Who Regulates the Cost of Drugs and Why Can’t They Be Dispensed Free of Charge?

Who Regulates the Cost of Drugs and Why Can't They Be Dispensed Free of Charge

In social networks, you can often find calls to raise funds for medicines for a sick child. A logical question arises: why won’t the state save this child by paying for the necessary drugs? We figured out how drug prices are determined, who should regulate them, and why pharmaceutical companies do not distribute drugs to save lives.

How are drug prices determined?

Manufacturers of medicines and pharmacies participate in the formation of final prices. Pharmacies set a mark-up on medicines, but the main cost is formed by the pharmacological company. The final price depends on many factors: the effectiveness of the drug, the market, the purchasing power of the population, the cost of research and production, advertising costs, and the like. For example, if a manufacturer develops a cancer drug that has a high rate of successful trials, and there is no other equally effective drug on the market right now, it will most likely be quite expensive.

In 2013, the pharmaceutical company Gilead Sciences released a hepatitis drug called Sovaldi. The company estimated it at $1,000 per pill, or $84,000 for a full course of treatment. At the same time, the real cost of all components of the drug was about $100 per course. However, this did not stop Gilead Sciences CEO John Martin from making more than a billion dollars in several years of selling Sovaldi. Many Americans even had to take payday loans to afford treatment with Sovaldi. The popularity of payday loans is due to same-day funding and relaxed eligibility criteria. For example, to get accepted for quick loans Massachusetts, you only need to have a government-issued ID, a source of stable income, and a personal bank account. The money can be spent on anything, including the purchase of expensive drugs.

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The UK National Health Service was unable to include this drug in the public procurement list because of its price – even though it is vital for a certain category of citizens. The United States even wanted to sue the company for too high a price, but probably realized that the court would not be won. The cost of a drug from the point of view of doing business is quite objective: before the appearance of Sovaldi, there were drugs on the market with less efficiency, which cost about 150 thousand dollars per course. Therefore, the drug from Gilead Sciences was also more profitable for the state.

If we are talking about new drugs of those categories that already have competitors on the market, their price will depend mainly on the cost of competing drugs. The difference in price should not be higher if the efficiency differs little. However, even in this case, the price may rise – for example, due to a markup from a pharmaceutical company for the money invested in marketing or some insignificant component that practically does not affect the effectiveness of the drug.

Can the government somehow regulate this?

The state may try to do this. In the case of Sovaldi it was powerless. In general, there are four main methods of government regulation of drug prices:

  • Setting fixed prices – the state sets the maximum price threshold based on the general price level, budgetary restrictions on public procurement, the procedure for providing prescriptions for drugs, the importance of the pharmaceutical industry, etc.
  • Regulation of profits – pharmaceutical companies limit their profits due to the fact that the state sets the maximum allowable threshold for it.
  • Efficiency-based pricing – involves the economic assessment of medicines (cost-benefit analysis). This method is usually used in addition to other methods.
  • Setting base prices – in this case, the maximum price tag for goods of one category is set. The base price can be calculated based on the average price of drugs in this category, the price of one or two of the cheapest drugs in the category (as in Denmark), or the price of the cheapest equivalent (as in Sweden).
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Most often, different countries of the European Union use several options for regulating prices in the pharmacology market at once.

Are absolutely all vital medicines paid by the state?

Unfortunately, no. Basically, such lists include drugs that are used most often. However, there is another caste of patients – orphan patients.

Orphan diseases are congenital or acquired diseases that are extremely rare – less than one case per 2000 population of the country. 80% of these diseases are genetically determined. They not only have a severe and chronic course, but are also accompanied by a decrease in the quality and life expectancy of patients.

Usually, drugs for the treatment of such diseases are rarely produced due to insufficient demand. Accordingly, they are very expensive – not because the manufacturer wants to cash in on them (although often and therefore also), but because of the high cost of producing small batches.

For orphan patients, the state annually allocates about a quarter of the total budget for the purchase of drugs and medical devices. These funds are used to buy medicines for people suffering from cystic fibrosis, primary immunodeficiencies, Gaucher disease, Pompe disease, tyrosinemia, phenylketonuria, mucopolysaccharidosis, pulmonary arterial hypertension, epidermolysis bullosa and other rare diseases. However, this is not even half of all orphan patients in the country. The state cannot provide more due to the lack of funds in the budget.

Why can’t the company supply the patient with vital medicines?

Because it is a very profitable business. In developed countries, the state can buy at least some of the medicines necessary for the life of citizens, but what about poor countries that do not have such an opportunity?

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The main goal of any business is to make money. Pharmaceutical companies are no exception. Behind the global pharmaceutical market is an influential system of lobbyists who advance the interests of the industry and prevent the adoption of laws that would regulate drug prices for consumers.

For example, in 2015, entrepreneur Martin Shkreli was sentenced to seven years in prison in the United States. At first, he devalued the shares of pharmaceutical companies through deception and speculation, and then he bought these companies and raised the prices of the drugs they produced dozens of times. Thus, he raised the price of Daraprim, a drug for the treatment of toxoplasmosis, the standard treatment for HIV infection worldwide. First, his company bought the right to manufacture the drug, and then raised the price for it from $18 to $750 per tablet. Because of such schemes, he is considered one of the “most hated” millionaires in the United States.

Discussions about the possibility of providing some patients with drugs for free have been going on for a long time. One of the arguments “against” is that most of the profits from the sale of drugs often go to new research. That is, if a pharmaceutical company donates drugs for free, it does not receive enough money, which affects new research – and, accordingly, patients who need new drugs. This argument is based on the belief that it is unjustifiable to save the lives of the poor by providing them essential medicines, while at the same time depriving people of new medicines who can afford to pay for them.

Another argument is based on the idea that a pharmaceutical company in its obligations is no different from other types of companies. That is, in fact, they are obliged to save lives in the same way as representatives of any other industries are obliged to do. Social responsibility in modern companies is undoubtedly an important component, but it cannot work to the detriment of the company’s profit and is not something obligatory.