Why do drugs cost so much?

Multiple reasons. For one, it costs a lot for biopharmaceutical companies to research and develop new medications.

How much is “a lot”?

The cost estimates of bringing a new drug to market range from hundreds of millions of dollars to more than $2 billion. When a new drug reaches the market, companies charge a price that helps them recover their investment and also make a profit. Worth noting: That investment covers the many potential drugs—9 out of every 10—that fail in clinical trials and never reach the market.


Okay, what are some of the other factors?

  • Pay for delay” agreements. Patents typically give biopharmaceutical developers exclusive rights to sell the drug for 25 years (though part of that time can be eaten up by delays in getting the marketing plan OK’d by the U.S. Food and Drug Administration), in recognition of the investments they have made in it. Then other manufacturers are allowed to make generic versions, which cost less for consumers. But companies sometimes pay other drug manufacturers to delay producing and launching generics, even after the initial patent expires. So higher-priced, brand-name drugs are people’s only option for even longer.
  • Patent “evergreening.” Drug manufacturers can stall a generic competitor from entering the market by filing patents that cover not only the drug’s active ingredient, but also things like whether it takes the form of a pill or a liquid. For example, one biopharmaceutical company filed for a patent for dispensing its drug after crushing it and spreading it on applesauce.
  • Marketing and advertising. Companies spend large amounts of money to market and advertise their drugs—more than they spend to research, test, and develop them. This spending drives up the cost of doing business and probably contributes to high drug prices. Studies also indicate that advertising can increase patients’ use of branded prescription drugs.
  • Opaque marketplace. Many parties are involved in getting a prescription drug to a patient: manufacturers, wholesalers, pharmaceutical benefit managers (PBMs), insurance companies, and many more. In this complex supply chain, there are lots of opportunities to enhance various participants’ revenue and profits—often at the expense of patients. But financial details aren’t usually made public, making it difficult to understand how each of these parties affects the price of drugs.

Are drug prices really a problem?

Yes, they are, given how dramatically the cost has risen over the past decade. Many people are having difficulty paying for the medications they and their family members need. One survey found that in 2015, about 20% of Americans didn’t fill at least one prescription because they weren’t sure they could afford it.

Go on…

The past few years have seen some especially dramatic price increases that have drawn the concern and criticism of patients and policy makers. For example, Turing Pharmaceuticals bought the rights to Daraprim, a drug used to treat a type of severe infection, and promptly raised the drug’s price from $13.50 per tablet to $750 per tablet. EpiPens (used to treat potentially fatal allergic reactions) rose from $265 for a two-pack to more than $600 in 3 years.

A 2019 Kaiser Family Foundation poll found that in the past year about 3 out of 10 adults didn’t take their prescription as prescribed because of the cost. Instead they resorted to a variety of cost-saving measures that made more than a quarter of those who tried them say their condition got worse as a result. Credit

While increases in drug prices are not always so steep or high profile, biopharmaceutical companies routinely raise the prices of drugs and the general upward trend has been clear.


What about generic drug prices?

Even they aren’t immune to large price increases. One study that tracked prices for 1,411 generic drugs found that between 2010 and 2015, there were at least 315 instances when the price of a drug rose by 100% or more. In 48 cases, the price increased by 500% or more.

In recent years, drug prices have climbed dramatically while the inflation rate has remained low. Here the average annual prices of 268 top brand-name drugs (orange) are compared with general inflation (blue) from 2006 to 2015. Credit

Well, what can we do about it?

Some things policy makers can do:

  • Make generic drugs available sooner. If agencies such as the U.S. Department of Justice and the Federal Trade Commission prevented “pay for delay” agreements and the U.S. Patent and Trademark Office prevented unjustified patent evergreening, reasonably priced generic drugs would reach the market sooner.
  • Change incentives. Many aspects of the health care system encourage clinicians to prescribe, and patients to use, more expensive drugs. Providing patients with more useful information about the potential benefits and costs of treatments would help reduce inappropriate demand for higher-priced drugs. So would discouraging direct-to-consumer advertisements for prescription drugs. Clinicians, medical practices, and hospitals could also tighten restrictions on drug companies’ direct visits to health care providers, and the acceptance and use of free drug samples and other incentives.
  • Improve financial transparency in the biopharmaceutical supply chain. To help understand the root causes of price increases, Congress could require insurance plans to disclose the average net prices paid for prescription drugs, including the amount paid by patients through cost sharing. They could also require biopharmaceutical companies to disclose the average volume and the prices paid for drugs across various sales “channels” (PBMs, insurance companies, wholesalers, etc.). The U.S. Department of Health and Human Services could curate, analyze, and publicly report the data.

Putting this in perspective…

Many medical conditions that were thought to be untreatable can now be cured or managed effectively thanks to the development of new drugs. That’s a plus. But prescription drugs are among the fastest-growing segments of health care spending—annual expenditures exceed a half trillion dollars. The changes we make need to ensure the continued development of drugs to battle disease while keeping costs in check.

Take a deep dive

Need a higher dose of information? Check out Making Medicines Affordable: A National Imperative.

Know it all? Prove it.