Drug prices are rising faster than most other health care costs and while surveys show that the American public resents the situation – 73 percent now favor price controls – the costs still keep going up. It seems that unaffordable medications have now taken their place in American life alongside deranged mass murderers with firearms and enormous disparities of income and wealth. The American public despises all those trends, but not enough to fix any of them.
For starters it is worth asking why the U.S. pays two to three times more for the same drugs than other advanced nations? In most cases a few basic factors account for it.
A principal reason is that the U.S. allows drug companies to price their products at whatever the market allows. While markets under ideal conditions can encourage the best products at the best prices, a true market for prescription drugs never really exists. The requirements for a functional market laid down by Adam Smith in the 18th century (many competitors, no pricing collusion by producers, buyers with adequate information to compare prices and benefits, all the other elements) almost never apply to medications.
One obstacle to a real market for medications emerges because governments around the world want to encourage investments that will result in better therapies. The incentive they provide consists of granting patent protections to companies that develop new drugs. When a small handful of companies have patents to make and sell drug brands in a particular therapeutic class, there is no open market competition to limit prices. The patents act as government-granted monopolies. Other countries throughout the world account for this market distortion by establishing a price control system on drugs. Nothing of the sort exists here. In the good old U.S. of A., drug companies remain free to squeeze the lifeblood from patients, taxpayers and insurers.
Then there's the fact that the U.S. grants those patents for longer periods than other countries, meaning pharmas have oligopoly pricing power for more extended periods here.
When patents expire and compounds become available as generics, the market often works well to reduce their prices, often cutting them to a small fraction of what companies charged when patent protection gave them oligopoly pricing power. But occasionally the generic pharma companies feel that a functioning market doesn't allow them to make the sort of unconscionable profit margins to which they feel entitled. When that happens, none of them will make or distribute certain generic compounds. Makes no difference if those generics cure people and save lives: no profit means no drug.
That occurred in the recent case of Daraprim, a 62-year old drug for treating a parasitic infection that hits people with compromised immune systems. A new company, Turing, acquired the drug's registration rights from another company, Impax. A condition of the deal was Turing's insistence that Impax deplete the available supply of Daraprim by stopping its sale to wholesalers and drugstores. That made it nearly impossible for other generic companies to obtain the samples they would need for showing the FDA their capability to make it.
So last June, two months before selling Daraprim to Turing, Impax placed the compound on a tightly controlled distribution. Turing then acquired the rights and, absent any competitors, immediately raised the price by 5,455 percent!!
It seems the government in this country is fond of granting pharma companies monopolies even when there's no desire to encourage new drug development. The FDA's unapproved-drugs initiative is an example where the agency grants a patent monopoly on some older generics.
So for example, the FDA wanted to encourage companies to apply current testing procedures to older products that were approved before the agency developed its rigorous standards for efficacy and safety. To accomplish that, the agency decided in 2006 to offer companies market exclusivity on compounds where they would agree to resubmit them for approval, using current standards.
URL Pharma took advantage of the program in 2011 by testing the safety of colchicine, a drug that has been used for gout since the Middle Ages. Despite the fact that many researchers feel URL's testing was minimal, the FDA granted them an exclusive license to sell the drug.
Immediately after receiving exclusivity, URL raised the price 2,660 percent. Where the average cost for a 23-day prescription for colchicine, including pharmacy charges, was previously $6.72, URL hiked it to $185.53.
But the way patents have enabled rapacious pharma pricing represents just a specific example of how intellectual property rights (patents, trademarks, copyrights) bestowed by government create windfalls for a range of corporate sectors. In similar fashion, government winks at antitrust enforcement for enormous telecom and cable companies, as well as Wall Street investment banks. The government's deference to these sectors makes Americans pay higher prices for a lower quality of services.
Much the same applies to the entire legal and political framework – laws governing contracts, bankruptcy, taxes and international trade – that organize the entire range of American commerce. As former U.S. Secretary of Labor, Robert Reich, recently wrote, this legal and political favoritism has "resulted in higher corporate profits, higher returns for shareholders, and higher pay for top corporate executives and Wall Street bankers – and lower pay and higher prices for most other Americans."
Whether the objective consists of obtaining more affordable drug prices or faster broadband, the way to achieve either one requires politics, not economics, because the trend of paying more for less quality "can be reversed only if the vast majority join together to demand fundamental change."