Why Are Drug Prices So High?
By David Henderson
Economists have shown that the cost to get one drug to market successfully is now more than $2.8 billion. This cost has been growing at 7.5 percent per year, more than doubling every ten years. Most of this cost is due to FDA regulation. Some potentially helpful drugs don’t ever make it to market because the cost the company must bear is too high. Drug companies regularly “kill” drugs that could be effective because the potential profits, multiplied by the probability of collecting them, are less than the anticipated costs. One of us has helped kill drugs for brain cancer, ovarian cancer, melanoma, hemophilia and other debilitating conditions. Imagine a drug for melanoma that never got on the market due to FDA regulation. In a sense, its price is infinite because it can’t be purchased. Reduce FDA regulation so that it gets on the market, and the price falls from “infinite” to merely “high.” If you had melanoma, which would you rather have: no drug or a high-priced drug that treats it?
If we simply went back to pre-1962 law, the FDA could still require proof of safety, but would not be able to require evidence on efficacy. This one change would allow drugs to be developed faster–often as much as 10 years faster. Market success would establish efficacy. Could there be ineffective drugs? Sure. But as doctors and patients learn, such drugs would disappear over time. This is nothing new; doctors and patients regularly evaluate drugs for efficacy. Clinical trials often show that perhaps only 20 percent, 40 percent, or 60 percent of patients benefit. Even when the FDA finally approves the drug as “safe and efficacious,” doctors must still evaluate the drug to find out how efficacious it is for each particular patient. In practice, an FDA certification of efficacy is just a starting point.
Who would want to take a drug that has not been shown, to the FDA’s satisfaction, to be effective? Almost everyone. Many drugs have off-label uses. These are uses that doctors have found effective for a particular use but that the FDA has not approved for that use. According to WebMD, “More than one in five outpatient prescriptions written in the U.S. are for off-label uses.” Tabarrok cites studies showing that 80 to 90 percent of pediatric patients are prescribed drugs for off-label uses.
As is well-known in the medical establishment, off-label prescribing is legal and widely practiced. Indeed, Congress, the National Institute for Health, Medicare, the Veterans Administration, and the National Cancer Institute all encourage it. Consider gastroparesis, a poorly understood upper gastrointestinal disorder in which the contents of the stomach do not move efficiently into the small intestine. Diabetics are particularly susceptible to this condition. The FDA has approved only one drug to treat it: metoclopramide. But doctors have found that, for some patients, an antibiotic called erythromycin reduces nausea, vomiting, and abdominal pain. Erythromycin is not FDA-approved to treat gastroparesis. But it works. Moreover, off-label uses in oncology account for as much as 90 percent of all cancer treatments. For some diseases, like AL amyloidosis, there are no approved medicines. Not a single one. So what do doctors do? They use medicines developed to treat related diseases, such as multiple myeloma, even though they and their patients would prefer medicines that treat AL amyloidosis directly.
This is from David R. Henderson and Charles L. Hooper, “Why Are Drug Prices so High?” Goodman Institute Brief Analysis No. 117, January 10, 2017.