The Three Most Important Reasons for High Drug Prices: A Pharmacoeconomic Perspective

Drug prices have been increasing at a rate higher than inflation over the last few decades.? Due to this and other factors, the costs of drugs are much higher than they were previously on a per-capita basis. The three most important causes for high drug prices are innovation, an imbalance of demand due to insurance companies masking of true drug costs, and drug shortages.

Long gone are the days of drug companies creating palliative treatments or medications that are just used to manage a disease.? The goal of treatment now is a cure.? Why take the risk of creating a drug that a chronic patient will take daily for 20 years that is likely to get replaced with another treatment before then?? Creating a more expensive drug that pulls the lifetime costs of the drug forward to now and cures the disease eliminates the risk of formulary changes, insurance coverage being lost, patient decompensating and dying unexpectedly, or new advances in surgical or medical devices replacing the drug.? An example of this are the drugs used to treat hepatitis C, which in the past managed the disease with a small chance of a cure vs. a 90%+ cure rate for current medications that can prevent more expensive interventions such as liver transplant, hospitalizations, and addition of other medications to manage the disease.

Then next reason is that healthcare does not follow a proper supply/demand economy.? The advent of insurance for prescription drugs has thrown the supply/demand curve out of whack.? Insurance companies use the pooled resources of their clients to purchase medications from the drug companies regardless of the cost.? To take advantage of this, pharmaceutical companies raise the costs of their medications and give copay cards directly to the patient to assist them with their out-of-pocket costs.? This keeps the out-of-pocket cost for the cost-sensitive patient artificially low compared to the true cost of the drug.? Insurance companies then have to float the larger bill, the cost of the drug minus the out-of-pocket cost paid by the patient.? To cope with these costs, the insurance company raises rates on all of their clients which gives the drug companies a limitless ability to raise the prices of their drugs.? Since these practices are masked from consumers, it does not allow for a proper supply demand curve.

Lastly, drug shortages are a large risk factor in the high cost of drugs.? When a pharmaceutical company is having a hard time procuring ingredients to manufacture their drugs, gray market wholesalers use this to their advantage purchasing up the remaining supply and selling what is left to the helpless hospitals and pharmacies who are forced to buy these drugs at any price to treat their patients.? Another side effect of drug shortage is a switch to higher priced alternatives, as well as a shift to brand name drug purchases when the generic becomes unavailable.? When the drug shortages get severe enough, some companies may pull out of manufacturing that drug due to the cost of the inputs being too high.? This causes a shift in the market where less companies are making a given drug causing a decrease in supply.? This decrease in the number of options to purchase this drug from allow the remaining manufacturers to exercise absolute pricing power over the medication since they control the market for the drug. ?An example of this is calcitonin for injection, which in 2014 was about $50 per vial but now retails for about $2500 per vial.

While this is not an all-inclusive list of reasons for high drug prices, these are some of the main drivers.? The healthcare system has multiple mechanisms that cause shortages and unbridled pricing power, which throws off the supply/demand curve leaving the patient holding the bag.? ?????

1.???? Feldstein PJ. In: Health Policy Issues an Economic Perspective. Chicago, IL: Health Administration Press; 2019:401-421.