Via Health Affairs Blog:
“Calls for prescription drug pricing transparency currently echo through state legislatures. Vermont, Maryland, and California have passed legislation requiring various aspects of prescription drug pricing to be made public. Numerous other legislative bodies are considering related efforts.
Supporters of these efforts argue that providing more transparency on prescription drug prices will encourage manufacturers to set prices that can be better justified to the public. But fundamental questions remain. What constitutes a ‘justified’ prescription drug price? What can economics contribute to this discussion?
For new drugs, manufacturers hold intellectual property protections that provide a temporary monopoly on selling the product to the US market, which confers on manufacturers the temporary right to pursue ‘monopoly pricing.’ The US has long upheld intellectual property protections on these products to incentivize manufacturers and private investors to engage in the long, risky, and uncertain process of research and development
However, just because a manufacturer holds monopoly pricing power does not mean that manufacturers can charge whatever they want. To remain solvent, manufacturers must, on average, set prices that exceed production costs. Yet, if prices drift too high, consumers—some combination of patients, their physicians, insurers, pharmacy benefit managers, and their employers — may shift to potential substitute treatments. In other words, even in a monopoly supplied market, the laws of supply and demand still hold.”