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Consumer Behavior
Why Are Drugs So Outrageously Expensive?
Will politicians protect us?
Posted November 18, 2015
The drug industry is the most profitable on earth. It has two branches—an illegal one consisting of drug cartels and a legal one consisting of drug companies.
The huge profits derived by both branches accrue from the same source—monopoly price gouging. The monopoly on the illegal side is enforced by guns; on the legal side by patents, lawsuits, mergers, advertising, research, and politics.
Both markets are asymmetrical—all the power is with the seller, the consumer is desperate to buy and therefore is price insensitive. Addiction and fear of illness are among the strongest of motivators.
The drug cartels are murderously ruthless. Twice as many people now die from prescription drugs as from street drugs, but this does not prevent the drug companies from pushing sometimes harmful products for profit.
In a previous blog, I pointed out that we are fighting the wrong war on drugs—a 45-year losing battle with the cartels that we cannot possibly win, while neglecting the battle against drug companies that we could not possibly lose. (click here)
I will indicate the various ways drug companies have gained and protected their monopolies, and then suggest ways of restoring restraint and price competition:
● Playing Politics: The drug industry has one of the strongest lobbies in Washington and is one of the biggest contributors to political parties and candidates, especially on the Republican side of the aisle. Its influence is also augmented by the revolving door — people who serve as legislators or staff or regulators during part of their careers become highly paid lobbyists during other parts. The crazy result, although Medicare is the world's biggest buyer of drugs, it is prohibited because of the political power of the drug industry from negotiating their price. U.S. consumers and taxpayers pay more than twice as much for the same pill as people in other countries.
● Toothless Regulation: Drug industries increasingly dominate their regulators. Eight years ago, the FDA approval rate for new drugs was 33 percent; this year it jumped to over 95 percent. The FDA seems close to losing control over what is being marketed to the public and to doctors. And it has been deprived of the ability to consider cost in its drug approval process. New drugs that are far more expensive, but safer or more effective, are legitimized by a cursory FDA approval process and then are advertised into billion dollar "breakthrough" blockbusters.
● Third Party Reimbursement: For most drugs, many people have insurance that allows them to co-pay only a small fraction of the enormous prices now charged to insurance. This has made much of the public relatively price insensitive. Those without coverage either have to go without or suffer great financial hardship. This is now changing. As co-pays and deductible limits rise rapidly, more people are feeling the pain and are pressing for government protection against exorbitant pricing.
● Disease Mongering: The drug industry have successfully pressured government for the right to advertise directly to consumers, something allowed in no other developed country except New Zealand. Misleading advertising allows drug companies to create artificial demand—selling the pill to sell the ill. Billions of dollars are spent on extensive "disease awareness" campaigns that hide the true intent of drug companies.
● "Research": Drug companies pretend they must charge outrageous prices to support the research that will lead to miracle cures. Not true. Drug companies spend twice as much on lobbying and marketing than on research. And most of their research is no more than a disguised arm of marketing—driven by profit motive, not concern for patient health. The drug industry has been great at making profitable me-too drugs to extend patent life, not very good at finding new drugs that really make a difference.
● Co-Opting Consumer Advocacy: Drug companies heavily finance consumer advocacy groups, often making them little more than extensions of the drug company lobbying efforts to pressure legislators and regulators.
● Generic Drug Consolidation: Generics were meant to be the one refuge of competitive, rational and affordable drug pricing. Once the patent protecting the monopoly on a drug ran out, other companies would produce generic versions competing on price to attract consumers. It isn't working out that way. The price of generic drugs is now also skyrocketing because companies are consolidating and have figured out all sorts of tricky ways to restrict access to less expensive medications. The most dramatic recent example is Daraprim, a drug sold at reasonable prices for 62 years, whose price would have been raised 5000 percent if media and public outrage had not caused its producer to back down.
Monopolies are the cancer of capitalism. Adam Smith, the revered father of free market economics, recognized the dangers of cornered markets and endorsed the role of government in regulating against monopoly power. He would be appalled by the drug companies' ability to rig pricing.
The solution to the drug company stranglehold is simple—restore competition by reducing monopoly power. Preventing Medicare from negotiating prices is nothing less than a giveaway of taxpayer dollars to drug companies by politicians who are in its hip pocket. So are me-too patent extensions, reduced FDA regulatory power, marketing directly to consumers, off-label marketing, and a host of other tactics to create false demand and retain exclusive control over supply.
A free, fair, and constructive drug market would be easy to create if the game weren't so badly rigged. The drug industry has purchased the politicians and diverted their loyalty away from the public good.
Fair play can be restored, but only if there is the same intense public outrage and class action suits that tamed Big Tobacco. Politicians will do the right thing only if and when they become more afraid of voters than of lobbyists.
There are some encouraging signs even this early in the current election cycle. Candidates and legislators of both parties now realize that public outrage has reached a boiling point and are beginning to suggest various ways drug prices should be controlled. Drug companies, of course, are doubling down with its usual platitudinous defenses and enormous campaign contributions.
The drug industry is the most profitable on earth because it has exercised to the full its monopoly power to price gouge. But the combination of mounting public outrage, frequent media exposure, and the politics of this election season now provide the critical ingredients for possible change.
It will be extremely easy for politicians to make empty promises, much harder under lobbying pressure for them to deliver on them. But talking the talk will no longer cut it—we should elect only those courageous politicians who can also walk the difficult walk. They are in office to protect us, not the drug companies.
