Opinion: A Prescription for Controlling Drug Costs; Drug Spending Is Rising at More Than Four Times the Rate of Inflation

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Byline: Arnold S. Relman, M.D., and Marcia Angell, M.D. (RELMAN and ANGELL have both served as editor in chief of The New England Journal of Medicine, and both are Harvard Medical School faculty members. Angell is author of "The Truth About the Drug Companies: How They Deceive Us and What to Do About It." (Random House. 2004).)

The cost of health care is one of the biggest challenges facing the United States, and, as most people know from experience, drug prices are a growing part of the problem. Although drug spending represents only 12 percent of total health costs, it is rising at an annual rate of 10 to 12 percent--more than four times the rate of inflation--and will soon overtake physician fees as the second largest part of the health-care bill, after hospitalization costs. Why is this happening? Unlike other advanced countries, the United States doesn't regulate drug costs. Private insurers bargain with manufacturers for discounts on the medicines they cover, but the drug industry has long stymied such efforts by the federal government. The result is that Americans pay roughly twice as much as Canadians or Europeans for brand-name medications. The problem is reaching crisis proportions--and without bold reforms, it will get worse.

The pharmaceutical industry claims that high prices are necessary to cover its research-and-development costs. The truth is that in 2002, the top 10 American drug companies had a median profit margin of 17 percent, compared with less than 3.1 percent for the other Fortune 500 industries. With that record, the pharmaceutical industry can hardly claim that it is struggling to finance medical progress. The major drug companies spend less on R&D than they keep in profits, and far less than they spend on marketing and administration.

The industry also justifies its high prices by claiming it turns out a steady stream of life-saving miracle drugs. But this industry engages in much less innovation than its ads claim. Of the 78 drugs approved by the Food and Drug Administration in 2002, only 17 were new chemical compounds, and only seven of those were classified by the FDA as likely improvements over drugs already on the market. (None of these seven came from a big U.S. drug company.) The few innovative drugs the industry does bring to market usually stem from research done at government or university labs. …