May 2014

Drug Pricing: The root cause of the internet pharmacy debacle

Most Americans buy medicines from overseas online medicine sellers because they are cheaper. Some of these people just don’t want to pay a “fair” amount others are simply unable to afford what they require. Proper pricing of medicines is difficult. Developing effective medicines requires years of research and even longer amounts of testing, yet for most products the cost of production is low. So pricing on average has to be orders of magnitude above marginal cost in order to recoup research costs. In principle low production costs means companies should be able to tier their prices based on ability to pay, amongst other factors. This is both equitable and efficient. See here for more details.

The US is quite unusual in allowing the market to set some medicine prices. Most other nations, such as Canada, cap prices and hence average prices are cheaper than in US – this is inefficient and overall inequitable. The products are the same and so, quite naturally, some US patients, especially those paying out of pocket, would prefer to pay Canadian or other nations capped pricing. And before internet pharmacies existed busloads of Americans went over the border to buy their medicines. Today millions do it via the web.

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