The U.S. pharmaceutical industry may provide us with life-saving drugs, but it is no friend of the people. The industry, or Big Pharma as it is often called, has a long track record of using aggressive political lobbying and unethical business practices in order to raise their prices and squeeze exorbitant amounts of money out of desperate people. These desperate people often face death or serious discomfort if they don’t continue to buy these expensive drugs. They have no bargaining power and Big Pharma knows it.
Taking advantage of the people and the government has been incredibly lucrative for Big Pharma. Of the 500 largest companies in the United States twenty are pharmaceutical companies. These companies profit at unprecedented rates with at least five pharmaceutical companies enjoying profit rates over 20% and Pfizer, one of the biggest pharmaceutical companies in the world, profiting at a terrifying 42%. As a whole, the industry made $711 billion in profit between 2003 and 2012.
The simple reason for these high profits is that Big Pharma charges prices way above what is ethical and above what would be possible in fair market conditions. How is Big Pharma able to get away with charging such ridiculous prices?
This article will explore two of the biggest factors. First, unlike the governments of other developed countries the U.S. government has done little to regulate or influence pharmaceutical prices. And second, patent protections reduce competition within the pharmaceutical industry allowing pharmaceutical companies to essentially charge whatever they want. Both of these factors exist in part thanks to decades of intense lobbying.
Pharmaceutical companies claim that they need to charge high prices in order to continue doing research that saves countless lies. This claim is disingenuous and manipulative.
Government Oversight and Drug Prices
If the government really wanted to control drug prices it could just set price limits. Even if this were a bureaucratic nightmare it would surely make up for the bureaucratic cost in the customer savings it would create. Thanks to extensive Big Pharma lobbying it’s unlikely this will happen anytime soon, and besides, many in the government get queasy when they think of such a non-market solution.
A much more conservative step would be to let Medicare negotiate drug prices with the pharmaceutical companies. Most other developed nations either have a public single payer system that negotiates drug prices with pharmaceutical companies or at least a public insurance provider that represents a large portion of the population and does the negotiating. Because these entities represent so many customers, they have a lot of leverage in keeping pharmaceutical costs low.
In the U.S., Medicare payments represent 25% of Big Pharma’s revenue but the government doesn’t allow Medicare to negotiate drug prices with pharmaceutical companies. That means a huge part of the customer pool has no bargaining power for no good reason. Once again, this ridiculous situation is thanks to years of lobbying on the part of Big Pharma.
Patent Protection and Drug Prices
Patents are meant to encourage innovation and R&D by rewarding inventors with the sole use of their invention for a period of time, but this idea doesn’t work as smoothly in the realm of medicine. If a company invents and patents a fancy new type of bicycle then they still have to sell it at a reasonable price or else people won’t buy it. However, if a pharmaceutical company invents a new cancer drug and charges an exorbitant price then cancer patients might be forced to either pay for it it or die. Exploiting cancer patients is not why we have patents.
Strong patents also allow for drug companies to avoid R&D costs by simply buying patent rights from other drug companies. In a recent controversial transaction, Turing Pharmaceutical bought the rights to a drug that helped patients with suppressed immune systems and then immediately increased the price of a single pill from $17.50 to $700. These kind of nefarious deals, in contrast to the supposed purpose of patents, actually discourage innovation and R&D because Big Pharma can simply buy the patents and still reap huge profits.
It is estimated that every single year these patent protections add $370 billion to Big Pharma’s earnings, that’s 2% of U.S. GDP. And this is no mere quirk of the system, Big Pharma lobbies Congress aggressively and thanks to their efforts, patent protections have been strengthening and lengthening since the 1970’s.
Are Prices High because of R&D?
Big Pharma claims that high drug prices are entirely justified by the high cost of R&D. This claim is extremely dubious. Pharmaceutical companies will usually point to a recent study done by the Tufts Center for the Study of Drug Development which calculates that it costs $2.7 billion on average to develop a new drug, but this number is far greater than what most other research has found. Furthermore, half of that number is based on money the company could have made if they had invested in something other than R&D. How would they even have drugs to sell if they didn’t spend money on R&D?
Well, a huge amount of R&D spending actually comes from the federal government which invests $30 billion annually in biomedical research through the National Institute of Health. Big Pharma can just use their deep pockets to turn this research into a new drug, pay for the patent, then market the drug to consumers. In fact, nine out of the ten biggest pharmaceutical companies spend more on marketing than on R&D. Johnson & Johnson, the world’s biggest pharmaceutical company, spends $17.5 billion annually on marketing compared to $8.2 billion on R&D.
Big Pharma has rigged the system to take advantage of the American people. These pharmaceutical companies patent drugs developed in public facilities and sell them at extortionary prices to people who can’t say no. It’s time to take our well-being out of the hands of these corrupt profiteers.