Last week, President Joe Biden emphasized the importance of the drug pricing proposals in the Democrats’ roughly $2 trillion Build Back Better spending package.
“I think it’s safe to say that all of us, all of us, whatever our age, wherever we live, we can agree that prescription drugs are outrageously expensive in this country,” Biden said. “Under my Build Back Better bill, which has passed the House of Representatives, it won’t be the same way.”
Build Back Better would make significant changes to drug pricing — and not for the better. The price controls it envisions will sap medical innovation and only distort the nation’s drug market further.
The bill controls prices in three ways: by limiting out-of-pocket costs for insulin, by capping drug price increases at the rate of inflation, and by permitting the government to effectively set the prices of an increasing number of drugs each year through direct “negotiation” with drug firms. I’ll focus on the first two.
Under Build Back Better, Medicare beneficiaries and privately insured Americans would pay no more than $35 a month in cost-sharing for insulin products.
These price controls may be popular. But they ignore the real cause of insulin’s high out-of-pocket costs — and that’s the failure of middlemen known as pharmacy benefit managers to share the rebates they secure from drug companies.
Insurers hire PBMs to negotiate drug prices on their behalf with pharmaceutical firms. Those negotiations usually result in steep discounts, particularly on insulin products.
According to an investigation spearheaded by Sens. Chuck Grassley, R-Iowa, and Ron Wyden, D-Ore., the value of PBM rebates for insulin has increased significantly over the last few years, reaching as high as 70% of the drug’s list price. As recently as 2013, those rebates were in the single digits.
Despite these hefty price reductions, insurers generally base patient cost-sharing on a drug’s undiscounted list price, not the lower price insurance companies end up paying. That latter figure is generally kept secret.
The upshot is that middlemen are capturing much of the money spent on insulin today. Research from the Schaeffer Center at the University of Southern California found that the share of insulin spending received by manufacturers dropped from 70% in 2014 to 47% in 2018.
PBMs’ share more than doubled, from 6% to 14%. Pharmacies’ more than tripled from 6% to 20%.
All told, the various middlemen between insulin makers and patients claim 53% of the money spent on insulin — up from 30% in 2014. Manufacturers may raise list prices and actually take in less money.
This broken, opaque pricing model is the chief reason out-of-pocket insulin costs have become unaffordable for so many.
One sensible approach to reducing these costs would be to bring these negotiations out of the shadows — and pressure insurers and PBMs to share their rebates with patients. Simply dictating maximum out-of-pocket cost for insulin across an array of health plans, as Build Back Better does, is a crude intervention that could send the insulin market into disarray.
Something similar could be said about the bill’s inflation penalties. These provisions would penalize manufacturers for raising prices for drugs faster than the rate of inflation. Drugmakers who violated these rules would have to pay the product of the number of drugs sold and the amount by which the price exceeded inflation.
This is another form of government price-setting. These price controls will decrease the incentive for investors to fund drug research. And that means fewer new therapies and cures in the future.
According to research from University of Chicago economist Tomas Philipson, these inflation-linked price caps could reduce pharmaceutical industry revenue by nearly $1.8 trillion through 2039. That’s a lot of money that won’t go toward drug research. And that means patients desperate for cures will have to wait quite a bit longer.
Destroying the market for pharmaceutical research hardly sounds like building back better.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in health care policy at the Pacific Research Institute. Her latest book is “False Premise, False Promise: The Disastrous Reality of Medicare for All,” (Encounter 2020). Follow her on Twitter @sallypipes.