The Solution to Drug Prices - The New York Times

"Almost all developed countries — including those run by very conservative governments — have an effective solution for drug prices, which is why these countries often pay less than half of what people in the United States pay for drugs. For instance, Australia’s more than 60-year-old Pharmaceutical Benefits Scheme has been the single purchaser of drugs for the country, making drugs available at fixed prices that are now listed online.



If the United States were to consider such an approach, drug companies would immediately raise two objections: the high risks associated with drug development and, related, the high cost of research and development. But both of these arguments are fatuous. It is true that a vast majority of drugs fail. On average, only one in every 5,000 compounds that drug companies discover and put through preclinical testing becomes an approved drug. Of the drugs started in clinical trials on humans, only 10 percent secure F.D.A. approval.



Regardless of the risks, many drug companies are making huge profits. Gilead, maker of Sovaldi, has profits of around 50 percent. Biogen, Amgen and other biotech firms have profits of around 30 percent. Merck and Pfizer are seeing profits of 18 percent or more. Even if profits were cut by a third or a half, there would be sufficient incentive to assume the risks of drug development.



What should be done? The United States government has created myriad special pricing arrangements that pervert incentives. For instance, Medicaid generally gets the lowest prices in the market. This discourages drug companies from experimenting with other payers on lower price arrangements, knowing that they will most likely have to give the same deal to Medicaid. Similarly, through the Orphan Drug Act of 1983 the United States created many incentives for developing drugs for orphan diseases — those with fewer than 200,000 patients nationwide. Through special tax credits and better deals on marketing exclusivity, the federal government is encouraging the companies to benefit thousands instead of millions. The result has been the development of more than 400 drugs and biologics. While it is important to find effective treatments for rare diseases, it is more important to target serious, common diseases such as stroke and antibiotic-resistant infections.



The Solution to Drug Prices - The New York Times