As inflation has worsened, the Biden administration and its allies have drawn attention to an old bugbear: prescription drug prices. Democratic Senator Joe Manchin of West Virginia said at a recent AARP convention, “If we don’t do anything else this year, that’s the only thing that needs to be done.” Speaking on NBC’s Meet the Press, the former Treasury Secretary emphasized Lawrence Summers highlighted the government’s drug price negotiations as one of the “most important” measures to control inflation.
It’s time for a reality check. The consumer price index rose 8.6% year-on-year in May. Household spending on prescription drugs increased by just 1.9% over the same period. In the final quarter of 2021, net drug prices — after deducting rebates, discounts and fees — fell 0.7%, the largest quarterly decline in 15 years. Had other products like eggs (up 32%), gasoline (up 49%) and used cars (up 16%) behaved like drugs, inflation would be completely under control.
Drug prices are an attractive political target, but the campaign to control them rests on a misunderstanding of how they work.
Large pharmaceutical benefit managers, or PBMs, negotiate prices with pharmaceutical companies on behalf of insurers and employers. In exchange for including drug company products on insurance forms, PBMs secure billions of dollars in rebates to pass on to patients. The problem is that they often keep these discounts to themselves. The net effect is that consumers pay more than they should.
Insulin is a prime example. PBMs have pocketed outsized rebates, while manufacturers of insulin products have seen their net prices fall. Meanwhile, higher co-payments are becoming unaffordable for some patients. In March, the House of Representatives approved a $35 monthly cap on insulin copayments for patients on a Medicare or private insurance plan, and the Senate is now considering legislation to that effect.
Capping the ancillary costs makes sense. After all, that’s what insurance is for. But capping list prices – as some in Congress have suggested – makes no sense and would not effectively curb inflation. Instead, such a restriction would perversely encourage manufacturers to bring new drugs to market at higher prices (since they cannot raise them in the future) and discourage innovation.
What should Congress do then? First, it should try to make drug markets as efficient and competitive as possible. Under these conditions, the unit costs are the most favorable. One way to ensure this is by continuing to support the Food and Drug Administration’s intensified drug approval process, which has accelerated in recent years. As new branded drugs are allowed to compete with competing drugs – and new generic versions of existing drugs come onto the market – prices will inevitably fall.
Second, policymakers should encourage the adoption of global measurements from value, instead of just tasting. Take the drug that eliminates the hepatitis C virus. Initially, governments and private insurers were reluctant to do so because of the relatively high unit cost. In the short term, we’ve been easy on budgets and keeping prescription drug inflation low. But in the long run, we’ve lost thousands of lives and added hundreds of billions of dollars to healthcare costs. Prioritizing a drug’s real-world value—regardless of its high initial cost—will drive innovation for other treatments, such as cancer and Alzheimer’s, and improve the return on dollars spent.
The Covid vaccination process was enlightening. To ensure everyone had access, the federal government bought the vaccines in bulk. The FDA accelerated their approvals. And the result has been widespread uptake and dramatically reduced mortality rates. The most beneficial effect was that care was reimbursed on the basis of value rather than price and access to that care was maintained.
The right combination of pharmaceutical policies will incentivize innovation and allow market-based competition to mitigate price inflation. Advocating price controls – and misinterpreting inflation figures for political reasons – will only lead us in the wrong direction.
Mr. Goldman is Dean of the Price School of Public Policy and Co-Director of the Schaeffer Center for Health Policy and Economics at the University of Southern California. Ms. Trish is co-director of the Schaeffer Center.
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https://www.wsj.com/articles/drugmakers-driving-inflation-perscription-price-control-congress-insulin-11657225910 Drugmakers Aren’t Driving Inflation – WSJ