A Secret Revealed: Why Drugs Cost What They Do

Work in Progress (April 20, 2011)- Few are the people who have not wondered why drugs cost what they do and, when the price tag has a pinch, sighed with exasperation. We’ve all read countless reports on the time- and resource-consuming labor of research and development (PDF). Elaborate studies have been done to count up (and debunk) all the dollars spent on creating new drugs. Even reports enumerating all the various pharma expenses still explain the price of prescription drugs by looking at what companies spend. And we’ve all read (or had our own) complaints: if only drug companies would advertise less, the price would go down. If only drug companies stopped wining and dining physicians, the price would go down. If only CEOs weren’t so greedy. But here’s the thing: none of this explains the price of medications.

So what is the great, big secret about why drugs cost what they do? Read on.

Drugs cost what the market will bear. It’s that simple. Drug prices are set at whatever the market will bear.

So what does that mean? It means that if no one purchased a drug that cost $X, then the price would be lowered. Prices are set at exactly—and I mean exactly—at what the consumer/insurance infrastructure is able to carry.

It would be wrong to say that the prices reflect what we are willing to pay because for the most part, we don’t pay the price tag; we pay for our insurance and then the co-pay amount for a given prescription. Of course this insight is referring to prescription drugs. When it comes to, say, headache medicine on the drugstore shelves, then the price more closely reflects what the customer is “willing to pay,” the economic counterpart to “what the market will bear.” But once we get into the domain of prescriptions, prices are guided by the market.

NOTE: To read the full article, click on the title above.