If you’ve stepped into a pharmacy recently, you know that getting sick is going to cost you. All of those insurance premiums and co-pays got you a doctor’s appointment and prescription; now you’re going to have to pay much more than someone in another developed nation to get the medication you need.
According to data from OECD, the average American spent nearly $1,100 a year on pharmaceuticals, nearly $400 more than second-place Canada. That high cost is one reason the U.S. spends almost $2,300 more per person in health care costs.
With health care costs projected to increase even more in the next few years, a lot of innovation is needed to bring costs down across the board. One method that got a lot of press during the 2016 presidential election was increasing access to generic prescriptions.
A few months ago, we explored the effectiveness, or bioavailability, of generic drugs. You can read about that by clicking here, if you are reading online, or by typing https://progress-cobap.com/replacing-big-pharmas-products-how-good-are-the-generic-options/ into your url bar. In summary, generic drugs are mostly as effective as their name-brand counterparts, except with drugs that need extremely precise dosing. However, a study by the University of Cincinnati found that there is a significant placebo effect attached to paying a higher price for medication, regardless of the actual effectiveness.
That said, with increasing evidence that generic medications are just about as effective as their name-brand counterparts, the significantly lower cost of generic drugs may be one way to bring down the cost of health care. Per the Generic Pharmaceutical Association (GPhA), nearly 89 percent of prescriptions are filled with generics, which saved, for example, the people of the state of Utah $1.7 billion. This translates to a national savings of $227 billion.
Efforts to further increase the savings from generics center on increasing access to options, reducing advertising and payments by pharmaceutical companies to players in the market, and loosening patent laws to allow generics to enter the market sooner. Drugs typically reach market with about 13 years of market exclusivity left, which allows drug manufacturers to recoup the cost of research and development. Many times, companies will marginally alter drug composition to extend patents and maintain exclusivity. Relaxing these patent laws would allow generics to come to market sooner and drive down prices across the board. The recent Epi-Pen pricing scandal highlights the complex issues at play in drug pricing.
While it is easy to target pharmaceutical companies when looking to reduce health care costs, profits secured during exclusivity periods incentivize future drug innovation. The importance of this exclusivity period is highlighted by the fact that patent laws can discourage development of drugs deemed “unpatentable.” Unable to make money off their discoveries, companies are slow to fund interventions that cannot be restricted.
President-elect Trump has reiterated his campaign promise to “bring down drug prices.” Though short on details, the call to do something about drug pricing was echoed from both presidential candidates. Ideas to drive costs down include lifting the ban on Medicare to negotiate drug prices with pharmaceutical companies and, as previously mentioned, reforming patent law.
Unfortunately, driving health care costs will not be as simple as paying pharmaceutical companies less. These companies continue to emphasize the importance of higher U.S. prices funding drug research and subsidizing the cost of cheap medications in other parts of the world. Though generics save Americans nearly $227 billion a year and offer an avenue to further cost savings, bringing down prices may come with their own consequences.
In any case, the next time you’re at the doctor and they tell you to take something, feel free to ask if a cheaper generic option is available.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Craig Yugawa, Hoffmire’s colleague at Progress Through Business, did the research for this article.