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May 22, 2018 no comments

Forget about greed, President Trump: the villain responsible for high drug prices is inefficiency

Endpoints article

“I have directed my administration to make fixing the injustice of high drug prices one of my top priorities.”
– President Donald Trump
2018 State of the Union address

Directing people to fix problems is one thing, but actually fixing them is quite another. And while President Trump may see high drug prices as an “injustice”, the evidence that corporate greed is to blame is patchy at best. The truth is, there’s a complex set of factors at work behind high drug prices. And taking the time to understand it has to be the essential first step towards identifying the true villain and then “fixing” the problem.


First, while US healthcare costs are already a global outlier at around $10,000/person annually, and still rapidly growing, drugs of all kinds including OTCs represent approximately 14% of the total bill.  By far the largest contributor to costs are hospital and physician fees.  As a result, even halving drug costs (which is as impossible as it is undesirable) would fail to lower US healthcare spending to level of the next most profligate country — tiny Luxemburg.  If the President wants to address healthcare spending, he needs to take on physicians, not pharma companies, when he returns to the subject in his forthcoming speech.


If we narrow the focus just to the cost of drugs, we still do not see egregious inflation.  Annual growth in drug costs has been below 5% a year for the last decade, such that the proportion of healthcare spending on drugs is actually falling. That’s because hospital and physician costs grow faster.


If those are the figures, why then is there a perception of over-priced drugs? Let’s explore the reasons:


Bad actors are cheating the system by offering old, cheap drugs at exorbitant prices


The tale of Martin Shkreli’s ill-fated price hike for daraprim, an aging AIDS and cancer med sold by Turing Pharmaceuticals, made headline news but these brazen attempts to exploit the barriers created by the regulatory framework around prescription medicines have no meaningful impact on the overall drugs bill.  Of course we should take action to prevent consumers and taxpayers being exploited in this way, but we should not generalize the problem.


New drugs are launched with massive and unjustifiable price tags


Neither, too, do the introduction of new medicines, often with eye-watering price tags, contribute to runaway healthcare costs.  Indeed, the focus on the prices of these successful innovations is the most frustrating aspect of the debate.  Most egregious was the ire directed at Gilead following the launch of Sovaldi with a headline price of $84,000 for a course of pills that, in almost every patient, could cure …


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