Costs Of Prescription Drugs Spike

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Prices for brand-name prescription drugs are on the rise. In some cases, they are up by more than 8 percent despite a decline in generic drug prices. Uwe Reinhardt, a professor of economics and public affairs at Princeton University, offers his insight.

ROBERT SIEGEL, host:

Now, a talk with a prominent health care economist about a trend that the New York Times reported on earlier this week: prices for brand name prescription drugs are going up, typically by more than eight percent. That is despite a decline in the consumer price index, that is, prices are generally not going up, they're going down. And it's also despite a decline in generic drug prices.

This has led to charges that are heatedly denied by the drug companies that they are boosting their prices in anticipation of a health care overhaul, an overhaul for which they have pledged to slow the rate of price increases. Are the drug companies running up the base from which future cuts will be calculated? Uwe Reinhardt is a professor of economics and public affairs at Princeton. Welcome once again.

Professor UWE REINHARDT (Economics and Public Affairs, Princeton University): Thank you for having me, Bob.

SIEGEL: And what do you make of these price increases?

Prof. REINHARDT: I think it's just an attempt to grab cash wherever it can be had in anticipation of a so-called patent cliff in 2011, when a lot of blockbuster drugs still unpatented will become generics and much, much cheaper for us, but less profitable for the drug industry. So, they are running scared. If you pull up some drug companies' stock chart, you see they, since 2000, had plummeting stock prices. That industry faces serious problems.

SIEGEL: Now, what should we make of the difference between the U.S. market for generic drugs, which, I gather, are cheaper here than they are in Canada or in Europe, and brand named prescription drugs, which are more expensive here than they are in Europe or Canada?

Prof. REINHARDT: Well, if you focus on brand names first, they are protected by a patent, which means no one else can make or sell these drugs, which gives the manufacturers a monopolistic power, which is economist jargon for the ability to set prices high without fearing much competition.

While in a generic, two generic made by different drug manufactures have exactly the same chemical composition and therefore they are what is called commoditized and their raw competition on price really sets in. We have the most competitive generic market in the world. That is why our generic prices are cheaper than, say, Canada's or Germany's.

SIEGEL: What's the history of drug prices or for that matter, other health care prices and impending big health care legislation?

Prof. REINHARDT: Historically, when there was talk about cost containment, prior to the law being passed, the manufacturers of products or the doctors in hospitals would not raise prices a lot. So, then they could say to the public, see, there's no need for this legislation. We're quite modest in price increases.

This one is really somewhat unusual because it's really a thumb in our eye. I mean, from a point of view of political cosmetics, you have to say, raising drug prices just before this legislation is being debated and passed is not politically the smartest thing to do. But they must've weighed the political damage against the economic advantage of having this cash.

SIEGEL: Do you see anything in the legislation that's now on Capitol Hill that actually would bring down or at least slow the increase of our costs for health care in this country?

Prof. REINHARDT: Well, I think of it more like building a house. When you build a house, you pour the foundation and that usually is not a big deal. It's very fast and then it takes two years to build a house on top of it. In this case, the legislation lays the foundation for a number of things that could in the long run control cost. For example, an independent Medicare commission that would set prices for Medicare and other utilization control measures without having Congress in the mix, that I think would be part of a foundation for better cost control.

SIEGEL: Professor Uwe Reinhardt of Princeton University, thank you very much for talking with us today.

Prof. REINHARDT: Thanks, Bob.

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