Prescription drug pricing, like all market-driven mechanisms, is often driven by a combination of many factors. Price dispersion is one of these factors. Price dispersion is often done as a result of costly consumer searches through examination of retail prices being imposed on different prescription drugs. This is the reason why one can easily notice differences between pharmacies in different geographical regions even when variations due to pharmacy differences have been accounted for (Sorensen, 2000:38).
Role of research and development in pricing
DiMasi, et al (2003), carried out a research on drug research and development in order to determine the effects of research costs on the pricing of drugs. After studying the costs of producing 68 randomly chosen drugs from 10 pharmaceutical firms, it was found that the cost of all compounds that had been abandoned in the testing process was accounted for in the price of the final product.
The price was very closely linked to the cost of all compounds that had been used in the development of new drugs. Compared similar researches carried out previously within the same methodological framework, it was determined that out-of-pocket costs were responsible for increase in total capitalized costs. These costs were responsible for pushing prescription drugs upwards by 7.4% above the prevailing price inflation index.
Impact of increased drug prices: increased spending among pharmaceutical companies
Some researchers have argued that increase in drug prices is responsible for increase in spending among pharmaceutical companies. Giaccotto (1991:1080) found out that spending in R&D pharmaceuticals increased with increase in drug prices, both within the company and in the entire pharmaceutical sector. In either case, the federal government had a hand in adjustments in prescription drug pricing. The research propounds theoretical arguments in order to show empirical proof of this price elasticity, through multiple regression models.
According to Giaccotto (1991:1082), if the government had reduced price growth such that it was concordant to that of general consumer index, spending in terms of R&D Pharmaceutical capitalized value would have been reduced by 30 between 1980 and 2001. Moreover, if a control regime on drug prices had been imposed by the federal government, it would have reduced the number of new drug launches made within the global market by between 330 and 365 new units. Launch of new prescription drugs is cited as one of the main causative factors in price increases. Corporate greed is therefore seen to be a major cause of perennial increase in prices of drugs.
Monopolistic tendencies by the U.S pharmaceutical industry players
Criticism on the U.S pharmaceutical industry has been ongoing for a very long time. This is because prescription drugs made by these companies are always perceived to be expensive, yet the fact of the matter is that prescription has always been the cheapest type of therapy for majority of citizens. On their part, stakeholders in this industry say that risks associated with drug research and development has increased Ekelund and Björn, (2003:301). They add that the market is always changing and pharmaceutical companies have to keep launching new drugs in order to retain competitiveness.
A commonly cited example of unfairly high prescription drug prices is the history of Lovastatin. The U.S pharmaceutical industry has been in the forefront in global research and development, meaning that has the highest exposure level to financial risks. However, this risk is always rewarded by a very huge potential for profits in these global markets. Perhaps these companies have taken responsibility in research and development but have not done that same thing when it comes to pricing mechanisms. If the U.S. pharmaceutical industry were to act responsibly in matters of pricing, majority of the population would have access to cheap, important prescription drugs.
Pharmaceutical companies have often been criticized for imposing punitive measures on helpless citizens. However, it is sad to note harsh market realities are the main causative factors for this situation. The companies are often torn between the need for research favorable pricing mechanisms. Due to the sensitive issue of research and development, monopolistic tendencies in pricing have been very rampant. This issue has dominated debates on economics of pharmaceutical industry for almost four decades.
Monopolistic pricing tendencies among U.S pharmaceutical companies were first noted in the 1950s. All along, players in this industry have blamed this course of action on advancements in medical therapy that this industry has had to pursue, at a very high cost. The defenders of the industry go on to mention the landmark advances that have been made within this duration. Although it is important to clarify all the components of this debate, discussion on these components cannot resolve a problem that has persisted for more than four decades. Rather, value judgments and decisive policy measures are needed in order to achieve closure, considering that the bounds of this industry have always remained mysteriously indistinct
Effects of cost-sharing prescription drug prices
Cost sharing is one of the determinants of prices of prescription drugs especially among the poor and elderly. However, the concept, though effective in controlling prescription drug expenditures among special interest groups, has been a subject of contention since little is known about how this impacts on the health of these groups.
Some researchers have indicated that adverse events coinciding with introduction of cost sharing initiatives might have inhibitory effects on sustainability of this pricing mechanism. However, in a journal article entitled “Equilibrium Price Dispersion in Retail Markets for Prescription Drugs” Sorensen, 2000 indicates the need for more research to be done on these adverse events in order to make a comparison on their prevalence before and after implementation of cost sharing programs. In terms of lowering prices of these drugs, cost-sharing has been one of the most effective price control mechanisms that governments have used to bring important drugs within the reach of everyone in the society.
Demand and supply forces
For those prescription drugs where drug search benefits are expected to be very high, the prices tend to be slightly lower. This is as a result of reduction in both price cost margins and dispersion. For this reason, the nature of drug therapy also determines pricing. In this case, the forces of demand and supply are the chief determining factors of drug prices.
In cases where drug reforms are done, the forces of demand and supply have to be interfered with. A good example is the cost-sharing program. The sensitivity of such reforms requires that all industry players get involved. This is where the main problem arises: pharmaceutical companies are not willing to engage in such programs since ordinarily, they fall outside their scope in terms of business relevance. In case they want to get involved in these measures, they would be doing so within the backdrop of corporate responsibility. This is the main reason why the companies are perceived to be motivated by greed when adjusting prices for their products.
Government regulations and policies have played a significant role in ensuring that consumers are protected from unreasonable pricing mechanisms from pharmaceutical companies, times are changing and a review of these policies seems necessary. The policies were set up at a time when the cost of research on new drugs was not as high as it is today.
On the other hand, leniency in implementing existing policies creates a policy vacuum that enables pharmaceutical companies to impose punitive pricing measures and get away with it. The most commonly given explanation is that many risks are involved when new research and development is being done on new drugs. The risks come with opportunities for higher profits without the need to exploit consumers. In this regard, the pharmaceutical companies tend to act as the main determinants of prices of prescription in an environment of a liberalized market.
Among the greatest risks involved is the bottleneck of policies of foreign countries. Although pharmaceutical companies could be operating within reasonable pricing standards in their home countries, policies of foreign countries might lack in terms of business-friendliness. This results in escalation of frequent price adjustments as companies try to cushion themselves from losses.
New pharmaceuticals often bring in some new approaches in their pricing strategies. In most cases, the most important consideration is often the therapeutic advances that have been embodied in the new product. for all drugs that present new therapeutic benefits, the launch prices are often set two or sometimes three times higher compared to the prices of similar products that already exist in the market.
The greatest negative effect of launch prices is presence of substitutes in the current market, some of which could be counterfeits. This reflects the competitive realities that new players in the pharmaceutical industry have to face right from the first day. In this case, duplicates are unavoidable since they force new entrants into the pharmaceutical market to lower prices of high-quality drugs to affordable levels
Research and development remains the greatest determinant of pricing strategies. The industry players contend that they have to spend billions of dollars in order to research and develop medications that are relevant to medical problems facing the whole world. However, the exact level of expenditure on development of crucial medications is a matter that is often shroud in secrecy since large companies fear that counterfeiters will steal the innovation, modify it and use it to produce cheaper and ineffective drugs.
Without proper policies being put in place in order to protect industry players from liability, drug prices will remain high. Even after investing huge sums in research and development, large pharmaceutical companies have had to face litigation from some consumers who suffer adverse effects after using the drugs. In some cases, such litigation leads to withdrawal of some drugs from the market. In order to account for such liability, the companies are often left with no other option other than imposing high prices for their products.
In a comparison between regulated Swedish markets and U.S. markets, Lu and Comanor (1998) noted that the extent of therapeutic innovation was the greatest determinant of the introductory prices in both countries. However, in Sweden, unlike in the U.S, new chemical entities (NCEs) introduced in the country from 1987 to 1997 recorded a substantial fall in prices within the first year of the launch. Lu and Comanor (1998) attribute this to presence of substitutes. However, Ekelund and Persson (2003) did not notice any significant effect of substitutes on newly launched drugs with high-level therapeutic relevance. Their research led them to conclude that competition among makers of related brandname drugs is discouraged by price regulation.
In conclusion, the research and development factor is the greatest determinant of the pricing strategies that are adopted by pharmaceutical companies. Corporate greed is often a measure of last resort that pharmaceutical companies use to survive in a market full of uncertainties resulting from punitive policies. The forces of demand and supply present opportunities and risks for both manufacturers and consumers due to pricing instabilities. Therefore, some form of regulation is needed.