The conventional wisdom is that drug prices are high in the United States because pharmaceutical companies reinvest their profits in research and development of better products. But scandals in recent months—including the controversy over the epinephrine autoinjector EpiPen—have shaken that belief.
The surge in EpiPen's price stoked public outcry following published reports last August about the business practices of Mylan, the pharmaceutical company that acquired the lifesaving product for people with severe allergies in 2007. From a wholesale price of less than $100 for a two-pack prior to Mylan's involvement, the cost to pharmacy retailers had climbed to $608.61 by May.
Mylan responded to the furor by announcing plans to offer a generic version at half the price; it also created a rebate program to reduce out-of-pocket costs for some consumers. But it was too little, too late. The House Committee on Oversight and Government Reform called hearings on the price hike and, on September 21, rebuked Mylan's chief executive, Heather Bresch. Bresch testified that the company's profit per two-pack was $100 but a week later acknowledged that the pretax profit was actually $166.
Mylan is hardly alone. Earlier this year, the House Committee questioned Martin Shkreli, former chief executive officer of Turing Pharmaceuticals, and Howard Schiller, interim chief executive of Valeant Pharmaceuticals International, about extreme price hikes during 2015. Turing raised the price of the antiparasitic drug Daraprim by 5,500%, from $13.50 to $750 a pill, and Valeant raised the prices of Nitropress and Isuprel—two heart medications—by 525% and 212%, respectively. Shkreli, who resigned from Turing after his arrest for securities fraud in another matter, invoked the Fifth Amendment, refusing to answer committee members’ questions, and later tweeted: “Hard to accept that these imbeciles represent the people in our government.”
The reasons for unusually high drug prices in the United States, compared with other countries, are complex. A recent review in the August 23/30 JAMA found market exclusivity to be the primary culprit: 72% of the money spent on medications is for brand-name drugs, which make up only 10% of dispensed prescriptions. For widely used medications, manufacturers typically retain market exclusivity for an average of 12.5 years after approval by the Food and Drug Administration. Companies may extend that period by making minor changes to a drug's formulation, thereby delaying patent expiration, and by paying competitors to delay or abort the introduction of generic versions.
Another reason is negotiating power: unlike in most developed nations with national health insurance systems and commissions that negotiate drug prices, drug companies in the United States set their own prices. The JAMA authors propose several solutions, including limiting patent extensions, policing anticompetitive practices, and giving price negotiating authority to Medicare and other government payers. Other solutions may come in the form of legislation. For example, California and Ohio have introduced drug price relief initiatives to limit how much state government payers can be charged by drug manufacturers.
As for research investment by drug manufacturers? The review found that major pharmaceutical companies spend only 10% to 20% of their income on research. Those whose business model primarily consists of buying and reselling existing drugs—such as Valeant—spend as little as 3%.
So why do U.S. pharmaceutical companies charge so much for drugs? The reasons are intricate but the answer is quite simple: because they can.—Dalia Sofer