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Pharma’s monopolies are the reason for high drug prices

Written by Diane Archer

David Blumenthal, President of the Commonwealth Fund, explains in the Fund’s blog, that the simple reason for high drug prices in the US is that Pharma has monopolies over the prescription drug supply for many drugs. This monopoly power results from the patents we grant to pharmaceutical companies for novel medicines.

Once they are granted patents on their prescription drugs, drugmakers tend to have monopoly pricing power for these drugs for 12 or 13 years. This means that they can charge whatever they would like for their drugs. And, the prices they choose result in industry profits far higher than most other sectors of the economy. For example, in 2015, the 25 biggest software companies had an average profit margin of 13.4 percent; the 25 biggest pharmaceutical companies had an average profit margin about 50 percent higher, 20.1 percent.

What’s perhaps most insane is that pharmaceutical companies can raise drug prices as they please. There can be some competition from prescription drugs that have their own patents and are marketed to provide the same treatment. But, the competition does not bring down prices sufficiently.

Moreover, pharmaceutical companies have ways to stretch their monopoly pricing power to as long as 20 years or more. Mylan’s EpiPen patent is just one example. They can change the drug’s packaging or method of administration without clinical benefit and extend their patents. They can also pay off generic drug manufacturers not to bring a generic substitute to market.

When a patent expires, generic drug manufacturers can enter the market. But, prices often still do not come down because of generic drug company monopolies. For that reason, for example, doxycycline’s price increased 90 times in the two years between 2013 and 2015.

This drug company monopoly power undermines the free market as a solution for bringing down the price of drugs. We need a “nonmarket force” with as much power as the drug companies to ensure drug prices are affordable. Most foreign governments exercise that power. They do so in different ways. Many base their prices on the clinical benefits of new drugs over other drugs. In all cases, if pharmaceutical companies are not happy with the price of their drugs, they do not have to sell them. But, they usually sell their drugs.

Drug companies argue that without their ability to generate the revenues they do, they could not develop new therapies. As a country, we need to ask the question how much that innovation is worth and who makes that decision.  For the moment, so long as pharmaceutical companies can set prices for many patented and generic drugs as high as they please, Americans will struggle and those in government with the power to allow negotiated drug prices if they chose to do so will be held accountable.

If you want Congress to rein in drug prices, please sign this petition.

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