Why do drug prices keep going up?

See Here’s a Plan to Fight High Drug Prices That Could Unite Libertarians and Socialists by Charles Silver and David A. Hyman. Charles Silver s an adjunct scholar at the Cato Institute and a law professor at the University of Texas at Austin. David A. Hyman is an adjunct scholar at Cato and a professor at the Georgetown University Law Center. Excerpt:

"Why do drug prices keep going up? For branded drugs, the short answer is that patents give drug companies monopolies, which they exploit to the fullest. An added factor is that our payment system often allows manufacturers to charge whatever they want.

Let’s start with monopolies. Give a business, any business, a monopoly and it will extract wealth from consumers by charging monopoly prices. And that is precisely what patents for drugs do: They give drug companies monopolies on the sales of new medications.

Even when the original patents have long-since expired, drug companies use various contrivances to keep prices high. The most common tactic is to obtain extensions on marketing exclusivity by means of secondary patents on superficial characteristics, such as pills’ coatings or formulas for timed-release.

Consider Lipitor, a cholesterol-fighting statin. An extension of its patent term and a second extension for pediatric testing gave Pfizer, Lipitor’s manufacturer, an additional 1,393 days of marketing exclusivity, during which it took in $24 billion more than if the drug had entered the generic category when originally scheduled.

Lockstep pricing — made possible because only a small number of manufacturers compete in many drug categories — is a problem too. Companies don’t compete for customers by undercutting other makers’ prices; rather, when one raises its prices, the others follow suit. Economic theory suggests we shouldn’t see this kind of behavior, but we do.

What can we do about these problems? Let’s start with generic drugs, because the problem in that category is the most straightforward. Many of the pricing problems in the generic drug market are directly attributable to insufficient competition. Substantial price hikes occur and stick because only one company makes a drug, or because manufacturers raise prices in lockstep. Illegal, anti-competitive conduct may underlie some of these problems, in which case aggressive antitrust enforcement is the answer.

But the US Food and Drug Administration also bears part of the blame. There is a backlog of pending applications from generic drug manufacturers that want to enter the market. Congress should give the FDA the resources it needs to process these applications more quickly. But until that happens, the FDA should give priority to applications for generics that have experienced price hikes.

Currently, the FDA follows a first-in, first-out approach to applications. A more consumer-friendly arrangement would move applications for drugs that have experienced significant price spikes to the head of the line. A bonus: Once incumbents realize that price hikes will result in fresh competition, they may be deterred from jacking up prices to begin with.

More broadly, policymakers should liberalize access to the US generic drug market by relaxing the FDA’s grip on entry. Currently, the FDA requires that it, and it alone, approve the safety of generic drugs. But why not let a company that qualifies to sell a generic drug in Canada, England, France, Israel, or other developed country sell the same drug in the United States — at least so long as a generic equivalent has already been approved by the FDA, and the 180 days of marketing exclusivity provided to that generic by the Hatch-Waxman Act has expired.

These countries have the expertise needed to protect their citizens from excessive risks and the desire to do so. Sen. Bill Cassidy (R-LA) recently came out in support of a similar idea. If such a policy had been in effect, Martin Shkreli wouldn’t have been able to price-gouge anyone."