Why are prescription drugs so damn expensive? Or that test your doctor ordered–requiring you to be contorted into some ornate machine–that costs thousands of dollars?

Layers of cost build up as we dive deeper and deeper into the life of a medical drug or device. At the shallowest depths are the most obvious additions to costs, the vast sums of money spent on marketing to consumers and doctors alike. Next down are the costly FDA trials, phase I, II and III that must be completed before a medical device or drug comes to market; it’s these studies that also ensure safety and efficacy. At the beating heart of all of this, typically, is in an idea from a publicly funded academic research lab.

The basic biological research done in the United States is the envy of the world. From the investments of the National Institutes of Health (NIH) an the National Science Foundation (NSF) and even more esoteric government sources (the Department of Energy largely bankrolled the Human Genome Project), legions of academic labs have been pumping out the foundation of the medical revolutions of the past few decades. The massive, freely accessible and well-curated libraries of genes, genomes, proteins and even entire metabolic pathways were built through US government funding. Simply put, it would not be possible to do modern biological or medical research at any level without these tools. It’s from these laboratories that we know how, say, cholesterol is absorbed, made processed, eliminated and even turned pathologic in the human body. This knowledge is how drug companies figure out how to test new drugs, measure their effects and safety.

It’s at this level, in academic labs, where the epiphanies behind new devices and meds occur. The discovery of a new pathway, the teasing apart of a bit of physiology, or simply a new understanding why some are protected from disease when others are not all lead to ideas of new drugs and devices. If it’s a really good idea, if the potential seems ripe, it becomes the core of a startup company.

The idea is teased out. If it really looks good in animals, the phase I human trials start at about this point. (Phase I trials are small scale, and focused on establishing safety and reasonable doses or ways of application.) Money is raised (the first big cut of cash taken by the parasitic financial industry). Most often, the goal is to make the idea look good enough for one of the supersized biotech companies (essentially a pile of money and lawyers blended into the equivalent of the Borg cube) to buy up the whole company, idea and all. (The next major step where the financial industry takes a cut.) Somewhere about this point, Phase II human trials begin (small scale, but now focused on both safety and efficacy.)

The last step before a drug or device can be sold is a phase III human trial, large scale and required to statistically demonstrate in a randomized and controlled trial efficacy and safety of the new idea. A typical phase III trial costs ring up at about a billion dollars. Only the Borg-cube level of biotech can really take them on. For a genuinely new idea–an entirely new kind of drug or device–this is the riskiest step. All sorts of unexpected things happen–sometimes for the better, sometimes for the worst. (Both Minoxidil and Viagra started as entirely new blood pressure pills; they worked terribly at controlling blood pressure, but excellently at helping old men feel better about themselves.) The payoff is an exclusive, time-limited, patent. For a new drug or device that genuinely solves a large and unaddressed problem, this adds up to tens of billions of dollars over the ensuing years of legalized monopoly.

The patents for drugs work as the founders intended; they’re just long enough to make the investment worth it, but not so long as to prevent real competition forming while the drugs are still useful. Generic drugs are those that have gone through this whole process, and been on the market long enough for their patent to expire. These copycats mimic the molecular structure of a drug already proven through the phase I, II and III human trials by someone else. Without the R&D costs (or marketing costs), they become instantly cheaper than their parents.

Most drugs on the market today, including new drugs, are actually based on old ideas. Prozac was followed by a dozen or so drugs that work in the same way. (Viagria was followed by Cialis and Levitra.) It’s here where consumers get soaked. As soon as a lucrative drug is about to go off patent, the parent biotech company will typically come out with a new, improved (in some minor way) version. The repeated phase III trial tends to be much cheaper, and with a near certain outcome. The new drug is then relentlessly marketed, driving as many customers as possible away from the imminent generic competition. For the big biotech companies (heavy on money and lawyers, light on genuine risk taking science), developing new ideas isn’t a strength. Instead, they devote vast sums of money into promoting these derivatives, certain that the government funded labs will keep churning out new ideas worth picking off in the future.

In a somewhat ugly way, the whole process works surprisingly well. At this point, most of the drugs most of us will need to take (statins like simbastatin to reduce cholesterol, ACE receptor antagonists and HCZ for blood pressure, SSRIs for depression) are available in generic form. They work well, are cheap and safe. Find a doctor who still reads, and doesn’t have to learn about new drugs from a rep paid to tout the newest (but not necessarily meaningfully better) and more expensive drug, and you can game it all fairly well. That’s to say, the problem of expensive drugs and devices is as much one of this system as that of the poor continuing medical education of many physicians.