drug pricing

7 Things To Know About Drug Pricing in The US

With more people than ever on prescription medications, drug pricing has been a hot topic of debate due to waning affordability.

Ex-hedge fund manager and current CEO of Turing Pharmaceuticals, Martin Shkreli, briefly took over the role of most hated man on the Internet in September of 2015 for raising the price of an HIV drug from $13 to $750 per pill.

This instance is more than simple skullduggery: it’s a small aspect, or rather, a symptom, of how the US pharmaceutical industry works to price medications. Here’s seven facts to know about the nuances of drug pricing in the United States.

1. Production cost is low, but research and development costs are high

While the cost of manufacturing drugs is negligible, the real costs are in research and development (R&D) of new treatments. The US in particular provides 36 percent of drug development, which is estimated to save $750 billion in treatment cost over a course of 25 years (numbers from 2006).

Higher drug prices, in theory, funnel more money towards the research and development of new and more effective drugs that could help people across the world.

2. Spending on marketing may be even more than R&D

Though research is a prioritized expense, there have been various accounts of drug company expenditures going towards marketing and promotion over actual drug development. It’s thought that 9 out of 10 big pharmaceutical companies spend more on marketing than they do on research and development.

This can contribute to price spikes, and monetarily incentivizes doctors to prescribe certain drugs, since a majority of marketing is targeted at medical professionals instead of consumers.

3. Drug prices are rising faster than inflation


The AARP reports the rise of brand-name drug prices is faster than inflation. One reason is the length and strength of IP law, which keeps manufacturers from developing cheaper versions of brand-name drugs. And even when patents do expire, manufacturers can pay off their generic counterparts not to enter the market so they can keep prices high.

An increase of new and expensive drugs and less generic competitors makes for high prices all around. Even for older generic drugs, when competition dwindles or is bought out, prices rise.

4. Price gouging is a controversial reality

After being acquired by Turing Pharmaceuticals, the 62 year old drug Daraprim (treatment for the parasitic infection toxoplasmosis, used by many AIDS patients) had its price raised by 5000 percent in a night. This is called price gouging: when a company buys an old drug to raise the price and turn maximum profit.

Defenders argue that spikes in pricing will help companies develop more effective drugs, but the tactic makes it difficult for patients and hospitals to access vital medications in times of need.

5. The consequences are dangerous 

Due to high prices, about two percent of Americans have imported drugs from countries like India, Canada, or the UK. People that do this run the risk of counterfeit or substandard drugs, which could endanger their health.

Even worse is that an estimated one fourth of prescriptions aren’t filled at all because people can’t afford them. 70 percent of Americans feel the prices of medications are too high, and that companies put profit over patients’ medical needs.

6. Medicare complicates the issue

Pharmaceutical companies also sometimes raise prices to prevent losses from third-party payers like Medicare.

Whatever the cost of a drug may be, private plans negotiate on behalf of Medicare for a lower rate, which lowers profit. Companies raise prices to get better deals, but at the end of the day, it’s taxpayers who pay for the heightened cost of Medicare, which covers 83 percent of brand-name drug costs.

7. Everyone disagrees on the solution

Drug pricing has become a political issue, with Democratic presidential hopefuls Clinton and Sanders having proposed plans to address the trend.

Their proposals want to give Medicare the power to negotiate with drug providers in a united way, cap patient prices, allow legal imports from Canada, and report pricing more transparently.

This isn’t necessarily a silver-bullet approach: some say that stringent regulations are part of the problem, as they can induce price spikes by companies worried about the effects of new changes. Some also argue that transparent reports would be costly and misleading.

8. Prescriptions account for 9.3 percent of healthcare costs as of 2013.

Fortunately, medication costs are a relatively small fraction of healthcare expenditures in the US, most of which comes from hospital care and nursing and physician services.

Even so, patients feel the rise of drug prices more acutely than other costs, and many have to foot a good part of the bill even with good insurance. At the end of the day, it’s important that prescriptions are affordable and accessible, because it keep patients out of the hospital, resulting in lower costs all around.

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Jennifer Markert