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Why Drugs Cost So Much: Drug Company Monopolies


Here’s an article in the NYT that discusses the high cost of drugs in the US:

One of the most important reasons for high drug costs is that the government, through Medicaid and Medicare, is unable to negotiate the costs that they pay.  The Veteran’s Administration is able to negotiate, and has a totally different pricing system: far more reasonable.

The drug companies don’t spend that much money on research and development, but they do spend enormous amounts on advertising.  By one estimate, a third of companies’ revenue is spent on direct to consumer advertising.   The result is the flood of TV advertising for drugs that creates patient demand.  The drugs advertised are no better than the drugs not advertised, and the pressure put on doctors by patients swayed by TV ads is inimical to good medical care.

Another important reason is that insurers seem to be required to pay for virtually all medicines, regardless of their cost and relative effectiveness.   There are many very expensive drugs that offer little or no advantage over more reasonably priced drugs.  These drugs are still covered by insurance, even though they show no better cost-effectiveness and in many cases much worse.

A third important cause of increased drug companies is the strategic maneuvering that some companies undertake in order to obtain monopolies on the manufacture of certain generic drugs.  An example of this process is the antiparasitic drug albendazole.   The manufacturer sold its American distribution rights to a small private company, which raised prices from about $6 a day to about $120 a day between 2010 and 2013.  Captopril, a blood pressure drug which was a breakthrough 30 years ago but has been superseded by dozens of newer drugs of the same type, suddenly increased in price from 1.4 cents a tablet to 39.9 cents a tablet from November 2012 to November 2013.  In each case, a private company maneuvered to obtain exclusive marketing rights or a monopoly on manufacturing, which allowed it to increase prices without limit because there was no alternative.

Such practices should be illegal, but there is no legal system that counters this type of behavior– in contrast to the legal systems that prevent price fixing between competitors and other “anticompetitive” practices.  This is a dangerous loophole in consumer law that allows companies to reap enormous profits simply by maneuvering to become monopolists on individual drugs (or similar products.)

A New England Journal of Medicine article from last fall goes into detail on  the monopolistic practices of drug companies that allow them to jack up the prices of generic drugs that should be cheap and readily available.  Go to to read the full text of this alarming article.

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