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Politics, Profits Drive Big Pharma Drug Prices

 6 min read / 

Why do pharmaceutical companies charge more for drugs in the United States? Because they can. While it sounds like a bad joke, it’s essentially the truth according to multiple analysts, including Dr Peter B. Bach, director of Director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering.

Pharmaceutical companies have a vested interest in getting the highest possible price for their products for the longest possible time. Not only does it take $2.6bn and 10 years of research and development to bring a new drug to market, Big Pharma needs to pay dividends to its shareholders.

At the same time, insurance companies and patients have a vested interest in getting those drugs for the lowest possible price as soon as possible to help keep down the ever-rising healthcare costs. According to a 2016 article in The Economist, in the US, Big Pharma spends millions on lobbying to prevent the government from adopting European style price controls, such as allowing Medicare to negotiate the cost with pharmaceutical companies.

Single Payer, Single Buyer

Europe and Canada get the same drugs as the US, but sometimes for much lower prices due to universal health care allowing these nations to barter as a whole, and because of anti-price gouging legislation. Suggestions that the US follow suit are met with claims that this would “squelch” innovation and everyone would lose in the long run.

That would mean the US is sacrificing itself for the benefit of other nations, which doesn’t sound too likely. More likely is it’s because of politics and profits.

The US does have something of a mania for the free market, and a tendency to see anything approaching universal healthcare and a single payer system as encroaching socialism. To a large part of the population, that means it’s seen as evil. A report by The Heritage Foundation claims that single-payer government-run healthcare encourages oxycodone, hydrocodone or morphine abuse because they are free.

Although there is more interest in a single-payer system amongst US citizens since healthcare turned out to not be an easy fix, there’s no appetite for it from the Congress or president.


Medicare – the US national social insurance programme that mainly benefits those age 65 and older – is single-payer universal health care insurance for the elderly, and Big Pharma’s biggest customer; it spent $112bn on prescription drugs in 2014. Why can’t it use its collective clout to negotiate lower prices as they do in Canada and Europe?

Because Medicare is forbidden by law from doing so. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Medicare cannot negotiate drug prices as a whole. Instead each of the insurance companies that administer the programme do the negotiating, diminishing their clout.

Besides, letting Medicare negotiate drug prices might not help much. It’s not just about size. According to the Motley Fool, Britain and other governments aren’t just the biggest buyers, they are the only buyers, and they aren’t afraid to say no. That means if they won’t buy a drug because they think it’s too expensive, Big Pharma has lost that market. As big as Medicare is, it’s not the only game in town. And Medicare might not have the will to say no and mean it.

Generics and Biosimilars

Another thing that might lower prices is increased use of generics and especially biosimilars – virtually identical versions of biologics, large molecule biotech drugs (as generics are to small molecule). According to a 2016 study by Yale School of Management’s Fiona M. Scott Morton, in the US biologic drugs represent less than one per cent of prescriptions filled, but more than 27 per cent of total drug spending.

Biologics are more difficult to re-create exactly – hence the term biosimilar – and so it’s easier for Big Pharma to maintain their monopoly after the patent has expired. Only after passage of the Affordable Care Act (Obamacare) did the first biosimilar make it to patients in the US.

In Europe, however, Morton says they have had biosimilars for years, which has cut some drug costs as much as 80 per cent over biologics. More than 50 biosimilars are currently in clinical trials for the US and Europe.

Reference Pricing

Some analysts think reference pricing, as used in Europe, would help. In a New York Times editorial, Austin Frakt explains that in Canada and Europe reference pricing already is used, and has lowered costs seven to 24 per cent without “squelching” innovation as some critics charge. Rather he argues that it rewards smart innovations, innovations that matter, such as developing new drugs that have “novel therapeutic effects” instead of duplicating an existing, less costly drug’s effects.

Sometimes when a drug’s patent expires, a pharmaceutical company will resist the release of generic or biosimilar drugs by any means necessary. Sometimes they will come out with a new similar drug or change the delivery system in an effort to hold on to its profits. Last year the makers of Humira and Enbrel, two best-selling drugs, filed for new patents to keep cheaper generic or biosimilar versions off the market.

With reference pricing, instead of saying a drug is priced too high, it says a drug is priced too high for the value it offers. If it has similar effects to an existing, less expensive drug, it must be more effective to merit a higher price. Frakt gives the example of Tarceva, a cancer drug. It is more effective on some cancers than others in terms of extended life. Under reference pricing, the pharmaceutical company could charge more when it’s used for a cancer on which it works better.

Other Remedies

US President Donald Trump campaigned on a promise to negotiate lower prices with the drug companies, and an executive order is promised for later this year. It looks like he may be walking that back bit though, just as he walked back promises of universal health care, better and for less money. Analysis of a draft of the order seems to favour cutting regulations for Big Pharma over cutting costs for consumers.

Europe also has been more aggressive in prosecuting perceived price-gouging, and the US could do so as well. But the Congress is loath to interfere with companies’ profits (free-market spirit and lobbying again), despite unwarranted and abusive price increases such as by Martin Shkreli with Daraprim and Mylan with EpiPen.

Another solution, offered apparently seriously by Democratic presidential candidates Bernie Sanders and Hillary Clinton, is to allow Americans to buy drugs from Canada, the US’s northern neighbour, which are less expensive than in the US. Of course, even if it was practical and the Canadian government and Big Pharma allowed this, it’s not convenient for most of the population to make the trip. Even if it was, there wouldn’t be enough drugs both for the Canadians and the American pharma-tourists. Another solution would still need to be found.

With lobbyists throwing money around to convince US lawmakers – already hostile to regulations – that high pharmaceutical prices are the price for innovation, and no consensus for or even the prospect of universal healthcare, US drug costs will likely remain higher than Europe and Canada.

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