Why Is Medication Expensive? Reasons, Costs, Solutions, A Guide

Posted March 27, 2020 by Michael Chamberlain - See Editorial Guidelines

If you are living in the US you may be wondering, why is medication expensive? It may seem like they are becoming more and more expensive as the years roll on, and there are good reasons why you might think that.

In this article, we’re going to answer the question – why are medications expensive? We will provide details and reasons for the status of medical expenses in the US.

But first here’s the quick answer as to why is medication expensive! then we’ll get into more details.

Why Is Medication Expensive?  Medications are expensive mainly because of:

  • Flexible and unregulated policies 
  • Extending patent rights
  • Medicare covering every drug approved
  • Drug manufacturers allocating funds for future research
  • Research cost of unsuccessful drugs
  • The expensive drug development process
  • High advertising and other costs

Why Is Medication Expensive

Medications are indeed a major part of human survival. With many new diseases arising no one can escape from spending on medications.

Expensive medication is affecting the normal and healthy lifestyles of many people around the world. An example of this is those with diabetes that have had to ration their insulin due to the high price of insulin. It has affected individuals to the point where states across the US are implementing a price cap law on insulin

While it’s a similar situation in almost every country, expensive medication seems to be more extreme in the US, a country well-known as a world medication hub.

In the US many drugs can cost the consumer more than $12,000 a year. It’s also estimated that, on average, citizens of other well-developed rich countries spend 56% less than American citizens can expect to pay for the same medication!

When comparing health care overspending between the US and Europe, the US stands out for excessive drug prices when compared to Europe.

The expensive medication cost in the US tends to be higher than the healthcare administrative costs. Unlike any other healthcare products, medications tend to continuously experience a regular price spike to date. 

It’s also estimated that medication prices will rise by an expected 6.3 percent each year over the coming decade, while the health-care cost will rise by 5.5 percent.

So, it clearly provides an indication of how medications within the US continue to become more expensive as time progresses.

However, surprisingly, the basic economic estimations suggest, in contrast, that medication prices should actually be going down.

So, to understand why medication is expensive and is continuing to rise, let’s take a look at everything you need to know on this topic.

There may be several underlying reasons why medications are expensive, especially within the USA. However, below are a few of the more important reasons that we’ve found that can make medications expensive in the US.

Flexible Government Policies That Don’t Regulate Medication Prices

When taking other countries like Canada, Australia, and Europe into account, they also follow flexible government policies.

Flexible government policies are when the government doesn’t interfere or regulate the prices set.

These flexible policies apply to just about anything that consumers buy from computers to clothing. But these countries, along with many others, do have strict regulations and some interference regarding the prices of medications.

This is because these countries believe medications are an “essential need” and utility for its citizens, which impacts the day to day life and overall economic well-being. 

As such, most of the countries do regulate medication prices to create a healthy lifestyle for every citizen.

Why Is Medication Expensive

Unfortunately, the US doesn’t regulate the prices of medications. Meaning, manufacturers of medications are given more freedom to set their own prices, which consumers will have to afford and buy without any other option.

While there has, in the past, been many reasons and statements given by the government as to why the prices of medications are not regulated, the US continues to allow the free setting of medication prices.

The United States also doesn’t have any specific governing body or panel that regulates or even negotiates prices to make it more affordable.

On average there are around ten thousand health insurance plans within the states and each of them has to negotiate the price with the medication manufacturers.

And with such prices set without any regulation, the health insurers are bound to accept these prices which would eventually be passed out to the customers.

This is one reason why medication ends up being expensive for customers.

Unregulated Approval of Drugs

Many countries in the world refuse to approve certain drugs from getting into the market.

This mainly happens when the relevant regulating or approval authorities identify these medications to have no real effect when compared to other medications, or if it provides similar benefits as those that are on the market already for a cheaper price. 

Since many countries also have regulatory bodies for deciding the prices of medications, the drug makers are required to gain approval from authorities for the uniqueness of their medication in order to offer a high price.

If this fails, then these drugs don’t even get to market. This also means that several medications that are sold in the US drug market are not present in other countries. 

Although the public in other countries has a negative impression on regulatory bodies blocking medications from coming into the market, it doesn’t necessarily mean the US has a more stable medication system.

This is because the main reason that other countries reject certain drugs from coming into the market is that the rejected drugs don’t seem to be offering enough benefit to justify the price the drug manufacturers want to charge.

This price-to-value comparison is not regulated in the US. So, this also means that in the United States patients get medications that offer little to no additional benefit at a potentially more expensive price with no real added value.

A very famous incident of such a scenario was in 2012 when a medication by the name of “Zaltrap” hit the market for the treatment of colorectal cancer.

This medication was priced at $11,000 per month, which was twice the price of its competitor products. But doctors and regulatory bodies in other countries believed this medication doesn’t offer any other additional or unique benefits when compared to similar medications. 

So, apart from price and value, even if certain medications don’t offer any additional value when compared to competitors, these medications are seen as no value and never get approval for sale.

However, surprisingly, in the US with zero regulations, the FDA approves all the drugs and medications that are proved to be safe and of reasonable effectiveness.

This directive fails to uphold the value price comparison for the economy and is more of a free market for expensive medications to make a profit from. 

Extending Patent Rights That Creates Monopoly Pricing 

All over the world, drug manufacturers are given a limited-monopoly. This is given with the pure intention of boosting innovation.

Meaning, if a patent expires, the competition among drug manufacturers increases. This then encourages drug manufacturers to come up with new innovative medications with a new patent right.

However, in the US, this patent right is extended by any ways and means available, which makes it difficult to produce a generic and cheaper version of the same medication.

This not only forces customers to pay for the more expensive medications but has also reduced the bargaining power of customers because of fewer to no substitutes.

The same applies to insurers, insurance plans, and other health care service providers. These organizations do not have many alternatives to switch and are bound to accept the expensive prices, which are passed down to the customers. 

The extension of patent rights has also created a monopoly situation within the drug market in the US, reducing the competition and giving sufficient power for these manufacturers to continue increasing the prices of medications. 

Medicare Covers Every Drug Approved

The large health insurance plan in the US “Medicare” covers around 55 million Americans who are above the age of 65. This program was introduced as a way of covering medical and related expenses to citizens above the age of 65 and other eligible persons.

Although this program was introduced to create a healthy economy around medication manufacturers and suppliers, federal law prohibits Medicare from negotiating prices to make medications more affordable. Medicare is also prohibited from making any decisions regarding which medication the program will cover. 

Medicare by law is required to cover all the drugs that the FDA approves. And the FDA, as you might already know, approves all medications that are safe and effective regardless of any value comparison.

Meaning, all the medications count, with no real difference to competitor products or products already in the market, as long as a medication passes the test for safety and effectiveness, they get added to the Medicare coverage.

So, this offers sufficient freedom for drug manufacturers to introduce medications with no real value and set high prices for them, knowing Medicare will cover them anyway. This is one of the main reasons why patients, despite being enrolled for Medicare, still find medications expensive to purchase.

Drug Manufacturers To Allocate Funds For Future Investment 

When the world’s seven leading pharmaceutical companies were asked the reasons for high medication prices, especially in the US, they answered with:

“The US is carrying the cost of research and
development for the rest of the world”.

Why Is Medication Expensive

This statement implied that if medications were sold for a lesser and cheaper price, investment in research and development would fail, impacting the global medication industry.

The statement also added that cheaper medications would also reduce the investment necessary for innovative treatments. 

A few statements made by the big drug makers added that they make sure the pricing and sale of their medications contribute enough funds toward future investments. They also believe these accumulated funds, gathered through expensive medications, are necessary to invest in expensive research projects.

The main drug producers also freely stated their fears within the industry and how it contributes to expensive medications.

Drug manufacturers believe the investment in the industry comes mainly because of the expensive medications that make the industry appear more profitable and sustainable for investments. As such, the drug manufacturers are keen on increasing the prices of medications with the hope of attracting more investors.

And as you might know, pharmaceuticals can be a risky industry. The research, development, approval, and supply chain management can be expensive to deal with. The only way to survive in such an industry is through large and continuous, stable investments.

As such, lowering the price of medications would make pharmaceuticals a less desirable industry for investors.

This is another reason why medications are continuing to be expensive, especially within the US. There are no real regulatory bodies to control or bring the prices down. 

Research Cost Of Unsuccessful Drugs That Don’t Get Into The Market

Not all drugs that are introduced make it to market. There’s a hectic process every drug manufacturer has to go through to get each drug into the market.

Leaving aside the normal research and development cost, every drug should pass the tests and trials conducted by the FDA for it to be introduced to the mass market. And to date, it’s not known how many tests and trials a drug would have to pass for it to be approved.

So, it’s acceptable that every drug will have to go through all these tests and trial expenses, even if they end up being unsuccessful. 

So, when a drug becomes unsuccessful, there’s no way to recover all the cost spent for the specific drug as it cannot be sold or is not approved for sale. These unsuccessful drugs would also bring losses to the company. So, future investments are also likely to be affected.

What drug manufacturers do, is that when a drug becomes successful through approval, they try to set a price that would help them recover all these losses and expenses for unsuccessful drugs.

This is also one of the reasons why medications are expensive. 

Here are some of the stats around newly introduced drugs:

  • Around 90% of all the drugs that go through human trials and other tests fail
  • Around 40% of drugs fail at the preliminary phase one studies, which on average will cost about $25 million per drug.
  • Of these, around 70% of drugs that pass this stage fail at the second stage of studies. The second stage is where the drug is tested to find out if it’s doing what it’s supposed to do.

Drug manufacturers can’t sell a drug without these tests being undertaken, and to get through the tests and trials process, the drug manufacturers need to incur the relevant costs, whether the drug may be successful or unsuccessful.

The Expensive Drug Development Process

Why Is Medication Expensive

Every drug, apart from its research process, will have to go through several development phases that involve another set of incurred costs.

  1. The first phase involves developing the biological and chemical properties of the medication compound to see how it works, which involves initial cost.
  2. The second development phase goes through a healthy human volunteer testing to confirm the effect of any animal studies and other effects of the compound, this again involves a cost.
  3. Finally, the new compound rectified with the errors and drawbacks is finally tested in humans who have the health condition for which the medication is used, which again involves a cost. It’s only after all these development phases and associated costs, a drug will be applied for approval by the FDA. 

So, if the FDA doesn’t approve the drug despite all these development costs spend, it’s still a huge loss to these drug manufacturers.

As such, to recover the lost finances, it’s fair for drug manufacturers to charge or set high prices for successful medications. 

High Advertising Costs

The US is one of the countries that allows for the legal advertisement of prescription drugs.

So, after getting approval for the drug by the FDA, the drug manufacturers naturally try to sell them, since they don’t have any other regulations that will disturb these sales. 

It’s believed that the reason for expensive medication comes from the cost the drug manufacturer incurs in advertising these drugs.

Anyone watching television can easily see how much these drug manufacturers spend on advertising. It’s also believed that one in every 10 pharmaceutical companies spends more on advertising than research and development.

It’s estimated for a drug to go through all the related costs from research and development, approval and marketing to bringing the product to the market, it can cost more than $1 billion.

The cost of bringing a drug to the market will vary depending on the type of drug and how much research and testing is required. Regardless, the cost is high.

So, it’s fair for these drug manufacturers to state the high prices for medication to recover the costs, including marketing. 

Furthermore, drug manufacturers spend a lot in advertising because of the flexible drug market within the US, along with fewer regulations.

Fewer regulations mean that similar products with similar benefits can easily be released into the marketplace. Also, since the FDA approves all kinds of safe and effective medications, the competition within the US drug market can be ferocious. 

And to this end, with the fact that introducing and approving new medications takes both time and money, drug manufacturers invest a lot in the marketing of successful drugs in order to raise the necessary funds.

In this sense, drug manufacturers are no different than any other companies that are motivated to increase profits.

“One in every 10 pharmaceuticals company spends more
on advertising than research and development.”

Associated Costs

It’s also believed that many other costs are taken into consideration when pricing medications.

Overall, these include:

  • Research and development
  • Staffing – along with specialist staff
  • Manufacturing
  • Finance
  • Information Technology
  • Taxes

These costs are incurred for pretty much 100’s of drugs, out of which only a few will be passed through the drug tests and obtain necessary approval for sale.

Also, certain drug manufacturers state that they price the medications more like pricing automobiles. They consider all the costs involved in producing a single drug, like competition, patent status, volume, and most importantly the anticipated income stream.

It’s mainly the anticipated income stream that determines the cost of medications.

With the cost of research and development alone, consisting of $60 million on average, and the addition of other costs, the price of medications to the end-user will increase, making medications expensive to afford.

The Solution

This may answer the question of why medication is expensive, but that probably doesn’t help you to afford the medications you need. So, what can you do about it? This is where Patient Assistance Programs come into play.

Prescription Hope utilizes patient assistance programs to help individuals obtain their prescription medications at a set, affordable cost. Click here to enroll now and let us save you money on your prescription bills!

To Finish

When asking the question, “why is medication expensive”, we have to consider the vast amount of costs that go into starting, trialing, and manufacturing a drug, as well as the costs of taking it to market.

And the ones that make it to the market have to carry the costs for the many that don’t. There many factors to consider. Give us a call today and let us save you money on your medication expenses.