The Drugs in Your Medicine Cabinet Could Get a Lot More Expensive

Financial planning articles often touch on the high costs of healthcare, particularly those that retiring seniors face. It's an important issue: When attempting to estimate a budget for retirement, healthcare is a major line item and a hugely uncertain one.

Now, a recent study has found that the rules governing competition in the pharmaceutical industry could be having a significant impact on the types of drugs that are made -- and probably the prices at which they're being sold.

With health costs so high already, the risk is that patients, like seniors, who require certain kinds of medicines could get squeezed even more.

It all starts with the question of where to invest

Making new drugs is extremely expensive, so pharmaceutical companies have to be careful about where they invest and how much they spend. They ask themselves whether the potential payoffs of an investment will be high enough to justify the risks, or whether competition will eat away at margins and make the whole exercise unprofitable.

To balance profit margins with public health, pharmaceutical companies are allowed exclusivity on their creations, usually for five years, in addition to the usual patent protections. After that, generic drugmakers can also start producing the drug without having to carry out any clinical trials, as long as they can prove that their version is equivalent to the original.

This rule doesn't apply to specialized "biologic" drugs, which are made in a different way and are generally more complicated. For these, not only is the exclusivity period over twice as long, but a generic manufacturer would have to carry out clinical trials before entering the market.

It all sounds kind of arcane and unimportant, but it turns out that this is having a major impact on what drugs are being made.

Big Pharma likes more expensive drugs

You're probably thinking that if you were a pharmaceutical company facing stiff competition from generic drugmakers, it would make sense to target innovations that have a long exclusivity period and which are hard to compete with even after that period is over.

You'd be right.

A major analysis into pharmaceutical company activities found that a 10% increase in generic drugs in a particular market reduces early stage investments in that area by 7.9% In other words, drugmakers are moving away from markets where they have competition.

Where are they going? Into high-risk areas without a lot of competition, and into biologic drugs that have more profit protections.

What it means for your wallet

Health is already a huge line item in peoples' budgets, especially those at or near retirement. One study found that households with a member aged 50-64 spend 8% of their budgets on healthcare. Those with members over 85 spend 19%.

Prescriptions make up a significant chunk of that amount. Even with supplemental insurance available, prescription drugs amount to 14% of Mediare patients' out-of-pocket health costs -- a number that goes up to 17% when you exclude long-term care.

It stands to reason that the way drug companies decide which medications to pursue -- and how -- will eventually impact the amounts we pay and what options we have available for our own medical treatments. While the move into new types of drugs could expand treatment opportunities for those with rare or complex diseases, we would be naive to think that this won't come at a cost.

And if past experience with healthcare expenses is any indication, that cost is unlikely to be low.

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