Over the years, the consistently rising medical expenditures has been affecting all the stakeholders of the current healthcare landscape around the globe. In fact, according to PricewaterhouseCoopers, the projected  growth rate of medical costs for the year 2017 will remain at 6.5%. Though the rate is the same as this year, it still outpaces the general economic inflation.

One of the top drivers of the skyrocketing health care costs is drug price hike. Given the fact that pharmaceutical companies play the major role in drug pricing, they have to consider all aspects to justify the value of their products. Through this,  they will be able to maintain profitability while ensuring the welfare of a larger patient population. The following will give us an overview of the most common factors that can significantly affect the price of drugs currently available in the market.

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  1. Narrow competition in the marketplace

Due to a threat to profitability, particularly in the year 2009, many pharmaceutical companies ventured to merger and acquisitions while others decided to leave the industry. Hence, a decrease in the number of competitors gives large manufacturers a strong market power that is further influenced by the Food and Drug Administration’s (FDA’s) slow approval of new entrants into the pharmaceutical industry. This market structure leads to higher prices of drugs and other medical products.

  1. Research and development of new drugs

From idea to market, research and development (R&D) of new drugs entail complex processes. The whole course of R&D is not only long and tedious, but also enormously expensive. Most clinical research and trials involve recruitment of several patients and establishing multiple sites from different parts of the world. Thus, requiring huge budget.  Therefore, once it becomes approved, drug companies raise the price of their products to compensate for the high R&D costs and to sustain its supply in the market.

  1. Aging drugs and niche therapies

Due to very low profitability, some drugs that were approved years ago were dropped by manufacturers in exchange of newly discovered drugs with higher demand. Hence, shortages occur when some firms stop the production. Thus, leading to higher product price.

  1. Raw materials shortage

Raw materials shortage is one of the leading causes of drug shortage. In the marketplace, there may be several drug manufacturers, but few suppliers of raw materials. Multiple companies may import from other countries. However, the international supply chain may not always be reliable as it may face problems related to political issues, trade disputes, unfavorable climate conditions and contamination during transport.

  1. Drug shortage

Aside from raw materials shortage, multiple events may contribute to drug shortage. One of these is unanticipated demand, which occurs when the demand for a specific drug goes beyond the clinical demand predicted by pharmaceutical companies. This usually happens when a new indication of drug was discovered or in case of rapid progression of diseases. However, due to the strict rules governing the development and production of drugs, manufacturers cannot hasten the process to quickly top up the supply of their products in the market. Furthermore, another factor that may lead to drug shortage is manufacturing difficulties. From time to time, pharmaceutical companies may encounter problems related to the process of drug production such as outdated equipment, changes in the drug’s formulation, limited production capacity and quality control issues.

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