There are two main drivers: strict enforcement of liberal intellectual property laws, and political restriction of bargaining power.
The grant of a patent on a drug compound gives its owner a monopoly for the lifetime of the patent, which is now 20 years. During this time the patent holder is free to charge as much as they believe the market will bear without the threat of being undercut by competition.
This is not quite as bad as it sounds – drugs are patented before they receive FDA clearance for marketing, so the effective life of the monopoly is usually on the order of 10–16 years, not 20.
Some countries – India and South Africa are prime examples – are not particularly respectful of intellectual property rights. They have refused to enforce patents when homegrown competitors make generic versions of on-patent drugs, or they threaten to do so in exchange for country-specific reduced pricing.
But pharma companies have gotten very creative about extending their monopolies. One strategy is to pay generic drug manufacturers not to compete[1] . Another is to make very minor – and in my opinion, obvious – changes in formulation that result in new patents and a brand-new patent clock.
The most notorious example of this practice is Prilosec/Nexium for acid reflux disease[2] . The active ingredient in both drugs is precisely the same. However in the original formulation (Prilosec), the drug is a 50:50 mixture of two mirror-image versions of the same molecule. One version is active, the other is inactive.
AstraZeneca, Prilosec’s owner, figured out how to purify the active version away from the inactive one. This was challenging but not any kind of a breakthrough. Doing this was a pretty obvious step – of course you want a formulation to consist of its active ingredient. Patents are supposed to be granted only for inventions that are non-obvious, but the patent office sets a very low bar for non-obviousness, and granted AZ a patent for the purified form, known as Nexium.
Nexium’s clinical benefits over Prilosec are very modest, and mostly result from comparing the two drugs at equal doses, even though Prilosec is only 50% active. But AZ has marketed the hell out of Nexium, and global sales are around $4B[3] .
Nexium vs Prilosec (omeprazole). The benefits of Nexium are modest, even though given at 2-4X the effective dose of omeprazole.
The other driver of high US drug prices is a lack of bargaining power. Other countries have centralized/universal health care organizations that can and do negotiate with pharma companies on price. The US has Medicare and Medicaid. Although they are not universal, they do comprise about 30% of drug sales in the US, which should give them plenty of bargaining power.
Except that they are specifically prohibited by law from bargaining. Medicare and Medicaid must pay for nearly all FDA-approved drugs prescribed by a physician. But the Republican Congress, when it set up Medicare Part D in 2003, forbade Medicare from negotiating drug prices. Since Medicare must cover all drugs, and cannot bargain, pharma companies are free to charge as much as they like, knowing that Medicare simply has to pay up. This is a legally mandated transfer of funds from taxpayers to pharma companies.
And don’t expect this to change with a Republican Congress and President. US taxpayers will continue to be raped in this way for the foreseeable future.
Footnotes
[1] Generic drugs agreement struck down as anti-competitive
[2] Why no one should take Nexium and it should never have been approved
[3] Nexium, AstraZeneca