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How to Pay Less for Pharmaceuticals – Just Say No

February 20, 2011

A study by the AARP in 2010 found that the cost of brand-name prescription drugs grew 8% in 2009, compared with the overall inflation rate of -0.3%.  Over a 5-year period, retail prices for 207 brand name drugs increased 41.5 percent by December 2009, compared to the general inflation rate of 13.3 percent during the same period.

Why does this happen? The drug companies know that doctors and patients are very reluctant to change medications once they’re started and are perceived to work. Even for classes of drugs with lots of generic options, such as blood pressure and diabetes medicines, patients are reluctant to change established habits even if a much less expensive option becomes available. It’s kind of like a loss leader. The drug companies don’t make as much profit on the front end, but know they’ll make the bulk of their profit later as they increase the price of their patented drugs 6-11% per year.

Other countries such as Canada spend much less on medications. Their costs for patented drugs are about half the cost of U.S. drugs. The medications are purchased by government agencies at the provincial level and must meet cost-effectiveness guidelines. It doesn’t take much to get the drug companies to lower their prices. In a typical provincial formulary there are only a handful of drugs not available to those residents that are available in the U.S. Just saying NO to a few expensive medicines of marginal or rare benefit is enough of a shot across the bow of the drug companies that they are willing to drop their prices to such comparatively low levels. Some revenue is better than no revenue.

The fact that a government entity buys the drugs is really not the issue. The more important issue is the purchaser refuses to buy drugs that cost too much. This same reality plays out in all other developed countries except most of the U.S. In the U.S. those purchasers could conceivably be Medicare, Medicaid, and private insurance companies. The VA system is the only large payer I’m aware of that uses its purchasing power to get better deals on medications than other systems.

The deeper reality that is not mentioned often in commentaries on drug pricing is the relationship between the citizens of other countries and their healthcare systems is different from the U.S. There is an understanding that the healthcare systems have limits and difficult choices must be made, including not supplying every possible drug no matter the cost.

The next time you’re at your doctor’s office and he wants to prescribe an expensive patented drug, ask if a cheaper generic would work about the same. Don’t assume newer is always better, both for safety and cost reasons. Especially for chronic conditions, choosing generics will maximize the chance your drug costs will not expose you and your fellow employees (who give up wages to pay for health insurance premiums) to a decade of rampant pharmaceutical inflation.

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