It’s not just greed.  We have no particular sympathy for pharmaceutical companies.  (This website has never received money or anything of value from the drug industry).  But even if the profits of the drug developers and manufacturers were set to zero the drugs would still cost a lot.

Some factors that increase cost

1. Development costs. New drugs are very expensive to invent. The people looking for them often have PhDs and MDs and get paid a lot. Further, drug development is not done on the cheap in a “skunkworks”. It involves many dozens of people with expensive laboratories and, if the drug gets to clinical trials, human experiment subjects. If anyone has ever tried a “lean” development in this industry, we are not aware of it. The hassle and cost of dealing with clinical trials makes it unlikely a project could get too lean.
2. Regulatory costs. New drugs are sponsored, almost always by pharmaceutical companies, and those sponsors have to pay the FDA (and European Medicine Agency and other agencies) to review their applications.
3. Supply chain risk premiums.  Players in the supply and distribution system charge a higher markup than analogous companies in other industries because of the risk that comes with medicines.
4. Patents. Society created patents in part to spur invention.  Most patents make little or no money for their holders.  But for a successful product, the patent holder is tempted to raise the price to very high levels, knowing that the legal system will permit it and keep out competitors, and knowing that when the patent expires, prices will fall.
5. Problems in the patent system regarding biologics. While small molecule drugs can be patented and later produced as generics (after patent expiration), it is not clear that other drug makers can produce the same monoclonal antibodies as the originator with legal protection. Biosimilar is the term for the equivalent of generic drugs among biologics. If no technological solutions present themselves, the developer of these medicines may have exclusivity for a longer period than the patent system intends. The challenges in this field afflict both pharmaceutical companies and regulators.
6. Imperfect market.  Medicare, which pays for a large percentage of chemotherapy medicine in the United States, is actually prevented by law from negotiating prices.
7. No pushback from oncologists.
8. Hype.  Media talk portraying new drugs as breakthroughs and that may influence doctors and patients to try them.

Further, how chemotherapy drugs are employed (and their low efficacy) makes overall treatment more expensive than for other diseases. Patients often get every chemo agent used to treat their cancer, either in combination or in successive rounds of treatment. If the patient doesn’t get better, there is often just more chemotherapy, either with the same drug or new ones.

Also, (and this is a problem in medicine in general) even patent expiration doesn’t mean cost of treatment necessarily declines. The drug companies develop follow-on medicines, “new and improved” versions, and the old drug, now available as a generic, is perceived as inferior by doctors and patients alike.

Follow-on Problems

Writing in 2014, in the American Society of Clinical Oncology, doctors concerned about healthcare costs wrote: “Cancer drug prices in the United States follow their own economic rules that have little to do with what the market will bear.”

There have been shortages of generic chemotherapy drugs and market forces and incentives can explain those shortages. Low prices and small patient populations discourage manufacturers from making those medicines.

Discussions of drug prices in the US always refer to the Hatch-Waxman Act, which is formally known as the Drug Price Competition and Patent Term Restoration Act. Passed in 1984, this law encouraged pharmaceutical companies to develop generic drugs, and also allowed the FDA to grant periods of market exclusivity to companies that introduce new products that cannot be patented. For instance, a variation in a medicine already on the market cannot be patented (it is not a new invention) but a variation in the form of the drug (allowing a different form of administration) or a combination of two or more active drugs can be a valuable contribution to the medical world and a benefit to patients. The Hatch-Waxman Act lets the FDA, in its judgement, give the maker exclusive rights to sell the new concoction for a period of time (typically a few years). This is often used when a company develops a combination of old drugs – the old drugs themselves are not patented (patents have expired) – but the FDA can enable the company to make extra profit.

Responses?

Should the government intercede more in the controlling the price of medication? It’s a philosophical and political question. Are there precedents for departing from an unrestricted free market? Yes. In times of natural disasters and famines, humanitarian aid provides free or discounted products (including medicines), and during wars governments often intercede in the market to ensure a continuous supply of vital good. No large country in the world today has a truly free market. Even the United States has a large portion of the economy in the government or pseudo-government. This is particularly true in healthcare where the military, Department of Veteran Affairs, Medicare, and Medicaid make up a large percentage of medical spending. Even people who work for private industry do not approach healthcare the way they do other goods and services because they have insurance. Whether this is good or bad is debatable.

And as far as high prices being required to promote innovation, even that is disputed. An essay in the Journal of Oncology Practice by five doctors opines that “there is no evidence that innovation in cancer research has ever been stifled by curbing profiteering and increasing affordability.”

Pharmaceutical companies spend a low percentage of their revenues on basic research. Research at the biochemical level is funded mostly by governments. Drug companies invest in sorting out which compounds and combinations of compounds make effective medicines, and in refining the products, and in clinical trials to see if the new drugs are safe and effective. But the research they build on has been largely done because of a government or private charity, an irony not lost on critics. This irks many people because residents of the US, the biggest funder of cancer research in the world, pay more for chemotherapy than residents of other countries. The same essay: “American patients with cancer pay 50% to 100% more for the same patented drug than other countries, even though much of the research is subsidized by US tax dollars”

This has also led to allegations that people in other countries are essentially “free riders” (a technical term in economics) on US taxpayers. Americans are paying more than their fair share. Writing in the journal BMJ, two doctors found evidence that this was not true. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1261198/ They also state the pharmaceutical industry “uses false economics and makes up stories to justify higher prices”.

Value vs Cost

The American Society of Clinical Oncology (ASCO) has a Value in Cancer Care Task Force which put out a definition of value in cancer care by emphasizing three critical elements articulated by the IOM: clinical benefit (efficacy), toxicity (safety), and cost (efficiency).  Our page on decision-making has more.

The federal government sponsors a non-profit organization called Patient Centered Outcomes Research Institute (PCORI) that acts as a think tank.  It is charged with analysis of treatment methods and finding which is more effective, but from the law stops PCORI from considering cost comparisons and cost effectiveness in its recommendations.  Further, Medicare, which is the source of much money used to purchase chemotherapy, is prevented by law from trying to negotiate prices.

Brown-bagging is a way some patients use to cope with high costs.