Drug Price Gouging?

Prices are set based on what the market will bear

By Ronald Bailey of Reason. Excerpts:

"Are these price hikes indicative of an overall trend? Not according to the Express Scripts Prescription Price Index. The pharmacy benefits manager, which keeps track of the prices of both branded drugs and generic drugs, reports that since 2008 "the prices for the most commonly used generic medications decreased to $37.13 (in 2008 dollars), and prices for the most commonly used brand medications increased to $227.39 (in 2008 dollars)."

Overall, the company notes that since 2008, "the average price of brand drugs has almost doubled, while the average price of generic drugs has been cut roughly in half."

As in other markets, more competitors generally mean lower prices. The Federal Trade Commission reports that prices drop about 20 percent when first generic manufacturer enters the market for a branded drug whose patent has expired. As more generic competitors enter, the price falls to as low as 20 percent of the original branded drug price. The Food and Drug Administration (FDA) points out that nearly 8 in 10 prescriptions filled in the United States are for generic drugs. Using data from the IMS Health Institute, the Generic Pharmaceutical Association calculates that the cost savings in 2013 from using generics was $239 billion and that generic products saved the U.S. health system nearly $1.5 trillion between 2004 and 2013."

"Other factors also play a role in steeply rising prices for some generic pharmaceuticals, including industry consolidation and increasing regulatory burdens. There is a strong relationship between a drug's market size and the number of companies that decide to make it. The fewer prescriptions that are likely to be filled, the fewer competitors will emerge. A 2013 study by the Federal Trade Commission found that "drugs that eventually attract at least five competitors face a steep decline in prices." So if, say, there are only two manufacturers of a rarely prescribed drug, it's easy for them to form a cartel. There is also little incentive for another company to challenge their monopoly by seeking to enter such a small market.

In addition, the FDA has increased its scrutiny of generic pharmaceutical manufacturing processes. One result, as Scott Gottlieb of the American Enterprise Institute has noted, is that "higher manufacturing costs, and the tighter scrutiny applied to new manufacturing facilities, have increased the entry costs for new generic drugs and generic drug makers." Furthermore, the higher costs make drug production unprofitable for some generic drugmakers that then choose to stop producing marginal products.

There is also a growing backlog of new applications seeking FDA approval for generic drugs. Average review time for an application is now over three years. So even if another company decided to enter the Daraprim market, Turing could probably count on at least a three-year competition-free period in which to sell the drug at a high price.

Reputation matters, and customers can still complain, call out, and shame companies they believe are exploiting them. That's what happened in the case of Daraprim: The media firestorm pushed Turing to lower its price. But the best long-term solution to the situation is to enhance competition. The FDA should immediately adopt an explicit policy in which applications by companies seeking to compete with generic monopolies such as Daraprim are fast-tracked over the backlogged queue."