Merck research chief tells why drug costs are so high in U.S.

By Jeff Evans '01

An elderly couple in the United States without medical insurance needs prescription drugs to maintain their quality of life. But they cannot afford the cost.

A similar couple in another industrialized nation -- in western Europe, for example -- has a similar need for a prescription. Mandated price controls on drugs set by their government allow them to purchase the drugs they need.

Edward Scolnick, left, president of Merck Research Laboratories, talks with student members of the Veterinary Economics Group -- including veterinary students, from left, Mary Nabity '02 and Mike Hornberger '02 -- at the College of Veterinary Medicine, Feb. 8. Frank DiMeo/University Photography

What underlies the difference in the availability of prescription drugs to these couples? The relationship each government's health-care system has with pharmaceutical companies, according to Edward M. Scolnick, president of Merck Research Laboratories (MRL), a unit of Merck & Co., one of the world's largest pharmaceutical concerns. Scolnick also is executive vice president of science and technology for Merck.

"Managed care, in one way or another, affects the practice of medicine and the dispensing of health-care services and medicine virtually everywhere in the U.S.," Scolnick said in a public lecture as an inaugural Frank H.T. Rhodes Class of '56 Professor at Baker Laboratory, Feb. 7. His lecture was titled "Modern Drug Discovery and Development: Science and Availability."

The current system of managed care in the United States gives pharmaceutical companies the impetus to discover and design new drugs, said Scolnick. Novel drugs, he said, tend to have higher prices due to their scarcity and the demand for them, despite the hardships this may bring to patients without prescription drug insurance.

According to Scolnick, 20 percent of people in the United States pay the full price for prescription drugs because they either lack health insurance or coverage that includes reimbursement for prescriptions. He noted that part of the increase in third-party health insurance has been due to the growth of managed care since 1990.

Prescription drug benefits, said Scolnick, have encouraged price competition among pharmaceutical companies, which was not so intense before the advent of managed care. "It's healthy for patients and it's healthy for pharmaceutical companies because it makes the companies more efficient in the long run," said Scolnick.

To help find a solution for the uninsured, Merck has introduced a program called YOURxPLAN. Developed by Merck-Medco and Reader's Digest, the plan allows uninsured patients to buy newer drugs at the bulk prices that pharmacies normally pay for the drugs, said Scolnick.

Other countries that set price limits on new drugs, Scolnick said, tend to discourage pharmaceutical companies from investing money to develop new drugs. Whereas, higher prices would foster more competition and the search for better drugs, he said.

"There are countries, like Japan, that arbitrarily cut prices of a drug every two years," said Scolnick. "What has happened is that all the Japanese companies every two years bring out a drug in the same category [with a similar function], knowing that it has higher value than the drug the company had put out for the previous two years. That does not foster drug research."

Scolnick cautioned that it is a mistake to directly compare the prices of drugs since goods in other countries often have different costs than in the United States, which can offset the lower drug costs. Furthermore, he noted, in many countries, such as Canada, generic drugs (pharmaceuticals without a proprietary name) cost more than in the United States because of the lack of price competition.

In addition, Scolnick pointed out that the high cost of new drugs in the United States also is due in large part to the "sunk cost" of the research-and-development phase of making the drug -- a process that takes an average of 14 years at Merck.

"What many people focus on when talking about the cost of the drug, instead of the sunk cost, is the term in economics called the marginal cost -- the cost of making the pill at the end of the process -- which is a tiny percent of the total cost," said Scolnick.

Countries that practice price controls need to recognize the total cost of producing a new drug and the social benefits that accrue from the widespread use of new drugs, said Scolnick. Without price competition, Merck and other pharmaceutical companies, he said, will lack the resources and desire to develop new drugs.

On Feb. 8, Scolnick and his faculty host, Bruce Ganem, the Franz and Elisabeth Roessler Professor in chemistry and chemical biology at Cornell, met with students at the College of Veterinary Medicine. Among other activities, they joined a round-table meeting with the Veterinarian Economics Group, a new student organization. Later that day Scolnick participated in a new course taught by Ganem on the biotechnology industry. Scolnick spent his final day, Feb. 9, at the Johnson Graduate School of Management, where he met with the student Science and Health Management Club.