Photo by UNC KenanFlagler, via Flickr

November 6, 2017 Logan Kolas 1Comment

Think, then choose.

Earlier this week the Cincinnati Republic denounced Ohio Issue 2 as an inadequate supposed solution for rising pharmaceutical prices. The proposed legislation is clearly well-intentioned, but the issue’s supporters and skeptics have spent the lion’s share of their time screaming solutions without diagnosing the precursors that have placed Ohioans in a seemingly inescapable box. Healthcare is complicated and pharmaceutical prices are no exception to the rule. Before going to the polls, let the drivers of higher drug costs influence your final decision on the merits and drawbacks of Ohio Issue 2.

The Role of Competition

Government programs are a reliable payer that exchange money for pharmaceutical products to be distributed by their federal or state-sponsored plans. To stay solvent, the government must bring in enough tax revenue to justify the expenditure. Therefore, the government and the consumer both benefit from lower prices.

The two biggest criteria that affect the price of medicine are competition levels and regulations. The regulations are typically administered by the Food and Drug Administration (FDA) to ensure the quality of the drug stays high. After all, people purchase pain medicine with the expectation that it will help with their headache.

The largest beneficiary of competition is the purchaser of the drug – whether this is the government or the consumer directly – as both producers offer better deals to entice the customer to purchase their products. Name brand pharmaceuticals see their biggest market competition from generic drugs. Scott Gottlieb, Commissioner of the FDA, has gone as far as to estimate that safe generic drug competition has limited healthcare costs to the tune of $1.67 trillion in savings. However, there are many necessary and unnecessary factors that hinder competition within the healthcare markets, leaving the customer to float an exorbitantly expensive bill.

The Basic Price Structure

Pharmaceuticals are typically in high demand and in “relatively” short supply while often remaining hidden from competition. Demand stays high as many people need the drugs for a basic standard of living while immediate supply has remained relatively low. These supply and demand precursors make the price of drugs inherently high, but other outside effects further contribute to significant price elevation.

The contributors to high drug prices extend past the baseline of supply and demand. Different medications have different production costs associated with them. One of the most obvious examples is insulin. Bacteria and yeast are two of the most common ingredients used in the production of insulin, but they are also expensive to purchase and store. These contributors, unfortunately, keep the price of insulin high for many diabetics around the country that depend on the medicine for an improved quality of life.

Intellectual Property Rights

The most significant driver in high pharmaceutical prices is intellectual property rights – specifically patent rights. This is not to say that intellectual property rights are not vital. The Founding Fathers thought highly enough of them to enshrine them in the nation’s Constitution.

Patents serve an integral role: they incentivize innovation by manufacturers and researchers that allow them to see a return on their investment in the market. Otherwise, they would simply not make the medicine. Unfortunately, their benefits come at an extremely high cost. The biggest competitors to brand name drugs are their generic forms which are unable to compete until the patent has expired. Without competition, prices remain high. Many of the same supplier-customer principles associated with intellectual property can also be applied to price ceilings.

The length of the patent on pharmaceutical products currently sits at 20 years from the date of the invention. Unfortunately, the FDA approval process that enables the drugs to legally be sold sits around 6 to 8 years. This means that nobody – neither the company nor the ill patients – have access to the benefits for the duration of the approval process. Once approved, it takes an additional 12-14 years before generic drugs can compete in the market and drive down price. By that time, there may be other, more effective medications in need of approval. Altogether, it takes roughly 20 years for sick patients to see the gains from competition due to necessary patents and a bureaucratic approval process that has remained dedicated to quality.

Finding the Right Balance

Healthcare is complicated. People have dedicated decades of their life to its nuances and have walked away having only been able to make trivial contributions. However, the basic price structure of pharmaceutical pricing, a quality-driven bureaucratic approval process, and a plethora of necessary and unnecessary competition barriers have lent themselves to increased drug prices. These all add to the naturally high rate. Ohio Issue 2 has the power to change the direction of Ohio healthcare – for the better or for the worse. In the heat of the marketing ads and journal publications, let the drivers of high prices mold your opinion. The future of Ohio healthcare is in your hands.

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  • TZ

    Great article. Maybe we have to revisit the long term intellectual property rights for products that have no competition and in which demand is high. Essential medicine consumers can not just say the price is too high. We regulate the price of electricity, water. and even alcohol, etc. but not Meds?