Drug Debate

Nobel Prize winning economist Milton Friedman argued that businesses have one social responsibilityвЂ"to maximize profits. This comprises the “free market” philosophy which supports allowing a price to reach however high the market will tolerate . Although this may be considered good business practice is some instances, it fails to recognize the social impact such decisions have on society. Companies are thus faced with recognizing these social impacts and acting accordingly, or they can ignore them until the people of the community begin to get angry and complain. Allowing the free market to set prescription drug prices causes prices to reach an offensively high amount, so high that many people here in the United States cannot afford them. The elderly and chronically ill are the most affected in this situation. Elderly people often have to buy their prescriptions on their own because Medicaid will not cover it . According to a survey taken in 2003, one-fourth of senior citizens in the United States have been forced to quit taking much needed prescription medications due exclusively to the inability to afford them . These high prices are a result of the United States’ method of free-market sales of prescription drugs. This is a very controversial topic, currently, and it is giving many American citizens a negative attitude towards the many pharmaceutical companies in this country. Recent Harris polls confirm that the pharmaceutical industry comprises the bottom of the rankings alongside the oil, managed care and tobacco companies in relation to positive public attitude… “No other industry has fallen as hard and as fast as has the drug industry in the poll since 1997, i.e. 35% in 6 years. Just 13% of the poll respondents described pharmaceutical companies as "generally honest and trustworthy"’ . Several people believe that a more efficient method of setting prescription drug prices would include involving the government to regulate the sale price. Others think that there should be a form of bargaining that takes place between the government and the pharmaceutical companies in order to reach a compromise. The drug industry has clearly reached an outrageously high-pricing method that is in dire need of some form of change to ensure that the American people can afford to take care of themselves.

Prescription prices escalated to over six times the rate of inflation in 2001. The average price per prescription increased 10% from 2000 to 2001, while the inflation rate was only 1.6% in 2001. This disproportion has spun out of control, and one of the main contributing factors is letting the free market determine price of prescription drugs. These increases have led the pharmaceutical companies to gain tremendous profits here in the United States. It is estimated that nearly two-thirds of their profits come from the United States because they can charge outrageously unreasonable prices here and not elsewhere due to lack of government regulation . For example, the drug valium produced by Roche Products cost nearly triple the price in the United States than elsewhere.

An illustration that exemplifies the intensity of the situation can be portrayed by considering the drug Azidothymide, or simply, AZT. This is the drug used to treat HIV/AIDS. This treatment costs about $6500 per year, set by the Burroughs-Wellcome Company, which is not reasonable for the poor and those without proper insurance coverage . Since this company has a patent on the drug, they are the only supplier of an effective AIDS treatment. Thus, they can set an unreasonably high price, as they have done, and the demand is still there. In this scenario, the consumers do not have hardly any influence of the market price. This leaves a majority of those in need of this life-saving drug helpless because they have no means of accessing the drug.

American society as a whole is harmed by the free market pricing method for prescription drugs. More specifically, a majority of the harm falls upon the elderly, the sick, the poor, and those who do not have or cannot afford health insurance. The insurance companies are also harmed because they have to fork over millions of dollars to help cover the cost of prescriptions. Additionally, the government is harmed because the high prices drive up the cost of Medicare and Medicaid. According to Dr. Matthew Openshaw, professor of Public Policy and Political Economics at the University of Texas at Dallas, over 6.8% of the annual GDP in the U.S. is spent on Medicaid and Medicare services and with the exception of national defense spending no other industry compares with the amount of money government spends on health services .

The drug companies benefit from a free market pricing method because it allows them to charge incredibly high prices for drugs because they possess a very inelastic product and people have no other alternatives. “The drug industry currently boasts a return on sales of 20%. Also, its return on common equity of 31.9% compares quite favorably with the average return of 11.7% and is the highest of all the industry groups tracked by Business Week”. The shareholder’s of the companies benefit because profits are highly maximized, furthermore the doctors who prescribe the drugs also benefit because the companies go in and market to physicians to increase demand for certain drugs. Foreign companies benefit because U.S. citizens who cannot afford to pay for drug prescriptions here in the United States are forced to look elsewhere for affordable prices. With foreign drug prices being significantly lower and easily accessible (due to the internet) this makes them the best alternative.

An argument many pharmaceutical companies give regarding their high prices is that they must charge a lot for the drugs they make in order to pay for R&D and because manufacturing a drug brings with it a lot of risks. Interestingly, we discovered that economic theory in the pharmaceutical industry is being misused by the industry. Everyone was taught that in economics that fixed costs like research do not determine prices. The market sets prices, meaning they are open to free trading like stock prices. A patent essentially turns the market into a monopoly because only a monopoly can claim that fixed costs determine prices because it can make that a self-fulfilling prophecy. The declaration by pharmaceutical companies that they have to set prices at 50-100 times production costs to recover R&D costs has never been authenticated, because they have never allowed their books to be inspected by an independent agency to prove it . What we do know is that all R&D costs are fully recovered each year from domestic sales in the UK and Canada at prices that are far lower than those