How Can a U.S.-Made Prescription Drug Cost Hundreds More Domestically Than Abroad?

by Odysseas Papadimitriou on December 20, 2012

prescription drug pricesJust a few weeks ago, my wife and I welcomed into the world our first child, Achilles Spiro Papadimitriou.  He obviously takes after his papa when it comes to having an exceedingly Greek name (just check out my byline), and my hope is that he can channel his namesake, Achilles of Greek mythology, when it comes to strength, bravery, leadership, and general badass-ness.  Anyway, that’s beside the point.

You see, Achilles recently had some trouble with his eyes (I know, surprising it wasn’t a leg tendon), and our experience getting him medication raised some very interesting questions about our country’s medical system (I know, U.S. healthcare is flawed, surprise surprise).  To make a long story short, there was some sort of snafu with our insurance and Achilles didn’t show up on our account, so we had to pay for the medicated eye drops he needed out of pocket.  No biggie, right?

That’s what we thought, but guess how much those eye drops cost?  $125!

My father is an ophthalmologist back in Athens, and guess how much the exact same eye drops cost in Greece?  Three Euros, or roughly $4!

In other words, it costs $121 more to buy a U.S.-manufactured drug in the U.S. than it does 5,000-plus miles across the Atlantic.  What’s up with that?

This startling price disparity obviously got me thinking, so I looked into the matter a bit and came up with a few reasons (albeit not good ones) for why the prescription drug trade works the way it does.

  • High starting prices enable drug manufacturers to offer “big discounts” to insurance companies – It’s Negotiating 101 to set your initial sale price well above the amount you’d ultimately feel comfortable receiving.  By starting high, drug manufacturers can therefore try to maximize their profits while allowing buyers to feel like they’ve pulled off a major coup if they ultimately agree to a lower price.
  • Because they can – Drug manufacturers have what’s known in economics as “market power,” which means that a lack of competition borne from exclusive patents allows them to set high prices because people will inevitably pay them rather than do without the products being sold, which they can’t get anywhere else.  You also have to consider things in a more practical sense.  If a doctor writes you a prescription for a specific drug and you find out at the pharmacy that it costs more than you’d expected, you have few options.  Sure, you could go generic (if it exists), but that might still end up being expensive.  You could also go back to the doctor and ask for a different recommendation, but even if there is a comparable drug to prescribe (not always the case) you might be in the midst of an emergency that makes doing so impossible (you need the drug for a reason, after all).
  • Formularies – A formulary is a list of drugs approved for treating specific illnesses that doctors are encouraged to adhere to by insurance companies via financial incentives and/or the need to seek prior approval for use of other drugs.  As of 2001, roughly 75% of employers used health insurance providers that employed formularies, and there was and continues to be a clear financial incentive to fill these formularies with the most profitable drugs possible.
  • Inefficient Distribution:  The vast majority of prescription drugs are relayed from the manufacturer through wholesalers and other middle-man distributors before finally making their way into the hands of hospitals and retailers.  That means price points are negotiated numerous times, resulting in significant disparities in terms of how much different people end up paying.
  • Prescription Drug Marketing Act (PDMA) of 1987 – The PDMA was enacted to ensure the sanctity of the country’s prescription drug supply, but it also significantly restricts the resale of prescription drugs.  In other words, organizations like nursing homes and hospitals that are able to negotiate discounted prices for their prescription drugs can’t turn around and resell them to others facing higher prices, which would naturally bring down prices across the industry.

So, to sum things up, a  myriad of factors enables the drug distribution industry to set outrageously high prices for their products, and while insurance makes them relatively affordable for a lot of people, those who don’t have insurance (and therefore don’t benefit from insurance providers’ contractual discounts) are left shelling out absurd amounts.

The high margins that drug manufacturers reap domestically undoubtedly serve as a form of subsidization for what people pay abroad.  That’s great for countries with high poverty rates, but we can’t lose sight of the fact that nearly 1 in 6 Americans lives in poverty or that we are in no position to subsidize drug prices for other wealthy countries.

Still, it’s important to note that domestic subsidies aren’t the only reason why prescription drug prices are often lower abroad.  You also have to consider:

  • Government price regulation:  Canada and the European Union regulate drug prices, and the pharmaceutical companies are obviously going to sacrifice a certain portion of their profits in order to do business in those places.
  • Prevalence of generic equivalents:  It’s pretty common for foreign governments and companies to replicate designer drugs from the U.S. and then sell them for less.  The practice obviously raises a number of important intellectual property and patent issues, but it happens nonetheless.

At the end of the day, these things only scratch the surface of the complicated healthcare dynamics that exist both at home and abroad.  We’re bound to hear and learn much more about them in the years to come, though, and that’s good because changes obviously need to be made.

Discussion

PharmacyChecker.com
Excellent and fun analysis about why U.S. drug prices are so high! Odysseus, if you don't mind sharing the name of that drug product we'd like to know if it was even "American made". It might not be.
December 21 at 15:32 pm

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