Cost of Drugs and some basic economics

Most recently on the front page of the Cedar Rapid Gazette, I read where a physician discussing how he will not be accepting gifts from pharmaceutical companies. While one can empathize with the physician and his patients on the high cost of drugs, it is also time to understand a little economic 101.

There are many reasons why drugs cost what they do. In the overall scheme of medical care, drugs have reduced the cost of treating specific diseases states by reducing more expensive invasive procedures. So in the treatment of the disease states, drugs are often the least expensive alterative.

Here is one argument often heard, “I can buy my drugs cheaper in Canada” Yes, with many brand name drugs, you can. And the reason is simple. Canadian government uses various mechanisms to artificially control prices. The Canadian consumers are not paying the actual cost for their therapies but artificially low prices. So if a government chooses to restrict prices and profits, then there is price to be paid. One price to be paid is the lack of research for new therapy, a cost to be borne by future generations.

Another aspect to study is how government policies can affect the market place. In the late 70’s and early 80’s, many states repealed anti-substitution laws. What this meant was that pharmacists could substitute a generic drug for a brand name. In the mid 70’s, many drug companies actually promoted off patent drugs since branded names could not be substituted. After many states change their laws and the Waxman-Hatch Act of 1984 made it easier for generic drugs to come to market, the generic market grew. What also happened is that drug companies quit promoting their less expensive drugs in favor of their more expensive newer drugs. Consumers found themselves paying higher prices for newer therapies, prices that were higher than the previous generation of drugs.

Article Author: Tom Donelson

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