Drug prices are high in America, Harvard study finds out why.

Drug prices are high in America, Harvard study finds out why.

The idea of government sanctioned monopolies isn’t new. As of last month, the Journal of American Medical Association recognized why drug prices are high in America. The pharmaceutical companies in America are effectively granted a monopoly by the state. This allows them to charge high prices.

The paper, The High Cost of Prescription Drugs in the United States: origins and Prospects for reform, set out to review the reasons and effects of high drug prices in the United States and to consider policy options that could contain the cost of prescription drugs.

Sadly the paper’s authors, Aaron Kesselhiem, Jerry Avorn, and Ameet Sarpatwari all Harvard Medical School doctors, found that government regulation in the market is what lead to higher healthcare costs.

Government responsible for high drug prices

According to the paper: “The most important factor that allows manufacturers to set high drug prices is market exclusivity, protected by monopoly rights awarded upon Food and Drug Administration approval and by patents.

The amount of time and money spent on finding new drugs to help with diseases can be astronomically high. All of these costs need to be paid for by someone and generally it’s the consumer. Sadly, the people involved in helping figure out these diseases cannot work for free, they have a family too.

There is nothing wrong with making a living by saving people’s lives and profiting a little from it.  However, when the profits are a result of government regulation and involvement this is bad. The issue here is the resulting monopolies and inefficient business practices that follow misplaced government intervention. Here we can see the evidence by the huge increase in drug prices as a result of poor government management.

According to the paper:

Although prices are often justified by the high cost of drug development, there is no evidence of an association between research and development costs and prices; rather, prescription drugs are priced in the United States primarily on the basis of what the market will bear.”

Increasing the price of an item to where the profit is at a maximum per unit is a natural function of a business and the free market or as near as possible to it. In a monopoly the company would set a price which maximizes the company’s profits. However, if there was more competition in the market the price would be pushed down.

As the paper says:

The most important factor that allows manufacturers to set high drug prices for brand-name drugs is market exclusivity, which arises from 2 forms of legal protection against competition. Together, these factors generate government-granted monopoly rights for a defined period. Initial regulatory exclusivity is awarded at FDA approval.

The American Medical Association is just finally figuring out the reason for the absurdly high drug prices. Some economists, particularly advocates of a truly free market, have been pointing this out for a long time.

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The Mises institute for Austrian economics says it plainly:

As has been pointed out already, there is no such tendency toward monopolization. It is a fact that with many commodities in many countries monopoly prices prevail, and moreover, some articles are sold at monopoly prices on the world market. However, almost all of these instances of monopoly prices are the outgrowth of government interference with business. They were not created by the interplay of the factors operating on a free market. They are not products of capitalism, but precisely of the endeavors to counteract the forces determining the height of the market prices. It is a distortion of fact to speak of monopoly capitalism. It would be more appropriate to speak of monopoly interventionism or of monopoly statism.

Americans spend more than twice the amount of other industrialized nations on prescription drugs. “In 2013, per capita spending on prescription drugs was $858 compared with an average of $400 for 19 other industrialized nations.”

This isn’t the only way for pharmaceutical companies to make money because they are making money overseas. Take India where the competition is fierce for pharmaceutical drugs. There is a drug for curing Hep C called Sofosbuvir. In America, the drug is called Sovaldi, but per pill it costs about $1,000; In India the comparable pill costs $4.

The reason why there is such a big price discrepancy there is due to numerous business and legal strategies pharmaceutical companies employ to keep the patent. The generic form of the pill is used to reduce the price in America but the production is often interfered with. Resulting in the generic product not reaching people.


The paper concludes that if we care about high drug prices doctors and the public should push for: more stringent requirements for the extension of drug patents, ensuring generic drug availability is timely, providing greater opportunities for price negotiation, generating more research on cost effective healthcare alternatives, and educating patients, doctors, payers, and policy makers about these choices.

Ultimately nothing will change unless we elect people who are educated about these issues facing the public. Or a second option, the public creates such uproar about the drug prices that the representatives are forced into action. As boycott isn’t exactly an option for someone who needs these life saving drugs. Those people are just forced into waiting for the generic products to bring down the price.



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