Monday, October 5, 2009

Why prescription drugs are so expensive in the US?

About a month back I had the opportunity to attend a seminar on the above topic. To be frank I was surprised to hear some of the facts and hence decided to share my notes from the seminar and also talk a little bit about “My Thoughts” on the current scenario in US healthcare.
Diving right away into the topic of expensive prescriptions, I am sure anyone who has been exposed to US healthcare system would certainly have raised this question at least once apart from the other issues that plague the US healthcare system. Personally, I feel that there is nothing like a cheap prescription drug in US healthcare system. Always a prescription drug is expensive than its generic counterpart. I just like most others was always confused about this logic until I attended this seminar. My aim in this blog is to make sure that you also understand the rationale and logistics that go into the pricing of prescription drugs as opposed to generic drugs.
What factors affect a drug’s cost?
Before I jump into the specifics of the factor’s that affect a drug’s cost below are some of the generic reasons why medication costs in US, in general, is on the rise.
1. Almost 70% of one’s medication expenses occur in our senior years. With the rise in senior’s population, from the baby boom days, there is an increased use of medications by the senior citizens community.
2. Unfortunately, many commonly used drugs are newer and are expensive than the older ones. We will talk more about it in detail.
Below are the primary influencing factor’s that affect a drug’s cost.
1. Research & Development cost (R&D)
2. Drug Approval process
3. Marketing & Advertising cost
4. Administration cost
Research & Development – I am sure that most of us think that all the pharmaceutical companies spend hell a lot of money on R&D as they do not have much government help and that the R&D cost constitutes a great portion of their expense. In reality, much of the drug discovery research happens in academic laboratories like those of medical schools and teaching hospitals which are funded by NIH grants and tax payers like you and me. All that the pharmaceutical companies do is, have an eye on the drug discovery work that is going on in these institutions and find out which one could be the next “BIG” drug that could essentially mean a multi-million dollar, if not billion doallrs, business for them. When the research in these institutions reach a point from where these drug companies can take over and patent it they simply pay the academic institution a flat rate which is usually a fraction of what their estimated profit would be eventually and start the dug approval and manufacturing process. So next time when any pharmaceutical company claims that they had spent hell a lot of money in R&D you could be 99% sure that it is a lie and just ask them from which institution did they actually purchase the formula for the drug. In fact it is believed that drug companies assign only about 20% of their annual budget towards R&D.
That’s one down.
Drug Approval– This is probably the second biggest contributor for the drug’s expensive pricing. Drug Approval process can be further divided into
            a. Clinical Trials
            b. FDA Drug Approval
            c. Drug Patent
Clinical Trials – Since we are talking about drugs that could potentially save human lives it obviously makes sense to have them go thru different level of testing before releasing it to general public. Hence, it is not a surprise that FDA mandates 1 non-human trial 4 phases of human trials to test a drug’s safety and effectiveness before certifying them as “FDA Approved”. I understand that ensuring the safety of the drug should be FDA’s primary concern and I have no qualms about these trials. The different levels of trials are as below.
Non-Human Testing (pre-clinical)
Preclinical studies first done in vitro (test-tube) and in vivo
(animal) experiments.

Human Testing (Clinical)
Phase 0 – exploratory microdosing
Phase I, II, III – Human trials ranging in size
Phase IV – Post Marketing Trials
Just to further emphasize how difficult it is pass thru these trials below are some statistics.
·         1 in 1000 candidates make it through preclinical trials
·         Of that, 1 in 5000 candidates make it to clinical trials
·         Very expensive and time consuming process and
·         The entire process can take from 6 to 12 years
As mentioned above the clinical trial process is very much time consuming, expensive and can be very elaborative which I agree should be given the fact that human life is at stake here.

FDA Drug Approval – Once the trials are completed the data is submitted to FDA which then begins the actual drug approval process. This is kind of cat and mouse game where drug companies claim that FDA is slow in approving their drugs while FDA claims that they do not have enough staff to actually expedite the process. FYI, it seems that the drug approval process usually took about 1 – 2 years. Drug companies not being able to release their drugs to the market and reap the profits until they are approved raised their concerns in the congress, with the help of lobbyists, resulting in a law being passed in 1992 called as “Prescription Drug User Fee Act” ( It allowed drug companies to pay FDA to staff personnel to work exclusively on the approval process of their drugs and there by expedite the approval process and be able to market the same earlier. How does this sound? Legal bribing or Bribe Panel!!! Well, that’s the way it is.
As a result of these rushed FDA approvals, in other words greed from pharmaceutical companies to see the dollars roll in earlier, more and more drug recalls have happened in the past decade. Example – Vioxx, Baycol & Rezulin. Also it has been figured out that some of these medications really do not show much of a long-term benefit in terms improving quality of life or reducing the mortality rates. So why still encourage “Legal Bribing”? Correct? Raise your voice.
Drug Patent – Getting a drug patented essentially gives the pharmaceutical company exclusive rights to manufacture and market the drug. This basically boils down to the fact that when a company has a patent on a drug they pretty much make a hell a lot of money. This is the reason why drug companies try to maximize their profits when they have patent rights. As a common man, you might raise the question “If I have a patent on a drug then don’t I have exclusive rights to manufacture and market that drug forever?”. The answer is “No”. In other words, how patents on drugs works is as follows…
When a company is issued a patent on a drug they hold the exclusive rights for a period of 20 years and not for ever. At the end of 20 years, anybody can start to manufacture and market the drug as long as it matches exactly in dosage, safety, strength, how it is taken, quality, performance, and intended use as the original one. Also, the clock starts ticking on the patent from the moment the drug company approaches the FDA and starts the clinical trials. So now you get why the drug companies want to rush thru clinical trials and FDA approval process ASAP. Obviously, the earlier they are able to market the drug the more profit they get out of it during exclusive patent period.
That’s two down.
Marketing expenses– Contrary to the statement by drug companies that R&D is the major driving factor for the high cost of prescription medications the truth is that marketing and distribution cost forms about 35% of a drug company’s annual budget and is the #1 contributor to rising prescription drug prices. That is about 2 times R&D budget. Marketing Cost can be further sub-divided into

Direct-to-Consumer (DTC) Marketing - Today if you are watching TV or listening to radio you can be sure to see or hear a minimum of 2 drug ads every hour. This was not the scenario before 1997 when there were hardly any drug ads. In 1997 FDA relaxed the conditions for drug ads that basically resulted in a huge spike on marketing costs by the drug companies. Pharma companies also indicate that as a result of DTC marketing their sales have also spiked. They also claim that DTC marketing is the best way to get the patient involved in the diagnosis process as a result of which the doctor-patient rapport building is encouraged.
So what kind of drugs primarily go for DTC marketing?
Mainly the kind of drugs that try to imitate the mainstream patented drugs by slightly changing the formula and claiming that they do wonders. These are called as isomer entities of mainstream drugs. But keep in mind that these are just copy cat drugs made by altering the formula of a mainstream drug slightly but still claim as a prescription drug and end up being expensive. Most of such drugs are not really that effective. In reality, there might be a better effective and similar kind of drugs in the market that are far less cheaper than these isomers but they need to be pushed to the consumers and hence incur a lot of marketing cost.
Sales pitches and Free samples – It is very common for drug companies to do sales pitches and provide free samples and coupons to doctors and hospitals. These could be in the form of pens, food, trips, concert tickets or even just free samples of the drug and asking the doctor to provide the same to the patients and thereby get them used to the drug which they would eventually have to buy.
Consultation fees for educational events – These are the kind of seminars that drug companies conduct and provide the doctors with fees for attending and speaking in these seminars. Bear in mind that doctors need not necessarily do these things for the drug companies but the expectation back from the drug company is that the doctor would prescribe the company’s drugs to his/her patients.
That’s three down.
Administration expenses – This basically constitutes the salaries, bonuses, accounting and legal fees that the drug company ends up paying it employees and legal firms. Do you know that year after year drug companies have been paying millions of dollars to its executives in the form of bonuses and claim that as part of their expenses and top it by charging us more and more for the drugs so that the executives get hefty paychecks. So now you see that it is not just the financial institutions and banks that hand over hefty paychecks and bonuses to their employees but so do the drug companies. The only difference is that the drug companies do it in a smart way by taking more money from us thereby eliminating any risk from their side.
You might be wondering what constitutes “Legal Fees”. As I had said earlier patents are valid for only 20 years and after that the company loses its exclusive patent rights on a drug. But at the end of 20 years when another drug company starts manufacturing a generic version of the original drug the patented company can file law suits claiming that the new drug is not an exact match of theirs and be able to retain its exclusive market rights. Lot of drug companies use this way to make more profits out of patented drugs and they spend quiet a lot of dollars in the form of legal fees so as to ensure that they are able to reap more profits during this exclusive extended patent period.
That’s four down from the factors that directly affect the drug costs.

Pharmaceutical Industry mixing with Politics
Now let us look into how Pharmaceutical industry and US politics are inter-related and as to why politicians do not react much to raising healthcare costs, in general.
As a common man, I was surprised to learn that annually drug companies budget around $60 million for political advertising and in DC at any given time there would be around 300 paid lobbyists trying to influence the congress to make sure that US drug companies make as much profit as possible. Some examples of how the industry has mixed with politics is as follows,
·         Lobbyists persuaded congress to pass a law stating that medications need to be bought in the US for one to claim Medicare part D coverage benefit.
·         Politicians even went to the extent of claiming that canadian prescription drugs are “Unsafe”.
·         FDA, NIH and CMS have significant number of board members with financial ties to the pharma industry
With so much of politics mixing with the industry I believe it is obvious why US politicians are turning a blind eye to the rising drug prices.
Finally, here are “My Thoughts” on the system as of today. Just because drug companies spend hell a lot of money in advertising and salaries it does not justify the high pricing of the drugs. In essence, we are paying them so that they can spend more and put that burden back on us without actually passing down the profits to consumers like you and me. With all the talks going about health care reform and the different players involved in it, take it from me today that “Nothing is going to change”. There might be so many debates and talk shows surrounding this topic but I am pretty sure that “Nothing is going to change”. I sincerely hope that I would be proved wrong on this but unfortunately I am not optimistic about that. One example of that is the recent exclusion of “Public Option” from the healthcare bill that is to be presented in the senate.
End of the day, people, it is all up to us to be careful to protect our interests. We can do so by getting ourselves involved in our healthcare. How we can do so?
·        Always ask your doctor for the prescription drug information and also ask if there is a generic alternative that works as well as the prescription one.
·         Do not trust the DTC ads. Most of them are usually not as effective as the original drugs. Effective drugs will automatically be sold and do not need to pushed to consumers.
·         Get yourself involved in your community and check the financial ties of your local representative to the pharmaceutical industry.

Let me know what are “Your Thoughts” about rising drug prices.



  1. Shyam,
    Thanks for sharing your thoughts on the rising cost of prescription drugs.

  2. Thanks Shyam,

    For sharing such nice and informative thoughts with us..

    Your article is full of goood information...

    keep it up
    Blogging Tips and Tricks

  3. I read some of ur blog posts incl this 1.Bribe panel is a real eye opener.

    all govts r corrupt or corruptible !

  4. Yeah Vasu, everywhere there is corruption. It is only a question how much corruption is the govt and not whether corruption exists in the govt or not.

  5. The salary of the scientists, R&D, patenting, FDA approval process, and brand name of the drug were the factors I thought of when I think about the high cost of prescription drugs. You included many others that I didn't know about. I think less competition in the pharmaceutical industry leads to the overpricing of the drugs. Just like a monopoly in any industry, they charge however they want because they have want people want. Maybe if there are more competitions, the prices will decline.

  6. Yes Rose, I was also surprised at the end of the seminar to know how factors that are not in the best interest of customers is actually leading to higher drug prices.


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