Thomas Donlan‘s latest editorial commentary for Barron’s focuses on the basic economic concept of scarcity, applying that concept to pharmaceutical prices.
High prices for prescriptions have been worrying Americans for years, with peaks coming every four years as candidates advance unfounded solutions to a small problem.
A poll released last week by the Kaiser Family Foundation found that 77% of Americans surveyed considered high drug prices to be their primary health concern, and 63% said they would support government action to lower prescription-drug costs.
The respondents are missing a few facts:
• Retail prescription medicines account for only $300 billion of the nation’s $3 trillion annual health-care bill.
• Prescription-drug charges are largely covered by private or government health insurance.
• Drugs are usually more effective and cheaper than alternative treatments—if there are alternative treatments at all.
We should celebrate the benefits from our drug industry. Most other rich countries do fix drug prices; the U.S. never has. In fact, the prime object of U.S. policy on drug prices is to restrict research and competition, which raises prices.
The FDA requires years of research and evaluation before approving drugs. The Tufts Center for the Study of Drug Development reported a year ago that developing a new prescription drug that gains marketing approval carries average direct out-of-corporate-pocket costs of $1.4 billion (including the cost of drugs that fail) and opportunity cost of $1.1 billion (including the time value of money invested for an average 10 years of development).
As any McDuck knows, production costs are only half the story of prices.
The other part is the scarcity of drugs. FDA regulation restricts production and competition in generic drugs as well as those under patent. The agency controls entry into profitable generic businesses by licensing marketing and manufacturing.
