Prescription drugs, which can be more than twice as expensive in the United States as in other Western countries, cost the average American nearly $1200 per year. Matthew Fiedler, a research fellow at the Brookings Institute, said several factors drive up prescription drug costs in America.
It’s a Classic Monopoly
New name-brand drugs are more expensive because they are usually the only drug for sale on the market.
“When a manufacturer develops a new drug, we give them a patent,” Fiedler said. “And we allow them to be the only one selling that drug for some period of time after the product is developed. And so that means that the company can see whatever price the market will bear for that drug.”
Drug Trials
Traditionally, the FDA’s drug approval process is expensive and lengthy.
Dr. Jeffrey Smith, a research fellow at the Cato Institute, said drug companies often don’t get enough exclusivity time to recoup up-front costs for research and development. As a result, they will make minor modifications to the drug to extend their patent.
“That’s how it costs $600 for an EpiPen, because just when the patent was about to expire, and the generic was going to come out for the EpiPen,” Smith said. “They made some modifications to the injector; the FDA said, ‘Yes, you’re right, this is a significant modification,’ and got an extended stance on a patent.”
The Middleman
In the United States, insurance companies and drug manufacturers determine pricing. However, other countries such as Canada, Japan, and Great Britain negotiate directly with drug companies, drastically lowering costs.
“The government revenue negotiation systems that are used in other countries lead to much lower prices,” Fiedler said.
