Should prescription drugs cost as much as they do?

Many technology items see price decrease over time (think TVs, DVD players, computers, etc.). Despite most drugs eventually seeing similar me-too agents that serve as competition, drug prices generally increase over time. Further, the price of newly-launched primary drugs has risen at a rate much faster than inflation. (I’ve written before about some egregious instances of drug price inflation here.)

To put drug prices in context, it is worth examining the cost of a few drugs brought to market in the 1990s. Statins (anti-cholesterol drugs such as Lipitor) were launched with prices in the $60-70/month range. Glucophage (now generic metformin, perhaps the best oral diabetes drug ever developed) had a price of about $50 per month. Antiulcerant drugs (proton pump inhibitors) such as Prilosec and Nexium were a bit more expensive at about $100/month.

Assuming a standard CPI inflation rate of about 3%, a typical drug costing $70 per month in 1995 should cost about $120 in 2013. Arguably drugs should cost less given that most therapeutic categories have more options (meaning competition) than in the past. Offsetting this, clinical trials are more expensive now, so that argues for higher drug prices to allow drug companies to recoup their investment.

Even allowing for inflation, the cost of new drugs launched today are surprisingly expensive. For example, DPP-4 inhibitors (a new class of diabetes drug, such as Januvia and Onglyza) cost about $225/month. Prolia, a new injectable osteoporosis drug, costs about $425 per month. Effient and Xarelto, both of which are new anti-clotting drugs, each cost roughly $250/month.

Even existing drugs have seen substantial price inflation. For example, Zetia (cholesterol drug with much less impressive efficacy than statins) launched in 2002 at a price of about $80 per month. It now sports a price tag of about $180 per month.

I am generally critical of the inefficiency within the healthcare system. However, while I think there are many reasons to argue that drug prices are too high, in this particular case, there are two arguments I think are valid and cogent to justify high prices.

First, as a society, we benefit tremendously from new pharmaceuticals. For all the advances in surgery, imaging, and science, new drugs and therapies have arguably made the biggest collective impact in overall health. Cholesterol medicines, blood pressure medicines, antibiotics, new cancer therapies, etc have been transformative at extending life spans. High prices of drugs ensures that development of new therapies will be highly profitable for innovators. Given the substantial benefits of these therapies, I don’t mind providing rich incentives for R&D.

Second, many technology innovations are associated with high barriers to entry. Computers for example have complex parts and require manufacturing, marketing, and distribution infrastructure. Price competition can make products much cheaper, but they still usually carry price tags that don’t go unnoticed. Not so with drugs. Once patents expire, generic companies enter the market, and the price of most prescriptions drops to a level of about $5 per month or less. The actual ex-factory cost per pill coming out of a generic manufacturer can be as low as one cent.

Patents in general confer protection to new drugs for about 10 to 12 years. After this period, drugs go generic and the cost to society is next to nothing. In essence, this fact echoes the argument of allowing drug companies to earn a good return for investing in research and development. This argument simply takes a slightly different approach, namely that high prices are transient. It may be reasonable for society to incur high costs for a decade so that the benefits will remain available to us (people/society) at negligible cost forever more.

All this is not to say that high prices should not be scrutinized. Nor is it to argue that current drug prices are uniformly acceptable. This is merely to say that new therapies bring benefit and innovation must be encouraged and rewarded.


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