By Noah Rothstein
On Tuesday, June 29, the Competitive Enterprise Institute hosted an event with a distinguished guest panel to discuss the potential impact of price controls on prescription drug costs in the U.S.
American patients benefit from a bounty of choice and innovation in medical treatment options. Yet many Americans believe the price of prescription drugs is far too high, and politicians from both parties have proposed policies intended to lower pharmaceutical prices.
President Joe Biden called for action on drug prices during his address to Congress earlier this year. Congressional Democrats have held a series of hearings to promote a bill dubbed H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act. Republicans have countered with their own proposal, H.R. 19, the Lower Costs, More Cures Act of 2021.
The U.S. spends more than $500 billion on prescription drugs, more per capita than any other country. Roughly half of that is spent by the federal government on Medicare, Medicaid, and military and veterans’ health programs.
Are prescription drug costs too high?
“Unfortunately, that perception is at odds with reality,” said panelist Dr. Richard Manning, managing director at Intensity, LLC.
According to a poll taken by the Kaiser Family Foundation, 74% of those who buy prescription drugs can afford the drugs they take.
“I see it as how to better provide insurance for the people that pay large amounts for drugs instead of throwing a blanket over the entire prescription drug sector and perhaps do real damage to the incentives for innovation,” said Dr. Manning.
Dr. Joel Zinberg, a senior fellow with the Competitive Enterprise Institute and an associate clinical professor of surgery at the Mount Sinai Icahn School of Medicine, explained that no one is paying for list prices. They are just the starting point for negotiation, rebates, discounts, etc. that determine the actual transaction prices that concern consumers.
Drug prices in the U.S. are cheaper in the aggregate when compared to other countries. Dr. Zinberg said that even though drugs may initially be very expensive when they enter the market, the price usually comes down very quickly with competition. In addition, generics account for 9/10 prescriptions in the U.S. and can fall to 10% of the original drug price after months and years of competition.
What’s happening in the marketplace?
Spending on prescription drugs has been stable as a percentage of overall health care spending, with retail drugs at 10% overall and prescription drug spending at 14% overall. In the last few years, prescription drug costs have dipped well below the consumer price index (CPI). There is now a deflation in the prices of prescription drugs.
It can cost upward of a billion or two billion dollars to bring a new biologic from conception to approval and into the marketplace. Dr. Manning recalled his time working at Pfizer, where the company tried releasing a new drug called Exubera marketed as a potential replacement to painful insulin injections. However, nobody bought it because it did not fit patient need.
“Only the drugs that are worth the cost of the price it is charged for will succeed in the marketplace,” said Dr. Manning.
“Many countries have an overall lower GDP per capita, but pay roughly half for prescription drugs due to price controls. The EU has a mix of lower prices due to price controls and a lower appetite for health expenditures,” said James Williams, Special Assistant to the President on the White House Domestic Policy Council from 2019 to 2021.
Of the 408 new medicines launched in the last decade, 86% are available in the U.S., 60% in the UK, and only 47% in Canada. Mr. Williams remarked that these statistics “[reflect] the fact that pharmaceutical manufacturers are developing drugs primarily for the U.S. market because of a higher willingness to pay.”
How do we pay for drugs in the U.S.?
Patients pay less than $500 for out-of-pocket payments over a year on average. Dr. Zinberg said that barriers to entering the market can cause high drug prices.
“We need to reform systems that allow the benefits of those negotiations and the benefits of insurance coverage to flow to the patient and not leave that subset of the population exposed to larger out-of-pocket costs,” Dr. Manning said.
Pharmaceutical companies are cautious but commonly engage in price discrimination.
“Price discrimination creates the incentive for companies to delay and not launch in other countries,” Dr. Zinberg explained. “Companies will walk away if they can’t make money, and that’s what it ultimately boils down to.”
The Trump administration considered ending the rebate rule, which provided safe harbor for secret rebates between manufacturers and plan sponsors. President Donald Trump proposed the reference pricing rule, the most favored nation model, which was a temporary rule that would last seven years and would establish an external pricing regime to get Medicare Part B drugs to the lowest price for the top spenders in that program.
“8 out of 12 months in 2018 saw a decrease in prescription drugs on average,” Mr. Williams said.
Efforts by Congressional Democrats and the Trump administration were similar in that they both piggybacked onto the price controls imposed by foreign governments to force spending down.
In Congress, Democrats hope to pass H.R. 3, which seeks to reduce Medicare spending by requiring manufacturers to negotiate prices for a cohort of the most expensive drugs with the Department of Health and Human Services. The bill also caps the top-end price at a benchmark rate tied to the average price in six countries that impose price controls.
Title I of the bill empowers the Secretary of Health and Human Services to establish a list of top-spending drugs. The companies that manufacture those drugs would be required to enter negotiations with the secretary on the price. If they choose not to participate in that process, an excise tax of 65-95% of that product’s sales would be applied.
H.R. 3 also includes a drug inflation rebate where if the price goes over the CPI-U for price increases annually, the drug company would have to pay the Treasury the difference over that CPI-U. In addition, the bill contains caps on Medicare Part D planned spending for beneficiaries of $2000. There is currently no true cap for Medicare Part D.
Is it inevitable that Americans will pay a price in lost innovation?
The consensus seems to be yes. The pharmaceutical industry is unique in that it does not typically rely on outside financing but instead on its profits to fund its current capital.
“Investors have alternatives, and if they aren’t going to earn as good of a return investing in pharmaceuticals, they will go elsewhere,” Dr. Manning warns.
What would be a more constructive response to prescription drugs?
“Improving credit markets for health care to lower interest rates and [increasing] access to some of the ways that people can smooth out their health care expenditures over time,” said Mr. Williams.
Dr. Manning suggested policymakers facilitate the entry and exit of generics, reform insurance, and allow for more competition.
“When you bring more things to market, whether they are generic or branded, you encourage competition, [lower] prices, and spur innovation,” Dr. Zinberg explained. He also mentioned in passing that surrogate markers and biomarkers can bring things to market quicker.
Pharmaceuticals have around a 60% approval rating, which was unheard of just a couple of years back. Fewer people have a negative view of pharmaceutical companies because of their contributions during the pandemic.
On the other hand, COVID-19 exposed vulnerabilities in America’s medical supply chain and its dependence on foreign countries, especially China.
“We need to bring manufacturing back to the U.S. even if it costs a little more,” Dr. Zinberg cautioned.
