The United States spent $457 billion on prescription drugs in 2015, nearly 17 percent of total healthcare spending. The Department of Health and Human Services estimates this figure will grow to $535 billion by 2018.

Bringing a new drug to the market is notoriously expensive due to research and development, time opportunity costs, and jumping through hoops for FDA approval. Avik Roy, president of the Foundation for Research on Equal Opportunity, found thatthe clinical trials phase accounts for 90 percent or more of a typical firm’s development cost, which has drastically increased in recent years.

The FDA approval process has a high potential payoff at an extremely high risk, which discourages the development of new drugs. Patented drugs have only a five- to seven-year period of market exclusivity, lower than for other patents. This shorter period opens the market for generics and lower costs to consumers, but it also lowers the return to investment.

Once the patent has expired, other firms are allowed to copy the drug, subject to FDA approval. A recent working paper from the National Bureau of Economic Research by MIT professors Ernst Berndt and Stephen Murphy, and University of Chicago professor Rena Conti, finds that competition among generics is insufficient and contributes to high prices. The paper illustrates some of the underlying causes of this upward trend.

The professors find that prices for prescription drugs are rising — and not only in isolated cases of price gouging such as Turing Pharmaceuticals former CEO Martin Shkreli’s audacious overnight price escalation of Daraprim from $13.50 to $750 per pill. Daraprim’s patent expired decades ago, but it did not have a competitor. However, prices are rising across all generic markets.

Read more at: Curing America’s Expensive Drugs | Economics21