Is the answer really just “because people will pay it”?
I mean it seems almost outrageous how much drugs cost in the USA versus on the free market in other countries, almost every other country.
Just as an example I know of generic albuterol inhalers in the USA are $40-60 each, locally they are $2.50. My mom had a RX for a diarrhea med, the cheapest she could find it was $40 for 40 pills generic, checking locally the same amount name brand was under $4.
Obviously a profit is being made everywhere, so why should such an outrageous profit be made off US consumers?
(Yea maybe this should be in GD, but I really am curious why there is such an outrageous difference.)
You are also subsidizing the cost of R&D. Market pressures, artificial controls, and marketing do explain some of it. If no generic is yet available, the price may be inflated. Note Prilosec, which is now available as generic OTC omeprazole (although still not cheap), and brand Nexium (esomeprazole) which are very similar chemically. I just learned a new word: Evergreening.
One reason is that single payer systems can negotiate with drug companies. They are large buyers so they have bargaining power. As long as the drug company is selling the pills for more than the marginal cost, they make money on the sales. Of course to stay in business, they have to cover all their costs. For the drug companies this is largely R&D costs. So buyers in the USA, and I assume other non-single payer systems which can’t negotiate so well, pay those other costs for everyone.
The U.S. is perfectly capable of negotiating drugs costs - they just won’t. That is to say that Congress will not authorize Medicare to put the screws to the drug companies (the VA can, which is why they pay 40 - 85% less). It’s true that no one else in the country can do it.
However, the claim that costs for pharmaceutical companies are “largely R&D costs” is nonsense - they (I mean we) spend more on marketing - a cost which has increased with the rise of direct-to-consumer marketing (which used to be illegal and should have stayed that way). The high prices in the U.S mainly go to drive the 17% profit margin of U.S. pharmas.
It’s the miracle of the free market in action. When a drug is produced by only one or two manufacturers, companies can charge whatever they want for it. Demand curve is price inflexible, and naturally the manufacturers never collude to split up manufacture of the various generics in order to maximize industry profits: Generic Drug Price Sticker Shock Prompts Probe by Congress
They’re not. About 15 years ago, Walmart reduced the prices of a very long list of popular Rx drugs to a small fraction of what thay had been previously, many of them at a flat rated of $3, which had been selling for $25-50. In order to remain competitive, other pharmacy chains quickly instituted a similar policy. Walmart had the clout to hold big pharma at bay, and forced them to modify their profit margin. (I’m not a big Walmart fan, but I give credit where credit is due.)
Yes, there are drugs today which are very costly, some running as high as a thousand dollars a month, but for the great majority of Americans, their drug costs are a pittance compared to what they had become a generation ago.
One reason for the high cost is the resisance to gain by economy of scale. There is a manpower cost to dispensing tiny quantities of drugs at high frequency. Insurers refuse to pay for more than one month at a time, so it is necessary to keep running back to the pharmacist and make him keep doing his job over and over again. A full year supply of most drugs costs no more than three one-month prescriptions doled out piecemeal. Where a one-month Rx might cost $20, the pharmacy will sell a year’s supply of the same drug for $50, without having to dole them out on 12 different days into 12 different vials. But the insurance companies (both private and Medicare) refuse to pay on that basis.
Case in point, my MD prescribed cyanocobalomin injection once a month. The pharmacy charged $6 copay for a single-dose vial of 1-cc. They told me I could by a bottle of 30 cc for $25, but I’d have to self-pay. So I reduced my cost from $180 to $25, and I have no idea how much I saved the taxpayers.
It’s like buying Kraft Lunchables at the supermarket, instead of cheese and salami by the pound and crackers by the box, and the insurance industry reinforces the folly by refusing to pay for the more economical bulk purchase.
There are a lot of direct factors that have been covered here, but a basic reason is that drugs are illegal to sell. Even the prescription drugs that are the topic of this thread can only be sold by a privileged group. This destroys the normal market forces that drive pricing. Eliminate the regulations and prices will plummet. However, there may be some side effects from a change like that.
$4 now, or $10 for a larger quantity, and Target does it too. You can save if you make a few concessions, e.g. swap a 1x daily SR pill for 2x daily regular absorption. Although I now suspect that those fuckers were charging medications on the list to my insurance, as the price changed for the better when I lost that insurance.
This has actually been done to death in other threads but it’s been awhile so what the heck.
Americans pay more for drugs because they’re paying what the market will bear. That is the entire answer. Everything else is merely a component of that simple truth; Americans pay what the supplier of the drug can get them to pay, and that’s it. What people in other countries pay has essentially nothing to do with it.
Now, what the market is willing to pay in the US is subject to many effects; collusion, oligopsonies exerting pressure (Walmart), the effects of insurance, and so on. But what people pay for the drug in Canada or France is simply not relevant. Once the market price is determined in the USA, that’s the market price. if GSK comes up with a new cholesterol drug, Fatawayol, and determines the profit maximizing price for Fatawayol is $5 a dose, then that’s what it is. If they charge more, they will lose money on decreased volume, and if they charge less, they’ll lose money on per unit sales. If in fact $5 is not the market clearing price, but $6.50 is, they’ll change the price to $6.50.
Now, if GSK goes to Health Canada and at the end of negotiations Health Canada says “it’s a good product, but we’ll let you charge $4.25 a dose and not a penny more,” GSK will go ahead and sell it at $4.25 if they can make a profit at that. It might not be as much as they could have, but oh well, profit is profit. The key thing is, though, that this does not affect the price in the American market whatsoever - the market clearing price there remains $6.50. GSK can’t make up for the lower Canadian price by charging Americans more, because we’ve established $6.50 is the ideal, profit-maximizing price; any alteration from that price point loses them money. (In fact there are probably multiple price points depending on what Americans you are selling to but I’m keeping this simple.) The lower Canadian price is simply a fact of life they have to handle, exactly the same way any business selling to Walmart is not getting as much from them as they would from anyone else.
The fact that US consumers pay more than Canadian or French of German consumers doesn’t mean US consumers are “paying the R&D costs” where others are not. All the money’s fungible, it’s all going to GSK and their suppliers. One way or another GSK is going to make SOME money on their Canadian and German customers, or they simply would not sell the drug there at all. Some of that revenue will go to more R&D, some to facilities, some to salaries, some to the electricity that runs the coffee machines - money’s all the same one you throw it in the “Revenue” pot.
Of course it’s also false to say “the high prices go to the 17% profit” line, as Nametag claims. (It’s also kind of strange to imply 17% is a particularly outrageous profit margin.) All the money goes to expenses AND profit. They make money every country they sell in, or they would not be selling the product there.
As of 2009 we spent about $300 more than france or Germany per capita, about $200 more than Canada.
We have a higher ‘per capita’ amount of wealth, but also higher inequality so I’d assume the median income is about the same for all countries. So it translates into a few hundred per person. A small fraction of the $5000ish we spend more per capita on health care.
Then again we spend almost $600 more than Norway, which is a pretty big hunk of change and far more than the $200 more we spend than Canada.
Why does it cost more, because we don’t negotiate prices.
Also pharma companies only spend about 12% of their budgets on research. So paying a pharma company $1 so they can devote $0.12 to R&D is a terrible bargain. It’d be easier to cut prices and devote some of the saved money to taxes to help fund R&D.
Also keep in mind 80%+ of Rx are for generics, which combined only come to about 20% of total spending. The other 20% of drugs make up 80% of spending. We are probably going broke on brand name and biologics, which cost far more here. I personally don’t know, but doubt, that generics are much cheaper overseas but I could be wrong.
non-scheduled Rx drugs can be bought from Mexico, I believe it is legal to import a 90 day supply of a non-scheduled drug w/o an Rx. And the prices are much higher than the $4 list at domestic pharmacies. So I don’t know if this is the case.
Even in countries with more liberal RX laws where more stuff is OTC, it is still illegal for a non-pharmacy or pharmacist to sell drugs. You can’t just set up a lemonade and drug stand, you need a licensed pharmacist to dispense etc.
Is it usual for government to negotiate prices for drugs even sold at private pharmacies? I assumed taxpayer supported healthcare AKA public hospitals negotiate for drugs provided by them at in house pharmacy, but outside private pharmacies buy the drugs on the market like anyone else?
It also occurred to me just now that public hospitals might provide a big incentive for drug companies to lower prices, because they act as a form of competition. If the price of drugs is too high well you’ll just go through the trouble of filling out forms and waiting for 12 hours to get it “free” from the public hospital, but if it is low enough you might just decide to buy it yourself. The lack of this in the US might remove the incentive to keep prices low.
Google Sovaldi cost: Google
July 14, 2014 – An investigation into the pricing of the hepatitis C drug Sovaldi has been launched by the U.S. Senate Finance Committee. The drug – made by Gilead Sciences Inc. – costs about $1,000 a pill, or about $84,000 for a patient on a standard, 12-week treatment schedule, the Wall Street Journal reported. (end Google)
As I recall the conversation, it went something like:
“Why so expensive?”
“Because we can make people pay it”.
It takes about a billion dollars to bring a drug to market. After that it is relatively cheap to manufacture most drugs. In order to stay in business a company must charge more than the average cost per pill. This includes the billion dollar R&D cost and is why drugs are so expensive. Once the average cost per pill is paid it is possible to make money by charging other countries more than the marginal cost but less than the average cost. It is impossible to charge everyone marginal price but as long as some people pay the average cost it is possible to charge others the marginal cost.
This is why generic drugs cost so much less, they only have to cover manufacturing costs and not R&D.
There’s currently a negociation between France and some pharmaceutical company about a relatively costly new drug that proved to be significantly more efficient than the existing ones. The price proposed by the pharmaceutical company is based neither on the reasearch costs (in fact, the company bought a small laboratory that discovered the drug, so it’s rather an acquisition cost) nor on the production cost.
It’s based on the price of the currently existing drugs + a hefty increase since the new drug is more efficient. The pricing by the drug company is completely arbitrary. And if there was no negociation with the French healthcare system (like in the USA), I guess it would be even higher.
There’s zero reason for a drug company to base its price on the research cost. Logically, they should use the market price. Knowing that it’s both a monopoly and an inelastic market, it’s not going to be cheap (in fact it shouldn’t be affordable for every person needing it).
The drug companies certainly do not want to charge anyone the marginal cost, which literally means the specific additional cost of manufacturing the dose that person is taking. By definition that would mean the drug company was making no money at all on that dose.
To make a profit on any one pill the company must have the customer pay more than the marginal cost. (Practically speaking, at the volumes we’re talking about, the marginal cost will be the same as the average direct cost.)
