Complaints about the U.S. pharmaceutical industry and its pricing are well known. Even after accounting for discounts and rebates, prices of leading brand-name drugs in the United States are two to four times higher than they are in Canada, Japan, and many European countries. Most new cancer drugs cost hundreds of thousands of dollars per patient annually, even though many seem to offer modest gains in life expectancy or lack such evidence at all. Even some older, generic products like insulin have experienced dramatic price increases. Rising drug spending stretches already stretched public budgets. Out-of-pocket spending for deductibles and coinsurance creates financial difficulties for individuals and their families, particularly among the sickest patients.
Critically, high prices for brand-name drugs—rather than reflecting a policy flaw or “bug” in the system—is an expected and even intentional outcome. Monopolistic pricing is a system feature, designed to incentivize companies to invest in expensive and risky drug discovery that can take years by providing the prospect of a big payoff if the investment succeeds. The government grants firms that develop new drugs exclusive, though temporary, rights (through legally protected patents and market exclusivity) to sell their products and thus recoup their investments and earn profits. Congress has enhanced these exclusivity provisions to encourage certain policy goals (e.g., the Orphan Drug Act of 1983). Companies with new drugs can charge what the market will bear without worrying that a generic manufacturer will undercut their pricing.
When patents expire, generic drugs enter the marketplace and prices of brand-name products fall, often precipitously, benefiting future generations of patients. Generics now comprise 90% of all prescriptions in the United States (though high and increasing prices of some generic drugs have also come under scrutiny, further highlighting the complexity of drug markets and the need for reforms).
But how much protection should patents and market exclusivity offer? How much is enough to incentivize drug development? At what point do high drug prices become an unnecessary and excessive industry windfall?