The Smart Money: The high cost of prescription drugs

Posted Tuesday, May 27, 2014 in Analysis

The Smart Money: The high cost of prescription drugs

by Gina Hamilton

The other day, I picked up my prescription and discovered a new feature my pharmacy had recently begun. On my receipt, the pharmacy printed the co-pay price, $10, and the “cash” price, $137.57, so I would know what my pharmacy benefit was. 

When I checked the price of the tablets at a Canadian pharmacy, the “cash” cost in U.S. funds would have been $29.66 for the same medication. It is even cheaper in Mexico, at $17.26 for 120 tablets.

It’s a generic medication.

The pills are exactly the same, same strength, same manufacturer, same everything. So why is there a difference?

In Canada, and in Mexico, the government controls the price of the medication. For instance, a Canadian law authorizes a review board to order a price reduction whenever the price of a drug exceeds the median of the prices in six European countries plus the United States. 

The U.S. is almost always the statistical outlier on the high end of the scale. Since all the European countries intervene in various ways to hold down drug costs, Canada uses other countries' price controls to create its own.

In the U.S., a pharmaceutical trade group, PhRMA, lobbies incessantly to keep prices higher. According to their website, they say they are for:

Broad patient access to safe and effective medicines through a free market, without price controls,

Strong intellectual property incentives, and

Transparent, efficient, regulation and a free flow of information to patients.

They have had many notable successes in preventing price controls, most recently during the negotiations for the Affordable Care Act, when the new law forbade reimportation of cheaper drugs from Canada. Pharmaceutical lobbyists have also successfully defeated government price controls for any agency except the Veterans Administration.

None of this makes much sense, since the U.S. government pays for prescription drugs for a vast number of people, from people on Medicaid, to people on Medicare, to members of the military, to government employees from the President to a low-level clerk in an Interior office in Alaska.  The federal government pays for more than 60 percent of all prescription drugs in the United States, and if the government were able to negotiate for better prices, studies predicted that the cost for the government would decline by about 68 percent.

Drug companies instead compete openly. In the U.S., the costs of researching, developing, and advertising new brand name medications are passed to customers as part of a medication’s price. Pharmaceutical companies also say that the cost of drugs is elevated by the costs of litigation in cases where the drugs have caused harm, although harm caused by specialized drugs, including vaccinations, are covered by the federal government now.

Drug manufacturers say that they would be less incented to put R&D money toward new medications. But in Europe, where several large pharmaceutical companies exist and create new products annually and where price controls exist, this doesn’t appear to be much of a problem. 

Seven of the top 10 drug companies are in Switzerland, France, the U.K., Sweden, and Germany. Part of the reason why companies settle there, and the U.S. recently lost a corporate giant to the U.K., is that European countries pay a much larger share of R&D costs than the U.S. does as part of general taxation — current estimates are that Europeans fund about 33 percent of their companies’ R&D costs, while the U.S. funds about 21 percent through direct funding. However, U.S. patients get it in the neck on the back end — we ... or our insurance companies ... pay a much higher price for our medications. 

And that might be OK, if those costs were actually going to new and innovative drugs that might benefit not only ourselves, but the developing world. 

But in fact, most of the new drugs are “me-too” drugs, very similar products made for competitive reasons by different manufacturers. A flurry of new cholesterol drugs, all released at about the same time, are about to lose their patent protections and become available as generic drugs, which is leaving their manufacturers in a dither about a hit to their stock prices. In fact, the affected companies’ share prices have slumped a little in recent weeks.

However, in general, stock prices have soared over the last 10 years, in large part because the uncertainty in the market, as Medicare Part D came online and then the Affordable Care Act banned reimportation of drugs, was reduced tremendously for manufacturers. And as the Baby Boom retires, with all their age-related prescriptions, the outlook is very rosy indeed for Big Pharma.

Some of those profits could be put toward reducing costs for American consumers, but they won’t be, because there isn’t anything compelling it. It’s unfortunate that in our rush to pass any health care reform, we gave away the pharmaceutical candy store.

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