Red tape at the FDA doesn’t explain America’s high drug prices

Earlier this week I wrote about how a lack of drug price regulation in the United States allows pharmaceutical companies — including EpiPen’s manufacturer, Mylan — to charge exceptionally high prices for their products.

Scott Alexander at the blog Slate Star Codex argues that I’ve got it all wrong: The problem isn’t a lack of price regulation. Instead, its too much regulation, which has prevented generic competitors from entering the market and has left EpiPen’s price so high. Here’s a bit from his piece:

If a chair company decided to charge $300 for their chairs, somebody else would set up a woodshop, sell their chairs for $250, and make a killing — and so on until chairs cost normal-chair-prices again. When Mylan decided to sell EpiPens for $300, in any normal system somebody would have made their own EpiPens and sold them for less. It wouldn’t have been hard. Its active ingredient, epinephrine, is off-patent, was being synthesized as early as 1906, and costs about ten cents per EpiPen-load.

Why don’t they? They keep trying, and the FDA keeps refusing to approve them for human use.

Alexander’s piece (which you can read in full here) makes the case that more generic competition would lower EpiPen’s price, and that is near certainly true! The Food and Drug Administration has found that the more generic competitors enter the market, the more the cost of a given drug declines. And it is undoubtedly true that there are obstacles to bringing generic drugs into market in the United States right now. The FDA has reported a three to four year back-log for generic drugs to even get to the review process.

Alexander sets up the difference between our arguments as a split in views of regulations: I favor more regulation of drug companies, and he favors less. He says that it’s absurd to argue for more regulation when the problem is too much regulation to begin with.

But it doesn’t really make sense to put all regulation on the same playing field here. Some regulations, after all, are really good for pharmaceutical companies — and some are quite bad for their business.

Alexander and I are both essentially pointing out two examples of how the United States has created a regulatory system that is incredibly favorable to pharmaceutical companies. We’ve set up a system that makes it incredibly easy for drug companies to score high profits and charge exceptionally high prices for their products.

One way it’s favorable is that we let drug companies pick their own prices — in this way the United States is exceptional, as the vast majority of developed companies regulate their drug prices.

Another way we’ve created a favorable regulatory environment, as Alexander writes, is by allowing roadblocks to stand in the way of generic drug makers who want to enter.

Greater use of generic drugs is widely accepted as a way to drive down drug spending. The FDA has found that drug prices decline to 55 percent of the brand-name price when two generic manufacturers begin making a product.

Right now, the United States already uses a lot of generic drugs. In fact, about 90 percent of drugs prescribed in the country right now are generic.

Brand name drugs are the reason that America has higher per-capita drug spending than other countries. Brand-name drugs make up just 10 percent of prescriptions filled in the United States, but account for 72 percent of drug spending.

Drugs that are under patent are the true source of high American drug costs. EpiPen is, in a way, a bit of a red herring. It is harder for other manufacturers to create generic epinephrine injectors than it would be to create other generics because the actual injector pen remains under patent — although as Alexander points out, the FDA certainly hasn’t made the process any easier.

Our brand-name drugs are much more expensive than other countries’. As Harvard health economist Aaron Kesselheim writes in his recent review of drug spending in the United States, “Drug prices are higher in the United States than in the rest of the industrialized world because, unlike that in nearly every other advanced nation, the US health care system allows manufacturers to set their own price for a given product.”

Humira, a medication used to treat multiple autoimmune diseases, costs $2,699 in the United States — compared to $822 in Switzerland and $1,253 in Spain. Harvoni, a pill that cures Hepatitis C, costs $32,114 here — and $22,554 in the United Kingdom.

Less red tape around generic drug competition wouldn’t really change that fact. As long as we’re going to have patented drugs, letting drug manufacturers set their own prices will remain a key driver of America’s higher drug spending.