By: Dr. Frank MacMillan – December, 2015
As a college student in the mid 1980s, I studied and received my bachelor degree in economics prior to attending medical school. Also In the mid 1980s, I took note that one component of the new wave in health care was insurance paid prescription drug coverage. As a young person, I always recalled paying cash for prescriptions. Back in the day, prescription drug options were far fewer, but cost a lot less. During the early days, prescription copayments were one to five dollars. But I knew from studying economics that if you price something close to zero, that demand will increase exponentially. The converse of this has also proven true 30 years later, which is that the seemingly endless demand for prescription drugs has resulted in pricing that is no longer grounded to any rational economic principle. This is a big problem even if you don’t believe in medicine, because the economy that we depend upon for goods and services and to pay our wages, is extracting an enormous tax on everyone else to pay for it. The genie is truly out of the bottle, and no one knows how to put him back. Our poisoned politics (pardon the pun) makes solving this problem look rather unlikely, absent truth telling and real leadership, which has been lacking on so many levels.
I think we all get it that the development of new prescription drugs has made advances in health seemingly routine. It costs ridiculous sums of money to develop, test and bring a new drug to market, and we have made real strides in improved health as a result. There is no denying the recent advances in pharmacy and therapeutics have helped us live better and longer than ever imagined. There needs to be some way for drug developers to offset the cost of new drug development and pay for the necessary safety testing prior to general use. Patent laws allow market exclusivity that gives drug developers time to recoup the costs associated with developing new treatments before they are subjected to competition from generic drug makers. Imagine however what the pricing would be if ordinary people were paying for new treatments with their own dollars. I guarantee that the public would value that new drug differently. Heartburn drugs are a great example. I treat this condition every day, and though some people have serious acid reflux disease, most people with heartburn do not, yet I am frequently asked to prescribe medication that costs over $400/month (patient pays nominal copay, insurance company covers the balance) for what is essentially a lifestyle complaint. Especially when there is OTC medication that costs $10/month (out of pocket costs paid for by the patient), ask yourself how much you would pay for a branded medication that is only marginally more effective? Those excess costs get spread among the population by way of health insurance premiums. The insurance companies don’t care; they just pass along the costs to everyone. The new hepatitis C drugs are priced at 4/5 the cost of a liver transplant, not what it took to develop the drug. Most people with hepatitis C will never experience liver failure or advanced liver disease, but yet the manufacturer somehow figures that their pricing ($80,000 for 12 weeks) represents good value. No one can afford to pay that much! Are you kidding me?
One of the new “innovations,” is in the realm of generic drugs. For thirty years, plans have incentivized doctors and patients to use generics wherever possible because they generally give good value at lower cost. Generics in theory should not enjoy market exclusivity. For many years, generic drugs were priced in pennies, not dollars. Generic lisinopril, used to control high blood pressure, costs less than $2 for a month’s supply. There are several generic manufacturers that still make money on this drug, even at that price. What is generally not known however, is that the generic manufacturer industry, like most of health care, has been quietly undergoing a dramatic consolidation through mergers and acquisitions, resulting in some medicines having only one generic manufacturer, essentially market exclusivity. It doesn’t take a great leap of faith to understand why this is resulting in monopoly pricing. Because of regulatory barriers, another generic company cannot just decide to enter the market and create downward pressure on pricing through competition. Some have suggested that at least some of the generic manufacturers may be colluding to agree to divide up the world of generic drugs. Small generic manufacturers have also been targeted for purchase by other companies solely to exploit drug pricing where there are few or only one generic manufacturer. The facts are what they are, and I am not ascribing a specific cause, but tell me why, according to the Wall Street Journal, a 500 capsule bottle of doxycycline, a very old antibiotic you might take for Lyme disease or your kid might take to clear their faces of zits, cost $20 in 2013, but $1849 in 2014? You could make a similar case for digoxin, colchicine and what seems to be countless other drugs. It’s not just employers footing the bill, all of us do through lower wages and depressed economic growth. Don’t also forget that the government pays for over half of all the prescription drugs sold in the United States via Medicare, Medicaid, the VA and other programs. That government is every one of us who pays taxes.
I would like to propose some bold policy prescription (again, pardon the pun) for fixing this, but it is really hard to take something away once it has been given. That is the problem with putting the genie back into the bottle. Mark my words however, that the political class will not look to the root causes like monopoly consolidation, illegal collusion, free stuff and corrosive expectations, regulatory barriers to entry of new companies or allowing foreign importation. They will predictably default to price controls, which will only create scarcity and shut down real innovation. That’s where Politics 101 meets Economics 101, and the suckers holding the bag will be all of the rest of us.