The pharmaceutical industry, like any good magician, knows not to reveal his or her
secrets. Some of the industry’s secrets are grounded in psychology and behavioral economics.
These fields can provide perspective into the nature of drug prices and how drug prices have
spiked. In 2015, prescription drugs rose, on average, more than ten percent in the United States
according to Truveris, a health information technology company that analyzes payments to
pharmaceutical companies. The Washington Post reported that branded drugs rose by 14.77
percent. Specialty drugs rose by 9.21 percent. With notable exceptions, we generally accept this
rising trend, because medicine is constantly advancing, so drugs are expected to be increasingly
effective over time (and consequently more expensive). A major problem with our perception
of this phenomenon, however, is that the rate of increasing prices is not commensurate with
the rate at which drugs are improving. To better understand this example, an analogy can be
made with iPhones. Each new model may exhibit a few improvements, but are these slight
improvements worth the significantly higher cost to buy the newest model? Still, many people
buy the newest iPhone for the sole purpose of having what is new and best. However, for the
drug industry, what is new is not always what is best.
In 2007, for example, two new medications, Avandia and Actos, were released to treat
type 2 diabetes. According to reports from the Consumers Union, these two new and highly
advertised drugs were, “no more effective or safe than older drugs and cost significantly more.”
Older drugs, like metformin, glipizide, and glimepiride, ranged in cost from $10 to $60. On the
other hand, Avandia costs anywhere from $131 to $262 a month, and Actos from $142 to $221
a month. New schizophrenia drugs released in 2006 costed as much as $600 more than older
medications, without demonstrating greater efficacy or safety. Manipulative advertising lies at
the root of these price discrepancies.
In the United States, the drug industry’s right to directly advertise to consumers
bestows the industry with substantial rhetorical power. A study in the journal, Pharmacy and
Therapeutics, reports that while this practice has some benefits, including improved patient
dialogue, increased patient-clinician contact, reduced underdiagnosis, and removed disease
stigmas, this privilege of the drug industry also has its disadvantages. The industry’s power to
select what information to provide patients has led to misinformation and deception. According
to a study on Direct-to- Consumer Advertising (DTCA) that was published in Annals of Family
Medicine in 2007, the authors found that 95 percent of evening news and prime time ads used
emotional appeal. While 82 percent made factual claims, only 26 percent described risk factors,
26 percent referred to condition causes, and 25 percent indicated the condition’s prevalence.
These companies appeal to consumers’ emotions rather than logic in order to bias the
consumers to purchasing a drug. This is known as the framing effect, a cognitive bias in which a
choice is presented to a person in a certain context such that a person’s perception of that
choice is skewed.
The same study found that only 19 percent of Direct-to- Consumer Ads conceded that
patients could supplement the drug with lifestyle changes. Unsurprisingly, none of these ads
stated that lifestyle changes could serve as an alternative to the drug. In this way, patients’
perceptions are manipulated into believing that a certain drug is absolutely critical for their
survival, while cheaper, equally effective alternatives are typically available. Moreover, drug
companies gain more leverage in advertising their products in this way, obtaining even more
pricing power. Consequently, desperate patients, in the face of an apparent intellectually
untouchable drug industry that knows a thing or two about pathos, will pay whatever it takes to
get the drugs they see on television or hear about on the radio.
Despite this pricing power derived from direct-to- consumer advertising, the drug
industry, on average, seems to have capped its price hikes to around ten percent per year, as
was previously stated. Nevertheless, the industry continues to exert its pricing power due to a
complex political system. A number of factors contributes to this continuing power of the
pharmaceutical industry, including multimillion dollar donations to patient advocacy groups by
drug companies, Medicare’s inability to negotiate prices, lack of industry regulation, and
lengthy FDA delays when vetting generic drugs.
The drug industry, when it so desires, can implement even higher price hikes, far beyond
the typical ten percent. For example, Forbes magazine reported that Lannett, a small drug
company in Philadelphia, raised the price of a certain medication used to treat schizophrenia by
1,650 percent over a period of three months starting in April. Why wouldn’t all drug companies
follow Lannett’s example and raise drug prices however much they want? Why does the
industry as a whole cap annual price increases at ten percent? This is a smart move by the
pharmaceutical industry – exceptionally deceptive, but smart nonetheless, as explained by the
work of Ernst Heinrich Weber.
Weber, a German physiologist, postulated in 1834 what became known as Weber’s Law.
Weber’s Law relates the cognitive and physical worlds, suggesting that there must be a
minimum amount of change between two stimuli necessary for one to notice a difference
between the stimuli. For example, if one is presented with two very similar shades of blue, he
or she will likely not be able to distinguish the shades. However, if two distinctly different
shades of blue are presented, he or she will likely recognize the difference. This law was
originally applied to sensory perception, but the rule also holds for business. Weber’s Law of
prices postulates that consumers will only notice a price increase of ten percent or more. Sound
familiar? Is this merely a coincidence that prescription drugs rose roughly ten percent in 2015?
Is it a coincidence that Vanda Pharmaceuticals increased the price of one of its sleep disorder
pills by ten percent? It is perchance that Pfizer raised its list prices for more than sixty of its
products by an average of 10.6 percent from last December to January? Did Acorda
Therapeutics arbitrarily decide to raise its price of Ampyra, a treatment for multiple-sclerosis,
by eleven percent last January? Are all of these pharmaceutical companies capping their
increases around ten percent so that consumers do not notice the such changes? Perhaps the
only reason we have noticed price hikes in the drug industry at all is because a few companies
like Lannett have increased prices far beyond ten percent. These are the stories that make
headlines, and consequently, backlash against the entire industry has ensued.
There has been significant criticism of the pharmaceutical industry among politicians,
doctors, patients, and health-care payers alike. Ben Goldacre’s book entitled, “Bad Pharma:
How Drug Companies Mislead Doctors and Harm Patients,” published in 2012, exposes the
systematic distortive power the $600 billion pharmaceutical industry has over clinical trials. He
describes how these companies that set the prices are also the companies that test the drugs.
They have selective power of the data and can ignore negative results. Despite efforts like these
to expose the tricks of the industry, these companies continue to raise prices.
How can our society distance itself from the consumer mindset that the drug industry
inconspicuously exacted on patients? If regulation on advertising is one of the answers, we
need to change the drug industry’s political invincibility. According to the same 2007 paper on
DTCA as mentioned above, no other developed country in the world permits direct-to-
consumer advertising besides New Zealand. We need to start asking some fundamental
questions about the desired relationship between the drug industry and consumers. Until then,
the drug industry will continue to capitalize on the same psychological tools that it is has used
for decades to take patients’ money.
Ciotti, Gregory. “10 Classic Studies on Pricing Psychology.” The Huffington Post. TheHuffingtonPost.com, 25 Nov. 2014. Web. 29 Oct. 2016.
Dennis, Brady. “Prescription Drug Prices Jumped More than 10 Percent in 2015, Analysis Finds.” Washington Post. The Washington Post, 11 Jan. 2016. Web. 29 Oct. 2016.
Dillner, Luisa. “Bad Pharma by Ben Goldacre – Review.” The Guardian. Guardian News and Media, 17 Oct. 2012. Web. 29 Oct. 2016.
Frosch, Dominick, Patrick Krueger, and Robert Hornik. “Creating Demand for Prescription Drugs: A Content Analysis of Television Direct-to-Consumer Advertising.” Ncbi. Ann Fam Med, 2007. Web. 29 Oct. 2016.
Herold, Susan. “CR Best Buy Drugs Report: New Oral Diabetes Medicines No More Effective, Safe than Lower-Cost, Older Drugs.” Consumer Reports, 16 July. 2016.
Loftus, Peter. “Drugmakers Raise Prices Despite Criticisms.” WSJ. Wsj.com, 10 Jan. 2016. Web. 29 Oct. 2016.
Vardi, Nathan. “Another Drug Company That Raises Prices Like Crazy.” Forbes. Forbes Magazine, 6 Oct. 2016. Web. 29 Oct. 2016.
Ventola, C. Lee. “Direct-to-Consumer Pharmaceutical Advertising: Therapeutic or Toxic?” Pharmacy and Therapeutics 36.10 (2011): 669–684. Print.
“Weber’s Law.” Encyclopedia Britannica Online. Encyclopedia Britannica, 28 Dec. 2015. Web. 29 Oct. 2016.