This is my last post about Section 2 of the TIME magazine article “Bitter Pill: Why Medical Bills Are Killing Us“.
2. Medical Technology’s Perverse Economics
Section 2 ends with a discussion about the high costs of prescription drugs. In this case, Brill brings Sean Recchi back to illustrate the “out of control” profits that pharmaceutical companies and the hospitals they sell their drugs to are making. Brill reports that Rituxan (rituximab) cost Biogen only $300 to produce, yet the company charged MD Anderson between $3000 and $3500 for the drug. In turn, MD Anderson billed the Recchis over $13,000 for the drug. And this is the well known MD Anderson Cancer Center – which probably gets a hefty discount on the price of Rituxan compared to other hospitals. One can only guess what Biogen charges everyone else.
The high cost of prescription drugs in the United States comes as both a blessing and a curse. The curse part of the equation is easy to understand – medicines in the United States are more expensive than anywhere else in the world. According to the Commonwealth Fund, the United States spent $983 per capita on prescription drugs in 2010. The next highest spender was Canada at $741 a person. You might be thinking that we spend more because Americans take more medicines overall, but that’s not entirely true either.
Point blank, drug prices in the United States are higher because every other industrialized nation exercises price controls over prescription drugs. The United States does this as well, but primarily only for the Veterans Administration (VA). When Medicare Part D was createdin the Medicare Modernization Act of 2003, Congress expressly forbade Medicare from negotiating with pharmaceutical companies on drug prices. The effect of negotiating would have been huge had Medicare been allowed; nearly 60% of all US pharmaceutical purchases come from Medicare (critics point out that the influence of pharmaceutical lobbyists and the close ties between politicians and pharmaceutical companies are to blame).
Pharmaceutical companies are quick to justify their high prices by noting the high cost of researching, developing, and bringing new drugs to market. And those high costs are real – on the order of billions of dollars for each new drug. Because the cost of bringing one new drug to market also includes the costs of researching and developing all of the drugs that fail to work, what many consider a 10:1 ratio of failures to successes. Furthermore, some drugs, like Rituxan, are more complicated to produce and have a much smaller market than anti-cholesterol drugs like Lipitor or beta-blockers like Lopressor. The price of drugs like Rituxan are therefore higher since the market is smaller; the cost of producing the drugs is spread over a smaller group of patients.
This is where the blessing part comes in, although I admit it’s not going to sound like much of a blessing. Our drug prices in the US are astronomically high because they finance the research and development of new drugs. Without high drug prices, pharmaceutical companies would lack the incentive to develop new drugs. Several economic studies point out that if the United States implemented drug price controls, the number of new drugs coming to market would plummet. The US is essentially subsidizing the cost of researching and developing drugs that ultimately the rest of the world will benefit from – at far lower prices than we have here.