Category Archives: Journal 3

Drug Prices At Their Worst, Pharma CEOs At Their Best

It is unbelievable what life in the U.S. has become like for patients who are diagnosed with diabetes. A third of America (that’s roughly one hundred million people), are diabetic or pre-diabetic.

However, with insulin prices having spiked by 150 percent over the last five years, these people are taking drastic measures to survive, all the way from injecting themselves with expired insulin, to purposely developing diabetic ketoacidosis, a fatal complication of diabetes that will result in insulin injection in an emergency hospital room.

All because of what?

An insulin cartel composed of the same three companies (Sanofi, Novo Nordisk and Eli Lilly) to which the University of Toronto licensed the manufacturing of insulin to back in 1922. Nobody deserves to lose a life because they cannot afford the medication they need in order to keep it.

But, the worst part is that this not only happening with insulin—this is the ongoing situation with the entire U.S. drug industry! Drug prices are rising by the day and it is not because of innovation or production costs according to many sources and a myriad of data.

Did you know that between the years of 2005 and 2015, around 80 percent of the new patents filed were ones that were for existing drugs rather than new ones?

Why is this so, you ask?

The patent regulations in the U.S. are designed to allow companies to find “loopholes” such that as long as they make “changes” to the drugs they are selling, the patents on the drugs can be extended. Notice, there is a reason why changes has the two quotation marks around it: these drugs do not have to be improved, they just cannot be made worse off. By doing this, companies are locking out their competition because they are re-filing their patents for the drugs over and over again, preventing generic drug companies from entering that particular drug market.  

Does this remind you of a certain market structure yet?

The U.S. pharmaceutical industry is a pure oligopoly in which the entire market is dominated by a small number of sellers for each drug product. This market structure creates a significant barrier to entry because since there are only a few firms dominating the industry, the firms have a strong influence over the price of the product. Despite U.S. laws against price fixing and collusion, companies follow a price leader strategy in which when the “leader” raises their prices, all of the other companies follow. With the U.S. government not putting a cap on drug prices you can see that this story does not have a happily ever after ending.

Evidently, demand for life-saving drugs such as insulin is highly inelastic because it is a necessity for those people who live with life-threatening conditions. In fact, you can say that the demand for these drugs is perfectly inelastic because no matter who the supplier is and for how much the drug is sold for, this good will not lose demand because of the value it provides to its users, right?


Although goods can have an inelastic range, eventually they become too expensive for consumers to afford, and suddenly demand goes down because consumers do not have enough monetary resources to satisfy their demand (and frankly, their need) for the product. This is currently the case for many U.S. residents, and it is being made worse off by the fact that there is a lack of availability of substitutes due to the patent regulations and the existence of an oligopoly, bringing us back a full circle to where we started.

One last area that can be investigated is the efficiency of pharmacy benefit managers (PBMs). These managers claim to be reducing insurance costs of drugs and health plans in order to make medications more accessible to all consumers. They do this by negotiating a rebate with drug manufacturers on the overall price of a large selection of drugs, but they compensate themselves by taking a chunk of the rebate. How big is this chunk? We do not know, and that is the problem. The amount that PBMs keep in their pockets from the rebate versus the savings that they pass on to consumers is not publicized. Thus, we do not know if PBMs are actually helping the case, and if they are, whether they are doing it ethically and to their maximum ability.

Why do we not have this problem here in Canada?

We often forget how privileged we are to be living in a country with free healthcare and excellent medical insurance. But how does Canada prevent the conflict of drug pricing from occurring like it does in the U.S.?

If you haven’t guessed the answer already, it’s only a matter of imposing strict controls and regulations—concepts on which the U.S. is stagnant upon. We have a Canadian review board that ensures our drug prices are in check by comparing the drug prices we set to six European countries and the United States to ensure that they do not exceed the median prices that these countries have set on their medications. If they do, a reduction in price is ordered by the board. The issue with implementing such regulations in the U.S. is that sellers engage in price discrimination because the government plays almost no role in the regulation of these drug companies and the prices they set.

So, what can be done?

  1. Well, firstly, a law can be passed that will allow patients to import drugs from Canada because as you and I (and everyone) knows, our drugs are much more affordable. If this is done, a substitute will be introduced, increasing supply (shifting the supply curve to the right), and lowering prices for U.S. citizens to increase affordability.
  2. Another law can be passed to make it easier for generic drugs to appear on the market faster. In fact, there is a set of bills that Sen. Chuck Grassley (R-IA) is working on passing in this regard.
  3. Drug companies can also be taxed for every price hike according to how much they raise the price of their medications to. This can potentially decentivize them from doing so, and decrease the rapid rate of drug price increase.
  4. Lastly, laws should be passed for all PBMs to disclose how the rebates they receive are divided. This will ensure that this money can be tracked, and that the compensation people receive for their medication is the rightful amount they deserve.

There is a recent large focus on conquering this issue in the United State’s pharmaceutical industry, and you can check out the eight ideas that Congress has published for bringing down drug prices in the U.S last month.

Change must be brought upon the U.S. pharmaceutical industry and fast. There are too many people suffering in exchange for the economic gain of big pharma CEOs. The solutions are not simple, and will require a lot of enforcement on the behalf of authorities. However, I believe the end result will justify the input. With the add-in of several regulations and bills, thousands of lives can be saved, and that is truly motivating.

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Believe it or not, but most people get sick from time to time. And here in the developed Western world, it’s easy to believe that medication is affordable for everyone. When you get sick or have a condition that requires medication, it makes sense to visit the nearby drug store to pick up a treatment. After all, everyone should have access to a good that keeps themselves healthy, right? As astonishing as it is, this is not the case in some places.

In recent years, drug prices have skyrocketed most extremely in one developed nation: the United States of America. This is most profoundly seen for specialty drugs— which are often patented and exclusively made by one corporation—however, this is also seen in brand name drugs and generic drugs too. In fact, annual spending on medication in the US tripled between 1997 and 2007, and in 2015, the average American spent $1000 on prescription drugs. Compared to other countries, such as Sweden at an average of $351 per year, per person, why has the US seen such a large increase in prices?

Image result for us drug price comic

Drugs can be categorized into 2 categories: patented and unpatented. Patented drugs are often produced and sold by one corporation that can set the price. In this way, the market of these patented drugs represent monopolies, as one firm is selling to the market at the price that they choose. In addition, patents can also be renewed through making “minor modifications” to their drug. Keep in mind that this is a “modification,” and not an “improvement.” This allows drug companies to keep their monopoly on their specialty drugs through superfluous changes. Unpatented drugs, on the other hand, consist of those that have had patents in the past, but which expired, allowing additional brand-name and generic copies to be produced. Although there is competition, the barrier to enter the market for these unpatented drugs is still massive due to strict FDA regulations and manufacturing standards. This results in a similar trend of increasing prices as of patented drugs, albeit to a slightly lesser extent.

There’s one key reason that explains it all: limited competition.

These types of market structure, combined with the fact that those who need drugs, need drugs regardless (leading to an inelastic demand curve), result in the surge in prices of all drugs in the US. And this is all to ensure that drug companies can maximize their profits.

Some believe that this is totally false. A general belief is that price increases are due to greater demand, but studies have shown that Americans use 12% less medication than other developed countries. In addition to that, Americans tend to purchase the cheaper, generic version of drugs, unlike the rest of the developed world, which tends to opt with the more expensive, brand-name version.

Why don’t other countries, especially Canada, have this same issue?

As a Canadian myself, I have never had to worry about the price I am paying for medication. But it’s not like Canada doesn’t suffer from limited competition—in fact, most of our drugs are imported from the US, representing the same corporations. The solution that Canada, and many other countries such as the UK have thought of is government regulation.

In Canada, the Patented Medicine Prices Review Board (abbreviated to PMPRB), established in 1987, regulates new and existing increases in drug prices. As this board is independent of Health Canada, their sole responsibility is to control the market through price ceilings. The PMPRB limits the prices of medication in Canada through a variety of criteria. First, the price of a drug cannot be higher than the median of other “comparator” countries. These countries are currently France, Germany, Italy, Sweden, Switzerland, the UK, and the US. Second, the price of one treatment should be at a similar price to alternative treatments for the same disease or condition. Thirdly, annual price increases cannot be higher than the consumer price index. Most importantly, the Canadian prices of a certain medication can never be the highest in the world, often a title awarded to the US. To ensure that corporations follow the regulations, the PMPRB requires prices and sales data be reported within 30 days of first sale of a drug and every 6 months following that.

Even though Canada is doing well compared to the US, Canadians believe that even their own drug prices are too high. Canada is rated as the third highest among Organization for Economic Cooperation and Development (OECD) countries, placing them 22% above the median. This has been shown in recent proposals to the PMPRB. One key change would be the removal of United States and Switzerland, and the addition of Belgium, Japan, Netherlands, Norway, South Korea, and Spain to the list of “comparator” countries. This is believed to present a better comparison as consumers in Switzerland have a much higher income, but more importantly, the US does not have any price control mechanism in place.

This price difference between Canada and the US can be described as a case of price discrimination. Drug companies price their drugs for the highest possible amount, to maximize profits in each market. In Canada, that means pricing drugs at the limit that the PMPRB sets for each drug. However, in the US, there is no government organization that sets a price limit, which gives drug companies a free for all on drug price increases.

This price discrimination isn’t all bad for other countries. Medicine is most often cheap to manufacture and expensive to research and develop. Selling drugs in the US at higher prices can cover this expensive fixed cost of research and development. This, in turn, reduces the amount of fixed costs that drug companies have to cover in other markets, such as Canada. This essentially allows them to sell their product in less-profitable markets, which only cover variable, or certain manufacturing costs. In this way, other countries gain access to affordable medication that would otherwise not be possible without a price increase.

Should something be done about this?

The American population believe that something should be done about this. And clearly, something should be done about this. The situation is so far out of control that the Canada is interested in removing the US as a “comparator” country due to the lack of price controls.

However, it’s not possible to change the structure of the market. There should always be a high barrier to enter the drug market. The manufacturing of drugs should require strict government regulation to ensure public safety. In addition, awarding patents to inventors should still exist as it allows innovators to benefit from their own work instead of losing it to generic manufacturers. By nature, the drug industry is not very competitive. So, the most effective solution (similar to just about everywhere) would be to have the US government take action.

Although the possibilities are endless, here are a few frontrunners:

Solution 1: Allow drugs to be re-imported into the US from Canada and other countries.

Allowing Americans to import their medication from Canada would allow them a much cheaper alternative to the American drug market. This could also drive prices down in the United States to meet the Canadian price. This would require a lot of safety protocols, as Health Canada and the FDA have different standards. Canadian manufacturers would have to be inspected by the FDA. However, most Canadian drugs are already manufactured in the United States and imported to Canada, so there wouldn’t be much of an issue. This solution could reduce prices by 35%-55%.

A few other proposals include allowing American consumers to purchase from other countries with comparable standards, other than Canada. To combat safety concerns, the US could restrict foreign purchases to licensed foreign sellers only. This would also give US consumers access to lower drug prices through other markets.

The issue, and reason why policy makers do not like this solution is the fact that some countries wouldn’t want to welcome American consumers from purchasing from their markets. If Americans started purchasing from other markets, this could result in an increase in demand, either driving the prices up or in the case of a price ceiling, result in a shortage of drugs.

Although there are a few issues, allowing Canadian or foreign imports would certainly result in reduced prices.

Solution 2: Require drug companies to price drugs at one price for the entirety of North America.

This is a very ambitious idea. It would require cooperation between Canada, the US, and Mexico. And based on today’s political climate, cooperation doesn’t seem very common at this point in time.

Theoretically, however, it could work. Both Canada and Mexico, in addition to the US, would have to make a few changes to their pricing regulations. However, prices would be balanced for all three countries. Any fixed research and development costs for drugs would be spread over the continent, meaning that each country would be paying a reasonable amount for their drugs. In addition, this would still require price ceilings to prevent the issue of rising prices.

Solution 3: Introduce price ceilings through government regulation.

This is what Canada does. And it’s a proven system—it works in Canada, why wouldn’t it work in the US? Similarly to the PMPRB, the US counterpart could be a relatively small unit of the government. The US government could use a variety of criteria, similar to Canada, to set a price ceiling for each product. This may include comparisons to similar treatments, limiting profits, or judging the impact the drug would have on one’s well-being. Or alternatively, the US could use the piggyback method as Canada does, and base their drug prices on the prices of similar developed countries.

A far-fetched idea that could be implemented is removing patent protections for drugs deemed “excessively priced.” This would essentially “scare” drug companies to keep prices at reasonable levels, as the alternative would result in generic brands flooding the market and pushing prices even lower. This would still require criteria to judge whether or not a product is “excessively priced,” which could be similar to Canada’s current criteria.

Solution 4: Have the government manufacture drugs too.

No, this does not mean shutting down businesses and leaving it all to the government. Rather, this would only be for drugs (often patented) that do not have a generic counterpart. If a single or few companies are producing a drug, this would essentially add some competition to the market, attempting to create a market that is closer to perfect competition. The government wouldn’t need to necessarily profit, allowing prices to lower to affordable levels. This would also be an effective solution to counter drug shortages.

A similar possibility could include having the US government only produce drugs deemed “essential medicine” by the World Health Organization. This most crucially includes insulin, which has seen prices skyrocket in the US.

These are only a few of the potential ideas that could be implemented into the American healthcare system.

In the end, I’m sure that all of us agree that effective healthcare should be easily accessible to all. That includes the fact that prices should not affect whether or not we choose to use medication to treat a condition. And with the variety of solutions that the US government can choose from, it shouldn’t be difficult to close the price difference between the US and other developed countries. Although American drug companies may not agree, it’s time for change.

Big Pharma, Big Problem

If you’ve ever had the misfortune of falling ill on a vacation south of the border and having to buy medication, you’d know that we Canadians have it easy when it comes to drug prices. Americans pay about $342 more per capita for medicine every year than the average Canadian, making them the highest spenders in the world. Rapidly rising drug prices in the States regularly make news headlines, and Democrats and Republicans have found common ground on trying to find ways to make drugs more affordable to their citizens.

At first glance, it’s easy and tempting to assume that rising pharma prices are an effect of increased demand, rising production costs, and inflation. But when you look at the statistics, American drug usage hasn’t increased much over the years, and the rates are actually lower than some of their European counterparts, all of which still maintain significantly lower drug prices. Production costs haven’t gone up, either; economists generally agree that it’s getting cheaper to produce non-innovative drugs (in other words, drugs that have existed on the market for some time), so our big pharma friends are increasing their profit margins year after year. The inflation rate is at 2%, but some price hikes have been as high as 125%. So why exactly are Americans spending so much more on drugs than every other developed country, and how on earth is this being allowed to happen?

The biggest, and easily the most important, reason behind all this is government regulation. The United States is the closest thing we have to a market economy, with low government involvement and regulations in the business world; this near-free market system allows drug manufacturers to set their own prices with little-to-no pushback from regulators. There’s no such thing as maximum price limits for drug manufacturers, and the government lacks the basic negotiation strategies found in literally every other developed nation. Most countries around the world will go through a thorough screening process before buying or approving entry for a drug where they compare the new medication to its existing counterparts on the market. If the benefits of the new drug aren’t significantly higher than what’s already out there and the price increase on it is significant, a government like Britain’s or Canada’s will bid the manufacturer goodbye. The United States government has no such process; if the drug is found to be safe by the FDA, it’s sent to market.

Another incredibly important aspect to the situation is the lack of competition in the US drug market. The drugs with the highest price hikes are the ones that have been on the market for decades, like insulin or Epi-Pens, and those are precisely the ones with very limited competitions. The supply is usually controlled by one, or a select few, major companies, which allows them to bypass the annoyance of setting competitively low prices. The lack of competition mixed with the extremely inelastic demand in the drug market creates a dangerous scenario: if you can only get your life-saving medication from one supplier at one non-negotiable price, chances are that you’re going to keep paying for it no matter how high the price goes because you quite literally can’t survive without it. Without competition or elastic consumer demand weighing them down, big pharma companies have absolutely no incentive to keep their prices low.

Interestingly enough, this inelastic demand in a monopolistic marketplace allows drug manufacturers to “bypass” the supply and demand concepts that control most other markets. If we look at overall drug production in the United States, we have a steady, non-increasing demand and an increase in supply as drug innovation increases; according to the rules of supply and demand, this should cause the prices to go down. But because the demand for drugs is inelastic and people will generally buy their medication no matter how high prices get, drug manufacturers can keep raising their prices without seeing any drop in demand whatsoever.

Following the issue of supply, the United States has seen a massive increase in drug innovation in the last two decades or so. With the FDA relaxing their standards for approval, more drugs are able to enter the marketplace at a rapidly increasing rate, and with iron-clad patents leaving no room for substitute or competitive products, new releases can be priced to the manufacturer’s content.

Lack of regulation and competition are clearly the main drivers of these rising prices. But what exactly can be done about it?

The first, and most obvious, option is for the United States to tighten their regulations to match those of Canada and European countries. With stricter laws and negotiation processes in place, companies won’t be able to charge whatever they want, and new products won’t enter the marketplace with a high price tag unless it’s for a very, very good reason. In fact, this seems like the easiest and most “duh” approach to the matter; literally everyone else is doing it, so why doesn’t America follow suit?

Well, it’s not quite that simple. While America may be in the lead for ridiculously high drug prices, they also have one of the highest rates of medical innovation in the world. Because American companies can earn extremely high profit margins, they’re much more likely to take the risk of investing large sums of money into research and development, since their return on investment will be so high. Lack of price regulation creates an incentive for people to take risks and come up with revolutionary medication at rates that we just don’t see in countries with tighter regulations like Canada and Britain. So if the US were to implement price regulations, they would almost definitely see a drop in medical innovation in the country. If the United States were to pursue this route, it would need to fine-tune a balance between keeping prices low and maintaining a medical innovation rate.

So without limiting innovation, what else can we do to combat rising drug prices? Policy experts have thrown around all sorts of other ideas, ranging from allowing Americans to buy drugs from Canada to having the government produce some drugs on their own. Both ideas have significant drawbacks; having drugs imported from Canada would definitely raise Canadian drug prices and cause a drug shortage, while having the government produce drugs would almost certainly be a long, bureaucratic, and inefficient process with major pushback from big pharma.

Realistically, if the United States are serious about protecting their consumers and combating rising drug prices, they’re going to need to take a long, hard look at their regulations and come up with a way to put a cap on drug prices without dealing a major blow to medical innovation.

Whatever they do decide to do, they should do it fast. At this rate, basic lifesaving drugs are going to become unaffordable to the average American in a frighteningly short period of time, and as of right now the American government has absolutely no systems in place to deal with that kind of crisis. Maybe it’s time for our free market-loving friends down south to take a page out of our book for once, or they may very well face a situation that they didn’t quite bargain for.