Last week, the U.S. Senate Finance Committee held a hearing, “Prescription Drug Price Inflation: An Urgent Need to Lower Drug Prices in Medicare.”
It’s rare to see so many falsehoods in so few words.
The idea that drug-price inflation is especially bad or that it poses some sort of threat to our health system is at best confused — and at worst dishonest.
The hearing was largely intended to give Senate Democrats a forum to grandstand with calls for price controls on prescription drugs.
That such a policy would obstruct medical innovation and thereby force patients to wait ever-longer for effective therapies and cures seemed not to matter.
Surprisingly, federal data show that drug-price inflation isn’t a major problem.
Between December of 2020 and December of 2021, “prescription drug prices were unchanged,” according to the Consumer Price Index by the Bureau of Labor Statistics (BLS).
The year prior, prescription drug prices fell 2.4%.
By contrast, the year-over-year inflation rate for gasoline in December 2021 was nearly 50%. Energy prices were up 29%, and meat and poultry prices grew by 12.5%.
Those numbers may seem impossible to patients staring down huge copays at the pharmacy counter. And it’s true that the list prices for some brand-name drugs are high.
But nine in ten prescription drugs dispensed in this country are generics, which are generally very affordable, even inexpensive.
Generics account for just one-fourth of overall drug costs.
A drug’s list price is usually a jumping-off point for negotiations between pharmaceutical firms and pharmacy benefit managers, or PBMs — the middlemen insurers hire to administer their drug plans.
PBMs insist upon discounts from pharmaceutical companies as a condition for including a drug on their list of covered medicines.
In 2020, pharmaceutical firms offered $187 billion in price concessions.
PBMs and insurers say they use those rebates to lower premiums for everyone. But PBMs are now reporting profits in the tens of billions of dollars annually.
Further, consumers’ copays are often calculated as a percentage of the list price — which the PBM and insurer don’t pay. So PBMs and insurers get a favorable deal from the pharmaceutical manufacturer — but use the inflated list price to extract more cost-sharing from their customers.
The net prices that drug companies received after accounting for discounts actually declined in 2020 for the third straight year.
In other words, PBMs and insurers are doing quite well under the status quo. Patients and drug companies, in many cases, less so.
Senate Democrats’ fixation on drug prices also ignores that they’re a relatively small share of our country’s health bill — just 12%. Retail drug spending accounted for 8% of the nation’s total healthcare bill in 2020, according to the Centers for Medicare and Medicaid Services.
Further, since prescription drugs often help prevent more costly medical conditions — as well as expensive hospital stays — they tend to put downward pressure on overall health spending.
Even if we accept Senate Democrats’ flawed premise that prescription drug prices are in need of attention, their proposed price control remedy fails a basic cost-benefit analysis.
Pharmaceutical companies devote tens of billions of dollars a year to research and development. Price controls will deprive them of the revenue that underwrites those efforts.
The result? A dramatic reduction in innovation.
Unfortunately, facts and sound economic reason are no match for the Democrats’ fixation with price controls on prescription drugs.