Factors Driving High Drug Costs and Ideas to Change the Paradigm

The Real Skinny on Why Your Drugs Are So Expensive

Americans are scolded they need to pay more for their prescription drugs, because of the inherent need for drug companies to invest in science to find cures. The real reason for the price gouging is American healthcare consumers are getting ripped off by Wall Street sharks who are profiting at the expense of the rest of us. First, there are differences in the market sector of the pharmaceutical industry, basically, the bio-pharmacological industry, which has invented the highly successful cancer treatments and other health enhancing drugs and the generic drug manufacturing business. For the former, these companies must wait years, often decades before they have a successful payoff, but the latter, is involved in the lucrative and predictable generic drug manufacturing business. This is the sector which creates drugs which are still highly effective, but for whom their patents have expired. In other words, this is where you, the consumer can obtain your medicine for a lot less money, at least, that used to be the case.

The pharmaceutical industry in the U.S. is theoretically subject to some market constraints based on patent laws. In other words, just because you invented penicillin (thanks France) doesn’t mean you get to collect royalties into eternity. Generally, drug patents are good for 20 years and expire after that, but exclusivity rights may only last 3 to 7 years. At that point, any drug company in the world can start to manufacture that drug and distribute it, causing market competition, which should result in lower prices. However, because the U.S. healthcare system is based on a cost-plus reimbursement system, with no cap, the incentive to retain artificially high drug prices has created a perverse incentive to stall the release of patents on drugs. Here is how companies restrict your access to less expensive medications:

Buying up the Patent Rights for Drugs which have Become Generic

Daraprim, a drug which is used to fight infections has become generic, but it isn’t profitable enough for most private companies to continue to manufacture. It has been around for 62 years and is used to treat pregnant women and people with AIDS. Thus, Turing Pharmaceuticals bought the rights and raised the price 5,000 % for this drug. In economic terms this is referred to as a monopoly and coincidentally, is prohibited for most businesses in the U.S. Essentially if there is no competition for something as critical as medicine, the rogue drug companies can and do take advantage of vulnerable consumers. Valeant is another company which jacked the price for generic heart medication formularies they acquired.

Extending Patents through the Courts

The drug companies have manipulated the 180-day-exclusivity and 30-month-stay provisions to their advantage, to prevent the release of generic drug formularies. Essentially these are loopholes which the pharmaceutical industry uses by tying up drug access through their lawyers via patent infringement lawsuits and extensions. The courts have found that generic applicants have prevailed 73% of the time in these challenges. This malingering allows the drug companies to continue to earn more money on medications whose patents have expired, because of the judicial process.

Lack of Meaningful Use for Patent Extensions

Pharmaceutical companies also try to extend patent rights by making minor changes to drug formularies and refiling the patent. This is purely about profit and not efficacy for the patient or health system. The FDA should have guidelines which prohibit this kind of shenanigans.

Generic Drugs Have Become a Lucrative Investment

The Hatch-Waxman Amendments to the FDA have contributed to a bloom of generic drugs from 19% of the U.S. pharmaceutical market to 47%. If generic drugs are such a bad deal, then why are so many companies interested in this business?  This change is also due to pressure from the insurance industry and consumers, to reduce the cost of medications. Unfortunately, what used to be a savings passed on to consumers is no longer the case.

Suggestions to Improve the Intolerable Drug Pricing

In 2008, the U.S. government bailed out many banks and of course, General Motors (which still hasn’t repaid its loans), so perhaps the nation should consider buying up some generic drug production rights and thereby controlling the price. The U.S. government could ultimately make money in the transaction by arranging for an exclusive manufacturer and distributing the medication throughout the health system. This would save Medicare, Medicaid, and the Veterans Administration a lot of money. And, since the private sector follows Medicare standards for services and reimbursement, this would drive the price down for all American healthcare consumers.  

The government should also require pricing transparency for pharmaceuticals, which should not be a charge-whatever-you-can environment without justification. Lots of companies invest for years and don’t get a return, why should a drug company expect to make all of their investment return in the first year of release for a new medication? Perhaps an amortization schedule can be agreed upon for this process, which is used in accounting vernacular.

Congress should remove the restriction from the Centers for Medicare and Medicaid, which prevents them from negotiating directly for drug prices for their enrollees. Since this is the largest single pharmaceutical customer base, this would have a huge impact.

The next time you think you are getting jacked for your prescription, you are probably right, so let’s reach out to our regulators and the executive branch for a fix.

References for more information

https://projects.propublica.org/bailout/list 

https://www.ftc.gov/reports/generic-drug-entry-prior-patent-expiration-ftc-study

https://www.ftc.gov/news-events/press-releases/2013/01/ftc-study-fy-2012-branded-drug-firms-significantly-increased
https://www.ftc.gov/news-events/press-releases/2011/10/ftc-study-finds-fy-2011-pharmaceutical-industry-continued-make 

Roberta E. Winter is a freelance healthcare writer who has published Straight Talk on Healthcare under the tradename, healthpolicymaven since 2007. She is the author of Unraveling U.S. Healthcare-A Personal Guide.
http://www.amazon.com/Unraveling-U-S-Health-Care-Personal/dp/1442222972
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