In part 4 of our 5 part series where we explore what influences healthcare costs, we dive into Pharmaceutical Companies. If you haven’t yet, take a look at the previous two posts in the series: “Why is Healthcare So Expensive?”, “How Administrative Costs Increase the Cost of Healthcare“, and “How Defensive Medicine Increases the Costs of Healthcare“.
Prescription medications in the United States are among the highest in the world. Even President Donald Trump claims that pharmaceutical companies are “getting away with murder.” For example, Nexium is a prescription medication used for treating GERD. In the U.S., a Nexium prescription for one month will cost an insurer, on average, $215. Compare that to the Netherlands where the exact same prescription costs just $23. How can that even be? It almost seems fake. But this is the reality that our country faces every day and it is destroying our national healthcare spending.
The Unfair Playing Field
There are three factors that give pharmaceutical companies major market advantages in the U.S.
1. Patent Laws
Patent laws allow a certain amount of time for the inventor or creator of a particular medication to have no competition. Pharmaceutical companies will make minor changes in the medications they create to extend their time with no competition. No competition allows for them to set any price they want for that medication. Once patent laws expire, other drug manufacturers can create the same medication for much less, driving down costs for patients.
2. Limits on Medicare
Medicare is government provided health insurance. Laws prevent Medicare from negotiating with pharmaceutical companies, leaving Medicare to pay the prices companies set. Other countries allow for negotiations between pharmaceutical companies and the government which helps to reduce prices. The Veteran’s Health Administration (VHA) is allowed to negotiate prices and subsequently pays 80% less on brand name prescriptions than Medicare part D.
3. No Negotiations
Lastly, pharmaceutical companies generally don’t negotiate directly with insurance companies but work with benefit managers, who negotiate rebates and prices for the insurance companies. This complicates things further.
How Do Pharmaceutical Companies Spend Their Money?
Pharmaceutical companies make many claims for why they charge so much money in the U.S. Some don’t agree with their claims and think the data provided is only partially true. Pharmaceutical companies note that drug costs only account for 10% of healthcare spending, in comparison to the 32% contributed to hospital care. They also note how the U.S. has the quickest access to the newest medications on the market, often before other countries.
Pharmaceutical companies make their biggest argument regarding the development costs of drugs. Developing one drug can take a decade or longer and can cost billions of dollars. The cost to research, develop, and market a drug can be costly.
Some experts claim that pharmaceutical companies overstate these costs noting that pharmaceutical companies are among the most profitable businesses in America. Other data suggests that 9 out of 10 pharmaceutical companies spend more on marketing than research.
More to Be Concerned About?
Many people are concerned about the direction of pharmaceutical companies. These companies tend to follow where the money is, and the money is in new, life-saving medications where they can justify charging a lot of money. This leaves a void the creation of important medications like new antibiotics.
Because antibiotics are only taken for a week or two at a time and then stopped, they are much less profitable than other medications. But bacteria can become resistant to antibiotics and create infections that can’t be cured by standard antibiotics. This means there may come a day when you get a common infection that cannot be treated. Many pharmaceutical companies shy away from investing money into important medications like these, which the world may need desperately soon.
Stay tuned for our final post of this series where we explain how the Third Party Payer system increases costs of healthcare.
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