In an America where everything has become practically unaffordable: a college education, proper housing, energy, etc., it is unfortunate that healthcare, perhaps the most important of them all, has become unaffordable as well. Many people intuitively believe that this is a result of high drug prices, and they are correct. Expensive drugs make it more difficult for people to acquire healthcare at tolerable costs. What is less intuitive, however, is the solution to this issue.
It is widely known that the United States pays more for drugs than other countries. This was recently brought to the forefront of American media when the CEO of Turing Pharmaceuticals, Martin Shkreli, raised the price of an anti-parasitic drug from $13.50 to $750. The public was baffled by the fact that this increase was not hindered by any laws. This perceived invincibility of the seller comes from the fact that Medicare, the largest American buyer of pharmaceuticals, is unable to negotiate drug pricing. As explained by The New York Times, people under Medicare wanted the program to cover all the drugs that they wish to use. In order to accomplish this, Congress gave pharmaceutical companies more bargaining power by essentially barring Medicare from saying “no” to most drugs. Since Medicare must cover many of the drugs that these companies manufacture, the companies are able to take in more revenue by raising prices, with the knowledge that there would not be a subsequent decrease in sales.
Knowing this, many Americans ask “is the right solution to return all of the negotiating power to the United States?” Not necessarily. Drug companies are still entities whose primary focus is to maximize profits. Therefore, if a company believes that the sale of a certain drug may not be profitable, then spending money on research and development for this drug would be counterintuitive. A forced decrease in drug pricing would therefore reduce the profit margins that certain drugs once had, and lead to a reduction in pharmaceutical innovation.
Nevertheless, many countries are still able to get away with paying less for drugs than the United States. Norway is one such example. As reported by The Wall Street Journal, in 2015 the cancer drug Ritoxan cost Medicare $3,678, whereas only $1,527 to Norway’s health system. This is not based in the idea that people in Norway cannot afford higher prices. Moreover, Norway’s GDP per capita of about $55,400 tops that of the United States. Instead, this stems from how countries such as Norway have more bargaining power. This is utilized to set price caps on medication and even to refuse coverage of drugs that may not be worth their prices.
The hard truth is that pharmaceutical companies are comfortable with other nations holding more negotiating power because these countries are not responsible for as large a portion of their revenues as the United States. For example, the 2015 financial report for Pfizer, one of the largest pharmaceutical companies in the world, revealed that 44% of its revenue came from sales in the United States. Therefore, when comparing individual countries, the U.S. is by far the most important market.
The IMS Consulting Group carried out a study consisting of two hypothetical ways that the U.S. could reduce drug prices if it had higher bargaining power; both resulted in a devastating loss in revenue for pharmaceutical companies. In the first situation, the U.S. kept its drug prices static at 2010 levels, which led to a 7% decrease in global pharmaceutical revenues. In the second scenario, the U.S. instead decided to use European drug prices as a reference point for setting its own. This situation in turn caused global pharmaceutical revenues to go down 29% – a frightening amount.
The underlying theme here is that pharmaceutical companies have become dependent on overpricing their drugs in the United States. Any attempts at creating fairer pricing in the U.S. results in substantial cuts in global pharmaceutical revenue. So from a complete business standpoint, it would not be wise for pharmaceutical companies to appease the masses and make drugs more affordable. Furthermore, as stated previously, many argue that if the U.S. were to ignore the interest of these companies and set caps on drug pricing, pharmaceutical innovation would slow. Therefore, since neither side can afford to impose stricter laws in regards to pricing, there is a chance that such laws will not be imposed until the far future.
However, drug companies have not always been reliant on high pricing in the U.S.; this is a recent occurrence. According to IMS Health, high price drugs made up about 19% of the top 10 pharmaceutical companies’ revenues in 2004. At this time, generic and low priced drugs constituted a higher percentage of total revenue composition. In the 12 years since then, this percentage has increased to about 40% and is still rising. Since higher priced drugs were less important to these companies in 2004, it may have once been feasible to impose stricter regulation on drug pricing. Now, that does not seem to be the case, mostly because high priced drugs would be the most effect by stricter drug pricing laws. Therefore, in today’s world, where high-priced drugs are very prevalent, pricing limitations would pose a larger threat to pharmaceutical companies.
Another idea that shows some promise is a restructuring of the way drugs are approved. Some believe that the FDA’s (Federal Drug Administration) regulation is overly precautionary. Joseph A. DiMasi, et al.’s study on the costs of Innovation in the Pharmaceutical industry reveal that the current cost to develop a new drug is around $2.6 billion. This is very large considering that this number was at about $1.2 billion in the year 2000. As explained by The Hill, this increase is attributable to higher clinical trial costs and lower success rates.
The soaring expenses behind drug innovation allow larger companies to form monopolies because smaller businesses and entrepreneurs cannot afford to even begin developing drugs. If these expenses were lowered, smaller businesses could enter the industry and increase competition. This increased competition would not only drive drug prices down, but also eliminate the side effects of the first solution that was discussed: a decrease in innovation.
Of course the side effect of looser FDA regulations could be that pharmaceuticals become less safe. In order to avoid this, but still reduce drug regulation, the FDA must determine how much regulation is enough, leaving only that which is necessary.
Interestingly, a decrease in FDA regulations may have also prevented the shift towards today’s pharmaceutical market which, as was discussed earlier, is more centered around high-priced drugs. An increase in FDA regulations in the past few decades cut into the profits of pharmaceutical companies. Furthermore, it made it less worthwhile for bigger companies to make more generic drugs as they would have had to spend millions to first create the drug, and also worry about competition from other companies. Since it became very expensive to develop drugs, companies began to shift their focus onto drugs that they could use to monopolize markets. And once they gained monopolies, they began to set prices in a manner that would maximize profits.
For these reasons, the most feasible method for reducing drug costs could be a decrease in FDA regulations. This would lead to an increase in the annual profits for pharmaceutical companies, reduce drug monopolies, and allow smaller companies to afford drug development- all things that would lead to a decrease in drug prices. However, would the American people be content with this solution? In a long struggle stemming all the way back to Upton Sinclair and The Jungle, the American people have finally become comfortable with what goes on in food and drug manufacturing factories. However, there are still people who are unable to trust the products coming from these companies. The solution that I am suggesting would definitely be opposed by such groups, and certainly add new skeptics to their cause.
Abdukadirov, Contributor Sherzod. “The Wrong Way to Reduce Drug Prices.”TheHill. N.p., 11 May 2016. Web. 12 Oct. 2016.
Benoff, Marc. Pricing & Market Access Outlook. IMS Health. IMS Consulting Group, 2016. Web. 12 Oct. 2016.
Dimasi, Joseph A., Henry G. Grabowski, and Ronald W. Hansen. “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs.” Journal of Health Economics 47 (2016): 20-33. Web. 12 Oct. 2016.
“Pfizer Financial Report.” (2015): 124-25. Pfizer. 2016. Web. 12 Oct. 2016.
Sanger-Katz, Margot. “The Real Reason Medicare Is a Lousy Drug Negotiator: It Can’t Say No.” New York Times, 2 Feb. 2016. Web. 12 Oct. 2016.
Wessel, David. “The Misconceptions About Drug Prices.” WSJ. Wall Street Journal, 06 May 2004. Web. 12 Oct. 2016.
Whalen, Jeanne. “Why the U.S. Pays More Than Other Countries for Drugs.”WSJ. Wall Street Journal, 30 Nov. 2015. Web. 12 Oct. 2016.