The Heartbreak of Drug Pricing

• Cost savings
• Prescription fees
• Drug costs
• Drug industry
• Cost-benefit analysis

It can hardly be a mystery why the price of prescription drugs in the United States has become such a contentious issue (1). The figures speak for themselves. The average price of drugs per prescription among older persons rose 48% between 1992 and 2000, and drug expenses now consume 14% of the average Social Security benefit, up from 8% in 1992. The prescription drug costs incurred by some 850 000 older Americans who lack insurance that covers drugs are more than $2000 per year (2). The increased cost of prescription drugs accounted for the largest share—44%—of the total increase in health care costs in 1999, a year in which, according to one report, the net income of internists fell by over 10% (3) and academic health centers began feeling the effects of multibillion-dollar cuts under the Balanced Budget Act.

These numbers are even more striking in the context of the industry's overall financial performance (1, 4). In 1999, it realized a profit of 18.6% (as a percentage of revenue) on sales of $125 billion, a larger profit margin than most other sectors of the U.S. economy. (Sales increased to $145 billion in 2000.) As one of the most profitable industries in the world, the pharmaceutical industry could afford to spend $13.9 billion in 1999 on promotion alone—which included about one drug “detail” salesperson for every 10 U.S. doctors, $2 billion on direct-to-consumer advertising, and more than $7 billion in “free” drug samples—-and to lay out $80 million per year on lobbying (4).

How does the industry explain the drug prices that fuel this economic juggernaut? Not by the postdevelopment costs of making the pills themselves, which is only about 20% to 30% of the overall sales price; in fact, the marginal cost of making an extra …