In 2021, the latest year for which data are available, the United States healthcare system spent over $600 billion on prescription drugs. That is about
12%
of total healthcare spending.
The cost of specialty drugs, which account for almost half of prescription sales, is growing at an 8% compounded annual rate. Eighty percent of prescriptions that Americans use are for generic drugs, but brand-name drugs account for 80% of spending. The top 10% of drugs by cost make up less than 1% of all prescriptions but account for up to
25%
of all spending on drugs.
More than
80%
of Americans say drug prices are too high. Indeed, many Americans don’t take their prescriptions or do not fill their prescriptions because of the cost. Drug prices in the U.S. average
2.56 times
more than in the wealthy nations of Europe. Importantly, Americans pay
3.44
times more for brand-name drugs — nongenerics — than the citizens of other wealthy countries.
So, how can we reduce prices?
First off, we must recognize that U.S. consumers of prescription drugs subsidize prescription drug consumption across the world. In 2021, the U.S. pharmaceutical industry spent just over
$100 billion
on drug discovery. U.S. drug research and development spending is about
10 times
what the pharmaceutical industry spent each year in the 1980s, after adjusting for inflation. Many new drugs are for life-saving therapies: cancer and nervous system disorders, such as Alzheimer’s disease and Parkinson’s.
AMERICA MUST CUT HEALTHCARE SPENDING
The U.S. accounts for 50% of global prescription drug consumption. Those revenues, including necessary profit, fund the development of new drugs that save lives. In effect, U.S. consumers of life-saving prescription drugs pay to save the lives of prescription drug users across the world. Prescription drug users in other countries are free-riding on Americans.
In turn, when it comes to future trade negotiations between the U.S. and the other countries, drug pricing must be on the agenda. Congress should mandate that U.S. pharmaceutical companies must receive reasonable profit markup, at least relative to U.S. pricing structures, when negotiating pharmaceutical prices with the socialized health systems of wealthy foreign countries. If this markup is not agreed, Congress should mandate export restrictions. Considering the benefits new drugs provide, the trade negotiating leverage will rest in America’s favor.
Domestic price controls, however, are a bad idea. They would lead to lower revenues and ultimately reduced research and development on life-saving drugs. The National Bureau of Economic Research is
consistent
: Drug price controls lead to fewer life-saving drugs. The economic benefit from each new life-saving drug can exceed $3 billion. Without profit and R&D spending, more Americans will die prematurely.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.
