high pharma prices in the USA

High prices for prescription drugs are not the only reason for the high cost of medical care in the US, but it is an important reason. Here is an ungated paper that seeks to explain how, and especially why, pharmaceutical companies charge so much, and are so profitable. The simple reason is they can get away with it!

Here is about half of an informative abstract from the full working paper. I especially recommend the paper’s conclusion, “How to Fix US Pharma’s Broken Business Model”.

This is ‘new’ research that is undergoing peer review. Yes, peer review is very slow, at least in the social sciences. That is why working papers exist, and SSRN is an excellent source for them.

Price gouging in the US pharmaceutical drug industry goes back more than three decades … [yet] the US government has not seen fit to regulate drug prices. UK Prescription Price Regulation Scheme data for 1996 through 2010 show that, while drug prices in other advanced nations were close to the UK’s regulated prices, those in the United States were between 74 percent and 181 percent higher. Médecins Sans Frontières (MSF) has produced abundant evidence that US drug prices are by far the highest in the world.

The US pharmaceutical industry’s invariable response to demands for price regulation has been that it will kill innovation. US drug companies claim that they need higher prices than those that prevail elsewhere so that the extra profits can be used to augment R&D spending. The result, they contend, is more drug innovation that benefits the United States, and indeed the whole world. It is a compelling argument, until one looks at how major US pharmaceutical companies actually use the profits that high drug prices generate. In the name of “maximizing shareholder value” (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their own corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price “performance.”

William Lazonick, Matt Hopkins, Ken Jacobson, Mustafa Sakinc, and Oner Tulum, “US Pharma’s Financialized Business Model“, Institute for New Economic Thinking, Working Paper No. 60 (13 July 2017, revised 8 September 2017).

This is joint research from five economists affiliated with the University of Massachusetts-Lowell, the University of Ljubljana (Slovenia), the University of London, and the University of Paris 13. The funding was also international, from the Institute for New Economic Thinking (INET) in New York City, the European Union Horizon 2020 Research and Innovation Programme, and the Ford Foundation (also in New York City).


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