Drug Pricing in the US

By March 8, 2017Commentary

As the Trump Administration continues to say it will find ways to reduce prescription drug prices in the United States, manufacturers have again trotted out their standby argument that lower prices in other countries mean they have to charge more in the United States to compensate for their research and development efforts.  A blog post at Health Affairs website once again shows this is basically hooey.   (HA Post)   The researchers used information on R & D expenses from the medication manufacturers public filings, as well as data on sales and prices in various countries, to ascertain the validity of the claim, focusing on the 15 companies selling the top 20 drugs by revenue.  The authors basically compared average US pricing to average worldwide pricing, took the excess and compared it to R & D spending.  List prices in other developed countries average 41% of net prices in the United States.  (A very conservative way of looking at the difference; all discounts and rebates are included in US pricing, none in overseas prices.)

In 2015, this higher US pricing allowed the manufacturers to garner $116 billion in revenue compared to the revenue they would have gained at average developed country prices.  So did they spend all this on R & D?  Not by a long shot.  These companies spent only $76 billion, or 66% of the excess revenue, on global R & D.  Note that this is very conservative, not just because of how the average worldwide price is calculated, but because it assumes that no profit is made on overseas sales, which is not the case.  If the drug manufacturers actions matched their claims, and US prices were just high enough to cover supposed R & D expenses, US consumers and payers would have saved $40 billion in 2015 alone. Of course, no one believes the nonsense the drug companies spout; they are just happy to charge as much as they can for their products.  And they fully deserve to have regulations put in place to limit that pricing.  A good place to start is by mandating full competition for government health program formulary status.  Another remedy would be to limit the length of patent protection according to the level of profit made on a drug or the rate of its price changes.

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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