What Makes Certain Medications So Expensive?

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The price of healthcare and the cost of prescription medication in America has become the cause of much political strife and heartache. Without delving into the political ideology of it all, we know that many people are frustrated with the current handling of healthcare in our country—and much of that has to do with the cost of medicine.

While health insurance providers, and in some cases governmental bodies help to subsidize costs for those who need medication, the bottom line for the consumer can still be too high to even afford a co-pay.

Which leaves many wondering, why is medicine so expensive?

Commonly utilized medications like aspirin or Tylenol tend to cost little more than the cost of a lunch yet in some cases, we’ve seen drugs increase price by over 5,000% overnight. So what’s the reasoning behind this seemingly broken system?

There are several factors at play.

Research & Development

The most commonly cited reason given by big pharmaceutical companies for the cost of pills in relation to the cost of manufacturing is the need to recoup losses during research and development.

For instance, research and development (including clinical trials) for Alzheimer’s treatment in the years between 2002 and 2012 resulted in the failure of 99.6% of all tests. Since there’s no profits to be gained from a 99.6% failure rate, if and when a comprehensive Alzheimer’s cure is created, those costs have to be made up somehow.

If we hypothetically consider the idea that these failures are all funded by a single pharmaceutical company, that company would need to either raise prices on current drug offerings or charge ludicrous premiums on the cure once completed.

Both tactics are used in modern medicine in various degrees by real companies.

Patents & Monopolies

Much like the rest of the American entrepreneurial system, the creation of a new drug is considered to be a development that deserves profit and the sole right to manufacture for a set amount of time.

In the United States, patents are set up to give creators and makers the right to profit on their inventions for a set amount of time. Eventually, these creations will make their way into the public domain after the creator has profited or passed away, and the rest of the industry is allowed to build upon the original creation.

In the case of pharmaceuticals, that means that anyone who makes a new drug has sole rights for 20 years to profit without competition—give or take some time due to exclusivity rules and international law.

For those twenty years, companies can decrease or (most likely) increase the price of the drugs they manufacture, and there’s little in the way to stopping them from raising the price as the expiration date for the patent draws near.

The costs aren’t guaranteed to go down after the patent expires, however. Once a drug becomes a “generic,” the potential profits for a company will decrease as more and more companies pick up the drug for manufacture. This works out in the benefit of the consumer in theory but sometimes, insidious cases come up over time.

Since the profit margins are down for most companies, those companies will eventually move on to more profitable ventures thus leaving few companies manufacturing the drug. Since there’s no real limit on how much a drug can theoretically cost, these companies can form a sort of oligopoly and control the prices themselves.

We’ll be getting to limits and costs in a moment.

Remember the earlier example we cited to show a 5,000% increase on a drug overnight? That drug itself was considered to be a generic but so few people could produce it, the price increase stuck, regardless of any ethical concerns.

Deregulation

Finally, perhaps the most important reason medicines cost so much money (at least in the United States) is the lack of governmental oversight into the standards and practices of pricing drugs.

There’s a lot to the United States law on drugs that makes it too complicated to really explain here, but the short version is that the United States does not set limits to pricing drugs sold to the American consumer. As a result, medicines in America cost more than in almost any other country.

This has resulted in several problems—including the political debate that continues on to this day.

For example, Americans spent up to 1 billion dollars on medicines from Canadian pharmacies to cut down on cost. Within the United States, shopping for drugs in different cities and even different pharmacies within the same town can result in a huge difference in price.

This deregulation is in a way responsible for the other two cited reasons here as well. There’s no oversight to compare final cost to losses from research and development (since these are conducted privately), and there’s nothing in place to break up the monopolies and oligopolies that form naturally around non-profitable and generic drugs.

Aside from ordering internationally or getting a pharmacy card for Eliquis and other commonly-needed medicines in the United States, there’s little for the average American to do to really combat the fringe cases that can result in drugs that you need.

Since this deregulation is in a system where the freedom of choice for healthcare is important for many people, fixing the problem in these cases is vastly complicated and comes down to personal preference and belief. We won’t be proposing any such solutions here in the interest of neutrality.

Final Thoughts

Medicine in America has grown and developed from the idea that entrepreneurship and growth of enterprise will result in better healthcare for all. Like most systems around the world, there are some great benefits—and great downsides to this system.

We hope that this has explained in some detail the reason why your pills cost far more than you would expect them to. Depending on the drug, that reasoning can be research and development, business practices—or plain old manufacturing costs. Be sure to look into the history behind your individual drug, and see what can be done to lower cost to you.

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