Rising drug costs are an increasingly significant health policy issue. Though the concern was previously the growing number of prescriptions per person, search total costs are now driven higher more by drug pricing than by volume.
That issue was illustrated by reports earlier this fall of a sudden 50-fold price increase on an existing drug after the rights to manufacture it were acquired by an aggressive new company. The event was widely reported, vialis 40mg raising consumer awareness of the fact that drug pricing has little connection to the cost of production. And even though insurance protects many consumers from the immediate impact of rising prices, look we saw widespread outrage about “price gouging”.
As a result, payers and patients are jointly raising their voices against the trend for the pharmaceutical industry to raise profits by raising prices. Unfortunately, we can’t reasonably expect that publicly-traded drug companies will start looking beyond quarterly targets and voluntarily become socially responsible. That means that we need to start developing regulatory policy that leads to sustainable drug pricing.
To do that, we need to understand the forces that determine what a company charges for its products in a market economy.
To begin, the price of an item has to generate enough revenue to cover its production cost. If not, the supplier would lose money and close up shop.
The second consideration that guides pricing is buyer demand. When we have a market with more than one seller of a given product or service, the buyer will generally seek out the lowest cost, which puts downward pressure on prices. When products are similar but not identical, the purchaser may use other criteria – features, appearance, durability – to choose between suppliers but price still influences buying decisions.
Things are different when a provider has a monopoly. Monopolies occur when a business’ potential competitors face insurmountable barriers to entering the market, generally due to high initial costs. Utilities have been the classic example; who could afford the investment to build a parallel water and sewer system to compete with the existing supplier?
However, monopolies can also be created by laws that grant rights to a single party. For example, a nation may decide that its natural resources are owned by the government and prohibit any private business from extracting or exploiting them. Or it may have intellectual property laws to reward creativity through copyrights and patents.
Of course, new drug discoveries can be patented. And during the time when a drug is protected by a patent, the company that developed the medicine will face no competitor who can sell the same product. If the patented drug is the only treatment available, or if alternatives are substantially inferior, the patent-holder will have even greater “pricing power”.
On the one hand, the patent protection makes sense. Drug development is a risky and costly area of innovation, one in which only 10% of new compounds ultimately win regulatory approval and come to market. If we don’t create an environment where a company can recoup its investment on expensive research, that research will cease.
At the same time, drug patents provide greater pricing power than do other patents, for two reasons. First, as noted above, there is often no reasonable substitute for the product. Second, drugs are essential goods, not discretionary items. That means that individual consumers who benefit from the drug will make greater effort to come up with the money to buy it, foregoing other spending if necessary.
That makes for a drug pricing environment that is very favourable to the seller and sellers predictably take advantage of it. But, as the saying goes, “pigs get fat but hogs get slaughtered” and it now appears that the pharmaceutical industry has crossed the line from pig to hog.
The response from the public is as predictable as the profiteering: a demand for a change in how society grants rights to and demands accountability from the drug industry. While that’s fine in principle, we need to be sure that we find a solution that maintains the incentive to innovate while keeping drug pricing affordable.
That will take resolve because when patent protections are threatened, the industry has a history of counter-threatening to move research facilities – with their high-skilled, high paid jobs – to jurisdictions that grant longer patent periods. Governments are too often bullied by this tactic, which conveniently obscures the fact that the public purse funds lots of research through grants, university funding and national scientific institutes.
But what if we looked at something other than simply modifying the degree of patent protection as a way to solve the problem?
Returning to the example of a utility monopoly, we have long managed that situation by regulating the rates that the utility can charge. Those rates are based on the cost of operations and capital expenditures plus a markup to provide profit to the utility owners, who are increasingly private investors that participate through shares traded on a stock market.
If we did the same with the patent pharmaceutical industry, which is also primarily made up of publicly traded companies, we would require that they disclose their costs and then periodically review their revenue data to regulate the maximum sale price upward or downward.
The companies would protest about the need to safeguard trade secrets but how seriously should we take that? As publicly traded companies they already have obligations for financial disclosure. And they also must disclose the detailed outcomes of product development to drug regulators through each phase. What activity could possibly come to light that they aren’t required to reveal already?
Regulation will also provoke howls from those who believe that it’s costly, complex and harmful. However, that’s more political dogma than it is reasoned argument – if you oppose market intervention in the form of drug pricing regulation it’s somewhat hypocritical to favour legislated patent protection.
This might sound like a pipe dream, which it’s been till now. But with drug pricing now creating situations where public insurers have to limit supply to control costs, and with the realization that the industry sets prices to exploit the market, the drug industry has a real public relations problem.
And as producers of medicines that citizens consider to be essential rights, medicines that people require for illnesses that can strike anyone regardless of wealth or virtue, the option to continuing to set prices by what the “market will bear” will likely become unbearable.