Why American Drugmakers Got A Bad Rap...

Drug companies are often assailed as price gougers by consumer groups, who cite government price indexes showing fast-rising prices of prescription drugs. But a recent study by Ernst R. Berndt, Zvi Griliches, and Joshua Rosett of the National Bureau of Economic Research concludes that the measures are seriously flawed.

The study analyzes sales data for 2,090 prescription products sold by four major U.S. drug companies from 1984 through 1989. Although wholesale prescription drug prices were reported by the Bureau of Labor Statistics (BLS) to have risen at a 9% annual rate during that period, the study finds that drug prices rose at just a 6%-to-6.7% clip.

Why the discrepancy? The two researchers found that the BLS undersampled newer drugs, which tend to post moderate price increases, and gave too much weight to medium-aged drugs (4 to 10 years old), which tend to have above-average increases.

The BLS has also treated generic drugs and their patented equivalents as separate products, though it makes more sense to combine them in a price measure. In the case of one typical drug, Griliches and economist Iain Cockburn found that adopting such an approach turned a 14% rise into a 48% decline.