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The real reason medical drug costs are so high from big pharma? This is why.

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The real reason medical drug costs are so high from big pharma? This is why.

Ever wondered why medical drug costs are so high, and why “Big Pharma” is so rich?

The lack of a free market means medical drugs cost outrageous amounts, and increasing market consolidation will exacerbate the problem.


Article courtesy of The Guardian 23rd April 2014.


This morning we heard of the row between the drug company Roche and the government’s drug adviser, the National Institute for Health and Care Excellence (Nice), apparently negotiating over the last six months of the lives of women suffering from breast cancer. At issue was the £90,000 per patient that Roche is charging for the drug Kadcyla, which is not a cure but can extend life. Protected by what are known as intellectual property rights, the company has a legally sanctioned monopoly and is free to set its price. This process is a game of chicken between the company and the government, which is subject to lobbying by desperate families but also restrained by a limited budget.


Pharmaceutical companies can extract enormous profits by controlling knowledge about how to make their drugs. Economic theory about market competition would suggest that, on seeing the huge profits being made, other producers would enter the market and produce the drug more cheaply. This is exactly what manufacturing companies have been doing in recent years, particularly in India, providing generic drugs to patients in the world’s poorer countries. But this has been challenged by big pharmaceutical companies, which use their intellectual property rights to constrain the operation of market forces to their benefit, and to the disadvantage of the world’s poor.


The first test case of the rights of corporations to profit v the rights of the world’s people to life was fought in South Africa in the late 1990s. At that time as many as a quarter of its people of working age were HIV positive, and the government decided to ignore international law and import generic Aids drugs from India. The price difference remains staggering – $350 for a year’s supply compared with $10,000 for the branded medicines – so a poor country like South Africa had little choice.


South Africa was able to justify its actions under clauses in the trade-related intellectual property rights (Trips) agreement exempting countries that face public health disasters, but its actions were challenged by the US trade representative and action was taken against the South African government by the Pharmaceutical Manufacturers Association of South Africa. The government’s courage was rewarded and the case was eventually withdrawn in 2001, with the agreement of a deal on reasonable pricing and availability of Aids drugs.


The lack of a free market in pharmaceuticals puts pressure on health systems in richer economies too, because the cost differences are huge: the British Generic Manufacturers Association says: “The average cost to the NHS of a generic medicine is £3.79, whilst the average cost of a branded medicine is £19.73.” The difference of £16 is the reward to the company for investing in research and development. The argument for this suspension of normal market forces is that without such an incentive new drugs would not be invented.


The row between the UK government and Roche implies that this argument is beginning to unravel, but it also points towards the underlying problem: the lack of true competition. While the rhetoric of free markets is more widespread than ever, the reality has been an increasing degree of consolidation in recent years. The alliance between Novartis and GlaxoSmithKline is the latest example, followed swiftly by the AstraZeneca bid for Pfizer.


And the problem of market consolidation and corporate power is not limited to the pharmaceutical sector. Just last week, the German publisher Axel Springer accused Google of seeking to establish a “digital superstate”; and there was also speculation about a merger between the beer giants SABMiller and AB InBev. February, meanwhile, saw the merger of banana giants Fyffes and Chiquita.


The trade talks taking place between the EU and US may further diminish the power of national governments to control consolidation: the draft Transatlantic Trade and Investment Partnership is said to threaten governments with damages if they introduce legislation that might undermine the returns corporations expect to receive from their investments within national territories. Enforcement of market competition and anti-trust action might be liable to legal action.


Health commentators seem to have been distracted by the debate about privatisation from looking too closely at the market power of big pharmaceuticals. Those who care about health and freedom – dammit, even those who care about a functioning capitalist economy and fair competition – should be raising more questions about the way our drugs are manufactured and how the knowledge over life and death is owned and controlled.

My Comments:

It’s clear from this article that the issues of rising medical drug costs issues in health insurance aren’t confined to NZ.

For a quote on Health Insurance so you can avoid most of these issues, or to discuss specific insurance policies that can help you avoid large medical drug costs, should you ever need them, just email or ring me.

Best wishes, Mike Bennett

Mike Bennett

In 1985, after 7 years in the banking industry in NZ & London, Mike Bennett joined the Life Insurance Industry as an adviser. In 2001 he started “Acorn Insurance & Investment Ltd” with the key principle; “to satisfy the insurance and investment needs of New Zealanders with the best products and service possible”. To achieve the guiding principle of “best products and service” the “Acorn” uses various industry research tools to identify the best products and prices to meet our client’s needs. Acorn has agencies with most of New Zealand’s major insurance companies which means we are free to use whichever products best meet our client’s needs. Believing that if we get it right for our clients we will achieve win-win solutions. We also recognise that nearly all insurance solutions are a compromise between the benefits you’d like to have versus the premiums you’re prepared to pay – with this in mind we WON’T be trying to sell you more insurance than you need or want !!

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