The Real Reason Drugs Cost Too Much

In America, they cost more.

Photographer: FRANCK FIFE/AFP/Getty Images

Hillary Clinton, Donald Trump and three-fourths of their fellow Americans say prescription drugs cost too much. They're right, and the two candidates even agree on a couple of good strategies to try to keep prices down: Allow Medicare to negotiate on behalf of its 40 million beneficiaries, and let Americans buy drugs from countries where quality is well monitored.

Yet neither of these strategies addresses head-on the No. 1 reason that drug spending is rising so much. The main culprit, according to research from Brigham and Women's Hospital in Boston, is that the government grants extraordinarily long periods of market exclusivity for new drugs.

The Food and Drug Administration and the U.S. Patent Office together give new drugs monopoly rights that last anywhere from eight and a half to 15-plus years. This helps explain why brand-name drugs account for 72 percent of drug spending in the U.S. even though they represent only 10 percent of prescriptions. Since 2008, prices for the most commonly used branded drugs have risen 164 percent -- far faster than other medical costs. The U.S. spends more than twice what other industrialized countries spend on drugs.

The problem would not be nearly so severe if the drugs' government-granted monopolies were shorter. Once generic versions are allowed to compete, a medicine's price often drops by almost half, sometimes more than 85 percent, if enough competitors jump into the market.

Yet the government tends to do the opposite, the Brigham and Women's researchers found, by extending market exclusivity via additional patents for trivial alterations -- a new coating on a pill, for example. This is nonsensical: Unless a drug is transformed in a way that affects its therapeutic value, it should not qualify for an extended patent.

Drug makers often stretch their own market exclusivity by paying generics companies to delay introducing competitive medicines.

The government, which is protecting these companies' monopoly rights, should demand an end to this tactic. Federal drug regulators should also require that manufacturers disclose the prices they negotiate with their various customers -- including all the rebates and discounts they allow. Not only would this help all private payers negotiate lower prices, it would create a more healthy marketplace.

To have an impact, however, all this information -- about both cost and effectiveness -- needs to be put to good use. In America's disjointed health-care system, too many doctors remain blissfully unaware of what they're asking patients and their insurers to spend, the researchers found. Doctors also need to be aware of lower-cost alternatives -- generics, of course, but also other medicines and therapies that can treat the same symptoms as well or better in other ways. So-called comparative effectiveness studies are needed for all drugs.

Yes, it makes sense to grant a company an exclusive license to sell a new medicine. But it's also important to know exactly how valuable that medicine is.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.