Lesson 11:  Why Are Prescription Drugs So Darn Expensive?
The problem with the price of prescriptions is not that they're too expensive.  The problem
is the unrealistic expectations of patients.  People think of drugs as just pills, many of which
have been sitting on shelves in our pharmacies for decades, not costing much.  Some of
them had been discovered in plant life.  Some had been invented rather cheaply.  But the
modern prescription medicine, while sometimes not as effective as the older ones, is
nonetheless a piece of state-of-the-art technology.  It's design is more sophisticated and
expensive than any gadget you can buy at Sky Mall.  It takes an average of 5 years to
design a drug and another 5 to study its safety and effectiveness.  Add 12-18 months to get
FDA approval.  A Tufts University study in 2003 estimated R&D (research and
development) cost of $897 million to develop one drug.
*  After that, the drug company has
about 20 years of patent protection to try to make their minimum profit margin.  (See
Lesson 9).

In addition, when you buy a drug, you're not just paying for its R&D.  You're also paying
for the R&D of all the drugs that didn't work out and weren't approved.  You're also paying
for the massive lawsuits that result from drugs that didn't work out
after they were
approved.  You're also paying for people in other countries to get cheaper drugs.  13 out of
15 countries in Western Europe, as well as Canada, directly regulate prescription drug
prices.
**   (See Lesson 10).  The pharmaceutical company has to make up the difference
somewhere and they do it in the United States.  

 If the U.S. passes price control on prescription drugs, one of two things will happen:
1.  The government will be forced to relax regulation and tort law in order to allow drug
companies to cut  R&D costs.  This will result in more dangerous drugs.  
More likely #2.  Pharmaceutical companies will stop making new drugs.  The companies
that don't close will  make old generics.  There has already been a trend in this direction.  
Many of the "new" drugs that these companies now sell are just combination pills:  They
take two old drugs, glue them together, paint a racing stripe on it and give it a new name.  

Prescription drugs are also expensive because of pretending.  (See
Lesson 2).  Medicare
and Medicaid allow many Americans to pretend that their drugs are free.
***  This relieves
the consumer from the job of shopping.  Consumerism without shopping raises prices in 2
ways:
1.  The consumer doesn't ask "Do I need
this drug?"  Price competition then vanishes and
the drug price fails to fall to its actual value.
2.  The consumer doesn't ask "Do I need
any of these drugs?"  When we buy anything else,
right down to a pack of gum, we instinctively and subconsciously conduct a cost/benefit
analysis where we ask "Is it worth the money?"  When we don't have to, then demand rises
artificially.  

What's the answer to all this?  Simple.  If you think you
must have the latest, greatest
chemical gadget that
might make you live a little bit longer than the older ones, then pay for
it.  Don't burden the tax-payer.  You can also pass the message on to your Canadian
neighbors.


*      Tufts Center for Drug Development, Journal of Health Economics, Volume 24, Issue 5, September 2005,
Pages 1034-1044
**    New England Journal of Medicine, 9/30/4
***  There is a case that can be made that this is also caused by the flat co-pay system used by many private
insurance plans.  The difference is that abusers of that system ultimately pay with rising premiums if they can
afford them; or cheaper, more sensible plans if they cannot.