Drug Prices Outpace Inflation
This is a serious issue. New drugs enter the marketplace at a higher price to recoup the costs of development. Do the prices come down over a period of time? Not necessarily, there-in lies the issues. When are drugs paid off? Can’t say I have an answer yet.
I am combining old data with new data. Just attempting to show this is not new.
Drug prices have outpaced inflation since the 1990s, USAFacts
Drug prices were 5.5 times higher in 2024 than in 1985, according to Bureau of Labor Statistics (BLS) data, and their increases are outpacing general cost-of-living increases: The cost of medication has gone up three times as fast as the overall rate of inflation, with drugs targeting heart disease rising the fastest.
How are increases in drug costs measured?
The analysis is based on the producer price index (PPI), which is based how much a producer charges for a good. It’s one of the statistics used by the government to show how inflation affects prices over time. This is different from the consumer price index, which is based on how much consumers pay for a good.
Which medications have gotten more expensive?
Since 2002, prices for cardiovascular medications have risen more than any other drugs. A cardiovascular drug that cost $100 in January 2002 would cost about $455 in January 2025, according to BLS data. Most of these drugs treat heart disease, the most common cause of death nationwide.
Insulin and antidiabetic drugs have had the second-highest growth — a drug that cost $100 in January 2002 would have cost $442 in January 2025. Insulin costs reversed course in 2023, when the Inflation Reduction Act capped insulin costs for Medicare enrollees at $35 a month — from January 2023 to January 2025, the price of insulin dropped 16%.
Heart and diabetes medications have had the largest price increases since 2002
How are drug prices determined?
Out-of-pocket drug prices depend whether the purchaser has insurance and, if they do, how much their plan covers. Public and private health insurance plans have covered an ever-increasing percentage of nationwide prescription drug costs — from 16% in 1970 to 68% in 2000 to 85% in 2022 — as updated legislation required many plans to increase prescription allowances and Medicare has added coverage.
Private insurance plans negotiate prices with drug manufacturers and wholesalers and, as of 2022, Medicare can do the same for drugs that have a high total cost to the federal government, don’t have a generic alternative, and have been approved by the Food and Drug Administration (FDA) for at least seven years.
Generic alternatives to brand name drugs can lower prices, according to the FDA. New drugs usually start out with patent protection, so they can’t be replicated by another company. Once patents for these branded drugs expire, the FDA can approve one or more generic alternatives, which must work the same way as the brand-name version. These generics tend to be cheaper to manufacture because they require less research and testing to demonstrate safety, so they create competition that drives prices down.
The chart below details the percentage of price increases from 2012- 2017. The factor here was wew and old brand-name competition does little to control the rising costs of products which can be used interchangeably. So, knowing pricing does little to control prices between competitive drugs.
As I wrote back then this shoots price transparency in the foot for constituents. Talking to pharmacists for will not work. Drugs such as Humira and Enbrel or diabetes drugs such as Humalog, Humulin, and Novolog will still be costly. “Relative cost changes are highly synchronized” resulting in large increases over the last 6 years. As mentioned there appears to be a pattern or practice of pharmaceutical companies acting in concert.
Figure 2. Comparison of Annual Net Price Percentage Increase and Annual Paid Price Percentage Increase for All Drugs Examined
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The article and chart above is old. I really need to revisit it again and see what is new in the world.
One thing I’ve noticed is that generics are rarely a lot cheaper than patent expired brand name drugs. This makes business sense. If someone is selling a $100 drug and the patent expires, this creates an opportunity to sell a cheaper version, but it makes no sense to sell it at $10 when you can sell it at $90. I get the general impression that pricing does not work as taught in Economics 101.
Some years back there was a used entomology textbook selling on Amazon for $24M. There were two sellers, but only one had a copy of the book. The seller without a copy did have a better reputation, so they offered the book at the other seller’s price plus a 25% premium to cover the cost of buying it, repackaging it and shipping it. The other seller undersold that seller’s price by less a percentage point or two. The price started around $100, but rose quickly. If anything, modern price transparency makes it easier to keep prices higher.
Also, if you look at modern pricing, price cuts are relatively rare. After all, if you make your product cheaper you risk losing revenue. So, fast food restaurants compete on the size of their soft drinks, not the price of their soft drinks. When a new gadget comes out, it tends to sell for the same price as the older model. It makes more sense to load it up with more features than selling it at a lower price. There’s an economic theory that as production grows more efficient, prices come down, but modern consumers tend not to see much of this.
Kaleberg:
I am manufacturing and Supply Chain. So, I know the costs of materials. labor, and overhead. To resolve one issue. labor is not the big cost when demand is prevalent. When demand disappears, labor costs and the overhead associated with it become problematic. There still remains Overhead for the facility and the costs of materials as you are never at zero. When you are in the position I was in, you match the demand for product against the materials to make the product. In 1982, I kept one company profitable for 14 months by matching materials to demand. When it balanced out, I was done and out of a job. My jackass boss was former sales and could not do what I did for the company including implementing Resource Planning.
There is no expensive product once all costs are recouped and even before that, one could take lower profit to be competitive and max out the facility Overhead through greater utilization. Nothing is iron-clad except throughput. If you max that out, then you could turn to obsolete ways of manufacture which are more costly and has less profitability to satisfy demand.
It is about costs, capacity, and demand.