Free Term Paper on Prescription Drug Costs

Few issues have created such controversy as the rising cost of prescription medicine. News reports often quote examples of patients, especially seniors, who cannot afford their medications. The pharmaceutical industry and advocacy groups maintain very different positions as to why prescription drug costs are so high in the United States compared to other countries. This entry examines the costs and related issues from both the industry and consumer advocate perspectives.


I. Research and Development

A. Industry Standpoint

B. Consumer Advocate Standpoint

II. New Medicine or Old Technology

A. Industry Standpoint

B. Consumer Advocate Standpoint

III. Marketing and Administration Costs

A. Industry Standpoint

B. Consumer Advocate Standpoint

IV. Importation

A. Industry Standpoint

B. Consumer Advocate Standpoint

V. Price Controls

A. Industry Standpoint

B. Consumer Advocate Standpoint

VI. Profits

A. Industry Standpoint

B. Consumer Advocate Standpoint

VII. Conclusion

Prescription Drug CostsResearch and Development

Industry Standpoint

Pharmaceutical companies contend that searching for new drugs, or the next cure, can be a costly venture. It may take hundreds and possibly thousands of “concepts” (experimental compounds) to create one drug that makes it to market. Cost estimates of researching both successes and failures range from $500 million to $800 million. An estimate released in a study by economists at Tufts University stated that, on average, it takes almost 15 years to bring a new drug compound to the market. Only 1 compound out of 5,000 ever makes it to market. Only 30 percent of drugs that make it to market will ever recoup their research and development costs (Clayton 2008). The cost and risk involved are very high. This is one way the industry justifies the high cost of medicine.

The U.S. Food and Drug Administration (FDA) maintains a strict and lengthy process to approve a medication for use. After filing a patent for a new compound, the drug manufacturer has approximately 20 years to research, receive FDA approval, and market the new drug. This process often leaves only five or six years to profit from the extensive research before generic manufacturers can challenge the patent. Therefore, a company can be limited in the time it has to recover its investment.

The pharmaceutical industry defends its position on research and development costs by demonstrating that all top companies in a variety of industries are research and development– intensive. The pharmaceutical industry relies on new drugs to keep an income stream from which it can continue to search for new drug compounds. Pharmaceutical companies invested roughly $50.3 billion in research and development in 2008, which is roughly a 51 percent increase since 2003 (Archstone Consulting and Burns 2009).

The U.S. government offers some help (mainly through research grants from the National Institutes of Health, or NIH), but in terms of overall development, the industry maintains that it bears most of the burden. The industry maintains that roughly 91 percent of all drugs brought to market have been fully funded by the industry, with no help from the NIH (GlaxoSmithKline 2005).

Consumer Advocate Standpoint

Consumer advocate groups contend that the numbers pharmaceutical companies present regarding the cost of research are overstated. Public Citizen, for example, released a report showing how the $500 million figure that the industry uses as a benchmark for new drug development is wrought with flaws and overestimates. The report showed that the $500 million figure is suspect and more likely a mathematical estimation. The true cost of researching and developing new medications, the report states, is significantly less— between $70 million and $110 million (Public Citizen 2001).

Anti-industry groups also illustrate that the pharmaceutical companies receive certain advantages—tax breaks, for example—for doing the research and development. These government tax breaks could lower a pharmaceutical firm’s tax burden considerably. The amount of tax incentives companies receive is a closely guarded secret within the industry. One such tax break involved incentives for pharmaceutical companies that built manufacturing facilities in U.S. territories. Many major manufacturers opened facilities in Puerto Rico to take advantage of this opportunity. Under this incentive plan, the industry’s average tax rate was believed to be around 26 percent, as compared to roughly 33 percent for all other major U.S. industries (Greider 2003). Advocates for lower drug prices cite examples such as these to show that pharmaceutical companies do receive some benefit for the heavy investment in research and development.

Consumer groups also dispute claims that the pharmaceutical industry pays for most of the research involving new cures. The advocate groups believe that the National Institutes of Health often conducts the most basic and risky research and that the pharmaceutical companies begin their research only after an opportunity arises based on discoveries made through government research efforts. In recent years, in fact, there has been increased spending by pharmaceutical companies on the development of so-called me too drugs, or medications that do not differ in any fundamental way from medications already on the market but rather offer minor differences in terms of dosing, price, or similar aspects. These drugs are patently less expensive to produce.

New Medicine or Old Technology

Industry Standpoint

Recent television advertisements quote lines such as, “Today’s medicines, financing tomorrow’s miracles.” This sums the industry view that, to discover new treatment, the cost of medication must remain at its current level. The industry invests heavily in research and development and needs to have adequate income to fund these ventures. New treatments for every disease, from AIDS to cancer, are being researched.

The principal industry trade group, Pharmaceutical Research and Manufacturers of America, or PhRMA, believes that these new cures are not only improving patient lives but are, in the long run, reducing the overall cost of health care. One study showed that treating patients with the latest medicines actually reduced their nondrug medical spending—for example, spending on hospitalization. The study showed that, for every extra dollar spent on new medicine, a corresponding decrease of $7.20 could be found in other health care costs (PhRMA 2005). Thus, the industry believes that it is not only funding future cures through revenues from its products but also helping to reduce the overall costs of health care by means of these new treatments.

Consumer Advocate Standpoint

Consumer groups respond to the pharmaceutical companies’ suggestion that they are searching for the next cure by showing that many of the drug companies’ newest products are me-too versions of existing drugs rather than new chemical entities. The new drugs may offer extended release (XR), controlled release properties to existing drugs (CR), or a combination of two readily available drugs in one pill. This allows for patent extension and continued profits from a drug that is about to become generically available. The producer simply changes the pill to make it time released or endow it with other properties and does clinical research showing the benefits of doing so. The FDA is more likely to approve the XR or CR version, which then becomes a market drug with extended patent protection. Advocacy groups see a serious decline in the number of compounds being studied to treat or cure new diseases or new ways to treat existing conditions. In fact, most widely advertised products are often product line extensions based on existing chemical entities. The industry is providing fewer new drug entities and increasing its output of current brand extensions. In fact, according to one report, only 15 percent of new drugs developed between 1989 and 2002 were made of new chemical compounds, and over half of the new drugs brought to market were product line extensions (Public Citizen 2001).

Marketing and Administration Costs

Industry Standpoint

Many believe that perhaps the reason drug costs are so high is that pharmaceutical companies spend a lot of money on product promotion. Pharmaceutical companies refute this argument by stating that they spend far more on research and development than on marketing. The companies maintain that they are not as heavily involved in advertising, for example, as consumer-oriented companies such as Coca-Cola are.

To help get their messages to patients, pharmaceutical companies have, however, launched direct-to-consumer (DTC) campaigns aimed at helping the consumer/patient appreciate whether a drug may be right for him or her. This information is then to be discussed between the patient and the physician to determine whether the drug is appropriate. The cost of DTC is relatively low compared to other industry advertising of products. One industry estimate shows that only 2 percent of U.S. drug costs are attributed to DTC advertising (Greider 2003).

The majority of all sales expenditures for marketing are for the salespersons each company employs. They act as consultants on particular disease states and promote medications using clinical data to demonstrate why their products are superior. The sales representative is trained as an expert and is versed in the latest clinical research, bringing the newest information to physicians to help them treat their patients. It is the strong belief of the pharmaceutical companies that the most effective way to keep physicians abreast of the latest clinical data is through this type of selling (McKinnell 2005). The physicians simply do not have time to keep up with every new publication and study.

Consumer Advocate Standpoint

Responding to the industry view regarding marketing expenditures, advocates point to some interesting information. One study found, for example, that eight of nine pharmaceutical companies studied spent twice as much on marketing, advertising, and administration as on research and development (Families USA 2002). Such high expenditures fuel the argument that research and development into new cures might not need to suffer if price controls were to be implemented.

Administrative costs tend to garner attention when the top officers of a pharmaceutical company have their salaries and bonuses published annually by the Securities and Exchange Commission. These generous salary packages are one of the areas that advocacy groups point to as needing reform if the cost of prescription medications is to go down. Even in the wake of the economic crisis of 2008–2009, the major drug companies remained hugely profitable. Net incomes for these companies are reported to be several times the median for Fortune 500 companies (Angell 2010). Too much of that profit, say consumer advocates, goes into marketing products, paying salaries and bonuses, and providing “educational services” for physicians.

The latter is something unique to the field of medicine. Most states require doctors to take what are called continuing medical education (CME) courses to maintain their licenses. The idea is that doctors must stay abreast of developments in their field, and CME courses are a means of ensuring that. Unlike professionals in other fields, however, who either pay for their own continuing education or receive off sets from the companies for which they work, CME courses are typically paid for by drug companies as a way of bringing a physician on board. In addition, academic researchers and doctors are courted using meals, payments for conferences and speaking engagements, offers of substantial research grants, assistance with publication, and so on in an effort to bring or keep them on board with respect to the company’s research interests. Besides posing questions about conflicts of interest, consumer advocates note that the practice adds considerably to pharmaceutical companies’ overall costs (Angell 2010).


Industry Standpoint

One of the hottest issues in pharmaceuticals is the possibility of seniors seeking cheaper medications from other countries such as Canada. To afford their medications, many people feel forced to bring cheaper medicines into the United States from other countries.

The pharmaceutical industry maintains that drug importation is illegal and is in violation of the Federal Food, Drug, and Cosmetic Act. The industry cautions against the importation of prescription drugs by consumers. Drugs manufactured outside the United States are not subject to the same FDA safety regulations. Therefore, there are no assurances that medications acquired from foreign pharmacies are chemical equivalents of U.S. medications. Sometimes the medications received from foreign pharmacies may be counterfeit. Because the FDA does not regulate these medications, there is no recourse for the patients who have been wronged by such a transaction. The online foreign pharmacies often have waivers that must be acknowledged by patients, stating that they have no recourse if they receive noncomparable medications through the transaction.

Not only can importation be unsafe, but the foreign medications are not always cheaper than U.S. medications. In general, generic medications are cheaper from U.S. than from foreign pharmacies.

Consumer Advocate Standpoint

The problem is obvious to consumer advocate groups, who cite numerous examples of seniors organizing bus trips and traveling hours to Canada or Mexico to buy their prescriptions. To consumer advocates, this practice shows that there is a major problem with the price of U.S. prescription medicines.

There is a certain trade-off that exists when a patient must look to other means to acquire his or her prescription medicines. Often, a patient may simply be unable to afford those prescriptions, and the only alternative other than importation is to not purchase, and therefore not take, the medicine that has been prescribed. This practice is, of course, very dangerous—and costly. One estimate is that $100 billion per year is spent on hospitalizations that could have been avoided had the patient properly taken his or her medication (“Potential Encapsulated” 2010). And, indeed, most patients recognize the danger; hence the interest in foreign pharmacies.

Another concern is that the FDA process for inspecting drugs is imperfect. The prescription drug Vioxx, for example, was associated with serious and sometimes fatal cardiac events in a small population of patients. Vioxx was an FDA-approved drug and had met all the requirements to be marketed. Some groups believe, in fact, that the FDA process is industry-friendly and that pressure from a company will hasten a product’s approval. This makes the industry’s argument against importation somewhat suspect. Political resistance to importation in the United States is intense. European countries, such as Germany and England, do allow drug importation. In the United Kingdom, at least eight prescriptions under the National Health Service are filled by imports from countries such as France and Spain, where drug prices are cheaper. The practice has been estimated to save the government $130 million a year (Public Citizen 2001).

Though generic drugs may be somewhat cheaper in other countries, such as Canada, advocate groups point to the fact that, in many cases, branded prescription drugs (newer medicine that is still under patent protection) are significantly cheaper.

Price Controls

Industry Standpoint

Why do branded medicines cost more in the United States? Government-imposed price controls are one option to help control the cost of medication. Canada has imposed a countrywide price for each medication. Under this system, the price of medications is specifically regulated. The belief is that more patients have access to the best medications.

The pharmaceutical industry maintains that government restrictions would severely limit the research and development potential. One study shows that the United States accounts for roughly 70 percent of the world’s new medical therapies (Clayton 2008). The industry points to the low percentages of innovation and new drug introductions in countries subject to price controls. From an industry standpoint, price controls are not the solution to improving access to the newest medications. The industry points out that prices are lower in countries with socialized medicine, a type of system repeatedly rejected by Americans.

The industry believes that using medications is actually cost-effective for the consumer, because it prevents costly surgeries or other hospital care caused by a preventable event. For instance, paying for a high blood pressure medication is cost-effective when compared to paying for hospitalization following a heart attack caused by uncontrolled high blood pressure.

Consumer Advocate Standpoint

Advocate groups argue for price controls by showing the effectiveness that the U.S. government has in negotiating prices for medications for its veterans and military personnel. The government set a price for branded and generic drugs that companies must meet. This allows for every veteran and active soldier to have access to necessary medication. Advocates believe that the government can go one step further and institute this type of system for the country’s seniors so that they, too, can have access to necessary medicine.

In comparison to other developed countries, consumer advocates show that the United States pays more for prescription drugs than any other country. In the United Kingdom, patients pay roughly 69 percent of the cost patients pay in the United States. The difference is the same for patients in Switzerland. Germans pay 65 percent, Swedes pays 64 percent, the French pay 55 percent, and Italians pay 53 percent (Public Citizen 2001).

Advocates point to the success of Canada’s Patented Medicine Prices Review Board, which puts a ceiling on prices for all drugs. Many of the drugs purchased in Canada are purchased by the government. This allows access for low-income and elderly patients. This system is very similar to how the United States purchases medications for military personnel, but Canada implements controls on a much wider scale.

As for the argument that price controls stifle innovation, a recent study found that European pharmaceutical companies are just as innovative, or perhaps even more so, than their U.S. counterparts, despite the existence of price controls. In addition, some countries, such as the United Kingdom and Germany, encourage comparative-effectiveness reviews, whereby cost-benefit analyses are applied to rival drugs to determine which perform best. The market values of the drugs—that is, their prices—are then adjusted accordingly (“Reds under Our Meds” 2009). Supporters of the idea say that, if anything, it encourages innovation.


Industry Standpoint

The pharmaceutical industry is currently extremely profitable. The industry maintains that the high profitability is necessary to attract new investment for further research and development. For the year 2008, as with previous years, Fortune magazine ranked industries in terms of their profitability. The pharmaceutical industry ranks third on the list behind network/communications equipment and Internet services/retailing (CNNMoney 2009). This represents a climb from the fifth spot just two years before.

The pharmaceutical industry, besides suggesting that profits are plowed back into research and development, cites examples of charity toward individuals in need of medication. It estimates that, in 2003, it distributed approximately $16 billion worth of free samples to U.S. physicians’ offices (Greider 2003). This provided patients access to the newest treatments for all types of illness.

The industry further demonstrates acts of giving in Third World nations, where patients have no possible means of paying for such medication. In these cases, the industry freely dispenses the necessary medications to those in need. Instances of giving in times of disaster can also be found. Emergency shipments of medications have been sent to victims of the recent tsunami as well as to U.S. hurricane disaster victims.

The industry trade group PhRMA has presented figures that show that the cost of medicine is in line with the increases in overall health care spending. Pharmaceuticals accounted for only 11 cents of every health care dollar spent. In fact, PhRMA suggests that the overall cost of prescription drugs has remained roughly 10 percent of overall health care costs for the past 40 years (Clayton 2008).

Consumer Advocate Standpoint

Consumer advocates believe that pharmaceutical profits are a clear example of the excess that exists in the industry. The pharmaceutical industry consistently ranks among the top in terms of profitability. For a 10-year period ending in 2001, the industry was the most profitable in the United States and, on average, was five and a half times more profitable than the average of other Fortune 500 companies (McKinnell 2005).

The industry spends a tremendous amount of money to protect its interests as well. For instance, the industry in 2002 had approximately 675 lobbyists in Washington, DC, to promote industry-friendly legislation. This amounts to seven lobbyists for every U.S. senator (Public Citizen 2003).

Although the industry may at times be charitable, such charity, particularly in the case of U.S. patients receiving free samples from their doctors, is surely, say consumer advocates, a form of marketing or public relations. The motives of the industry in providing a small sample of what normally turns out to be a longer course of drugs, are hardly pure; in fact, calling it charity rubs many the wrong way.

Advocacy groups are, moreover, quick to identify what they feel is a much larger issue. The rate at which prescription costs have risen in the past two decades is alarming. Costs began to increase significantly in the 1980s, but, between 1995 and 2005, the rate of increase averaged 10 percent per year, becoming a much larger component of overall health care costs and greatly exceeding the rate of inflation (Congressional Budget Office 2008). Fortunately, there are indications that the rate has begun to decelerate in recent years, perhaps owing to technological advances.


The issue of prescription drug costs in the United States remains very complicated. In many cases, the information supporting either side can be confusing. For every study that promotes an industry stance, a consumer advocate group has information that argues just the opposite. The government is little help when trying to find answers to the problem of high medication costs. Both sides of the argument frequently cite studies from the National Institutes of Health to support their own viewpoints. Regardless, it is imperative that patients always have access to all medications. Pharmaceutical companies have various discount programs designed to assist financially struggling patients receive medicine at reduced cost. Some companies even give medications at no cost to patients who can prove that their situation leaves no way of paying for the medicine. Although these programs can be complicated and time consuming, they can help alleviate the burden of prescription drug costs until definitive research can be conducted to find permanent solutions to this problem.


Brandon Kramer and Michael Shally-Jensen



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