Prescription Drug Costs to Plummet

by JT McGee

Patent protection makes big pharma billions, but not for long.Most people plan on having a lower cost of living in retirement, which doesn’t always pan out as well as expected.

In most cases, the difference can be attributed to medical bills, which are obviously more costly for older retirees than healthy 20- and 30-somethings.

This might not be true any more. Medical costs are in backwardation.

Prescription Revenues in Decline

A heart attack may set you back $40,000 in emergency medical bills, but by far the biggest drain on retirement costs is regular, maintenance spending on prescriptions.

According to an article on Boston.com, pharmaceuticals representing $255 billion in global sales will soon lose their patent protection by 2016.

The list of expiring drugs includes Lipitor, Plavix, Lexapro, and a slew of other drugs for all kinds of uses. High blood pressure, mood swings, and other medical problems won’t set you back $200 at the counter. Nope, according to industry data, the cost of generic drugs is usually one-third that of a protected pharmaceutical.

Rock on.

Drugs expiring in order of their patent date:

Drug NameExpiration Year2010 Sales
Lipitor2011$10.7 Billion
Seroquel2011$5.3 Billion
Zyprexa2011$5 Billion
Diovan2012$6.1 Billion
Plavix2012$9.4 Billion

Reversing a Trend in Rising Costs

GAO usual and customary drug index shows growth in prescription costs.

This chart of the GAO’s Usual and Customary Drug Index – which includes the 100 most commonly used prescription drugs – shows how pharmaceutical prices change over time. Brand name drug prices soared 6.6% annually from 2006-2010, greater than the 3.8% increase in the broader consumer price index measurement of medical goods and services.

Interestingly the price of generic prescriptions fell during the same period. I have a two guesstimates as to why this is the case:

  1. Four dollar drugs – Major retailers promote cheap generics to bring people into their stores with regularity. Walmart, Target, and presumably others have programs for cheap generics. The timeline for this new deal corresponds with the change in drug prices over time.
  2. Opportunity costs – Finding new drugs is expensive. Why stuff billions of dollars into R&D when you can use previously patented drug recipes for a guaranteed return? Several companies (Pfizer especially) are cutting back on R&D to find immediate income streams. More competition equals lower prices.

Trickle Down Savings

The statistics suggest that 15% of Americans take one or more of the patent-protected drugs slated to expire in 2012. The cost savings won’t only register for those 15% of Americans, but also the other 85% who subsidize their expenses through a health insurance plan.

We all pay for each other’s medical treatment with government programs like Medicare and Medicaid, as well as through our own private insurance at the workplace. Group rate insurance through an employer should decline dramatically as the most costly and regular expenses (monthly prescriptions) see falling prices.

Readers,

Can you dig cheap drugs?

Do you pay out the wazzoo for name brand prescriptions like I do?

How much credit do you think so-called “Obamacare” will accept for this non-correlated decline in prescription drug prices?

{ 12 comments… read them below or add one }

cashflowmantra August 10, 2011 at 11:49

Not sure how much credit Obama-care will take although I am sure they will want as much as possible. It is politics after all. It is good that drug costs are coming down. Living on fixed incomes for many seniors is difficult enough without having to worry about higher drug costs. But that is something that I will have to plan for and consider. Like you said, costs in retirement may not decrease all that much due to medical expenses.

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JT McGee August 10, 2011 at 11:59

The last zinger on Obamacare was in jest, but also serious. I don’t know if the final passage had this language, but originally the health care reform act was going to make it so that the average senior could not be charged more than two times the premiums for 20-somethings. As you can imagine, this would reduce expenditures for the major voting block, but not for younger people. Ahh politics…I love how we shape realities for convenience.

At any rate, I don’t think post-retirement health care costs will adjust all that much, but it’s good to know people will be getting at least some relief when they go to fill their prescriptions.

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krantcents August 10, 2011 at 12:29

As an old(er) person who is very healthy, prescription drugs is an important part of my costs. There are still too many drugs where is is no substitute for a brand name drugs. My saving grace is I have really good insurance and I will have it when I retire.

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JT McGee August 11, 2011 at 05:52

That’s awesome. A lot of people don’t have that “saving grace.”

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Ashley @ Money Talks August 10, 2011 at 16:14

To answer your questions….
1. Yes
2. I used to pay $26 a month for my daughters asthma meds but my health insurance stopped covering her dr. visits and she is currently on her last perscription and we can’t afford to go to the specialist anymore so I’m hoping that 4 years on the asthma meds were enough. fingers crossed. I suppose I should just save that $26 a month for the dr visit I’m sure she will need this fall when her asthma kicks in again. 🙂 So I guess my answer is no.
3. 100%

Also, this totally reminded me of this commercial when I was a senior in highschool that said “Seniors shouldn’t have to choose between food and drugs.” hahahaha… we took that to mean, high school seniors, not senior citiens, of course. We used to LAUGH.

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JT McGee August 11, 2011 at 05:53

LOL! My past high school senior self would have gotten a great laugh from that commercial too.

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Evan August 10, 2011 at 22:17

I don’t think models can answer this issue. What if Pfizer creates a lipitor that works 62% better (in a slightly different way) to earn another patent…then spend millions in advertising (i.e. really hot pharma reps…seriously every good looking girl I know at least tried the industry) explaining to docs they can’t prescribe the “generic garbage” and that this stuff is needed.

What did people do before lipitor? there had to be a diff drug that was protected for a while?

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JT McGee August 11, 2011 at 05:51

Good point. I’m sure they’ll come out with some new patented drug like they did with mine–just in time for a patent drop, new drug comes out and my Doc won’t give me the old one. Something about addiction or whatever.

Pfizer is trying to take Lipitor over the counter to hedge their loss. FDA won’t let them. I guess the next step is to come up with a slightly different drug and get another patent.

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retirebyforty August 12, 2011 at 12:05

It’s great to see drug cost going down. The big problem is still medical service cost though. If we can get that to go lower, things will look much better for retirees.

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JT McGee August 14, 2011 at 10:03

Yeah, but the prescriptions do eat up a lot of cash flow. I mean, at $200/mo each, there’s definitely some serious cash flowing out of HMOs/PPOs/HSAs around the country.

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Invest It Wisely August 14, 2011 at 09:45

I sometimes try to imagine a patent-less world. Economically the loss of the monopoly privilege would undoubtedly have an impact, but I wonder if the net gain would outweigh the net loss. You’d probably have to change some other areas of regulation as well, such as the FDA restrictions on new drugs (which saves some lives, but potentially costs many more that could not be saved).

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JT McGee August 14, 2011 at 10:05

You know, I go back and forth on patents. Look at high tech..there’s a patent war going on right now.

But I can see where companies wouldn’t have much incentive to produce new drugs if they couldn’t have protection. And yes, of course the FDA does play a role, too. I think it’s insane that the FDA has the power to block any and all drugs. There are lots of stories of people who are terminally ill who cannot take a research drug because it might harm them. Seriously, who cares about the side-effects if the side-effect of doing nothing is death?

I’ll never understand it. Thanks for bringing that into the conversation because it’s important.

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