Money and (Pharmaceutical) Drugs – the Rise of American Drug Costs

BY MIMI CHUNG

When Turing Pharmaceuticals increased the cost of a life-saving drug, Daraprim, from $13.50 to $750 last September, the nation was outraged. Daraprim is a drug that treats toxoplasmosis and is often used by people with weakened immune systems. The unexpected increase could put the drug out of financial reach for many of its purchasers, including patients with AIDS and those undergoing chemotherapy. Meanwhile, in many other areas of the world, a similar drug costs less than a dollar per pill. A 5,000% price hike of a lifesaving drug and an unrepentant CEO named Martin Shkreli instantly grabbed the headlines.

Yet the circumstances that created this situation run much deeper than one man’s greed. The Daraprim case is simply a manifestation of many American healthcare policy problems. The price jump is perfectly legal – and, more worryingly, similar price increases have been observed for hundreds of other important drugs. Elsevier, a publishing company for scientific and medical information, reported that the price of 222 drug groups out of 4,421 increased by at least 100% between 2013 and 2014. In the most extreme cases, some drugs increased almost 1,000% of the price the year before.

The causes for the price increase are many and varied – some stemming from economic necessities, some from policy changes, and some from pure business profit margins.

The FDA gives drug companies patents for new drugs to incentivize them to research and develop new products. Patents of new drugs therefore help protect drug companies from the high fixed costs of R&D, by guaranteeing a profitable market for the drugs after developed. However, patents can increase the price of healthcare by allowing drug companies to set their own prices by granting them an effective monopoly. The problem arises when pharmaceutical companies exploit these practices to make more money. For example, the drug manufacturer Gilead Sciences, which patented a hepatitis C medication that costs upwards of $80,000 per treatment called Sovaldi, has reported a huge company profit margin of around 30%. For comparison, British energy companies faced intense political and public backlash for a profit margin of 8%, which is less than a fourth of Gilead’s margin. Many analysts question how reasonable it is to allow drug companies to set prices for patented drugs when the profit far outweighs the justifiable cost of production and marketing.

Even generic drugs, which are not under a patent, have seen a steady price increase in recent years. Many companies can product generic drugs, so competition between them drives prices down to around 80-85% of the brand drug. However, many generic drug manufacturers have merged in the years following 2009 to prevent losses. For example, Pfizer stated in November 2015 that it would buy Allergen, which would create one of the largest pharmaceutical companies in the world with around $64 billion in annual sales. Consolidation of these large corporations have decreased competition in the market and increased drug prices.

Corporations alone are not solely responsible for the increase in costs either. Recent difficulties in manufacturing, including new policies and research prices, have required drugs to have a higher sticker price in order to ensure a return for the pharmaceutical company. Research costs for new products, while always the large bulk of expenses, has skyrocketed in recent years. New innovations in creating drugs has brought in a promising number of new pharmaceuticals for refinement and development, but the increasingly difficult process of testing and approval has companies increase prices for fear of losing money.

Higher standards for quality controls set by the U.S. Food and Drug Administration (FDA) also slow production. These new requirements often disproportionally affect older generic drugs, since these pharmaceuticals are more likely to require large-scale changes for maintenance or renovation. On occasion, the FDA has worked to eliminate some of the cheapest generics completely because the drugs started being manufactured before the 1938 Food, Drug, & Cosmetics Act, which set a basic structure for approving new pharmaceutical drugs. Drugs that went through clinical studies would replace these old drugs – which, while undoubtedly safer, also could drive up prices.

If there is anything that be considered positive from this situation, it is that the Shkreli case has ignited a conversation about pharmaceutical drug costs. Under the Affordable Care Act, Medicare is currently unable to negotiate prices with drug companies – however, the shock of this debate has forced Congress and presidential candidates alike to take a serious look at rising healthcare costs due to drug prices. As more attention is focused on this issue, perhaps the United States will discover a treatment to stabilize drug prices. But for now, many Americans still need to decide between the necessity of paying the mortgage and the immediacy of life-saving medication.

Sources:

[1] Anderson, Bill. “Pharmaceutical industry gets high on fat profits.” BBC, 6 November 2014. Accessed 18 February 2016. http://www.bbc.com/news/business-28212223

[2] Berkrot, Bill and Randsdell Pierson. “Pfizer to buy Allergan in $160 billion deal.” Reuters 24 November 2015. Accessed 18 February 2016. http://www.reuters.com/article/us-allergan-m-a-pfizer-idUSKBN0TB0UT20151124.

[3] Golstein, Amy. “Sharp increases in drug costs draw hundreds to government forum.” The Washington Post, 20 November 2015. Accessed 17 February 2016.https://www.washingtonpost.com/news/to-your-health/wp/2015/11/20/sharp-increases-in-drug-costs-draw-hundreds-to-government-forum/.

[4] Hamblin, James. “Pharma Bro Is the Face of U.S. Health Care.” The Atlantic, 23 September 2015. Accessed 17 February 2016.http://www.theatlantic.com/health/archive/2015/09/martin-shkreli-in-the-mirror/406888/.

[5] Herrick, Devon M. What Is Increasing the Cost of Generic Drugs? Dallas: National Center for Policy Analysis. 07 October 2015. Accessed 15 February 2016. http://www.ncpa.org/pub/what-is-increasing-the-cost-of-generic-drugs-part-ii-regulatory-and-legal-reasons.

[6] Johnson, Linda A. “Here are the 6 reasons why prescription drugs are so expensive.” Business Insider, 25 September 2015. Accessed 18 February 2016. http://www.businessinsider.com/ap-multiple-factors-cause-high-prescription-drug-prices-in-us-2015-9.

[7] “Painful Pills.” The Economist, 26 September 2015. Accessed 15 February 2016.http://www.economist.com/news/business-and-finance/21665436-dramatic-rises-price-some-medicines-prompt-calls-action-hillary-clinton-promises.

[8] Pianin, Eric. “The Feds Finally Make a Move on Soaring Drug Prices.” The Fiscal Times, 16 October 2015. Accessed 12 February 2016. http://www.thefiscaltimes.com/2015/10/16/Feds-Finally-Make-Move-Soaring-Drug-Prices.

[9] Surowiecki, James. “Taking on the Drug Profiteers.” The New Yorker, 12 October 2015. Accessed 15 February 2016. http://www.newyorker.com/magazine/2015/10/12/taking-on-the-drug-profiteers.

[10] Trefis Team. “Why Are Generic Drug Prices Shooting Up?” Forbes, 27 February 2015. Accessed 17 February 2016. http://www.forbes.com/sites/greatspeculations/2015/02/27/why-are-generic-drug-prices-shooting-up/#2db693c4377e.

[11] Walker, Joseph. “Gilead’s $1,000 Pill Is Hard for States to Swallow.” The Wall Street Journal, 8 April 2015. Accessed 18 February 2016. http://www.wsj.com/articles/gileads-1-000-hep-c-pill-is-hard-for-states-to-swallow-1428525426.

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