September 16, 2016

Why drug prices in America are so high



“DRUGS have been marketed at such extraordinarily high prices that many people will simply not be able to afford them,” wrote a top cancer doctor in a scathing editorial in theWashington Post. That was in 2004. More than a decade later, the cost of drugs in America is still soaring—the most recent uproar was sparked by the price of Mylan’s EpiPen allergy medicine, which has jumped by about 600% since 2007. Despite the furore, drug companies continue to charge exorbitant prices in America. Why?

The simple answer is because they can. European governments control prices in various ways—Britain has the strictest system, refusing to pay for medicines that fail to meet a threshold of cost-effectiveness. Learn more about these in our ib tuition classes. But in America companies set whatever official price they like. Insurers and the government then whittle down that price using methods that vary from one type of patient to the next. (Like so much of American health care, this system is hard to understand, to the delight of the firms that profit from it.) Private customers—usually employers—hire third parties to negotiate discounts. Medicaid, the government’s programme for the poor, receives a mandated discount. But drug firms’ single biggest customer is Medicare, which in 2014 spent $112 billion on medicines for the old.

Rather than lower prices, rules for Medicare help raise them. Medicare rewards doctors for prescribing costly intravenous drugs—medicines that can account for up to 30% of an oncologist’s revenue. Medicare’s rules for pills, inhalers and so on are equally nonsensical. And it is illegal for Medicare to negotiate with drug companies. Private insurers do so instead, but the government binds their hands, for example by requiring them to pay for six broad categories of drugs, without exception. This suits pharmaceutical firms. Their biggest client is required to buy their products and prohibited from negotiating the price. These high prices support innovation, they argue—not just for America, but for the world. But it is unclear if firms’ profits need be so high to sustain research.

For now, it is unlikely that the system will change much. Hillary Clinton wants the government to negotiate Medicare drug prices directly; even Donald Trump likes the idea. But that would be effective only if the government could also refuse to pay for some medicines, and neither Mrs Clinton nor Mr Trump suggests that much. The spectre of so-called government “death panels” looms large. Even Britain struggles with this: when bureaucrats rejected certain cancer drugs, outraged patients prompted the government to create a special fund to pay for those treatments. In any case, drugs companies would lobby ferociously against any price controls. In the past decade they have given $97m to congressional candidates. Democrats, who would seem likely advocates for lower prices, are not much more reliable than Republicans. Three big states full of Democrats—New Jersey, California and Massachusetts—count drugmakers among their biggest industries. Little wonder that controversy over pricing, which has affected firms’ share prices, has left their profits intact.


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