Why are prescription drugs so darn expensive in America?

Sep 08, 2021

Prescription drugs, which can be more than twice as expensive in the United States as in other Western countries, cost the average American nearly $1200 per year. Matthew Fiedler, a research fellow at the Brookings Institute, said several factors drive up prescription drug costs in America.

It’s a Classic Monopoly

New name-brand drugs are more expensive because they are usually the only drug for sale on the market.

“When a manufacturer develops a new drug, we give them a patent,” Fiedler said. “And we allow them to be the only one selling that drug for some period of time after the product is developed. And so that means that the company can see whatever price the market will bear for that drug.”

Drug Trials

Traditionally, the FDA’s drug approval process is expensive and lengthy.

Dr. Jeffrey Smith, a research fellow at the Cato Institute, said drug companies often don’t get enough exclusivity time to recoup up-front costs for research and development. As a result, they will make minor modifications to the drug to extend their patent.

“That’s how it costs $600 for an EpiPen, because just when the patent was about to expire, and the generic was going to come out for the EpiPen,” Smith said. “They made some modifications to the injector; the FDA said, ‘Yes, you’re right, this is a significant modification,’ and got an extended stance on a patent.”

The Middleman

In the United States, insurance companies and drug manufacturers determine pricing. However, other countries such as Canada, Japan, and Great Britain negotiate directly with drug companies, drastically lowering costs.

“The government revenue negotiation systems that are used in other countries lead to much lower prices,” Fiedler said.

JIMMIE JOHNSON: WE’VE ALL BEEN THERE. YOU GO TO THE PHARMACY FOR A PRESCRIPTION THAT’S SUPPOSED TO MAKE YOU FEEL BETTER, ONLY TO SEE THE PRICE AND FEEL WORSE.

THE AVERAGE AMERICAN SPENDS ROUGHLY 12-HUNDRED DOLLARS A YEAR ON PRESCRIPTION DRUGS.

TWO AND A HALF TIMES MORE THAN THE REST OF THE WORLD. SO WHY ARE DRUG PRICES MORE EXPENSIVE IN THIS COUNTRY? LET ME EXPLAIN.

WE ALL KNOW PRICES CAN BE OUTRAGEOUS. HERE’S WHY. REASON ONE DRUGS ARE SO PRICY? IT’S A CLASSIC MONOPOLY.

MATTHEW FIEDLER WITH THE BROOKINGS INSTITUTE, A PUBLIC POLICY THINK TANK SAYS PRICES ARE HIGH FOR NEW NAME-BRAND DRUGS BECAUSE THEY ARE THE ONLY GAME IN TOWN.

FIEDLER: “When a manufacturer develops a new drug, we give them a patent. And we allow them to be the only one selling that drug for some period of time after the product is developed. And so that means that the company can see whatever price the market will bear for that drug.”

THE F-D-A ISSUES PHARMACEUTICAL COMPANIES EXCLUSIVITY RIGHTS WITH THEIR PATENT. IT CAN LAST UP TO SEVEN YEARS. WHICH MEANS THERE IS NO GENERIC VERSION UNTIL EXCLUSIVITY EXPIRES. THAT MONOPOLY DRIVES UP THE COST OF THE DRUG.

MATTHEW FIEDLER: “That may be a good choice on the part of policymakers because it creates incentives to develop new drugs, or it may be a bad choice because we’re paying these higher prices, but not getting substantial innovation in return.”

JIMMIE: REASON NUMBER 2, DRUG TRIALS.

THE F-D-A’S PROCESS FOR APPROVAL CAN BE COSTLY AND TAKE A LONG TIME, ACCORDING TO JEFFREY SMITH WITH THE CATO INSTITUTE, A LIBERTARIAN THINK TANK. HE SAYS TOO OFTEN, DRUG COMPANIES DON’T GET ENOUGH EXCLUSIVITY TIME TO RECOUP THEIR UPFRONT COSTS FOR RESEARCH AND DEVELOPMENT. SO, TOO OFTEN, THEY TWEAK EXISTING MEDICATION TO EXTEND THEIR PATENT.

JEFFREY SMITH: “That’s how it costs $600 for an EpiPen, because just when the patent was about to expire, and the generic was going to come out for the EpiPen. They made some modifications to the injector, the FDA said, Yes, you’re right, this is a significant modification, I got an extended stance on a patent.”

SMITH SAYS OTHER COUNTRIES HAVE LESS RED TAPE WITH THEIR DRUG TRIALS. AND ANOTHER BIG DIFFERENCE? OTHER GOVERNMENTS CUT OUT THE MIDDLEMAN.

THAT’S REASON NUMBER THREE WHY PRICES ARE HIGHER IN THIS COUNTRY.

PART OF THE COST GOES TO THE MIDDLEMAN.

FIEDLER: ”In the United States, we essentially leave those price determinations to market negotiations between insurance companies and drug manufacturers. In practice, that system seems to lead to very high prices.”

BESIDES INSURANCE COMPANIES, THERE ARE DISTRIBUTORS WHO ACT LIKE WHOLESALERS. THEY CONTRACT WITH INDIVIDUAL PHARMACIES. WHICH IS WHY ONE PHARMACY WILL CHARGE MORE THAN ANOTHER.

IT’S BECAUSE THEY RECEIVED A BETTER DEAL!

THAT’S NOT WHAT HAPPENS IN OTHER COUNTRIES LIKE CANADA, JAPAN, AND GREAT BRITAIN. THEIR GOVERNMENTS NEGOTIATE DIRECTLY WITH DRUG COMPANIES AND LEAVE OUT THE MIDDLEMAN.

FIEDLER: “The government revenue negotiation systems that are used in other countries lead to much lower prices.”

THERE YOU HAVE IT. THE REASONS WHY SOME ARE GOING BROKE AT THE PHARMACY. WHAT’S THE MOST YOU EVER PAID FOR A PRESCRIPTION DRUG? LET ME KNOW IN THE COMMENTS BELOW.