If anyone asks you why drug prices are so expensive, you respond with, “Not really” and you give them this book. Some takeaways:
- The drug industry as a whole does not make exorbitant profits. With profit margins from 10-20%, it has lower margins than banks/software and more in line with those of oil/gas.
- Most complaints about drug pricing comes from “branded” drugs, which are under patent and sold exclusively by the drug company that brought it to market. The way to think about these is that the high prices charged during the exclusivity period (10-20 years) is a way to incentivize and pay off the R&D costs associated. Once it’s paid off and the drug goes generic, prices drop dramatically and it becomes part of the firmament of cheap drugs that permanently elevate our standard of care.
- The expensive “branded” drugs that bring in billions of dollars a year often are the only things keeping a drug maker’s product portfolio afloat. Naïvely applying price controls to these drugs in the hopes of limiting what Americans pay for drugs can lead to a 20% reduction in drug prices and a < 10% reduction in expenses for a couple years, but the long-term effects on innovation within the drug industry is likely to be chilling, limiting the amount spent on early-stage drug development.
- Forcing people to make out-of-pocket copays/deductible for drugs is like making someone pay every time they call the police or fire department – for folks where such a payment puts them under significant duress, some will just refuse to call. Access to drugs should not be gated by ability to pay, this is why we have health insurance. And as it turns out, the economics are such that a small increase in revenue (~2% increase in premiums or a ~0.40% increase in net income tax rate) is enough to eliminate all out-of-pocket payments for drugs.
- Thanks to 2nd-order effects of laws, we’ve created bad incentives for health insurance companies. Consider the “Medical Loss Ratio”: in order to prevent health insurance companies from overpricing their premiums and making extra profit, we’ve mandated that insurance companies have to spend 80-85% of revenues on patient care. The rest of the revenue is spent on operations, with anything leftover as profit returned to the shareholders. Notice that this seemingly well-designed policy links the absolute profit of health insurance companies to the overall amount spent on healthcare (hospital services, administrative/doctor/nurse salaries, drugs). Hence, health insurance companies have no incentives to contain healthcare expenses, only to maintain appearances of doing so.
- Americans do not subsidize drugs only for other countries in which the same drugs are sold at much lower prices. You need both American and foreign drug markets to keep drug prices where they are – if any one of them were to removed from the equation, you would see a dramatic rise in drug prices.
To sum up: drug prices are not high – they’re set to incentivize creation of novel therapies that permanently increase our standard of care. However, the cost to do so should be borne by all of society. This will require changes to how health insurance works. Drugs going generic is the key to cost-containment and we should do all we can to ensure that it continues to work.
For more reviews like this, add me on Goodreads!