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October 26, 2015 15:00 ET

Drug Prices: To Cap or Not To Cap?

TORONTO, ON--(Marketwired - October 26, 2015) - On the Xtalks Blog -- Like every product on the market -- from groceries to cars -- prescription pharmaceuticals are subject to inflation. However, recent price hikes on some new drugs -- along with those that were approved by the FDA decades ago -- have some asking the question, are these costs justified?

For example, the now-infamous Turing Pharmaceuticals CEO, Martin Shkreli, raised the cost of the company's antiparasitic -- Daraprim -- from $13.50 to $750, in the course of one day. While Shkreli has since redacted the price hike after public outrage, he initially defended the decision by saying, "This isn't the greedy drug company trying to gouge patients; it is us trying to stay in business."

Dramatically increasing the cost of a drug is nothing new in the pharmaceutical industry. Earlier last month, the cost of the tuberculosis treatment, cycloserine, was increased to $10,800 from $500, for a one-month supply. These examples represent a growing trend of seemingly-arbitrary price increases on old, off-patent drugs.

Steve Morgan, professor of health policy at the University of British Columbia's School of Population and Public Health, told The Globe and Mail, "We've seen drug prices go to levels we've never conceived of -- and the problem isn't confined to older generic drugs. Many new patented brand-name medications are being introduced at prices so high they threaten the sustainability of the health-care system."

Unlike other countries -- such as those in the European Union -- the US does not regulate drug prices. This means that the high cost of a drug in US would be many times cheaper in almost any other country. In the case of Daraprim, while it was selling at $13.50 per dose in the US, the same medication cost anywhere from 5 to 10 cents in India.

In an effort to curb the pharmaceutical industry's ability to charge any amount for a drug, presidential candidate Hilary Clinton proposed instituting price caps for pharmaceutical developers. Her plan in to establish an out-of-pocket expense ceiling at $250 per month.

"It has gotten to the point where people are being asked to pay not just hundreds but thousands of dollars for a single pill," said Clinton at a forum last month in Iowa. "That is not the way the market is supposed to work. That is bad actors making a fortune off of people's misfortune."

So are price caps really the answer? Some industry commentators are certain that putting a limit on how much a company can charge for its treatment will take away incentives for drug makers to develop innovative treatments, ultimately harming the patient more than the cap would protect their wallet.

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