmakers were hammering out the details of what would become the Affordable Care Act (ACA). In these early meetings, President Obama and Senate Finance Committee Chairman Max Baucus (D-Mont.) deliberated with Tauzin over how much money, in cost-saving measures, the drug industry would tolerate before it would turn against the bill and begin airing ads opposing it.

Eventually, the industry was able to get the White House and Congress to commit to $80 billion in savings to taxpayers over 10 years (down from an earlier projected possible savings of $2 trillion over the same period) in exchange for a list of demands, including cementing into place the ban on price negotiations and the importation of drugs from overseas.

The Shkreli incident and the high price of prescription drugs has caught the attention of the public and many presidential candidates. Democratic candidates Bernie Sanders and Hillary Clinton have released their own respective plans for how to make prescription drugs more affordable in the U.S.

Donald Trump criticized Shkreli for his now-rescinded price increase, but the Republican candidates have thus far been comparatively silent regarding how they would address the issue of the high cost of Americans’ prescription drugs.

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