5 Undeniable Reasons Your Prescription Drug Costs Are So Ridiculously High

Americans spend a little less than $1,000 annually per person on average for prescription drugs. That's the average, which means that many spend a lot more. Why are prescription costs so ridiculously high? You might not like the answers, but here they are.

1. You're paying for other drugs that you don't use.
When you put your money down at the pharmacy for Lyrica, the nerve and muscle pain drug from Pfizer (NYSE: PFE  ) , you're really paying for your Lyrica prescription plus a whole host of other drugs. How's that possible? The answer lies in the realities of the drug development process.

Dr. Josh Bloom with the American Council on Science and Health estimates that it takes a drugmaker an average of 14 years to bring a drug to market -- at a total cost of around $1.3 billion. However, only one out of every 50 drugs that start down the development path actually make it to market. And, of those that do, typically only two out of 10 will make a profit.

Pfizer spent around $890 million on cholesterol drug torcetrapib, only to cancel the drug's development program in 2006 after serious safety concerns. The big pharmaceutical company wrote off $2.8 billion on inhalable insulin Exubera after consumers simply didn't like it.

How did Pfizer make up for those and other losses? Like all the other drugmakers, it added to the cost of the drugs that did succeed -- so Lyrica and others cost more than they would have otherwise. 

2. You're paying for the world.
The weight of the world might not be on your shoulders, but the weight of subsidizing the world's drugs is. Prescription drug costs are higher in the U.S. than in any other country. Per-capita pharmaceutical spending in Canada, the second-highest nation, is a whopping 33% lower than in the U.S.

Two words explain why: price controls. Most other countries establish fixed price limits that they will pay for prescription drugs. What this means, though, is that pharmaceutical companies raise their prices for prescription drugs sold in the U.S. to make up for charging lower prices throughout the rest of the world.

You might think the simple solution is to implement price controls in the U.S., too. Such a move probably would lower prices for the drugs currently available.

The problem, though, is that it would provide financial disincentives for pharmaceutical companies to develop as many new drugs as they do now. If that happened, it could end up actually increasing overall health care costs, since taking prescription drugs is frequently much less expensive than other medical treatments.

3. You're paying for others to find out about the drug you use.
Marketing is king in the world of pharmaceuticals. And it demands a king's ransom. Unfortunately, you ultimately pay that ransom every time you buy a prescription drug.

Pfizer's advertising budget last year totaled more than $622 million. Over half of that budget was spent promoting three drugs -- Celebrex, Viagra, and Lyrica.Eli Lilly (NYSE: LLY  ) wasn't far behind with an ad budget topping $433 million. Nearly 94% of that amount was spent on only two drugs, in this case Cymbalta and Cialis.

Nielsen's tracking found that the top 10 pharmaceutical companies spent $2.7 billion last year on direct-to-consumer advertising. However, that figure doesn't include online advertising or physician promotions, so the actual marketing budgets for the big pharma companies is even larger. Research firm Cegedim estimates that total pharmaceutical industry spending on promoting drugs was around $28 billion in 2010.

You're also likely picking up part of the tab for the companies mistakes in how they promote their products. For example, Abbott Labs (NYSE: ABT  ) settled federal and state lawsuits accusing the company of inappropriate promotion practices for epilepsy drug Depakote for a cool $1.6 billion last year.

At the time of the settlement, the Justice Department said that the case demonstrated that "those who put profits ahead of patients will pay a hefty price." A hefty price was surely paid, but Abbott's profits for 2012 were more than 26% higher than either of the previous two years.

4. You're paying Uncle Sam.
Don't forget your good friends at the IRS. The passage of the Affordable Care Act brought new fees for large drugmakers totaling $80 billion. That amount is spread over multiple years, though. "Only" $2.8 billion was paid by pharmaceutical companies last year.

Technically, the big pharma companies pay these fees, which basically are excise taxes. However, those companies can't pay the IRS unless it first gets the money from its customers. Ultimately, you're paying Uncle Sam.

5. You're paying for profits.
Regardless of what product you purchase, you're paying for the maker of those products to make money. It's no different with prescription drugs. The concern is over whether prices paid by consumers contribute to excessive profits.

Most pharmaceutical companies generate nice profits. Despite Lilly's woes from losing patent protection for some of its big drugs, the company still had a profit margin of over 20%. Even though Abbott paid a steep fine last year for a legal settlement, its profit margin was 13% -- better than a lot of companies.

Pfizer ranks first among all Dow index stocks in terms of profit margin, with a margin of nearly 27%. The other two pharmaceutical companies in the Dow have profit margins higher than the average Dow company. However, of the top 10 Dow stocks ranked by profit margin, four are technology firms. Pharmaceutical companies generate high profit margins, but they're not always the highest among all industries.

A little good news
You're paying ridiculously high prices for prescriptions, but there is a little bit of good news. In 2012, Americans actually spent less on prescription drugs than the prior year for the first time on record. It was only 1% less -- but that's still better than spending more.

I figure this improvement amounts to maybe having an extra $10 in the wallet for the average American. You might want to hold on to that money. You'll probably need it soon enough.

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Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2013, at 10:41 PM, RxPro wrote:

    This article is missing the number ONE reason... in the section about why the USA pays more than other countries it is due to the LEGAL RIGHTS that US users have in case of adverse events to a medication. Legal suits are often worth millions PLUS if the drug gets removed from the market the company loses prospective profits as well.

  • Report this Comment On June 30, 2013, at 8:33 AM, RegExpert wrote:

    Basically, we in the US are fools!!!

    On top of that, the PHRMA blackmails the US citizens saying that new drugs will not be developed if we place price controls!

    Do these companies have a choice of abandoning the US market if we don't pay?? There is no other market in the world will pay for this robbery!

    More importantly, more than 50% of so called new drugs are not really new drugs according to the recent FDA approvals....This wasteful drug research can only be prevented if the companies terminate unsafe or non efficacy drugs early in the drug development program rather than keep spending and continuing the research despite early safety signals, like what happened with Pfizer's torcetrapib. Citizens cannot be penalized with higher prices for inefficient/greedy way of doing research by this big pharma. First their CEO's are paid too much money for their unethical behavior like spending money on ghost articles, paying physicians for illegal promotions etc etc.... It's time that US gives ultimatum for these companies either to behave and smarten up or leave this land. Let's see if they can find another lucrative easy money making market!!!

  • Report this Comment On July 01, 2013, at 12:09 PM, timmacaula wrote:

    So...the Pharma industry is like every other industry and exists to make a profit and reward their owners/shareholders. Why is this news? Companies pass fees, expenses and costs associated with government regulation on to the consumers. That's how it works.

  • Report this Comment On July 01, 2013, at 5:37 PM, PEStudent wrote:

    I don't like this article one bit.

    We are paying through the nose for Pharmaceuticals because Big Pharma owns Congress.

    When I was asst. chief chemist for process research and development for a large chemical company, one of assignments was pharmaceutical intermediates. I can tell you that the "risk" is spread around several companies when a new drug is being developed. Advertising eats up TWICE as much as research and development.

    So the line in this article about paying for future drugs is true - but it's a TINY amount.

    Take a look at how many drug company salemen and middle-management people retire as multi-millionaires and you get an idea where the money is going.

    We pay 50% more than Canada not because Canadians are subsidized, we're paying because Congress is subsidized!

    Personally, I have made MUCH profit from Pharma and continue to do so. Thank you Americans for being SO darn stupid!

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