Healthcare

Why do we spend so much on prescription drugs?

There are several reasons.

💊While government subsidizes some of R&D it is not the major portion of the costs to develop new drugs and get them to market; it’s expensive. It can take ten years to develop a new drug.

💊 The average time from FDA application to approval of drugs is 12 years, and the estimated average cost of taking a new drug from concept to market exceeds $1 billion.

💊 A new drug receives a patent for twenty years, but that starts with the invention of the drug not when sales begin which can take eight years more so the protection period is closer to twelve years … once there is a generic available brand sales drop by 80% or so.

💊 The patent protection referenced above causes drug companies to manipulate and tweak a drug to extend the patent period.

💊 While 84% of all drugs taken in the US are generic, some states limit substitution or require patient approval first (and there may be no cost sharing incentive to do so). Other states require substitution unless the physician states dispense as written. On the other hand, physicians have little incentive to prescribe a generic.

💊 Americans have a unhealthy demand for prescription drugs which supports the vast marketing/advertising that drug companies undertake which in turn drives more demand.

💊 For most Americans the out-of-pocket cost for a prescription is only a fraction of the true cost and thus limits the cost concern.

💊 Many foreign governments limit drug prices and limit the drugs available to patients. This puts greater pressure on prices in the US. Think of it as Medicare and Medicaid paying a fraction of the normal fee for a physician visit while the private sector makes up the difference.

💊 The supply chain for medication is complex and involves many players from manufacturer to pharmacy and thus makes it impossible to know the true fair price for a given drug. Everyone pays something different.

💊 Pharmaceutical profit margins vary widely, from less than zero to more than 40 percent, depending on the size of the company and whether it’s a powerhouse like Pfizer or Novartis or a startup still in the research and development phase. The average net profit margin for drug companies, including pharmaceuticals and biotech, was about 12.5 percent to 14 percent according to a January 2018 study by New York University’s Stern School of Business. But many companies have margins far greater than that. Gilead Sciences and Amgen are among the most profitable drug makers, with net margins of about 35 to 45 percent. Source: https://yourbusiness.azcentral.com/average-profit-margin-pharmaceuticals-20671.html

Compare that to the S&P 500 companies. As you can see the average for drug companies is not significantly out of line.

Source: https://insight.factset.com/sp-500-reporting-record-high-profit-margin-for-second-straight-quarter

🍔🍟🍕🥓🥞🍪🧁🍺🥃🍩🧂🧀And then there is this from a pharmacist:

Americans, at least those I’ve  dealt with, feel there is or should be a pill to cure everything and that keeping ” in shape ” was not necessary. When  they find out differently it is the fault of the system or the greedy pharmaceutical industry . It exasperates me when a 350 lbs patient with diabetes bitches about the lack of a drug or the cost of it to control it without having to change their lifestyle when 30 minutes of exercise per day will do it.  It’s part of our culture, always someone else’s fault. 

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4 replies »

  1. I totally agree with and understand the causes that you listed above. I really do not wish advocate any price controls or any restrictions for reasons that might restrict development of new drugs. However, I just reviewed my drug costs for 2018. Five drugs that we buy have gone up 11% and one went up 6% (all but one is generic). Inflation is only 2.5% so it is a little hard for me to believe that anything other than greed is behind some of these price increases. The story behind the EpiPen is a perfect example. I am sure that there are a lot of factors and policies that allow this to happen some of which I believe you can consider from above. With consideration of unintended consequences in changing policies and or payments, I think it is time to look at if changing either lengthening or shortening the patent protections can lower costs. For example there still is no generic form of insulin after decades of use. Why? What is preventing this from happening? I have read the investigate news reports and it comes down to the Big Pharm playing within the rules that they help write for good or bad. In the end, we all pay.

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    • There is little question there is some pricing abuse, but as you said the whole process needs review not simply limit pricing. The EpiPen was a good example of not seeing the full story on the news.

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  2. Exercise and diet choices can cure many of the health issues that most people take medication to correct. With all the side affects of many medications, why would anyone think it was a good idea to take medications, just because a doctor tells you to. Also, many people go to the doctor and get a script, when many minor issues can be fixed with an over the counter drug, but we all know insurance will not pay for it. So, many people with very good insurance and low co-pays head to the doctor, driving up the cost of healthcare for everyone.

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    • This year I have been trying very hard to figure out healthcare costs. The lack of transparency doesn’t help. However your post made me examine my drugs cost. There is one OTC generic drug that I can buy to replace Lansoprazole the generic form of Prevacid. It would costs me an extra $82.60 a year to buy it out of pocket or a total of $128.48 OTC. What I don’t understand is why Express Scripts cannot sell it for the same price or cheaper? They charge a total of $305.80. They do not have the overhead of stores, of packaging, or of marketing. You know that they buy the pills by the million.

      As far as life choices, my acid reflux is a direct result of me working shift work to support my family. In the 1980, they thought “ulcers” and heartburn was due to stress. Turns out when you work shift you have irregular eating and sleeping patterns. There are times where you eat dinner with your family and then lay down to get a few more hours of sleep before going to work. Very bad idea. It wasn’t really understood until the late 1980 and in 1990s what was happening to your esophagus.

      I consider it a shift work related injury and I tried to warn as many new hires about shift work. Do not eat and then lay down. But they will not learn that lesson until about 15-20 years of shift work. Once you damage your esophagus there is no going back.

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