The Truth about Drug Costs

Drug costs?

        A headline of June 22 announcing that US prescription drug costs now exceed $400 billion annually, failed to deal with some major  issues.

        The Medicare Prescription Drug Act, of  2003, in addition to creating  benefits to include drug costs also provided an underpublicized, but greater,  gift to Big Pharma. The law stipulates that Medicare  can't  negotiate drug costs, but will pay whatever the manufacturer charges.

         Recently, in Morocco, I bought a "Z pack" for $8.00 over the counter. It was Pfizer Azithromycin, made under patent in the USA.  Another identical later purchase in The Villages cost $27 and was made in India! For a monthly prescription for Nexium,  an insurer in the United States pays, on average, $215 per customer. The same prescription (identical drug) in the Netherlands costs just $23! As an aside, the VA DOES negotiate drug costs and pays far less!

         No drug company is selling at a loss, so why do these meds cost so much here? One obvious reason is because Medicare just pays, no matter what the cost. A second law, enacted in 2006, further stipulates that any and all drugs are to be covered under Medicare, even if a suitable generic is available.           

        As significant;  contrary to claims of high R&D costs, Pharma spends  tens of billions annually on promotions to physicians to convince them that minor differences between drugs are clinically significant. And it spends billions more in direct media advertising to fuel demand for "new" high-priced, low-value drugs.  Every single  major US drug company spends more on advertising  than on research!  One household name  US drug firm, Johnson and Johnson, actually spends more than twice as much on advertising as on research! Big Pharma is also the largest US lobby, outspending the Insurance industry by more than 50%!

        It is a foundation  principle of capitalism that as competition erodes profits on established products, enterprises will invest in innovation to earn higher profits from new products. In contrast, Federal law prohibits the Food and Drug Administration (FDA) from approving a copy of a new drug for a period of seven to 12 years even if there are no patents!     

       To put this in perspective, consider the proliferation  of cell phones, all of which do essentially the same thing. The wide variety of these devices creates marketplace competition and as Adam Smith's "invisible hand" manipulates the market, prices are kept relatively low. To distinguish this actual market process from the perks granted Big Pharma by a grateful (for lobbying donations) Congress, consider a cell phone marketplace where only one manufacturer was allowed to produce and sell phones for (at least) 12 years. What would a phone cost?

        Now consider that Big Pharma in the US is also the beneficiary of about $30 billion annually in public dollars for research, the results of which may well be applied to yet another "big ticket" drug, sold at a premium in the US and for a quarter of the US price overseas.  U.S. prices for the world's 20 top-selling medicines are, on average, three times higher than in Britain. This includes the entire range from acid reflux meds to cancer treatments.  Ads for the recent Hepatitis cure, Harvoni, which we see frequently, fail to mention that the pills cost $94,000 for the shortest course of treatment. Harvoni in the UK will cost roughly a third of that figure!  

        A final insult is to be found in the tendency of some firms to gradually but greatly  increase the consumer price of a drug as it nears end of patent. This has resulted in extreme cases of hundreds of percentage increases as manufacturers anticipate the generic to come as their patent protection ends.  

        In short, Big Pharma is the highest net profit industry in America, with Finance a distant second. Even this is misleading in a way, since the figure for the major Big Pharma companies is more like 30%   (Pfizer topping the list for 2015 at an unbelievable 42% NET PROFIT!!) rather than the 20% overall industry figure. In fact, 12 of the smaller ones also show net profits of over 40%!  So for the heavy players, the actual margin of profit is more than 10%  net profit higher than the next closest industry.  For comparison, the average US Corporation is delighted if they yield  6% net profit.  

     Quite simply, the pharmaceutical lobby has used its money and influence to sell the false notion that high drug prices and monopolies are necessary to support the high cost of research. Yet public financial data shows that high drug prices simply produce high profits! Oddly enough, the other health related industry sector, Health Services, averages a slightly below average 4% . Of course it goes without saying that the only one of the top industries where human lives actually are in play is the drug industry.