How Capitalism Will Save Us (59 page)

I
n 2008 the
New York Times
recounted the story of Robin Steinwand, a fifty-three-year-old Maryland woman who suddenly discovered that she would have to pay $325 a month for Copaxone, the drug she took to control her multiple sclerosis. The drug was so expensive that her
insurance company could no longer afford to charge her the usual $20 copayment. Steinwand was devastated. She would have to pay $325 a month—or $3,900 a year—for the rest of her life.

Steinwand told the paper that upon receiving that first bill from her pharmacist, “I charged it, then got into my car and burst into tears.”
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Things would have been far worse, however, if she wasn’t insured. She would have had to pay the entire $1,900-a-month cost of the prescription—or $22,800 a year.

Today’s new drugs work medical miracles—that is, when people can afford them. In the words of the
New York Times
, even insured patients can end up “[having] to spend more for a drug than they pay for their mortgages, more, in some cases, than their monthly incomes.”
²⁵

And prices keep going up. When Erbitux, a new, highly sophisticated therapy for colon cancer, reached the market, it was one of the most expensive cancer drugs ever—costing seventeen thousand dollars a month. Amazingly, medical journalist Robert Bazell reported in
Slate
, Erbitux isn’t the most expensive medication. “That distinction is currently held by Zevalin, a $24,000-a-month treatment for a relatively rare type of lymphoma.” Patients taking Zevalin have to somehow pay some $288,000 a year.
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What’s going on? Many blame “rapacious” drug companies. Bazell, who has a degree in biochemistry, points out that, after all, drugs like Erbitux are not really that expensive to make: “True, these antibodies are more expensive to produce than most pills, but only slightly—the technology can be replicated in any college biology lab. Production costs amount to few dollars a dose at most.”
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Even members of the medical establishment believe that drug companies are “gouging” consumers. Marcia Angell, former editor of the
New England Journal of Medicine
, caused a public furor when she wrote a book charging that a common tactic companies use to boost prices is reinventing slightly altered versions of the same medication. This way, she asserts, they’re able to extend a drug’s period of patent protection, which permits a legal monopoly—avoiding competition from generics makers and keeping prices up. Angell insists that one of the biggest drugs of the decade, Nexium, was actually a slightly altered version of Prilosec, a cheaper, older drug.

Angell’s claims were widely echoed by politicians. But her allegations,
when you think about them, don’t make sense in the Real World. Is it really in the interest of drug companies to gouge consumers? Companies in a normal market usually price their products so that they can get
more
customers, not fewer. In industries like electronics, for example, prices of new technologies come down fairly quickly. But like everything else in health care, the pharmaceutical industry is not a normal market.

One reason drugs are nearly unaffordable by individuals is that, as we’ve explained earlier, individuals are not usually the ones paying for them. Robert Bazell, for one, acknowledges this: “Few individuals purchase these drugs as they would a head of lettuce, say, or a refrigerator. In the case of cancer drugs, health-insurance companies are the consumers.”
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But drugs are not exactly like those four-hundred-dollar hammers or seven-hundred-dollar toilet seats purchased by the Pentagon. They’re genuinely costly to develop. Bazell, however, is right when he says that making the actual drug may not be all that expensive. It’s not the manufacturing process itself but the rest of what’s involved—developing and bringing a new medicine to market.

America’s drug-approval process is the most stringent in the world. Only about one in a hundred potential new drugs end up in drugstores and doctors’ offices. That tiny handful of successful drugs must throw off enough revenue to enable companies to recover the costs of the countless also-rans that never made it to market—as well as generate the capital to invest in developing the lifesaving drugs of the future.

As a result, experts estimate that the direct and indirect costs of bringing a single drug to market can be as high as $1.5 billion. Also driving up prices is the inability of drug companies to recover their costs from selling drugs in countries like Canada and Britain, where state-run healthcare systems insist on artificially low prices. Drug makers are forced to shift costs to the only segment of the global market that will enable them to recoup expenses—the American market and you, the consumer. Americans end up subsidizing the state-run health care of other nations.

American patent laws add yet another layer of costs. A drug company has a patent for seventeen to twenty years on a new drug. After that, any company is free to jump in and produce a generic version. In other words, drug manufacturers have only a limited window to make the profits they need to cover their expenses.

What about Angell’s claims that pharmaceutical makers seek to boost profits by subverting patent laws?
New Yorker
writer Malcolm Gladwell says the accusations by Angell and others are overblown. They ignore the Real World factors driving up the cost of drug production. New drugs in this country may be expensive. But the generic and over-the-counter drugs taken by millions of Americans are actually
cheaper
than in other countries:

Detroit journalist Thomas Bray confirms this. Writing in the
Wall Street Journal
, he recounts visiting a Canadian pharmacy just over the U.S. border, only to discover that “aspirin and similar products like Tylenol and Advil were much more expensive than in the United States—up to 30% more expensive, in fact.”
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Why? Bray explains that Canadian price controls on prescription drugs force companies to recoup their costs from over-the-counter medications.

Those pushing Canadian- and British-style price controls forget a fundamental Real World economic principle: when you pay less for something, you end up with less of it. Price any product or service too cheaply, and you will end up with runaway demand and shortages. That’s why in nations like Britain, where prices of medications are under strict control, drugs are often in short supply. British newspapers periodically carry headlines like “Cancer patients hit by shortage of drugs”—that we almost never see in the United States.

As in any market, overly low prices prevent producers—in this case, drug developers—from generating the capital for research and development. Pressure from state-controlled health-care systems is why European drug makers now lag behind American drug makers, which are still able to charge enough to make a profit. Günter Verheugen, vice president of the European Commission responsible for enterprise and industry, acknowledged this in a speech to the Pharmaceutical Forum in 2006.

In state-controlled systems, drugs may be “cheap.” But people who get fewer medications are paying a higher price—sometimes with their lives.