Are Prescription Drugs Getting More Expensive?

In this Kosmos podcast, I speak with Professor Jeremy Horpedahl about prescription drug prices. He elaborates on his research regarding the historical prices of prescription drugs, the effect patents have on prices, and provides some forecasting on what this means for the future of health care costs.

Jeanne Hoffman:        Welcome to this Kosmos Online Podcast. I'm Jeanne Hoffman; today I'm talking with Professor Jeremy Horpedahl about his current research on the recent history of prescription drug prices. Dr. Horpedahl is an Assistant Professor of Economics at Buena Vista University, welcome and thanks for joining us.

Prof. Jeremy Horpedahl:         Thanks I'm glad to be here.

JH:       How did you become interested in the price of prescription drugs?

PJH:     Well I was kind of interested in it because there is lots of these studies or tables I've seen where they look at other consumer goods so lots of economists would do this to say let's look at the price of bread overtime and compare it to wages also look at the price of cars and see how well people are doing. What all those studies have shown or the general trend they have shown is that goods become cheaper in fact much cheaper over time. So the average persons are lot there off. One of the objections raised there are certain things are not included in those things like education and healthcare and that'll be the usual retort to those. So I thought what it would look like if we actually would something like healthcare in there.

I started thinking about how could we work this in there if you just use the medical care CPI looks like it is going up much faster than the prices. I thought ‘what goods can we latch on to and look at?’ and prescription drugs seemed like the best thing to look at because they are specific good that consumers purchase in a lot of indirect ways. By looking at these we could see possibly what is going on with medical care in ways you couldn’t get by looking at say the cost of health insurance, because what health insurance buys today versus 10 or 20 years ago is a lot different. So by looking at specific drugs I thought that it was good way at least see what is going on. Looking at it I found somewhat surprising results.

JH:       Your results show that contrary to popular belief that prescription drugs are not getting more expensive. First what do you think led to this misconception?

PJH:     I should first say that some are getting more expensive. It is kind of interesting which ones are and which aren’t. Probably what led to the misconceptions in number of things some are just cognitive biases we can think of so availability bias or selection bias. Availability bias would just mean that people have these readily available examples in their mind. They have seen a drug that they purchase or a family member purchases, and the price of that drug may have gone up dramatically over a particular time period and that kind of sticks in their mind. With sample selection bias it might be they have seen a study. So lot of times it is perhaps say a senator or a particular news organization will put together a list ‘of well here is six drugs the price has gone up a lot’ and it is probably true. But when you look at all drugs a different trend emerges and if you weight that by how many these have purchased again you see different trends. Instead of just picking out specific examples either or in our own minds or be in the minds of people who might have an interest in the result. I think that is probably one of the main reasons that people think that and also because it is true for certain things.

JH:       So what is the reality then?

PJH:     The reality is at least when we study there is a good way to break down and that is between drugs that are currently under patent and those that have off patent. For those that are currently under patent it is just true that the prices are high and do continue to rise which is exactly we expect. It is a monopoly that's given for specific reason to encourage innovation whether it does that or not is another interesting question, but …..

JH:       In another podcast…

PJH:     Yeah that is not surprising right if you are giving some monopoly they are going to earn monopoly profits. But for drugs that go off patent first of all when they immediately go off patent not surprisingly you see a very dramatic drop in price, as we expect as soon as the generic start to come in the market. But for those drugs even once they are on generic the price will still continue to either be stable or to fall over time and the reason for that, the main reason I would suggest is that there actually is competition. There is innovation aside from developing the drug innovation in terms of cost cutting, in terms of marketing. So that once you have the market process actually is working it ends up looking like just another consumer good. Despite the fact that they are all of these other factors out there: Health care is different from other goods, there is a lot of government intervention, and there are third party payments. All these things are thrown out as reasons why drugs are different than other goods but when we look at generic drugs they look more like a normal consumer good. It is free, there is basically open entry, and there is competition.

JH:       So what does this all mean for the future of healthcare costs?

PJH:     Well it could mean lot of things. One general idea is that the more healthcare looks like in actual market the more of these types of innovations and cost savings you are going to see. The more that we move away from our market in certain areas of healthcare the harder it is going to be to control costs both for private insurers and for government agencies which are large supplier of healthcare in this country and around the world. I think that is a general trend that we could think that it relates to this is that: the more you make it look less like a market the harder it can be to control the costs. You have to control costs in other ways such as price controls or dictating prices in other ways. That will get you across all kinds of other bad results but if you want to control costs there are two ways to do it. You can either dictate through government mandates or you can let the competitive process work and that is the trade off.

JH:       Right thank you. Thanks so much for taking the time to talk to us.

PJH:     Thanks I enjoyed it.

JH:       And for more interviews with leading scholars visit KosmosOnline.org providing career advice and intellectual resources for academics and this is Jeanne Hoffman, signing off.