In countries such as the United States many prescription medicines are really expensive, and it seems like those medicines wouldn’t be that expensive to make. Also many medical procedures seem to be very expensive.

Why is this?

  • 3
    This is simply to broad and the answer will vary from country to country not to mention medicine to medicine. Aspirin is pretty cheap, for example.
    – user1530
    Jan 17 '18 at 0:12
  • 1
    I've voted to close this question because it isn't about politics, politicians, or policies. Jan 17 '18 at 2:37
  • 1
    It isn't really clear how you determine that something is or is not "really expensive". Relative to what? Also, as posed, it is largely an economics question and not a political one. Similar questions can be posed that are political, but this question doesn't do that.
    – ohwilleke
    Jan 17 '18 at 3:24
  • 7
    IMO this should get re-opened. It is an inherently political question. At one extreme there are countries like the US where having a heart attack can set you back $100k. At the other extreme there are countries in Europe where health insurance and state-run healthcare are so that having the same won't cost you a penny. If you need surgery and live in the US, flying to Mexico or Europe and getting it done there will sometimes cost you less. Which is ludicrous. Similarly, drug costs can be tightly regulated outside of the US. Jan 17 '18 at 4:49
  • 4
    Maybe health.stackexchange.com might be more knowledgeable when it comes to explaining how exactly the cost of a specific drug or a specific medical procedure is structured. But this question requires at least a country-tag to be answerable.
    – Philipp
    Jan 17 '18 at 13:58

The US healthcare system is set up in a way that the normal rules of supply and demand don't work.

With the US healthcare system the assumption is that your insurance provider will pay, therefore the price is not influenced by consumers, instead the drug companies only need to find a price that the insurance companies will agree to.

If drugs were cheap then more people would not see the need for health insurance, so it is in the insurance companies interests for prices to be higher than a normal free market would dictate.

When the supplier and the customer both want high prices, guess what happens.

In countries with a state run healthcare provider you cannot set the prices too high or they will either use an alternative or just not provide the treatment.

  • You completely neglect the entire issue around R&D costs for failed products that needs to be covered by non-failing products selling price. Yes most of your points are valid, but it is only half the story.
    – ssn
    Jan 23 '18 at 22:28
  • R&D costs apply to all standard product pricing decisions so that should be self explanatory, I was addressing why US health care is a special case
    – mgh42
    Jan 23 '18 at 23:59
  • 1
    But in most industries not in nearly as extreme cases as in pharma.
    – ssn
    Jan 24 '18 at 5:18
  • Can any of this be backed up? Jan 24 '18 at 14:59
  • There is also the additional complication that the insurance companies will never pay the full billed costs either as they negotiate big discounts with the hospitals truecostofhealthcare.org/hospitalization economix.blogs.nytimes.com/2009/01/23/…
    – mgh42
    Jan 24 '18 at 22:55

Drug pricing is an inherently complex issue, but it helps if you approach it from the perspective of the drug company. When you're attempting to develop a new drug, you need to design, model, and test the formula to prove its efficacy and safety to health authorities. The talent required to complete this process is significant, but even with some of the most talented people, you'll probably fail on the first try. The result of all of this is that there is a very high research and development cost to bring new drugs to market, a cost that is the same no matter the political situation.

However, once you are ready to bring your product to market, the calculation changes: your goal is to recover the research and development cost of not just that medication, but all of the other failed medications, as quickly as possible. And that means pricing the drug to maximize revenue, which is where politics comes in.

Your drug works the same in any political system, but in each system there are different rules. In the United States, you're essentially going to set the price to the highest price that the market will bear, but in other political systems, the government caps the price limit, so you're compelled to sell your medication more cheaply. The revenue from each country is additive, so essentially countries without price caps are subsidizing countries with price caps.

Another way to think about the situation is this: once you've spent the money to develop the drug, you essentially have a token-printing machine. In the United States, each person might give you $100 for each token, but in the U.K. someone might give you $50. But you're still going to sell your tokens in the U.K. because once you have your machine, the tokens don't cost you much if anything to print.

Note that this doesn't fully explain what happens with generics or medical procedures in the United States, which each deserve their own answer, but are too complicated to address here.

  • While true, the 'the US subsidizes everyone else' is a bit of an exaggeration. We over subsidize to a huge degree. For example, Pfizer has a 40% profit margin on their pharmaceuticals. (which is an incredibly high profit margin for nearly any industry). It's not like that without the US for-profit system there'd be no profit to be had for the pharma industries. It'd just be a smaller profit.
    – user1530
    Jan 23 '18 at 3:39

Most expensive medicine in the United States is covered by patent. As such, monopoly pricing applies. They price the medicine at the point where they make the maximum profit.

A side issue is that it is expensive to test that the medicine has only acceptable side effects and that it is effective for the purpose for which it is offered. So that puts something of a floor on the price of medicines that they actually bother to test. Perhaps there is some brilliant medicine that simply wouldn't pay for the cost of testing. So it doesn't get tested and it doesn't get approved.

With monopoly pricing, segmented markets are to the advantage of the producer. They can set different prices in each market and therefore maximize their overall profit. This is better for many of the segments, as they pay less for the medicine than they would if the medicine were the same price everywhere. TL;DR: they set the price that each market will bear.

Medical procedures may be expensive in the US for a number of reasons. For example, MRI (magnetic resonance imaging) scans are expensive in the US because a lot of different places have the machines. Each machine needs to be profitable. In other countries, they often have fewer machines that do more scans per machine. The US thus has higher availability but pays more for it.

For some procedures, the chances of medical error or simple failure are high. The way that liability works, this increases the cost of the malpractice insurance. So doctors (or their business managers, since doctors themselves can afford to be a bit unworldly about such things) increase the cost of the procedure to cover.

In general, there is more pressure to see patients quickly in the US than in other countries (e.g. the UK or Canada). The US has something of an immediate gratification problem. Everything is expected to be available now. The MRI situation is a specific example of this. This happens with doctors as well. The US has more doctors in part because people won't accept as long of a delay before seeing the doctor. Other countries triage more, keeping each individual doctor busier. But non-risky situations last longer. A patient may wait months to see a specialist.

There may be other reasons for specific procedures.

  • I don't disagree with anything you say here, but always like to point out: I'd love to find the health care in the US where I don't have to wait months to see a specialist. Seems to happen a lot here too. :)
    – user1530
    Jan 24 '18 at 23:34

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