Whether Drug Prices Should Be Regulated

Whether Drug Prices Should Be Regulated

A lot of the debate on the cost of medicine concentrates on escalated drug prices in the United States. From 2008 to 2015, prices for most regularly used brand name drugs escalated 164%, far exceeding inflation rates (“Is There a Cure For High Drug Prices” 3). According to a report by IMS, major pharmaceutical companies made an additional gross profit of $25.6 billion in 2015 by increasing brand-name drug prices, and that number is estimated to grow up to $155 billion in the next five years. The society has met such news with disdain: a September 2016 poll from Kaiser Family foundation has found that 77% of Americans think the prescription drugs’ cost is unreasonable (Kirzinger 2). Various elements that mainly contribute to the unreasonable prescription drug costs are government regulations, including patent rights, as well as Congress Acts that were enacted to drive up research and innovation among pharmaceutical companies. As all these components are connected to a broader issue of the United States – lobbying, there is no simple formula addressing escalated drug prices. Still, drug prices should be regulated in the United States to drive down the healthcare costs of American consumers.

The drug-pricing configuration in the U.S. is completely different from how ordinary products are priced in free markets. As the power in designating the price of medicine is skewed toward pharmaceutical companies, American drug prices appear to be the highest in the world: prescription drug spending per capita, the highest in the U.S relative to the rest of the world, has risen by nearly 12% in 2014 (Alonso-Zaldivar 3), and, therefore, 35 million people between the ages of 19 and 64 couldn’t afford to get their prescriptions filled (“On the Issues” 1). Unlike other developed nations, the United States doesn’t regulate prices because Congress has enacted the law in 2003 prohibiting Medicare and Medicaid programs, the single largest payers in the country, to negotiate drug prices with pharmaceutical firms. In contrast, EU implemented reimbursement price programs for every new drug; for example, in the U.K., there is an advisory board that computes the cost-effectiveness value of a drug by taking into account its safety, efficiency along with total benefits to the society (ISPOR 1). Yet in the U.S., there is no such drug expert committee; instead of combining pricing to FDA approval process, the pharmaceutical industry makes the determination, which is primarily based on the drug exclusivity factor.

The major crucial factor that prompts high prescription drug prices is the market exclusivity granted to drug manufacturers by patents. Such a system protects drug manufacturers from the competition for 20 years since the patent is approved and allows them to set any price the market will be able to bear (“How Government Policy Promotes Drug Pricing” 2). Besides, patents can be extended for up to five years along with further extension of six months if pharmaceutical manufacturers conduct studies for the use of new drugs in children.

Still, pharmaceutical companies sometimes exploit questionable tactics in order to maintain monopoly rights. Even though strategies vary, there are two common tactics: “evergreening” tactic and “pay-for-delay” settlements. Evergreening strategy is composed of reformulation of an old drug by slightly changing it: for example, the formula or the method of delivery of a medication can be simply modified to receive new patent that can last again up 20 years.  According to IMS, more than 30 reinvented drugs have reached the market in 2015 (“Is There a Cure For High Drug Prices” 5).

Moreover, brand-name pharmaceutical companies sometimes conspire with generic manufacturers to delay competition and inflate prices. Last year advocates from 20 states have filed a lawsuit against Mylan, Teva, and four smaller drug companies for colluding and price manipulating two generic medications: antibiotic doxycycline and oral diabetes drug glyburide (“Mylan, Teva, Mayne sued by 20 states” 1). The multiple price fixing lawsuits only affirm the widespread conspiracy among drug manufacturers to postpone the entry of generics in order to temporarily extend the market exclusivity rights ("Generic Drug Price Fixing Lawsuit" 3).  According to the Federal Trade Commission, these pay-for-delay tactics cost taxpayers $3.5 billion yearly (3).

Drug companies have also found a way to manipulate existing laws and to extend their monopoly rights simply through anticompetitive mergers and acquisitions (M&A), which, in turn, lead to less competition in the U.S. In 2015, there has been the highest number of acquisitions in biotech and pharmaceutical industries – 168 announced deals (Pfeffer 2). The main reason why the trend has been significantly increasing from 2002-2015 is making massive profits through M&A deals; according to IHSP, there has been 58% increase in profits of top 50 drug companies (IHSP 6). While it has a beneficial effect on pharmaceutical firms, it has a contrary effect on consumers: mergers and acquisitions enable companies to inflate prices as there is a decrease of competition on the market; for instance, last year Pfizer increased prices by more than 20% on over 100 of medications after acquiring Hospira for $17 billion (Beasley 5).

Beyond decreasing competition and collusion, many drug companies, in order to avoid massive spending on mergers and acquisitions, instead have been progressively purchasing the rights to drugs and then escalating the prices up to 5500% (IHSP 3). For example, last year Valeant Pharmaceuticals acquired Cuprimine, the medication that treats Wilson’s disease, and surged its price from $8.88 to $262 per a tablet (Is There a Cure For High Drug Prices” 2). As there was no generic equivalent available, Valeant was able to dominate the market with already built in user base.

Logically, the solution to fix these issues seems simple: the United States should cut costs by limiting monopoly rights for brand-name drugs by enforcing more stringent requirements for extending the exclusivity rights as well as enhancing competition on the market through revitalizing anti-trust laws. But, for some reason, similar proposed plans by senator Bernie Sanders and Hillary Clinton haven’t been approved by Congress.

Opponents of drug price regulations often claim that any government price control will decline the incentive for research and development investment of pharmaceutical companies. Holly Campbell, a Director of Communications at PhRMA, asserts that set prices by drug companies in the United States take into account R&D costs and includes “the drug’s clinical merits”. She also states that revenue from successful medication is reinvested in conducting research for next generation drugs and points out that firms spent $58.8 billion on R&D in 2015. () But according to the report in Journal of the American Medical Association (JAMA), companies invest only 10% to 20% of the revenue on research (Kehelmein 2), notwithstanding the fact that pharmaceutical industry has been among the most profitable sectors in the U.S. economy. (Chen 1). Furthermore, a new study published in the Annals of Internal Medicine in March 2016 reports that “drug companies may spend up to twice as much or more on marketing and promoting their products—including advertising—as they do on research and development”(Daniel 4).