AARP vs. the Free Market on Drug Prices
Ignoring the simple rule of demand in determining prices, news reports chide drug companies for not pegging their prices to inflation’s rise.

By Amy Menefee
August 23, 2005

     Much like oil companies, drug companies are held to a different standard than many businesses in the media. Journalists tend to report on what drug prices “should” be based on the claims of a particular group. The August 16 release of an AARP study on drug prices provided more fodder, as the study’s main conclusion was that drug prices “continued to substantially exceed the rate of general inflation,” according to the AARP. The organization’s CEO, William Novelli, said he was “very disappointed that brand name manufacturers have failed to keep their price increases in line with inflation.”

• He said/She said: Most of the print coverage, concentrated on August 16, bogged down in the debate between the AARP and the Pharmaceutical Research and Manufacturers Association (PhRMA) about the percentage increase in drug prices. Unfortunately, all of this coverage missed the point that prices are ultimately determined by demand for a product, no matter what anyone says they “should” be.

• Checking the Facts: PhRMA’s senior vice president, Ken Johnson, was quoted a few times saying that overall drug prices actually were not keeping pace with inflation if insurance discounts were considered. However, none of the reports clarified which side was correct or explained all the factors that go into drug prices.

• Slowing or Growing?: Newspaper stories across the country conflicted about the significance of AARP’s results. While the Associated Press and The New York Times focused on brand-name prices “outrunning” inflation, Bloomberg News and The Minneapolis Star Tribune led with the fact that price increases had slowed compared to last year. And the Sacramento Bee emphasized the savings available to consumers using generic drugs. Compare these opening sentences:

“Wholesale prices for the brand-name prescription drugs widely used by older Americans rose at more than twice the rate of inflation during the year that ended March 31, the AARP says.” – Associated Press

“Drugmakers slowed average price increases in the U.S. on brand-name medicines in the first quarter, according to a report released Monday by the consumer group AARP.” – Bloomberg News

• Networks: The networks gave only slight mention to the story; NBC didn’t cover it. The August 16 “CBS Evening News” gave both AARP’s and PhRMA’s side of the story. ABC’s “World News Tonight” used AARP’s phrasing, touting price increases “more than twice the rate of inflation,” and giving no rebuttal to the study’s conclusion.