Why Drugs Cost So Much / The Issues '04: Why We Pay So Much for Drugs

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The main battlefront over the Canadian conduit has been in Congress, where the drug industry has developed a close working relationship with powerful legislators to hold the line against cheap foreign imports. Just before Congress passed the $400 billion Medicare bill providing prescription drug coverage to seniors in November, friendly lawmakers deleted from the legislation a provision that would have legalized the importation of Canadian drugs with appropriate safeguards.

While the passage of the new Medicare law was sold by supporters as a major step toward reducing the burden of drug costs on Americans, the controversy is boiling over again. In fact, the Medicare bill does comparatively little for Clark and millions of seniors like her who fall within an income and spending range that offers fewer benefits. Nor does it help the millions of working people not eligible for Medicare coverage. As health-care spending keeps rising, (9.3% in 2002, according to the trade journal Health Affairs, the largest increase in 11 years) and employers tighten their coverage to cut costs, consumers have grown more resentful of what they are paying at the drugstore. While prescriptions represented only 10.5% of total health-care costs in the U.S. in 2002, they amounted to 23% of out-of-pocket costs for the consumer.

Americans spent $162.4 billion on prescription drugs in 2002, up from less than $100 billion a decade ago. The reasons for the boom are many. Prices on individual drugs have climbed sharply. More people are also taking what might be termed lifestyle drugs. And physicians are increasingly prescribing drugs for children and multiple drugs for an aging population. Yet the disparity between U.S. and other countries' drug prices is becoming a major sore point. The reason drug companies charge more in the U.S. is that, until lately, the market would bear it. Most countries in the world are too poor to pay top dollar for name-brand drugs, and in almost every other developed country, governments regulate lower prices with suppliers. That's the case in Canada. The U.S. government has largely avoided doing so, mainly because of drug-industry lobbying and political resistance to anything like price controls, but rifts have begun to develop. State and local governments from New Hampshire to California, tired of waiting for the border to open, have started considering ways to skirt federal laws to get Canadian drugs to their citizens.

What makes drugs cost so much? Are those prices fair to the American consumer? To find out, TIME investigated how drugs are made and sold in the U.S.--and why Washington has missed so many opportunities to rein in their costs.

HOW DISCOUNT DRUGS FELL OUT OF THE MEDICARE LAW

Whenever congress goes about the legislative process, it takes care of some people and denies protection to others. The Medicare bill was no different, as can be seen in the fate of three provisions with direct influence on drug prices. Those that would have reduced prices disappeared from the law, while one that protected high prices remained.