Myth Vs. Fact: What’s Behind Drug Prices

by Alicia Caramenico

July 25, 2017

The prices of many drugs continue to explode, and there’s still a lack of transparency in how these skyrocketing prices are set. So we’re fact-checking some of the pharmaceutical industry’s main arguments for why they have to charge hundreds of thousands of dollars for a course of treatment.

– Drugmakers say they set high prices that reflect the cost of researching and developing medicines.

Fact: High prices have little or nothing to do with drugs’ innovation or efficacy for patients.

“[Pfizer’s] process yielded a price that bore little relation to the drug industry’s oft-cited justification for its prices, the cost of research and development. Instead, the price that emerged was largely based on a complex analysis of the need for a new drug with this one’s particular set of benefits and risks, potential competing drugs, the sentiments of cancer doctors and a shrewd assessment of how health plans were likely to treat the product.” (Wall Street Journal)

Fact: Pricing is based on what already exists, and competitors use shadow pricing to drive each other’s prices higher.

“To determine the highest possible list price for a new drug, companies calculate what patients and insurers currently pay for competing drugs or surgery.” (International Business Times)

“We all look at each other and keep pace with each other. Honestly, there is no science to it.”  – Director of one multiple sclerosis drug developer, who spoke on the condition of anonymity (New York Times)

– Drug companies argue high prices are needed to fuel innovation.

Fact: Instead of promoting true medical advances, a common business strategy in the pharmaceutical sector is to buy the rights to older drugs and then immediately jack up the prices.

“A study by Bain, a consulting firm, found that in the past 20 years those drug companies that consistently did well in various therapeutic areas were earning more than 70% of their sales from products developed elsewhere.” (The Economist)

Many companies purchase rather than develop medicines; it can be an efficient business model. The method becomes suspect when costs spiral. Roughly 650 branded drugs doubled between 2011 and 2016, and prices went up 500 percent or more on about 100 of them, according to data from Connecture, the healthcare technology and data-analytics company. (Bloomberg)

– Drugmakers claims drugs account for only about 10 percent of U.S. health care costs.

Fact: The numbers keep telling a different story.

The IMS Institute for Health Informatics estimates that drugs account for 22% of healthcare spending, Altarum Institute pegs the number at 14%. MEDPAC reports that drugs amount to 19% of Medicare spending. Whether it’s ten percent, fourteen percent, or twenty-two percent, we’re talking huge numbers. Fourteen percent of healthcare spending is around $400 Billion, more than $1,000 per person per year.” (Morning Consult)

The problem with these faulty arguments goes beyond misinformation – they push important medical treatments farther out of reach for patients.