Tuesday, March 15th, 2011

Are drug prices really soaring?

Congress is up in arms about soaring drug prices. A study by the Government Accountability Office finds that the price of brand-name prescription drugs soared at an annual rate of 8.3% from 2006 through the first quarter of 2010. That’s more than double the rate of inflation, which averaged 3.8% over the period. It’s also faster than brand-name prescription drug inflation between 2000 and 2006, which averaged 6% a year.

“These soaring price increases seem to defy explanation,” said House Energy and Commerce Committee ranking member Henry Waxman, A California Democrat. “Congress needs to investigate and stop drug companies from overcharging seniors.” Are avid pharmaceutical companies going to bleed us dry? Probably not.

Inflation in brand-name drugs could be more a sign of weakness than of strength. Big Pharma has been losing ground to cheap generic drugs. 81% of all brand-name drugs sold in 2009 were for medicines that had a generic rival, up from 61% in 2003. When a generic exists, patients will order the generic over the brand name nine times out of ten. Lipitor’s cholesterol buster Pfizer, the best selling drug of all time, saw sales fall almost 13% in the United States between 2006 and 2009. And sales should fall further after Lipitor comes off patent at the end of this year.

This process boosts branded drug inflation. Makers of branded drugs increase prices starting around a year before the drug goes off patent, to squeeze as much money as they can from their eroding monopoly. Rather than follow generic prices down to maintain market share, they keep them high after the entry of generics to make more money off patients who insist on sticking with the brand even though it does them no better.

And most of the new branded drugs are very expensive. It’s been a long time since pharmaceutical companies had a big mass-market blockbuster.  Only 25 new drugs were approved in 2009, down from 53 in the pharmaceutical industry’s heyday of 1996.  But that means most new drugs these days are niche treatments against cancer that carry a six-figure price tag for a year’s supply.

But even ass branded drug prices soar, the price of generics are falling by about 2.6% a year, according to the GAO study. All things considered, the average drug prices paid by American consumers are not rising that fast. The GAO report finds that prescription drug prices adjusted to account for the share of generics consumed by patients are only rising at a rate of 2.6% a year.

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