The Prescription Drug Conundrum

Health care seems to be on everyone's mind lately. Our elected representatives are busy drafting legislation that will have broad reaching impacts on your future. One of the hot topics in health care is the cost of prescription drugs. It is no secret that drugs cost far less in many other countries. Canada has been touted as a place to buy cheap drugs and import them into the US to offset our higher prices. There are two questions we must ask ourselves.

First, why exactly are drugs cheaper in Canada or France? The answer is that the governments in Canada and France regulate the price firms may charge. They set a price slightly higher than the cost of manufacturing the drugs and do not allow advertising like we do. Reducing advertising reduces costs and may have additional benefits. This is really the only thing good about such a system. By forcing drug makers to charge only slightly higher than the cost of making the drugs these governments are preventing them from having sufficient funds to conduct research and development for new drugs. Bringing a new pharmaceutical to market can cost hundreds of millions if not billions of dollars and without making substantial profits on the sale of drugs for a period of time companies will not be able to make these investments. This is actually why our patent laws exist in the first place.

Second, why are drug costs so high in the US? The United States is currently the only major developed nation that allows drug companies to charge a market rate that factors in both research and development and manufacturing costs. This means that not only do American consumers pay the cost to manufacture the drugs they buy - we also pay the full research and development costs. Other nations have suggested that if they allow drug companies to charge a market price everyone will pay prices as high as the US. The US is already doing the bulk of the R&D for the entire world, so if the rest of the world paid market prices we would simply be spreading basically the same cost over a much large sales base. The result would be substantial declines in market prices. It would undoubtedly take time for these changes to happen, but patience would pay off.

The problem with drug prices in the US isn't from the US drug companies, but rather that the rest of the world doesn't pay its fair share.