In the business of drug production over the years, there have been astronomical gains in the technology of pharmaceutical drugs. More and more drugs are being made for diseases and viruses each day, and there are many more drugs still undergoing research and testing. These “miracle” drugs are expensive, however, and many Americans cannot afford these prices.
Prescription drug prices rose three times faster than inflation in the decade between 1981 and 1991, making the pharmaceutical industry the nation’s most profitable business. Prescription drugs even exceeded the rapidly rising inflation rate for all other medical services. They now represent at least 10% of all the medical costs in the United States.1
Why are the prices so high? Some critics of the drug companies argue that the larger firms are ripping off the American public, are dishonest and, in some cases, unsafe. On the other hand, there are health care workers such as doctors and their supporters who claim that research and testing for drugs costs money. This supposedly justifies their prices for their products. Also, as an argument to their side, they say that their practice is a benefit to the improvement to mankind. It is a life saving business, but are these prices justified? As one can see, this is a very important issue in medicine today. It affects everyone involved with medicine, which is much of the American public. It also affects the physicians and drug makers.
Government factors into the equation of the argument. Critics of the drug industry say that there is not enough regulation, while supporters of the pharmaceutical companies argue that there is too much regulation and that that is one of the factors to the high prices. In most industrialized nations, the drug regulatory system was developed over periods of many decades, or even a century or two. In the United States, there have been three important movements.
The first was the passage of the Pure Food and Drug Act in 1906. This was a designed more to control the promotion and marketing of bad foods rather than bad drugs. It came as a result of the exposure of the appalling unsanitary conditions in the Chicago Stockyard in a book by Upton Sinclair called The Jungle.
The second of the three movements was the passage of the 1938 Amendment. This came as a result of a drug called Sulfanilamide, which was mixed with DI-ethylene glycol (sometimes called anti-freeze). It killed more than 100 people. Government stepped in very quickly, and, with this new act, recquired the manufacturer of any new drug to present convincing evidence to the Food and Drug Administration (FDA) that the product was relatively safe for use before it was put on the market.
The final move was the 1962 Kefuaver- Harris Amendment, which tightened safety requirements and also recquired the manufacturers to provide FDA with evidence that the drug was both safe and effective for its intended clinical purpose. People of the drug industry were outraged because this would delay, often by many years, the time and cost of which a company could market a new product and begin to recoup its investment.2
The drug industry has severely attacked government, feeling that they are too restricted and that government has no right to interfere because it is getting in the way of production and prolongs the research time for each product that they put onto the market. This extension of research and prolonging of time spent on certain drugs, according to the drug companies, is one of the main reasons for high prices.
Economic Factors and Doctor’s Role in Choice
The possession of market power by a firm in a particular market means that the firm can behave in a manner different from the behavior that a competitive market would enforce on a firm facing similar cost and demand considerations. The most pointed evidence that large firms in the drug industry possess market power is that, for products that are therapeutically homogeneous, they are able to charge higher prices than those charged by smaller forms.3
Ethical drugs are unique commodities in that the consumer has no choice what he is getting. He is literally under doctor’s orders. The doctor himself is therefore an all- powerful middleman.4 This puts the consumer in a bind. They have no sovereignty. They are restricted to what the physician has specified and prescribed, even though there may be other drugs with identical therapeutic properties. Also, if the physician has identified the manufacturer, either explicitly or implicitly, by the use of a brand name unique to the firm, the consumers’ latitude is further restricted to the specified firm by state laws on substitution. The consumer does not have the usual option, available to him in other markets, of buying close substitution. Also, they do not have a choice at all of not using the prescription if he or she needs the drug in order to stay in good health (Walker 25).
The doctor is generally not well informed about the price of drugs and thinks that the patient would derive no significant economic benefit from exercising the option of selecting the firm. The doctor’s immediate source of information in a prescribing situation is The Physician’s Desk Reference, which is conveniently prepared and financed mainly by larger firms (The small firms, which sell drugs under generic names, are not represented in this manual). There is no mention of drug prices in this book. Given the scenario in which a person did not necessarily need the drug and choose not to get it, then the money that they have spent to see the doctor is a waste without the prescription.(Walker 29)
The family doctor does not see these prices as being bad. He believes, despite criticism, that the drug industry as a whole does an enormous service to medicine. The research departments in the better firms make a vast and valuable contribution to medicine. (Breckon 171)
Large vs. Small
According to Joseph Califano, former secretary of health, education, and welfare, “there is precious little competition among pharmaceutical companies…For pharmaceutical companies…research has become big business, with patent monopoly pots of gold at the end of the research rainbow.5
The drugstore industry is conventionally divided into chain and independently owned stores.6 Most physicians indicate that sales representatives are a source of data- among other commercial promotional means- on which they tend to rely, particularly for learning about new drug products.7 The larger firms have heavy influence over doctors’ choices of drugs. As mentioned above, the smaller firms have little representation. They have trouble getting salesmen to the physicians and cannot compare their products to the equivalent brand names for fear of legal action. (Walker 33) Therefore, cheaper generic drugs consisting of the same materials as the more expensive brand names are not available as widely as brand names.
In contrast, physicians argue that not much is known about these smaller companies, and that the safety is in question. Another thing that doctors feel confident in is that the larger firms have more money to help defend the doctors in practice if they get in any legal trouble. (Walker 51)
Whenever drug industry executives are challenged at congressional hearings by legislators looking into the high cost of drugs, their response is the same: Pharmaceutical research is very expensive. For every discovery that results in a breakthrough drug, many expensive efforts fail. (Drake 65)
Critics argue that drug companies make it sound like that it is a difficult business to which survive. Yet they not only survive, they manage to absorb all these costs and remain the most profitable business in America. (Drake 65) How do they do this?
They are able to minimize their research and development risks in many ways. Such as merging with other companies who have already done research on certain drugs, benefiting from basic research done by federal and academic laboratories. They also get substantial tax breaks or other incentives to develop and produce many of the drugs for which they charge high prices. They even put premium prices on the drugs that they didn’t develop. (Drake 65)
What the Future Holds
In an interview with Andrea Jones, a pharmaceutical technician with The Medicine Shop, I found out that that particular drug store is not even breaking even with their sales. The are marking up the prices a little bit, but they cannot mark up prices enough to make a profit because insurance companies know how much the drug costs to make. Andrea Jones also feels that the prices could be much lower than they are. She stated that generic drugs come out and they do not get advertised enough. They can cost as low as a quarter of the brand name drug’s price, but because of either poor marketing or a patent on the drug they do not sell as much.
Many of the authors used for reference in this paper had the belief that drug companies are, in fact, the most profitable business in America. The main reason for this is how they do not have to spend as much money on the research and development as they say. The high prices are high because cheaper drugs are not marketed as well as brand name drugs. The larger firms do not seem to have a care for the public and how much they can afford as long as they are making money. One author, Andrew Chetley, talks of how there are efforts being done to attempt Healthcare for all by the year 2000.8 That book was written in 1990. I do not think these ideals will be met by the year 2000 but could quite possibly happen in the near future. They key to this is that people forget about how much money they make and to simply just work for the betterment of mankind.
3Walker, Hugh: Market Power and Price levels in the Ethical Drug Industry; Indiana University Press, 1971, P 25.
4Breckon, William: The Drug Makers; Bowering Press Plymouth, 1972, p 145.
6Northrup, Jonathan: Prescription drug pricing in Independent and Chain Drugstores; UPENN, 1975, p 4.
7Lindsay, Cotton: The Pharmaceutical Industry; Wiley Medical Publication, 1978, p 73.