The high price of prescription drugs

I feel self-conscious about how infrequently I posted here on my blog between December and January.

Yesterday, I was listening to Radiolab's Worth episode, and one of the acts discusses how much a human life is worth--how much terminally ill people would be willing to pay for a drug that might give them one extra day or one extra year of life. A few years ago, a group of doctors boycotted a new colon cancer drug, Zaltrap, because it cost twice as much as drugs with similar outcomes. But what happens when a drug costs twice as much AND works twice as well?

Prescription drugs cost a lot of money. I'm fortunate that I don't often require prescription medication, but one of my baby cousins has terrible food allergies, and I researched the high cost of drugs in depth a while ago, when my aunt posted this article on Facebook about the cost of an EpiPen® in Canada versus the cost in the United States.

Going into my research, I figured it would be hard to wrap my head around the complex--and often political--reasons why many drugs* are cheaper in Canada than in the US**. (The article my aunt posted villifies American big pharma for charging "what the market will bear".) I hope my hypotheses will illuminate some parts of the debate.

I think a main issue in identifying why drug prices are so high is that there's a ton of complexity in the market. In most transactions, purchasing decisions are between the buyer and the seller, and you can draw a supply and demand chart for the entire market to identify the exact dollar value that your product is "worth". But in healthcare, there are a ton of players invested in deciding whether you will use a given drug or not: you, your doctor, your doctor's employer, insurance companies, policymakers...

A particular sticking point is that costs are hidden in the US system. Huge, wealthy insurance companies bear the cost of high-priced drugs rather than individual patients, and that leads to inflated pricing. Fortunately for most patients, this system saves us from paying sticker price for our medications, but the system is unfair because there are always a few suckers who will pay full price. Many countries, including Canada, have policies to artificially cap drug prices, which limits how high that sticker price can be inflated.

Second, the price drug companies can charge is limited by how valuable the drug is to the patients. Pharma companies try to figure out how many patients will buy the drug at a given price, and how much they need to make back the money spent on researching the drug. (It's scary how much guesswork goes into pricing prescription drugs.) But for medically necessary treatments, patients need the drug no matter the cost. There's no way for them to put a value on life (or a much better quality of life).

One point that bothered me about the EpiPen® article was the assertion that the low cost of R&D for the EpiPen® obligates drug companies to charge less. On the contrary, profits from the EpiPen® can subsidize less-profitable R&D efforts. (Yes, sometimes these profits go towards dividends for investors. I don't think that's right. There's an argument that investors wouldn't buy the stock if not for the dividends, so it's a way to increase the company's funds available, but then you're trading cash on hand for equity, and I have a feeling it's a wash. I haven't dived into the numbers.) By charging more for the EpiPen®, for which there is a huge market, pharmaceutical companies can spend money on R&D for diseases that affect a small number of patients, which they do. In 2012, the US spent $4.95 billion on R&D for new drugs while Canada, with their cheap prescriptions, spent only $0.89 billion. I once talked to an engineer at Merck who said they give most of their Hepatitis C treatment away for free.

After discussing the incentives for drug companies to charge high prices with one of my coworkers, he came up with an interesting point: Why are the incentives this way? Why does the pharmaceutical industry rely on profits to fuel innovation, since good healthcare is a benefit to society?

There's no easy answer. I can see a few situations where there's an obvious solution--such as reinvesting drug company profits in research, rather than providing dividends to investors--and those things are worth calling my representatives to fix. But overall? I'm not hopeful that the problem of high drug prices will be solved any time soon.

*Actually, the EpiPen® is expensive because of the patented injection method, not due to the active pharmaceutical ingredient, epinephrine, which has been generic since the early 1900's. I have a hunch that patents for equipment, like the EpiPen® injection method, work differently than patents on drug compounds, but I'm more familiar with patents on drug compounds, so in this article, I am assuming that EpiPen® pricing works the same way as pricing for brand-name drug compounds.

**In simplified form, three reasons why prescription drugs are cheaper over-the-border are: (1) the Canadian government puts an artificial cap on how much pharmaceutical companies can charge for drugs, (2) the cost of living is lower in Canada, so patients are not pre-conditioned to paying high prices, and (3) liability insurance is cheaper in Canada.

Disclaimer: I interned at Bristol-Myers Squibb in college. I'm not an expert, but I've worked on the inside, so to speak. Also, if you ever have the opportunity to visit a pharmaceutical pilot plant, you totally should. The reaction facility is a giant sci-fi version of a beer brewery, and where they put the drugs into syringes is like that episode of "I Love Lucy" where they're packing chocolates.


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