Why are medications so expensive in the U.S.?

Why are medications so expensive in the U.S.?
Jenny Brown
October 2000

At the October AARP meeting in Gainesville, retiree Marion Kelly recounted how her prescriptions prices have risen almost $100 a month. "My Social Security is low because they don't count the years you spend raising children, you get a big fat zero for those," she explained, "Now how am I supposed to afford these prices?" Kelly is one of many who have seen drug prices zoom upward. Contrary to the story that Canadians come to the U.S. for health care, many Americans who live in border states go to Canada or Mexico to fill prescriptions at the cheaper prices provided there.

The drug companies claim that high profits are necessary to provide funding for research of new medicines, but according to the Wall Street Journal, drug companies spend more than twice as much on "marketing and administration" as they do on research and development. Drug companies spend between $8,000 and $13,000 per physician in promotions annually.

A 1995 study by the Massachusetts Institute of Technology found that of the 14 new drugs the industry identified as the most medically significant in the preceding 25 years, 11 had their roots in studies paid for by the government. The National Science Foundation determined in 1997 that of the most significant scientific research papers cited in medicine patents, one half were paid for with U.S. public funds, 17% were funded by industry and the rest were funded by foreign sources.

A good example is the glaucoma drug Xalatan, which was developed by Columbia University researcher Laszlo Bito with $4 million in grants from the National Institutes of Health, a government foundation. The private corporation Pharmacia bought the rights to Xalatan for $150,000. Today, the key ingredient for Xalatan, latanaprost, is made at a lab in Hungary at a total cost of $5 million per year. Xalatan generated $507 million in sales last year. Pharmacia spent 40% of its revenues on marketing and administration last year, more than twice what it spend on research.

So if the public paid for the development of many of these drugs, why are we having to buy them back at a huge markup? In universal health systems, the government negotiates down pharmaceutical prices, whereas in our system, individual buyers have to pay what the drug companies ask because they have no choice--prescription medicines, are not something people simply decide not to purchase if the price is too high. Even in our system, there's one price for the individual buyer, and a lower price when a large entity like the U.S. military purchases drugs.