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Drug Price Rationalizations

By November 19, 2015Commentary

Responding to complaints about drug pricing, particularly in regard to specialty drugs, the industry’s most prominent trade organization, Pharmaceutical Research and Manufacturers of America, puts together a presentation to justify industry tactics.   (PHRMA Presentation)   Lets take a look at it.  It is called “Costs in Context”, and the title is a tipoff that they know that the prices of many medications are sky-high, but maybe they can persuade you there is a good reason for that.  The presentation starts by implying that improvement in certain health outcomes are largely due to new drugs.  There are many drugs that have a made a real difference in people’s health, but there are a lot of other drugs that have marginal benefits at best.  Next they switch to the argument that use of medications reduces hospitalizations and ER visits, which unfortunately for PHRMA is not really a proven proposition using well-designed studies, and given the cost of many new medications, there is no reason to think drugs reduce total spending.  This notion is most easily disproved by looking at the macro picture.  Total health spending in the country is rising by over 5.5% this year.  Drug costs are responsible for much of that growth.  If more drug use and spending reduced total spending, we would have to see dramatic offsetting spending reductions in other categories and we aren’t.

The presentation then says that new drugs can save the system from bankruptcy, saying for example that we would save $367 billion over 35 years if we had a drug that delayed Alzheimer’s disease onset by five years.  That is $10 billion a year and I can guarantee you that if that drug was developed and introduced, the manufacturer would be charging multiples of that alleged savings for the product.  Look at the hepatitis C example, which the industry loves to cite.  Those are great drugs, producing much better outcomes.  But the industry priced the products to fully recapture any present and future savings in other health spending and basically recaptured the full cost of development and then some in one year of revenue.  And that is for a product that produced dramatically better outcomes.  Most new drugs have only incremental benefits but are being priced in a similar way.  The presentation then tries to tell us about all at the great economic benefits the industry provides–good paying jobs, corporate giving, etc.  That may be true but it is irrelevant to a discussion of pricing.  And of course, we get the usual nonsense about how much it costs to develop a drug.  So let us assume for a moment that the Tufts numbers are correct, $2.6 billion on average to develop a new drug, which incorporates the cost of all the failures.  Take a look at pricing and revenue and you will again see that for most new introduced drugs this cost is fully recovered in a couple of years.  The drug companies biggest problem is that they keep spending such huge amounts on marketing and sales to convince providers and consumers how wonderful their products are.

So why are drug prices so high?  Partly because of a system that allows manufacturers to claim patent exclusivity on drugs that often were developed in part with use of government-funded research.  Because of tactics designed to suppress the development and marketing of competing compounds.  Because of sales and marketing tactics that mislead providers and consumers.  Because of lobbying to get regulatory actions that make it harder for payers to refuse to cover drugs with only marginal benefits over existing therapies.  I am a big, big free market economics supporter.  Our economy has been bastardized from free-market principles by excessive government interference of all types, including tolerance of market participant behaviors that are antithetical to efficient functioning of a market economy.  I am also very leery of businesses being expected to take on social or moral obligations.  But the behavior of some (let’s be honest, most) drug companies is simply disgraceful in regard to their pricing.  And patients and consumers bear the pain of that behavior.

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