Drug Industry Profits Are Good for Everybody

Published November 1, 2008

Innovation and the Pharmaceutical Industry: Critical Reflections on the Virtues of Profit
H. Tristram Engelhardt, Jr. and Jeremy R. Garrett (eds.)
M & M Scrivener Press, 2008
252 pages, hardcover, $69.00, ISBN: 978-0-9802094-4-0

Americans’ intake of prescription and non-prescription drugs has now surpassed $250 billion annually, reflecting a steady increase to new record levels each year.

One key reason: Drug therapy continues to serve as the most efficient way to treat illness—often replacing surgical and other procedures, thereby reducing the need for expensive inpatient care.

Profit Is Motive

Despite the proven benefits, drug industry profits are increasingly under fire by those who paradoxically preach the solution to lower costs and greater consumer access to prescriptions is to limit Big Pharma’s profit margins. Such measures have a proven history of strangling new development and significantly rationing new treatment options.

Addressing that controversy, the newly published Innovation and the Pharmaceutical Industry: Critical Reflections on the Virtues of Profit (M&M Scrivener Press) examines the ethics of the profit motive in the production of drugs. The book makes a compelling argument that innovation is not the result of altruism. Nor are new pharmaceutical discoveries merely the result of academic inquisitiveness in the pursuit of knowledge for its own sake.

Instead, the book shows, what drives companies to explore new compounds for therapeutic benefits is the pursuit of company profit and personal gain. The allure of profit not only boosts the available resources for research but also focuses research and development toward that goal.

While critics chant greed, the greater public good results from the higher quality and competitive costs created by encouraging drug industry innovation, growth, and production.

Profits Produce Public Benefits

Casting doubt on the ethics of the profit motive in drug development brings up greater questions: If not the market (meaning the public, through their free choices), who should decide which drugs are developed? And at what cost should they be sold?

Under the current system (at least to some extent) the market determines which drugs are developed, since drug profits are a function of a drug’s value in the marketplace.

Profits Don’t Increase Prices

One reason drugs are so costly is the unusual way they are produced and marketed as a result of government regulation. In most areas of consumption, buyers and sellers interact in a variety of settings. Manufacturers are allowed to distribute their products through almost any willing seller to any willing buyer.

Prescription drugs, by contrast, must be approved by a federal agency and can be sold only through pharmacies and dispensed by licensed pharmacists after being prescribed by licensed physicians. This convoluted system assumes individuals lack sufficient knowledge of medicine and pharmacology to judge the efficacy of medications without the protection of regulations and the guidance of health professionals.

Although this argument is not without merit, excessive regulation certainly drives up the cost to consumers.

Consumer Choice Impeded

Another reason drugs are costly is the way we pay for them. About 75 percent of our nation’s drug bill is paid indirectly by third parties instead of directly by consumers. This reduces patients’ incentive to be wise consumers and limits their ability to choose how their drug dollars are spent.

Because resources are finite, someone will ultimately have to decide between more drugs and other uses for our money. If patients are not allowed to make this tradeoff, insurers, employers, or government will decide for them. If limits are imposed on pharmaceutical profits, consumers will have even less opportunity to decide whether a drug holds value or not.

Consumers Can Cut Costs

By working closely with their doctors, consumers have many opportunities to make tradeoffs regarding the types of therapies they use.

An example provided in Innovation and the Pharmaceutical Industry is treatment for arthritic pain. Vioxx and Bextra (before they were taken off the market) and Celebrex cost about $800 more per year than over-the-counter remedies such as ibuprofen and naproxen.

Drugs affect people differently, and for some patients the brand name drug is superior. However, whether the extra benefits of a brand name drug are worth $800 a year in addition to the risks of side effects should be left up to the patients, who can weigh individual benefit versus risk. When people are spending their own money, invariably their actions will reveal their preferences.

To blame profit motive for high drug prices blatantly ignores the benefits and essential role of research and development. Giving patients freedom to act as motivated consumers—through options such as health savings accounts—is a far more effective cost control measure and would ensure the future availability of innovative new drugs.


Devon M. Herrick, Ph.D. ([email protected]) is a health economist and senior fellow at the National Center for Policy Analysis.