The Simple Economics of Why Prescription Drug Prices Are So Darned High: Econ 101

My apologies, but a draft of this was posted when I mistakenly clicked the “publish” button when I was working on it.  It still has far to go before being a completed piece, and it may be some time before I finish it.  There is more I want to look into.  Please ignore this for now.

Frank

 

A)  Introduction

The prices of prescription drugs – drugs that are often essential to our health and well-being – are unconscionably high in the US.  Generics can be an exception, although even for these it might not always be the case.  And even with such high prices, there are nevertheless critical gaps in what drugs are developed.  Delays in the development of a new generation of antibiotics is one example, as will be discussed below.

Why is this so?  The short answer is that they price them high because they can.  A more detailed answer requires an examination of why they can, as well as a look at how they determine how high to set their prices.  This goes into some basic economics of how someone with monopoly power (as pharmaceutical companies will often have, for several possible reasons) will set prices in a market such as this, with particular features on both the demand and on the supply side.  We will examine that below.

And the prices are not simply high, but also have grown sharply in recent years.  The chart at the top of this post shows prices for baskets of the most commonly used prescription drugs, as reported in a series of analyses undertaken by the AARP (see here, here, here, and here for the most recent in the series for each category of drug).  These most recent reports cover prices from 2006 through to 2017 (with the exception of the series for brand name drugs, which is now available also for 2018).

The set of all prescription drugs cover a basket of 754 drugs with the prices as billed by pharmacy benefit managers to health insurance plans.  The prices are what the cost would be to take the drugs for a one-year period, and the drug price indices are weighted by retail prescription sales in 2014 to Americans aged 50 and above.

 

note fixed 2014 weights will bias downwards

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Top 6 US firms, both by sales revenue and by market cap

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