The Democrats’ budget reconciliation bill is winding its way through the Senate.
Last week, Republican and Democratic senators met with the chamber’s parliamentarian to discuss whether the bill’s proposal for Medicare to negotiate the price of prescription drugs with manufacturers has a direct impact on government spending or tax revenue, as reconciliation rules require.
But these are not negotiations. They’re price controls. The bill’s text sets maximum prices that the government will pay — and threatens confiscatory taxes for drug companies that refuse to comply. That may be politically popular. But it will mean that fewer cutting-edge drugs are available to American patients.
Further, price controls on prescription drugs are unnecessary. Even as the price of just about everything else in our economy has soared in the past year, drug prices have been relatively flat. According to the latest federal data, consumer prices rose 9.1% between June 2021 and June 2022. Groceries are up 10.4%. Food away from home costs 12.2% more than it did last year. Airline fares increased by 34.1% since last year. Oil prices have nearly doubled. Prescription drug prices, meanwhile, have risen just 2.5% over the last year.
That’s partially because nearly 9 in 10 U.S. prescriptions are inexpensive generic medications. That helps keep overall costs to patients down. In 2020, generics saved the U.S. healthcare system over $330 billion. Defenders of negotiations point to nations like Canada that cap the price of medications as models for the U.S. But those price controls have a steep cost. Many cutting-edge medications simply aren’t available in countries with price controls, such as Canada, the United Kingdom, and France. For example, Canadian patients have access to just 59% of new cancer drugs launched between 2011 and 2018. U.S. patients have access to 96% of these medicines.
If lawmakers want to reduce patient drug costs meaningfully, they should train their focus on pharmacy benefit managers — the industry middlemen insurers hire to negotiate drug prices on their behalf. PBMs typically demand big discounts and rebates from manufacturers as a condition of listing a drug on their formularies. That has the effect of driving list prices up, even as the net price the manufacturer receives declines. PBMs keep a cut of the savings they extract and send another cut to the insurer, which may use that cut to lower overall premiums.
Patients, meanwhile, face cost-sharing obligations based on list prices that have no connection to what their insurer actually pays for a drug. They really ought to share in the savings their PBM extracts.
Inflation data indicate that drug prices are not the problem Democrats make them out to be. Their proposed remedy for this “problem” would have disastrous consequences.